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Trade Relationships between the United Arab Emirates and Islamic Republic of Iran

Guiding Principle

Iran and the UAE have close economic and historic relations for many years. The trade volume between Iran and Dubai alone is estimated at 10 billion dollars per year, mostly imported to the Emirate. With Iran facing growing Western pressure, its ties with Dubai have drawn scrutiny from the United States. In order to comply with international sanctions, the UAE has imposed some restrictions on its relation with Iran. The effect of international sanctions is reflected in different aspects, the most important of which are banking, shipping, insurance sectors and providing the facilities for Iranians to make investment and to set up their company and branch offices in the UAE.

A. The Effect of International Sanctions against Iran on Dubai Policy towards Iran

Iran and the United Arab Emirates (UAE) have enjoyed strong bilateral relations for many years.Iran and the UAE have close economic and historic relations. Though the two countries have been in a low-level dispute for many years over the ownership of three islands in the Persian Gulf – the Greater and Lesser Tunbs and Abu Musa – they nevertheless enjoy close relations based largely on mutually beneficial economic relations.

Iranis a significant trading partner with the UAE. The trade volume between Iran and Dubai alone is estimated at 10 billion dollars per year, mostly imported to the Emirate. Tens of thousands of Iranians live and work in trade hub Dubai and elsewhere in the UAE, many of them involved in the multi-billion-dollar, re-export trade to Iran. About 8,000 Irani an traders are registered in Dubai, and re-export trade between Iran and the UAE – goods sent to the UAE for on-shipment to Iran, and Iranian goods sent to the UAE for on-shipment to other countries – totalled 31.9 billion Dirhams ($8.7 billion) in the first nine months of 2011, being the latest data  from the UAE Customs authority. The UAE’s re-export market, however, has been crippled as of late by several new rounds of U.S. sanctions.

With Iran facing growing Western pressure, its ties with Dubai have drawn scrutiny from the United States. A substantial deterioration of  ties in late 2009 led to a reduction in trade relations between the two countries. The primary cause of the strain was initially UAE concerns over Iran’s nuclear program and its support for UN and unilateral sanctions, but later, in 2011,Iran’s interference in Bahrain’s domestic affairs further inflamed tensions. Nevertheless, Iranand the UAE have largely managed to overcome these difficulties and in 2011 the Persian Gulf neighbors signed an agreement that would have Iran provide the Emirates with significant quantities of natural gas.

Sanctions against Iran have been grouped into 1) UN sanctions againstIran; 2) Multinational sanctions against Iran; and 3) National sanctions against Iran.

United Nations Security Council passed several resolutions against Iran for failing to stop its uranium enrichment program. The main provisions of the last resolution (i.e. UN Security Council Resolution 1929 – passed on 9 June 2010) are as follow:

  • Iran could not participate in any activities related to ballistic missiles.
  • A ban on all countries providing military vehicles, aircraft or warships and missiles or missile systems and related materiel to Iran;
  • A ban on training, financing or assistance related to such arms and materiel and restraint over the sale of other arms and material to Iran;
  • A travel ban on individuals listed in the annexes of the resolution, with exceptions decided by the Committee established in Resolution 1737; and
  • The freezing of funds and assets of the Army of the Guardians of the Islamic Revolution and Islamic Republic of Iran Shipping  Lines.

EU Council Regulation No 961/2010 implements additional restrictive measures against Iran, the main of which are as follow:

  • Freezing of funds and economic resources of specific Iranian persons and entities;
  • Restrictions on transfers of funds to and from an Iranian person, entity or body;
  • Vigilance over activities with Iranian banks;
  • Dealing with the Iranian banking sector;
  • Restrictions onIran’s access to the EU’s bonds markets;
  • Restrictions onIran’s access to the EU’s insurance and reinsurance markets; and
  • Restrictions on financing certain Iranian enterprises.

Furthermore, EU foreign ministers decided on 23 January 2012 to ban new contracts to import petroleum and petroleum products from Iran and to end existing contracts by 1 July 2012.

