Hopes for a reversal in fortune as Iran votes for new leadership

As Mahmoud Ahmadinejad steps aside this week, many in the sanctions-strangled country and abroad will be hoping for a change in fortunes for international trade.

Dhows that ply the waters between Iran and the Emirates are seen docked in Dubai. Historic commercial ties between the nations have been strained as the screw of western sanctions against Tehran has tShow more

Traders in the UAE will watch the results of Iran's leadership elections on Friday with hope, rather than expectation, of a change in policy in Tehran to help revive the flow of goods across the Arabian Gulf.

The deterioration of one of the region's oldest and, until now, most enduring commercial relationships has been the side effect from the ratcheting up of sanctions against the Islamic republic.

The sight of dhows leaving Deira Creek in Dubai bound for Iran laden with dates, gold, TVs and other assorted items has become less common as the screw on Tehran has tightened. Now they are more likely to be heading to India, China, Africa or other markets in the GCC that have partly filled the void left by Iran's retreat from global trade.

With Mahmoud Ahmadinejad ineligible to run having completed two terms, whoever wins the elections will determine whether Iran remains at loggerheads with the West over its alleged nuclear weapons programme. By extension, that is likely to influence whether sanctions are tightened or eased.

Hossein Haghighi, an Iranian consultant in Dubai, is more positive than most about the outcome.

"We have reached a level in which some change is inevitable," he says. "I see positive changes in terms of international relations."

His comments partly reflect the reality that things cannot get much worse for businesspeople in the UAE with ties to Iran. Trade between the two countries sunk by nearly a third last year to Dh25 billion, down from Dh36bn the year before, show data from Dubai Customs. As recently as June 2010 Iran was the leading export market for members of the Dubai Chamber of Commerce and Industry.

"Things are getting worse every day almost," says one Iranian shipping agent, who asked to remain anonymous.

"Business has almost reached to a third of where it was four years ago."

Traders blame the decline on the steep fall in the Iranian rial, which has slid by 80 per cent in the past two years. That is only likely to worsen as the latest round of US sanctions specifically targeted the currency. The depreciation has made it tough for buyers in Iran to pay for goods they ordered, sometimes up to six months before, on credit. It leaves Dubai traders nursing hefty holes in their pockets and losing the goodwill of the few banks that are still willing to help fund trade with Iran. Many lenders have washed their hands of dealing with the country for fear of falling foul of sanctions. The measures by the US, European Union and UN bar transactions with a range of Iranian entities and individuals. Ammunition and technology and machinery, either for the oil and gas industry or products suspected of being linked to Iran's nuclear ambitions, are among the blacklisted goods.

Movement in the rial has been influenced by twists in Iran's election campaign. Hopes that Ali Akbar Hashemi Rafsanjani, a reformist candidate, would win helped provide a lift to the currency. Once he was disqualified from the contest the currency sagged again.

Still, some trade is happening. A few merchants are resorting to cash or the hawala network, an informal and unregulated payment system, to pay for goods.

But for many the risks outweigh any potential gains. Several UAE companies have found themselves blacklisted by US authorities for engaging with sanctioned entities. The US state department on May 31 sanctioned Niksima Food and Beverage, a Dubai-based frozen yogurt company, for "knowingly engaging" in a transaction for the purchase of petrochemical products from Iran. In April, Al Hilal Exchange and Al Fida International General Trading were also blacklisted by the US treasury.

"While there is not a blanket ban on doing business with Iranian entities, for many UAE companies, it is pivotal that all local businesses employ appropriate risk control measures, and seek appropriate advice, to ensure there are no actual or potential breaches of international sanctions," says Ben Constance, a partner at the law firm Taylor Wessing in Dubai. "We have seen a vast increase in inquiries over the last 12 to 18 months on the topic as the concern of international sanctions breach becomes more prevalent to many UAE companies."

Life has also become harder for many Iranians living in the UAE. Increasingly cautious banks are refusing to offer credit facilities to Iranians or those doing business with the country, with some telling Iranian customers to close their accounts. Iranians are also struggling to get their visas renewed.

In the face of such obstacles, some are closing their businesses and relocating to countries such as Malaysia, China and Turkey where Iran trade is still happening through bartering, says Mr Haghighi.

Evidence of the exodus comes from the decline in the membership of the Iran Business Council in Dubai by about 40 per cent in the last two years.

"They [Iranians in Dubai] are facing difficulties and the sanctions have indicated there's some sort of Iran-phobia in case there may be a risk for companies of breaching sanctions " says Mr Haghighi, a spokesman for the council.

Successful Iranians used to form the backbone of Dubai's property market, recycling wealth often earned in the emirate back into the economy.

But the combination of the rial's slide and visa and banking difficulties mean they have slumped to the sixth or seventh biggest foreign property buyers.

But there have been a few winners. Enterprising merchants in Dubai have taken advantage of the rial's crisis to snap up Iranian cement and other items at heavily discounted rates. The goods are then resold in the UAE market for a tidy profit.

"They have been able to sell on for up 30 per cent profit," says an Iranian trade insurer who did not wish to be named.

But for most, the past two to three years have got more tricky.

"It is possible the [new] leadership will recognise the struggle Iranians are facing at home and aboard and take measures to address that," says Mr Haghighi.

Possible, but few believe that it is likely.