How the UAE will Underwrite the Iran Deal's Success

10 Feb 2022

How the UAE will Underwrite the Iran Deal's Success

By Esfandyar Batmanghelidj

Founder and CEO of the Bourse & Bazaar Foundation.

February 10, 2022

https://www.bourseandbazaar.com/articles/2022/2/10/how-the-uae-will-underwrite-the-iran-deals-success

 

As negotiations on the restoration of the Iran nuclear deal reach their “final stage,” doubts persist about whether the lifting of US secondary sanctions will really boost Iran’s economy. Iranian leaders are seeking “guarantees” that they will accrue the economic benefits promised under the Joint Comprehensive Plan of Action (JCPOA), citing both the disappointing experience of sanctions relief between 2016-2018 and the pall that has been cast by President Donald Trump’s unilateral withdrawal from the agreement.

Doubts around the JCPOA’s economic prospects revolve around whether European companies will bother to engage the Iranian market given the challenging experience of the last few years. But there is another trade relationship that arguably matters more for the future of the JCPOA.

The United Arab Emirates (UAE) did not play a significant role in Iran’s economic recovery during the period of sanctions relief between 2016-2018. This is notable because in the period leading up to the imposition of financial sanctions on Iran in 2012, the UAE was catching up to the European Union as one of Iran’s top trade partners. In the ten years from 2001 to 2011, UAE trade with Iran rose at twice the pace of European trade, rising from $2.2 billion to $24.2 billion. In the same period, EU trade with Iran rose from $12.8 billion to $36.8 billion.

 

According to data published by IRICA, Iran’s customs authority, UAE trade with Iran peaked in 2011 at $24 billion. That same year, data from Eurostat shows that EU trade with Iran also reached an all-time high at $36 billion. To put it another way, the volume of Iranian trade passing through the UAE was equivalent to two-thirds of Iran’s direct trade with the whole of Europe. During the first decade of the millennium, Iran underwent significant industrial development enabled by the forces of globalisation. Iran lacked a global port and global banks. But its proximity to the UAE offered a conduit to global markets. Dubai was to Iran what Hong Kong was to China in the 1990s—the world’s gateway to a fast-growing economy.

After the imposition of financial sanctions in 2012, both EU and UAE trade with Iran took a hit as the Iranian economy was thrust into a recession. EU trade with Iran averaged just $10.6 billion per year between 2012 and 2015. UAE trade fell less dramatically, given that a large portion of Iranian exports to the UAE, destined for third countries, is comprised of food and consumer goods that fall outside of the scope of sectoral sanctions. The value of UAE trade with Iran averaged $15.3 billion in this period.

In January 2016, the implementation of the JCPOA saw the lifting of a wide range of UN, US, and EU sanctions on Iran. EU trade with Iran rebounded sharply as Iranian exports to Europe rose, driven by oil sales. Iran used its euro-denominated revenues to purchase European goods, especially industrial goods. EU trade with Iran rose to $23 billion in 2017, still down compared to the 2011 peak, but a marked improvement over the period prior to the implementation of the JCPOA. By contrast, trade with the UAE did not rebound. Total trade between the UAE and Iran averaged $14.4 billion from 2016 to 2018—slightly lower than the trade volumes in the period before sanctions relief.

 

This is the overlooked aspect of why Iran’s experience of JCPOA sanctions relief was underwhelming. While trade with Europe failed to return to its pre-sanctions peak, the greater constraint on Iran’s economic recovery was that trade facilitated through the UAE did not really rebound at all. Consequently, Iran’s ability to engage with all of its trading partners remained diminished. Iranian and foreign companies seeking to do business in the aftermath of sanctions relief could not avail themselves of the most obvious and efficient financial and logistical channels to do so. 