One of the most important national sanctions against Iran include an embargo on dealings with Iran by the United States, and a ban on selling aircraft and repair parts to Iranian aviation companies. Since July 2010, Canada, Australia, South Korea and Japan have also set unilateral sanctions against Iran.

In order to comply with international sanctions, the UAE has imposed some restrictions on its relation with Iran. The effect of international sanctions is reflected in different aspects, the most important of which are banking, shipping, insurance sectors and providing the facilities for Iranians to make investment and to set up their company and branch offices in the UAE.

The UAE has implemented UN Security Council Resolution No. 1929. The UAE blacklisted three firms controlled by Islamic Republic of Iran Shipping Lines (IRISL) and 15 belonging to the Revolutionary Guards, and also calls for establishing a cargo inspection regime. 

B. DubaiPolicy on Iranian Shipment

Dubai’s economy partly depends on trade with near by countries such as Iran. Iranhas been circumventing restrictions on goods blacklisted by sanctions and much of the trade goes via the UAE. The UAE fully supports and enforces UN Security Council resolutions barring shipment of sensitive materials and technologies to Iranand is taking aggressive measures to enforce export-control laws that prevent the transhipment of illicit materials. In 2007, Dubai imposed export-control laws designed to combat smuggling of military goods toIran.

Based on the inquiry made from some Iranian traders, who have close shipping transactions with Dubai, there is still trade relation between Iran and Dubai, although international sanctions made Dubai more sensitive to the shipments made to/from Iran. In general, Dubaiputs restriction on the shipment of the following cargos:  

  1. Any vessel containing any cargo related to Iranian oil and gas industry, Iranian military fields, uranium enrichment programs and petroleum resources, military vehicles, aircraft or warships and missiles or missile systems and related materiel to Iran;
  2. Any vessel containing any dual-use goods and technology which may have utility to Iran’s nuclear and missile programmes;
  3. Any cargo the end-customer of which is one of the Iranian individuals (whether legal or natural person) who have been banned and listed in the UN,U.S., EU sanction regulations.

From practical point of view, in order to comply with international sanction regulations against Iran,Dubai examines the manifest and other sipping documents of each container. In case there is a doubt whether a container loaded with any sensitive and blacklisted cargo, Dubai Customs Authority orders to inspect the container carefully to make sure that only allowed goods are going to Iran. If the container contains any illicit items, Dubai Customs Authority does not give permission for the shipment to Iran and the vessel shall be sent back to the country of origin.

According to UN Security Council Resolution 1929, the funds and assets of the Islamic Republic of Iran Shipping Lines (IRISL) have been frozen. Therefore, IRISL is not authorized to make any shipment to/fromDubaiports and the international shipments are made by foreign shipping companies and/or by Iranian private shipping companies.

In general, as a result of international sanction, there is a considerable decline in the business of Iranian shipping companies. Because of the restrictions imposed by EU and U.S. recent sanctions regulations, the process of purchasing and opening L/C gets so difficult. As a result, the shipment from Europe declined considerably. Even if any shipment be made, the problem of transferring money and the freight cost from Iran to abroad and vice a versa is not possible. So the freight cost shall be made only in the country in which the shipping company is located. Therefore, Iranian traders cannot discharge a shipping company located abroad for example.

Because of the above stated difficulties, most shipments are made from China and India to Iranand vice a versa.

C. The Effect of International Sanctions on Insurance Section

According to EU Council Regulation No 961/2010 there are restrictions on Iran’s access to the EU’s insurance and reinsurance markets. Therefore, European insurers or those UAE companies the re-insurer of which have European origin are banned from insuring cargo going to Iran.

D. Dubai Policy on Rendering Banking Services to Iranian Traders

UAE has a long  history of trade with Iran, especially in Dubai where there is a large Iranian trading community. Nevertheless, since the enactment of UN Security Council Resolution No. 1929, which includes freezing of some bank accounts, UAE Central Bank ordered financial institutions in the country to immediately freeze the bank accounts and stop remittances of money in the names of 41 Iran-linked firms, whose assets worldwide are to be frozen for assistingIran’s nuclear or missile programmes.

