Trade ties with Iran at the crossroads
Commercial relationships between the UAE and Iran are at a watershed, according to a new report, and could affect the business and financial environment for the Emirates as well as the geopolitical situation in the Gulf region.
The thought-provoking report, by Karim Sadjadpour of the Carnegie Endowment for International Peace, describes the origins of trade between Iran and the Emirates, especially Dubai, and maps its increasing importance after UAE independence in 1971.
But it also poses the question: will trans-Gulf commerce continue to grow in the light of tougher US sanctions against Iran and the regional repercussions of the "Arab Spring"?
Mr Sadjadpour says: "Both the US and the UAE face serious obstacles in distinguishing between legal and illegal commerce and have felt a backlash from legitimate merchants who feel unfairly targeted."
Commercial ties between the Gulf region and Iran go back thousands of years, but the modern-day UAE "is unique in that it combines vast networks of trade and personal relations with Iran with a close strategic relationship with Washington", Mr Sadjadpour says.
Interaction between Iran and the former Trucial States (as the UAE was known under British rule) took off in the early years of the 20th century, as the authorities in Tehran became increasingly centralist and sought to control the south of the country. It accelerated after the Iranian Revolution of 1979 and the Iran-Iraq war of the following decade.
Citing official statistics and information from a wide number of sources, Mr Sadjadpour estimates there are now some 450,000 people of Iranian descent in the UAE, making it the second biggest "diaspora" population outside Iran, after the US.
Commerce has grown along with the population, "as Dubai solidified its position as a burgeoning trade hub and built a reputation as a stable, comfortable environment for merchants". Dubai's decision to allow foreign property ownership in 2003, with residency rights, gave trans-Gulf trade a further boost.
"Over the past decade, the Emirates have become Tehran's most important connection to the global economy, as sanctions and other legal barriers have increased the difficulty of dealing directly with Iran," Mr Sadjadpour says. "The UAE-Iran trade relationship brings important benefits for both countries. Iran gets the imported goods it needs, while the UAE profits handsomely from the billions of dollars of trade flowing through its ports."
The result was that Iran-UAE trade ties rose steadily throughout the past decade, by most estimates peaking at some US$12 billion (Dh44.07bn) in 2007. The UAE eclipsed Iran's traditional European trade partners such as Germany and Italy.
"Countries such as China - whose commercial and energy relations with Iran are estimated to be upwards of $15bn - have begun to conduct much of their bilateral trade with Iran through the Emirates," the Carnegie report says.
"The overwhelming majority of UAE trade with Iran involves the simple re-exportation of goods received from other countries, ranging from everyday foodstuffs to industrial equipment.
"This re-export trade has grown steadily over the past decade and was officially worth over $8.5bn in 2010, though unofficial estimates are much higher. Iran is the UAE's second-largest re-export market (after India), accounting for about 17 per cent of total re-export volume, and the UAE in turn is one of Iran's top sources of imports, accounting for more than 15 per cent of its total."
Quoting official figures from the UAE Ministry of Foreign Trade, Mr Sadjadpour says: "As a result, the trade relationship is heavily weighted in the UAE's favour. In 2010 the UAE exported or re-exported over $9bn worth of goods to Iran, and only imported $1.12bn worth. Iran's trade deficit with the UAE is its largest."
Dubai is increasingly playing the role of free-market entrepot to Iran, he says.
However, beneath that evidence of increasingly close trading relationships lie tensions between Iran and the UAE over territorial issues, sectarian divides and, most recently and seriously, the tightening of sanctions by the US against Iran over its nuclear ambitions.
The Americans simultaneously play an increasing role in the UAE's economic life: the UAE is the largest export market in the Middle East for US goods, worth $12.8bn last year. This gives the Americans greater leverage in the UAE when it comes to applying sanctions measures.
"Sanctions have always put the UAE in a difficult position. The very factors that have made Dubai and the UAE as a whole so economically successful - namely free trade and light regulation - have also made them an inhospitable environment for enforcing sanctions," Mr Sadjadpour says.
The situation became more difficult last year, when the US ratcheted up sanctions another notch and UAE authorities increased their surveillance of businessmen and, significantly, financial institutions involved in facilitating UAE-Iran trade. Some UAE banks are making it more difficult for Iranian businesses to get trade credit facilities, with knock-on effects for regional insurance and shipping industries.
Mr Sadjadpour says that in these conditions, the black market flourishes, while legitimate businessmen suffer: "It's boom times for middlemen, tough times for businesspeople."
And all the while, the sanctions campaign is having little noticeable effect on Iranian nuclear plans, its intended target. "If, in two or three years time, there is still no change, the UAE will legitimately be able to ask: why are we doing it?" Mr Sadjadpour says.
Published: August 17, 2011 04:00 AM