Fallout

Jessica McCallin looks at the implications for Western business of war in the Middle East

It feels like an endless waiting game: will America or won't America attack Iraq? UN weapons inspectors are back in the pariah state, hunting down Saddam Hussein's alleged weapons of mass destruction. Many hope they will be successful and avert an American-led attack to overthrow the current regime, but hope is the operative word. Political commentators are pessimistic. At some point, probably within the next six months, almost certainly before 2003 is out, Iraq will see military action.

But what are the implications for business? In Iraq itself, the answer is not many. There is no foreign investment in the country. The biggest risk to commercial interests there will be the level of destruction. If the country's infrastructure is comprehensively damaged or left littered with unexploded ordinance, investors will have to wait a little longer to enter the country. Battlefields are not good real estate investments.

An attack on Iraq will, however, have implications for companies working in the rest of the Middle East and further afield in some of the less stable Muslim countries, such as Pakistan and Indonesia. Here, the risks are wide ranging and hard to predict.

The Arab world is already angry. The Israeli Palestinian conflict has been fuelling its discontent, and an attack on Iraq will only inflame it further.

This anger has already been manifesting itself economically. Consumer boycotts of American household names such as McDonalds and Kentucky Fried Chicken have taken off over the past two years and have been successful to the point where McDonalds has more or less abandoned the Arab region. High profile Western brand names can expect the same treatment if an attack takes place, although, providing the conflict is short and sharp, Middle East experts do not think that political unrest would get sufficiently out of hand to threaten governments.

"I think political instability in the Arab world is much exaggerated," says Josh Mandel, Middle East analyst for business consultants, Control Risks Group. "Revolutions or popular uprisings are very rarely seen. They are not the norm, and the security services in the region are very tough in quashing political unrest. Violent protest is unlikely to get out of hand. Even foreign embassies will probably be safe, as security forces will not allow protesters to get near them. The most likely scenario is that fast food chains and other obvious symbols of the American economy will get a stone or a petrol bomb. But I don't think it's likely to affect political stability. It's very unlikely, for example, that a regime will be overthrown."

For governments to be destabilised the war would have to drag out or go disastrously wrong. If this were to happen, the Jordanian regime is seen as one of the most vulnerable. Security services there are grappling with a growing fundamentalist movement that is targeting Westerners and Western interests. Over the past few years, they claim to have uncovered several plots to bomb hotels in the capital, Amman, and the tourist magnet, Petra. Jordan is closely followed by Saudi Arabia and Egypt. Problems in Saudi Arabia, where there are huge amounts of foreign investment, would certainly give cause for concern.

But what seems more likely than regimes being overthrown is that an attack on Iraq will encourage recruitment into the militant Islamic groups already gaining in strength throughout the region. The militants have little time for the resolutely secular Saddam Hussein, but would be keen to respond to another attack on their Arab brethren. An increase in terrorist attacks and a consequent increase in instability and repression can be expected.

Josh Mandel continues: "The immediate threat would not come from organisations like Al Qaida. Its brand of large scale, spectacular attacks are planned months or years in advance. They are not related to what happens on the ground. Al Qaida and its associates continue to be a global threat, not just a Middle Eastern one, and this is the case regardless of what happens in Iraq. What a war in Iraq might do is inspire local, amateur, groups to act locally. These groups will not, however, have the capability to carry out spectacular attacks like September 11 or the Bali bomb."

This is not to say that they could not wreak havoc. One man with a gun in a crowded bar or restaurant can cause a lot of damage and kill a lot of people. What he cannot do is cause vast economic loss and close down industries. The risk here is that foreign employees or foreign-owned buildings will be targeted. In the past few months, two Americans, a nurse in Lebanon and a humanitarian worker in Jordan, have been gunned down. The perpetrators are assumed to be Islamic fundamentalists. American companies and those of its allies, Britain, Australia and Canada in particular, will be likely targets of this sort of attack.

Prepare ahead
Vulnerable companies are advised to prepare ahead. Consultants recommend keeping a close eye on where employees are at any given time. Increased security at buildings, plants and expatriate residencies are also recommended, as in an evacuation plan, especially in countries such as Pakistan and Yemen, which are considered vulnerable to increased terrorist activity. Fences, cameras and reliable guards could prevent an attack.

Companies at risk will already be feeling the burden of increased insurance premiums. Andrew Underworld, political risk underwriter at Hiscox in London explains: "The current market position is that country risk premiums are increasing to reflect the increased uncertainty. Nowhere is completely off limits yet, but premiums have increased by up to 100% for the spicier deals, and underwriters are looking at shorter term policies. Many are agreeing to underwrite for a couple of months only. Six months seems to be the maximum at the moment."

Here, the main risk is that insurance will be so expensive that it will cancel out any profits from a deal. Shipping companies hoping to use the port at Aden in Yemen, for example, are finding their insurance quotes staggering since a French oil liner was bombed a few months ago. The number of ships using the port has dropped dramatically.

Getting oil out of the Middle East is becoming harder and more expensive. At the moment, the situation is not serious enough to affect the amount of oil coming from the region significantly, but if a war led to attacks on ships and offshore oil installations in the region or disrupted supplies coming from Saudi Arabia, all deals could be off. If the oil supply from the region is disrupted too much, it could be enough to push up the price of fuel and nudge the global economy into recession. Analysts are, however, quick to point out that that is very much a worst case scenario.

But it is not all bad news. Few commentators think that a seriously weakened Iraq will be able to hold off the Americans for long and the war should be quick. Thereafter, Iraq's huge oil reserves are open to exploitation, and the region presents companies with huge opportunities.

"The main beneficiaries from the rehabilitation of the Iraqi oil industry will likely be Russian and French, in many cases with existing contacts and connections at various levels of the administration in Baghdad," says Jestyn Cooper of the Eric Morris Consultancy, experts in political risk. "Russian firms in particular will benefit from their government's perceived distance from the US administration. As for US corporations moving in, much depends on the length of the military campaign. Short and sharp, and the door is undoubtedly open to inward investment; long and protracted, and a successor administration may well prefer the company of the Chinese, Russians and French. The new Iraqi leadership certainly won't be short of offers."

Until something definite happens, however, the waiting is the biggest risk. Companies engaged in long term deals, such as infrastructure projects, are going ahead with their plans and assuming that within a few years things will have settled down. Companies engaged in shorter term business, however, have been adopting a wait and see approach. The longer the wait continues, the more corporate balance sheets will suffer.

Jessica McCallin is a freelance journalist

Lack of Trust
According to Control Risks Group's 11th annual risk survey, RiskMap 2003, the ongoing threat of terrorist attacks at home and abroad, uncertainty and fear over the potential war with Iraq, and growing public scepticism about finance and business, have created a worldwide lack of trust, which could have a dramatic impact on international business success in the coming year.

Throughout the world, the public hear almost daily warnings of security risks, terrorism attacks and corporate scandals. As workers, shareholders and customers, they find it increasingly difficult to trust either business or government, at a time when trust is essential to business. Business in turn finds it difficult to trust potential allies or foreign markets, and may choose not to risk an overseas expansion.

Richard Fenning, chief operating officer of Control Risks, comments: "The ongoing threat of terrorism is a major factor in the trust deficit for Western companies. Without trust, business opportunities are lost. In this time of economic uncertainty, bridging this gap in trust by gaining a real understanding of business risks is essential to the survival and success of organisations."

RiskMap 2003 focuses on the external threats, such as terrorism and potential war, that present obvious risks for business, as well as the fallout in the wake of recent corporate scandals.