For the last decade, UAE relations with Iran have been strained. The UAE was quick to support the multilateral sanctions on Iran, with Abu Dhabi reigning in Dubai-based banks and companies that had long profited from their links to Iran. Under instruction from the UAE central bank, commercial banks closed the accounts of Iranian companies and Iranian nationals. Multinational companies that had used their UAE-based subsidiaries to conduct business with Iran shifted their operations (Turkish banks emerged as an alternative financial channel for trade with Iran, especially for the European trade that persisted in the sanctions period). The UAE gave tepid support to the Obama administration’s efforts to constrain Iran’s nuclear programme but felt excluded from discussions around the possible impact of the deal, which seemed poised to tip the regional balance of power in Iran’s favour. On January 2, 2016, a crowd attacked the Saudi embassy in Tehran. Two days later, and just ten days before the JCPOA was formally implemented, the UAE downgraded its diplomatic ties with Iran. Over the next year, Mohammed bin Zayed, crown prince of Abu Dhabi, joined with Mohammed bin Salman, crown prince of Saudi Arabia, to push back on Iranian influence in the region. By the end of 2018, following a unilateral withdrawal from the JCPOA, the Trump administration had reimposed secondary sanctions on Iran in full, with the full support of UAE leaders.

In May 2019, the same month that Trump revoked a set of waivers permitting Iran to sell limited volumes of oil to its historic customers, four tankers were damaged in an attack off the coast of Fujairah. The attack, attributed to Iran, was the first incident in a series of escalations that constituted Iran’s response to the Trump administration’s maximum pressure sanctions. Just a few months later, the UAE dispatched a delegation to Iran to discuss maritime security. Leaders in Iran and the UAE eventually came to realise that renewed dialogue could help avoid a spiralling regional security crisis. In December of last year, Tahnoon bin Zayed, brother to Abu Dhabi’s crown prince and the UAE’s national security advisor, visited Tehran. The maturation of this diplomacy has been supported by economic engagement. Over the course of the last two years, the UAE has taken steps to reprise its role as a facilitator of Iran’s trade links, emerging as a key intermediary in Iran’s oil exports to China, despite these exports taking place in violation of US secondary sanctions.

Back in 2019, as the first signs of renewed economic diplomacy emerged, I argued that “Abu Dhabi can’t afford to keep Iran out of Dubai.” The argument still holds true. Dubai and the wider UAE have performed an economic miracle, emerging from the desert as a global center of trade and finance. But as a new analysis from the IMF makes clear, further growth and greater resilience will require regional economic integration. While the IMF report limits its discussion to GCC countries, a restoration of UAE-Iran trade to pre-sanctions levels would be an enormous catalyst for growth. UAE leaders are aware of this fact. In a statement jointly issued with the United States, GCC leaders declared that “deeper economic ties after the lifting of US sanctions under the JCPOA are in the mutual interest of the region.”

When it comes to the prospects for renewed sanctions relief, the increasingly constructive relations between the UAE and Iran must be taken into account. If the UAE plays an active role in facilitating increased trade with Iran following the restoration of the JCPOA, the rise in trade could compensate for any diminished rebound in trade between Europe and Iran. More optimistically, if UAE banks are instructed to resume support for Iran-related transactions, the increase in available foreign exchange liquidity and the multiplication of the available payment channels could have a dramatic impact on the full range of Iran’s bilateral trade relations. Where European and Asian banks may remain hesitant to facilitate trade, UAE banks can step in as intermediaries, taking on the burden of the compliance requirements. They will have enough business to justify the costs of working with Iran.

While the normalisation of UAE-Iran ties remains tentative, UAE leaders aware of the role they can play as underwriters of the restored nuclear deal. The Biden administration, eager to consolidate the restored JCPOA, will likely encourage the UAE to reprise its role as Iran’s primary gateway to the global economy, with the U.S. Department of Treasury and U.S. Department of State engaging directly with UAE regulators and companies to help them navigate the new compliance landscape. The potential is enormous. UAE-Iran trade grew at an annualised rate of 28 percent between 2001 and 2011. Had this growth been sustained for just five more years, total trade would have exceeded $80 billion. What matters most for the long-term viability of the nuclear deal is not whether trade with Europe will return to pre-sanctions levels, but whether revitalised trade with the UAE can accelerate Iran’s reintegration into the global economy.