Source: Reuters
By Alistair Lyon, Special Correspondent
BEIRUT, Oct 1 (Reuters) - From Iran's nuclear ambitions to the fallout from the financial crisis in the Gulf, the Middle East offers several risks that could affect wider world markets.
IRAN - NUCLEAR DISCLOSURE HEIGHTENS TENSION
Iran opened talks in Geneva on Thursday with the United States and five other major powers which will demand immediate, unfettered access to a newly declared Iranian nuclear facility. [ID:nNWLA4687]
Tehran denies Western charges that it broke international rules by failing to notify the International Atomic Energy Agency earlier about a heavily guarded uranium enrichment site carved into a mountain at a former Revolutionary Guard missile base near the holy city of Qom.
But Iran's admission last week of the plant's existence has heightened fears that the world's fifth biggest oil exporter is seeking a nuclear bomb, not just nuclear energy as it maintains.
If the Geneva talks fail, the United States may seek tougher international sanctions or impose harsher unilateral measures. Any U.S. or Israeli military action to try to halt Iranian nuclear work could have devastating knock-on effects given Iran's regional clout and proximity to Gulf oil export routes.
That remains the key regional risk for most investors, who have largely shrugged off Iran's internal political turmoil that rumbles on nearly four months after a disputed presidential election won by hardline incumbent Mahmoud Ahmadinejad.
IRAQ - EYES ON ELECTION, U.S. WITHDRAWAL
Security has improved after ferocious Sunni-Shi'ite violence in 2006-07 pushed Iraq close to civil war, although recent bombings blamed on al Qaeda have raised concerns over the ability of Iraqi security forces to keep control as the remaining 126,000 U.S troops withdraw by the end of 2011.
The Pentagon now sees a chief risk to Iraq's future in the unyielding claims from minority Kurds to the northern oil city of Kirkuk and other disputed areas, which could set off a destabilising conflict with the Arab-led government in Baghdad.
The most immediate threat is that political jostling ahead of Iraq's first national elections in four years, scheduled for Januray 2010, will tilt Iraq back into greater violence. The stakes will be high as Prime Minister Nuri al-Maliki is expected to take on powerful former allies from Iraq's Shi'ite majority.
The government wants investors to revamp Iraq's economy and oil industry, but foreign cash has been deterred by concerns over corruption as well as security, legal and regulatory risks.
Iraq will offer 10 oil and gas fields at auction late this year, another chance for oil majors to compete for access to the world's third largest reserves. But many were aghast when the Iraqis, offering far lower returns than firms were seeking, awarded only one of eight fields at the first bid round in June. [ID:nL3485394]
ISRAEL-PALESTINIANS - OBAMA'S PEACE EFFORT
Hosting the first meeting between Israeli and Palestinian leaders since Benjamin Netanyahu became Israel's prime minister in March, Obama said negotiations on a "permanent status" deal to end over 60 years of conflict must begin soon.
Israel views the threat of a nuclear-armed Iran as a higher priority than peace with its neighbours. Any Israeli attack on Iran could start a war likely to suck in Lebanon and Syria.
Secretary of State Hillary Clinton is to report on efforts to renew Israeli-Palestinian talks in mid-October. Special envoy George Mitchell is due back in the region this week.
Obama eased demands that Israel halt settlement activity before talks, calling only for "restraint", no longer a "freeze" -- something Palestinian President Mahmoud Abbas still wants.
Abbas wants negotiations to resume where they left off a year ago with Netanyahu's predecessor, who Palestinians say seemed close to offering them part of Jerusalem and sovereignty over most of the West Bank and Gaza Strip. Netanyahu endorses no such concessions. He says that with Abbas's Hamas Islamist rivals running Gaza and with Abbas still demanding a return of Palestinian refugees and a share of Jerusalem, there is no way to negotiate a final settlement and end to Israeli occupation.
Instead he offers talks on improving mutual security and the economy in the West Bank. While Netanyahu's pro-settler allies might support that, Abbas has ruled out interim negotiations.
Abbas allies warn of a risk of violence if Israel does not change its stance. But Netanyahu says his focus is on Iran.
Obama is pressing his Arab allies, also concerned about Iran, to make gestures toward ending Israel's regional isolation to encourage Israel to negotiate. That track too is deadlocked.
For factors to watch between Israel and the Palestinians, click here [ID:nN22367440].
OIL PRICE RISE CHEERS GULF STATES; DEBT WORRIES PERSIST
Gulf economies will benefit from the oil price rise to $70 a barrel, which is above their budget forecast price, while public infrastructure spending should stimulate now-stuttering growth.
But scant transparency makes it hard to assess how exposed Gulf firms and sovereign wealth funds are to overseas markets.
The focus is on Saudi Arabia, the biggest Arab economy, where several Saudi family firms are embroiled in a debt crisis that has hit the kingdom's repute as an investment destination.
Saad Group [SAADG.UL] and Ahmad Hamd Algosaibi & Bros are fighting out several law suits in New York, rather than in Saudi Arabia, illustrating the need for reform of a clergy-dominated judiciary which lacks consistency in applying the law.
Saad has brokered a deal with local banks to reschedule debt, bankers said on Sept. 17. But questions remain over how international creditors will fare.
The Saudi bourse allows limited share ownership, but disclosure rules fall below standards of more mature markets.
Kuwait's lack of a market regulator and a parliamentary stalemate casts a pall over its efforts to lure investment.
In the United Arab Emirates, a property implosion plus debts burdening state-linked firms in Dubai will brake recovery in that emirate and compel Abu Dhabi, faring better as oil revenues pick up, to divert more federal resources to it. UAE interbank rates remain high by regional standards, stifling loan-making.
Ebbing investor confidence threatens Gulf banking, for example in Bahrain, where the central bank has seized two Bahrain-based lenders owned by Saad and Algosaibi. Qatar alone is weathering the financial crisis relatively well, insulated from oil price swings by its status as the world's biggest exporter of liquefied natural gas.
For the impact of the financial crisis on the Gulf region, click here [ID:nLN110886]
YEMEN -- FAILING STATE?
Impoverished Yemen is combating a renewed Shi'ite revolt in the north, where fighting has raged since the army launched "Operation Scorched Earth" last month, as well as separatist unrest in the south and intensified al Qaeda militancy.
Oil revenue sank to $803 million in the first seven months of this year from $3.12 billion in the same 2008 period due to lower world prices and a reduced state share in production.
This makes it even harder for President Ali Abdullah Saleh's government to cope with widespread poverty, runaway population growth, fast-depleting water resources and high unemployment.
If Yemen tipped further into instability, or even state failure, this could endanger its neighbours, especially Saudi Arabia, and complicate efforts to fight al Qaeda and protect international shipping routes from piracy in the Gulf of Aden.
Western alarm is growing. In a letter to Saleh this month, U.S. President Barack Obama said Yemen's security was vital to that of the United States and the region. He offered to help Yemeni efforts on counter-terrorism, development and reforms.
Aid agencies warn of a humanitarian crisis in the north, where up to 150,000 people have fled their homes since Shi'ite tribesmen known locally as the Houthis launched an insurgency in 2004. [ID:nLM252909]
For recent stories on Yemen, click here [ID:nLO586625] (Additional writing by Alastair Macdonald in Jerusalem, Ulf Laessing in Riyadh and Missy Ryan in Baghdad)
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