UAE’s estrangement with Iran another kick in the teeth for the Iranian Economy

Iran’s nuclear program dominates most discussions on nuclear proliferation, potential weapons of mass destruction, and international security threats. Yet despite its importance in ongoing negotiations, economic aspects of the conflict, is a topic that has not been discussed with the same frequency. Sanctions on Iran, often criticized as toothless due to the united opposition of China and Russia, have begun to flash teeth sharp enough to take a sizable bite of the Iranian economy. Iran’s trade partners are finding it increasingly difficult to maintain healthy relations with the Islamic Republic without drawing the ire of the permanent members of the UN Security Council.

The wave of sanctions passed by the UN Security Council earlier this June has extended the arms embargo on Iran to include battle tanks, artillery systems, conventional missiles and warships. The sanctions, which directly target the dealings of the Iranian Revolutionary Guard Corps, Iranian financial institutions and shipping units call for increased inspection of Iranian and any other vessels suspected of being related to Iran’s nuclear program and restricting Iranian companies’ access to financial services and insurance. ^[1] Besides, numerous Iranian financial institutions such as Bank Saderat Iran, Bank Mellat and Bank Sepah have been blacklisted by the United Nations and the US. ^[2][3][4] The sanctions have effectively discouraged foreign banks from having any dealings with Iran or suspected Iranian corporations.

Though Iran may not publicly admit it, the sanctions have crippled the Iranian economy. The Iranian Central Bank has not issued an annual economic report for the past three years. Rising inflation, which now stands at around 10%, has posed major problems for Iranian traders and consumers. ^[5] The Iranian Rial witnessed significant fluctuation in late September as Iranian banks and exchange houses stopped selling foreign currencies amid increasing scrutiny by international banks. ^[5] This follows the decision of four major European oil companies (Shell, Total, Eni and StatOil) to cease all investments in Iran and reports that the Stuxnet worm had infected computer systems at its proposed nuclear power plant in Bushehr. ^[6][7]

As an indication that the sanctions may be achieving their end, the UAE, one of Iran’s largest trade partners, has started reconsidering its relations with Iran. Since the sanctions were imposed, the UAE has been jolted into action and has taken tangible measures to distance itself from Iran. Under pressure from the US to squeeze economic ties with Iran, the UAE announced in early October this year that it had complied with sanctions prescribed by the UN Resolution. ^[8] Banks in the UAE have disconnected ties with the 17 Iranian banks blacklisted by the US. This follows steps taken earlier in June to shut down 40 organizations that had alleged relations with Iran’s nuclear program and the Iranian Revolutionary Guard Corps. ^[9] The anti-money laundering unit of the UAE’s central bank has also frozen certain Iranian accounts in the country. The central bank has stepped up vigilance and is scrutinizing cash transactions made between the UAE and Iran by individuals and organizations alike for irregularities. ^[10] Memoranda of Understanding have also been signed among the anti-money laundering unit of the UAE central bank and other organizations to facilitate the ease of sharing financial information. ^[8]

These measures prove to be particularly crucial because the UAE and Iran have been historically, strong trade partners. Bilateral trade between the two countries stood at close to $8.45 billion in 2009 and re-export trade volume amounted to close to $7.1 billion in the same period. ^[11] Furthermore, Iran occupies the spot of the second largest re-export market after India for the emirate of Dubai. ^[10] These figures are set to decline this year as the UAE reevaluates its economic and trade relations with Iran. According to the Iranian Business Council- Dubai, an association of Iranian businessmen based in Dubai, trade between the UAE and Iran is expected to decline to $6 billion in 2010. ^[12]

The level of activity at the Dubai Creek provides a clear sign that trade with Iran is headed south. Dhows, Arab sailing vessels, which used to hop with considerable frequency across the Persian Gulf from the UAE to Iran, are now sinking under the weight of the clampdown by UAE authorities. Boats bound to Iran now lay inactive along the Dubai Creek. The impact of this action has certainly been felt by small sailors.

