By Alistair Lyon, Special Correspondent
BEIRUT, Aug 10 (Reuters) - From Iran’s nuclear ambitions and post-election tensions to the fallout from the financial crisis in Saudi Arabia and the Gulf, the Middle East offers a string of risks that could spill over to wider world markets.
IRAN - POLITICAL TURMOIL, NUCLEAR QUEST
President Mahmoud Ahmadinejad is back in power after a disputed June election led to the worst unrest since the 1979 Islamic revolution and exposed deep rifts in the ruling elite.
The hardline leader must now submit a cabinet list for approval by parliament, where he could face stiff opposition from many conservatives as well as reformists and moderates.
The in-fighting among Iran’s political and clerical rulers, which has sapped the authority of Supreme Leader Ayatollah Ali Khamenei, may paralyse decision-making on issues such as how to respond to U.S. President Barack Obama’s offer of engagement.
Western leaders, who suspect the world’s fifth biggest oil exporter of trying to make an atom bomb, despite Iran’s denials, have set a September deadline for Tehran to enter nuclear talks.
If that fails, the United States will feel under pressure, not least from Israel, to seek Russian and Chinese consent for tougher sanctions, impose harsher unilateral measures or even brandish military action to try to halt Iranian nuclear work — an option that could have devastating knock-on effects given Iran’s regional clout and proximity to Gulf oil export routes.
Wider markets have largely shrugged off Iran’s post-election attention, but worries over a potential Israeli military strike on nuclear targets last year helped fuel propel prices higher and for most investors the country remains the key regional risk to watch.
IRAQ - COPING WITH 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 130,000 U.S troops withdraw by the end of 2011.
Iraq’s slow progress in finding jobs for thousands of former Sunni insurgents who switched sides to fight al Qaeda could jeopardise security gains, the Pentagon fears, while Kurdish claims to the northern oil city of Kirkuk could set off a destabilising conflict with the Arab-led government in Baghdad.
The government wants foreign investors to help revamp Iraq’s economy, oil industry and infrastructure, but some have concerns over corruption as well as security, legal and regulatory risks.
Iraq will offer 10 oil and gas fields at auction in late November, another chance for international energy firms to compete for access to the world’s third largest reserves.
But many were aghast following the first bid round in June when the Iraqis, offering far lower returns than companies were seeking, awarded only one of eight fields on offer.
ISRAEL-PALESTINIANS - OBAMA’S PEACE EFFORT
Obama has forged ahead with Arab-Israeli peacemaking early in his term even though a hardline Israeli government and rifts among Palestinians dim prospects for a solution to a conflict that has bedevilled the Middle East for more than 60 years.
The U.S. president has demanded that Israel halt settlement building in the occupied West Bank, long viewed by Palestinians as wrecking their hopes for a viable independent state.
The issue has opened the widest rift in U.S.-Israeli relations in a decade and Palestinian President Mahmoud Abbas has said peace negotiations with Israel, suspended since December, cannot resume until settlement activity ceases.
Washington has urged Arab states to make gestures towards Israel to help persuade Prime Minister Benjamin Netanyahu’s rightwing coalition to agree to halt settlement expansion, but U.S. allies Saudi Arabia and Jordan point to a 2002 Arab peace offer based on a two-state solution that Israel has ignored.
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. Many Arabs say a just, comprehensive peace with Israel would calm the region and deprive Islamist militants of a potent rallying cry.
SAUDI ARABIA - IMPACT OF DEBT CRISIS
Several Saudi family firms are struggling with a debt crisis that has exposed a lack of transparency in the financial sector and hit the kingdom’s reputation as an investment destination.
Saad Group [SAADG.UL] and Ahmad Hamad Algosaibi & Bros unveiled debt restructurings in May but have since left investors in the dark about the size or details of the problem.
The two firms are fighting out a $10-billion law suit in New York, rather than in Saudi Arabia, illustrating the need for reform of a judiciary which is dominated by clerics and which does not apply the law consistently from court to court.
The central bank has not confirmed that accounts related to Saad and Algosaibi are frozen, while Saudi banks have refused to disclose their exposure to the firms, making it impossible to assess whether the banking sector faces a systemic risk.
The Saudi bourse, the Arab world’s largest, allows limited share ownership, but disclosure rules fall below standards of more mature markets. Corporate stock market statements are released only in Arabic and often long after shares have moved.
Saudi Arabia, which quelled a violent campaign by al Qaeda militants from 2003-06, faces few other immediate challenges to its stability, but it is not yet clear who will succeed a king and crown prince who are both in their 80s.
GULF STATES - DIFFICULT RECOVERY
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.
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 coupled with a heavy debt burden at state-linked firms in Dubai will leave that emirate lagging any rebound and compel Abu Dhabi, which is faring better as oil revenues pick up, to divert more federal resources to it. UAE interbank lending rates remain high by regional standards, stifling loan-making.
Ebbing investor confidence threatens the banking industry in Bahrain, as well as in other Gulf countries, particularly since the central bank 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.