Therefore, the circular No. 3601/2010, issued on 24 June 2010 by the UAE Central Bank, has ordered the banks, money changers, investment and finance companies and other financing entities operating in the country to ‘freeze any accounts, deposits and stop any remittances in the names of (natural/juridical) persons, designated as being involved in the Iranian nuclear or ballistic missile activities.’

More than anything else, two U.S. steps have damaged the relationship between the two countries. On 21.11.2011, the United States named Iran as an area of ‘primary money laundering concern’, making it legally more dangerous for banks around the world that have any U.S. business to deal with Iranian banks. Moreover, on 31.12.2011, U.S. President Barack Obama signed into law a bill imposing sanctions on financial institutions that deal withIran’s central bank, which is the main conduit for its oil revenues. Sanctioned institutions would be frozen out of U.S. financial markets.

For many banks in Dubai and around the world, the two measures made financing even the most innocent trade with Iran prohibitively risky. In response, in February 2012, Banks in Dubai were asked by the UAE central bank to stop issuing letters of credit to finance trade withIran. Therefore, businessmen can no longer open a letter of credit to overseas suppliers if the port of discharge is an Iranian port.

Currently, the UAE stopped money transfers into Iranian banks. According to the Iranian Business Council, a Dubai-based group that promotes economic ties, the volume of trade between Dubai and Iran has been reduced by 50 percent compared to before the latest round of sanctions, mainly due to bank restrictions.

At the moment, Iranian traders in Dubai can not get letters of credit. All financial transactions with Iranian traders are done in cash rather by letter of credit. According to Iranian traders in Dubai, in the last three months, most non-oil trade with Iran remains perfectly legal under the sanctions – but if traders cannot obtain letters of credit or other finance, they cannot ship the goods.

The Iranian rials fell to a record low against the dollar within last two months following US bill dated 31.12.2011 on imposing  fresh sanctions against the country’s central bank. This issue had considerable effect on the rate difference between Iranian rials and Dirham. Currently, the exchange rate hovered at 5,200 rials to the Dirham, marking a record low. The traders in Iran and Dubai are reluctant to make any new order to purchase or sell any goods and many have stopped to launch their products into Iranian market.

Trade is also suffering at the Dubai Creek, a shallow water way snaking through the northern part of the city, where wooden dhows are loaded with boxes of clothing and household electronics heading across the Persian Gulf to Iran’s Bandar Abbas and Kish Island ports. Trade at the Dubai Creek is simple and straight-forward, in which merchants send goods and receive cash in return. But even that business is weakening, according to a trader at Dubai Creek, the number of trips has decreased and collecting money from Iranhas become harder.

E. Conclusion

Iran’s economy is mainly under the control of the government and the government has an essential role in the economy of the country. Therefore, the Iranian state companies and organisations are largely targeted by international sanctions. Such crucial point has had an important effect on the trade relations between Iran and UAE.

There is considerable speculation among Dubai’s merchants over how Iranwill seek to circumvent the obstacles to its trade. Based on the inquiry made from Iranian merchants in Iran and Dubai, because of extensive economic ties between Iran and UAE and the financial benefits both countries obtain from such relations, it is relatively unlikely that with in incoming two or three years, the trade relations will break off completely. Nevertheless, it is likely that such relation may be suspended for some months. As a result of restrictions imposed by international sanctions, Iranian traders have approached traditional business methods. Some plan to use the hawala system of informal money brokers who operate outside conventional banking channels; they are well established in the Middle East and South Asia.[1] Iranian importers have approached to barter trade as well.

It is probable that Turkeycould emerge as a new re-export hub for Iran, since at least one bank there, Halkbank, has continued to handle customers’ payments for Iranian oil.Iraq, which has a common border and political ties with Tehran, could also play a bigger role.


 

[1] In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient’s city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date

 The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. Trust and extensive use of connections, such as family relations and regional affiliations, are the components that distinguish it from other remittance systems.

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