Dr Abdulkhaleq Abdulla is a UAE-based retired professor of political science. He is currently a non-resident senior fellow at Harvard University
August 24, 2022
The UAE has decided to restore full diplomatic relations with Iran, six years after Abu Dhabi downgraded ties with the country in 2016. This week, its ambassador, Saif Al Zaabi, will return to Tehran.
A lot has happened in the past six years. So what triggered this latest development? Why now? Is this in any way related to the ongoing nuclear talks between Iran and major global powers? And who benefits the most from the resumption of relations between these two neighbours?
There is no single trigger. Essentially, the UAE move is the culmination of nearly four years of sustained and serious ongoing conversations on many levels between Abu Dhabi and Tehran, including five telephone calls between UAE Foreign Minister Sheikh Abdullah bin Zayed and his Iranian counterpart, Hossein Amir-Abdollahian, in the span of one year.
These high-level conversations started in early 2019, well before the latest round of Iran nuclear talks and the election of US President Joe Biden. The UAE was the one who initiated the contact and decided its pace based on reactions from Iran and the latter’s willingness to reciprocate these neighbourly gestures. The principle aim of these conversations was, and still is, to try to de-escalate tensions between the two countries and reduce regional tensions at large.
Therefore, the decision is mostly UAE-driven and regionally induced, rather than American-driven. It has little to do with the progress or lack of progress in seemingly never-ending nuclear talks.
Sending the UAE Ambassador back to Iran is consistent with recent UAE initiatives to engage regional adversaries
It is worth noting that, in 2016, nearly all Gulf states broke relations with Tehran. The UAE, however, decided to reduce its diplomatic presence there and not to totally terminate the relationship. The reduction of diplomatic relations was a legitimate response to the attacks in 2016 on Saudi diplomatic missions in Iran. Mobs stormed the Saudi embassy in Tehran as well as the consulate in Mashhad and ransacked them. The embassy building was set on fire with Molotov cocktails and petrol bombs. This was a severe breach of diplomatic protocol by Iran, warranting an angry response and immediate consequences for the status of diplomatic relations.
However, since then, Gulf capitals, including Riyadh, started to engage with Tehran slowly, especially the new administration of Iranian President Ebrahim Raisi. The conversation between between Abu Dhabi and Tehran touched on many issues both bilateral and multilateral. Needless to say, some have been more successful than others.
Now, the conversation with Iran includes all six Gulf states. There is a GCC-wide consensus to reach out to Iran and engage with it in the hope that it responds in kind this time around – especially as it claims it is eager to sign a new nuclear agreement.
The nuclear talks are one way to reduce tensions in the region. However, they will not stop Iran’s ultimate drive to develop its own nuclear weapons one day. Nonetheless, with or without a nuclear deal, the fact of the matter is that Iran has always been among the biggest threats to Gulf security, and remains so today. The threat is only growing, thanks to its missiles and drone capabilities.
So, short of confronting Iran, it is wiser to reach out to Mr Raisi. One way to deal with Iran is to continue the conversation and find common ground for good neighbourly relations. The ball is in Iran’s court. The UAE is testing Iran’s intentions and closely monitoring its behaviour. It has high expectations that Iran will reduce its threatening rhetoric, stop its provocative moves around maritime borders, reconsider its arming of the Houthi rebel group in Yemen and ultimately resolve its 50-year-old occupation of three UAE islands.
Shopkeepers roll a carpet at the Dubai Mall. Carpets from around the world, including Iran, are sold in the UAE Pawan Singh / The National
Politics aside, UAE-Iran relations are highly diversified. They are deep and multifaceted. The strongest leg has always been trade between the two countries, which is more than a century old. In fact, Iran is among the UAE’s top trade partners.
Even during the worst political tensions between the two countries, trade was uninterrupted. It went down, but never stopped. At its lowest point in decades, it still reached $11 billion in the year 2017. Now, it is back to its pre-2016 level.
The restoration of the UAE-Iran diplomatic relationship, as well as the possible signing of a nuclear deal, the lessening of regional tensions and, of course, the success of ongoing dialogue between the Gulf capitals and Tehran is all expected to increase trade volume between the UAE and Iran to more than $20bn annually.
Sending the UAE ambassador back to Iran is consistent with recent UAE initiatives to engage regional adversaries. It will certainly open a new chapter in UAE-Iran relations, and it is a sign that the two countries are heading back to business as usual. Needless to say, it is mutually beneficial.
Iran will certainly benefit politically and economically. But financially, commercially and diplomatically, the UAE will also benefit. And the region will gain from any reduction in tensions. This is about key regional powers, not superpowers, wanting a new Middle East order of their making.
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Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
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Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
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