The crucial role of Oman is becoming apparent as the dust settles after the recent Iranian nuclear deal. Can the sultanate leverage its diplomatic relationships and strategic geographical position to encourage trade and investment?

The crucial role of Oman, a sultanate located at the southeastern tip of the Arabian Peninsula, is becoming apparent as the dust settles on the recent Iranian nuclear deal. Oman is adept at balancing relationships in a notoriously fractious region and remains a friend to Iran, Gulf Arab neighbors, and Western allies. Now the sultanate is hoping to leverage its diplomatic relationships and strategic geographical position to encourage trade and investment, and plug a yawning budget deficit.

There is a degree of urgency to the sultanate’s actions. Hit by falling oil prices, Oman’s budget deficit is estimated to have grown to almost 19% of GDP in 2015. This year’s deficit is expected to be nearly as large. There is concern that there will not be enough money in the coffers to meet next year’s budgetary outlays. Current spending has risen since the Arab Spring protests of 2011/12 saw increases in standard wages and populist spending.

One of the drivers of youth-led protests has been corruption, an issue that the sultanate has done much to tackle; however, it remains a problem. Oman’s ability to improve its reputation and “ease of doing business” standing will be key to attracting foreign investment.

Investment Opportunities

The seriousness of the fiscal situation in Oman has resulted in a focused effort to promote investment opportunities and attract capital from abroad. This is a tough order for a market as dependent on oil as Oman, and at a time of persistently low oil prices.

However, Oman has a number of strategic advantages that it can leverage. Focusing on opportunities in tourism, logistics, manufacturing, mining, and fisheries, the sultanate is seeking to capitalize on its location and access to major markets.

Notably, Oman is the only Gulf Cooperation Council (GCC) country with ports on the international maritime routes of the Indian Ocean. Both of Oman’s ports at Duqm and Salalah sit outside the Strait of Hormuz, one of the world’s major choke points, giving it a significant strategic advantage.

Oman is increasingly positioning itself as a gateway to Asia and East Africa. Speaking at the Oman Economic Forum in Muscat in March, the head of Oman’s sovereign wealth fund (the State General Reserve Fund, which has offices in Tanzania and Vietnam) said that Oman plans to import raw materials from East Africa, add value through manufacturing joint ventures with Asian investors, and export products to Asia and other markets.

It is a compelling strategy, but there are challenges that will not be easily resolved. One problem is the stalling of the long-mooted GCC railway project. Oman’s new port of Duqm, and its attached economic zone, will ultimately depend on the railway for land access to regional markets. K2 Intelligence sources in the region say the railway has been mothballed and foreigners working on the Oman portion of the project have sent been home.

Nonetheless, the strategic significance of Duqm is highlighted by the British government’s announcement in late March that it plans to help Duqm support naval vessels. The UK also plans to establish a permanent army training base in Oman.

Another major problem facing Oman’s industrialization efforts is a lack of natural gas. This is a particular issue for the mining sector, which the government is making a strong push for, highlighting its copper and gold deposits alongside other nonmetallic minerals such as limestone and gypsum.

Oman’s heavy investment in energy-intensive industries such as mineral processing has meant that demand for gas has soared. Blackouts in Oman have been fairly frequent as a result, and some projects, such as a plan to double capacity at Sohar Aluminium, have been postponed.

Looking to Iran

Oman’s gas shortages should ease by 2018 as gas from the Khazzan gas field, developed by BP, comes online. Oman has also signed an agreement with Iran to build an undersea gas pipeline to carry Iranian gas to the Sultanate. Iran will export around 28 million cubic meters per day of natural gas over 25 years. Analysts suggest that at current prices, the deal would be worth close to US$60 billion.

Oman also hopes to leverage its relationship with Iran to promote two-way trade and investment; indeed, a whole session of the Oman Economic Forum was devoted to investment opportunities in Iran. Oman hopes to become a conduit through which Iran trades with other parts of the Middle East and East Africa.

Iran has already pledged some investments in Oman, including building a car manufacturing plant and a hospital complex, and signed an agreement with Oman to strengthen tourism ties between the two countries.

But closer relations with Iran risk upsetting regional rival Saudi Arabia. Oman will need to be careful not to alienate its Arab neighbors, who have provided billions of dollars of financial support since the Arab Spring.

The Politics of Succession and Economic Growth

Oman’s efforts to diversify its economy have been more effective than many other Gulf countries, partly out of necessity: its oil is set to run out relatively soon. At current extraction rates, Oman has only around 17 years of oil left.

The diversification program may be further complicated by the need to make serious fiscal cuts, which could stir up social discontent at a time when the health of Oman’s 75-year-old ruler, Sultan Qaboos, is deteriorating.

Concerns about the succession process are intensifying. The Sultan, who has been in power since 1970, is unmarried and has no heir or designated successor.

A smooth transition will depend on the youthful population’s faith in the governing system. A focus on good governance will do much to boost that confidence and dictate whether Oman remains a peaceful and fairly prosperous nation, attracting the investment it needs.