Moreover, Iranian shipping companies and exporters based in the UAE are unable to obtain insurance owing to the increased vigilance on Iranian and Iran-bound vessels. Ships lacking proper coverage for damages are bound to be denied entry at most ports. Lack of access to insurance combined with increased costs and risks of trade have proved to be ruinous for traders and shipping companies alike. Iranian traders can no longer use letters of credit issued by Iranian banks to trade with the UAE. With UAE banks cutting off ties with Iran, most transactions are being done by cash. ^[13]

However, the UAE needs to take into account the resultant economic impact of its estrangement from Iran. The UAE faces a tradeoff between strengthening ties with the US and restoring its trade relations with Iran. The proportion of the UAE’s economy that is linked to Iran is rather significant. The UAE and Dubai in particular, has established itself as a major entrepôt hub. Re-exports account for around 23% of the UAE’s total trade volume. ^[11] There are around 8000 Iranian owned businesses based in Dubai alone (a figure that has dropped by nearly 400 since the past year) and the Iranian community has a large presence in the UAE. ^[12]

Needless to say, there are strong implications of deranging economic ties with Iran. The UAE needs to carefully weigh its options and consider between the benefits of strengthening ties with the US and the resultant demerits of losing a significant trade partner. With the UAE joining the bandwagon of countries distancing themselves from Iran, this also leads to the question whether other countries in the Middle East will follow suit, under pressure from the US or on their accord. There have been reports that the US has been urging Qatar to follow the UAE’s footsteps. ^[14] Though the extent to which UAE’s actions will impact both economies is unknown, it is certain that both countries will have a void to fill in their trade volumes.

References

^[1] Lauria, Joe and Jay Solomon. U.N. Slaps Iran With New Curbs. 10 June 2010. 8 October 2010 <http://online.wsj.com/article/SB10001424052748704575304575296450656111536.html?KEYWORDS=Iran+Sanctions>.

^[2] BBC News. US blacklists major Iranian bank. 8 September 2006. 24 October 2010 <http://news.bbc.co.uk/2/hi/business/5329326.stm>.

^[3] BBC News. US blacklists Iranian state bank. 9 January 2007. 24 October 2010 <http://news.bbc.co.uk/2/hi/middle_east/6246665.stm>.

^[4] Palazzolo, Joe. U.A.E. Banks Distancing Themselves from Iran. 6 October 2010. 24 October 2010 <http://blogs.wsj.com/corruption-currents/2010/10/06/uae-banks-distancing-themselves-from-iran/?KEYWORDS=Bank+Mellat>.

^[5] Fassihi, Farnaz. Iran’s Economy Feels Sting of Sanctions. 12 October 2010. 17 October 2010 <http://online.wsj.com/article/SB10001424052748703735804575535920875779114.html?mod=WSJASIA_newsreel_world>.

^[6] BBC News. Energy firms to quit Iran to comply with US sanctions. 30 September 2010. 8 October 2010 <http://www.bbc.co.uk/news/world-us-canada-11448952>.

^[7] Associated Press. Iran Delays Nuclear Reactor’s Activation. 30 September 2010. 8 October 2010 <http://online.wsj.com/article/SB10001424052748704483004575523680412510168.html?KEYWORDS=Stuxnet+Iran>.

^[8] Kumar, Himendra M. UAE implements Iran sanctions. 5 October 2010. 8 October 2010 <http://gulfnews.com/business/banking/uae-implements-iran-sanctions-1.691909>.

^[9] AFP. UAE closes firms violating Iran sanctions: report. 21 June 2010. 8 October 2010 <http://www.google.com/hostednews/afp/article/ALeqM5idPzMXnyl5pfeHTaNajajIGhIGCw>.

^[10] Cummins, Chip and Jay Solomon. U.A.E. Cuts Off Ties to Iran Banks. 6 October 2010. 8 October 2010 <http://online.wsj.com/article/SB10001424052748703298504575534041013995702.html?KEYWORDS=UAE+IRAN>.

^[11]UAE Ministry of Foreign Trade. Foreign Trade Information Service Provider. 2009. 8 October 2010 <http://www.tradeexchange.ae/>.

^[12] Meyer, Henry and Ali Sheikholeslami. Dubai Curbs Iran Trade Under Sanctions Regime Hurting Business. 14 July 2010. 8 October 2010 <http://www.bloomberg.com/news/2010-07-13/dubai-curbs-trade-with-iran-under-new-sanctions-regime-hurting-business.html>.

^[13] Thompson, Ben. Iran trade sanctions hit Dubai port. 29 July 2010. 8 October 2010 <http://www.bbc.co.uk/news/business-10779331>.

^[14] Palazzolo, Joe. U.S. Puts Pressure on Qatar To Sever Ties With Iranian Bank. 7 October 2010. 8 October 2010 <http://blogs.wsj.com/corruption-currents/2010/10/07/us-puts-pressure-on-qatar-to-sever-ties-with-iranian-bank/?KEYWORDS=Qatar+Iran+sanctions>.