Dubai jittery over business with Iran
The New York state financial watchdog sent shivers down bankers’ spines last week as it accused Standard Chartered of hiding $250bn of transactions with Iran. Nowhere were those chills felt more than in Dubai, Iran’s longstanding trading ally in the Middle East.
“All international banks are scared stiff at the moment of having any links to any Iranian entities,” said one senior bank official in Dubai. “But you’ll always be one step behind clever people trying to get around the system; it’s pretty sophisticated.”
The United Arab Emirates has committed to implementing UN sanctions directed at sensitive Iranian nuclear activities. However, US sanctions are making it increasingly impractical for banks and energy companies in the UAE to do business with Iran.
Over the past year those sanctions have led to several entities from the UAE being publicly named and shamed for their Iranian business interests.
“The real tipping point was at the end of 2011, with the latest round of US banking sanctions, potentially exposing non-US banks to sanctions by the US,” says Patrick Murphy, a specialist in Iranian sanctions as a senior associate at Clyde & Co., the law firm in Dubai.
“That was a real wake-up call for banks outside the US still dealing with Iran. They didn’t want to run the risk of being cut off from the US banking system,” he adds.
With the toughened stance of US politicians, the overarching message of business with “them or us” has left mainstream UAE-based banks and trading companies with little option but to comply. If they do not, they risk their easy access to dollars, crucial for the UAE economy where the currency is pegged to the greenback.
The implications of this are particularly important for Dubai, the UAE’s trading hub, which has long
relied on Iran as a major business partner, and is home to an estimated 300,000 Iranians. The sanctions are already changing this.
Membership of the Iranian Business Council in Dubai has dropped to two-thirds of the nearly 400 members it had two years ago, says Hosseni Asrar Haghighi, spokesman and co-founder of the organisation.
“Iranians have been living here as one of the most prominent communities,” he says. “Now they have to restart somewhere else and that relocation will take some economic activity with it.”
Noor Islamic Bank, whose chairman is a son of Dubai’s ruler, was forced to admit in March that it had ended relations with Iranian banks in December to comply with US sanctions against the country, sending a clear signal to other UAE-based lenders.
Before that, the US had already made an example of other UAE-based companies allegedly dealing with Iran’s energy sector. In May last year Royal Oyster Group and Speedy Ship were among companies accused of being among the largest suppliers of refined petroleum products to Iran.
Then, in January, Hillary Clinton, US secretary of state, restricted US business with Fal Oil, another Dubai-based company conducting trade with Iran’s energy sector. Fal responded to the sanctions, saying they were “inappropriate and unwarranted”.
As sanctions bite, Iranians have looked to cash transactions to park their funds. In the first half of the year Iranian investors purchased real estate worth $128m in Dubai, land department data shows, which creates an effective drain on the Iranian economy. Every penny spent not investing in Iran is a bonus for the authorities trying to squeeze the already-choking economy. Still, getting those amounts of cash into the UAE is physically risky for Iranian investors.
Dubai’s direct foreign trade with Iran probably rose to Dh36bn ($9.8bn) last year, compared with Dh27.2bn in 2010, according to Dubai customs, which does not publish the data regularly. However, a large proportion of that is re-export, and represents goods such as food, cars, rugs, diamonds and gold. Price fluctuations affect the data.
To get around US banking sanctions in particular, traders barter goods to avoid the need for lenders. Small businesses or individuals also lean on Dubai’s myriad of unregulated money exchanges. While these exchanges remain a channel for Iranian funds, high commissions and currency depreciation make them far from ideal.
Although the UAE is now viewed as a co-operative partner for implementing US sanctions, its historic relationship with Iran is not so easy to deconstruct, as many Emirati families trace their roots to their neighbour, with decades-long trade links.
Traders complain that business has slowed and they have been affected by the steep depreciation of the Iranian currency over the past year.
The US decision to cut off financial dealings with an Iraqi bank and a new campaign by a US group against Lebanese lenders points to the rest of the Middle East no longer being an easy option for Iranian business either.
Despite the close ties between the Shia-led government in Iraq and the US, the post-Saddam Hussein Baghdad is one of Tehran’s closest allies.
In July, the US cut ties with Elaf Islamic bank, an Iraqi private bank, after the US Treasury department said it had engaged in activity in the past year worth tens of millions of dollars with the Export Development Bank of Iran, sanctioned by the US in 2008 and the EU in 2010.
International banks in Dubai have been particularly concerned over dealing with Lebanon’s banks for fear that they are unknowingly dealing with funds that might be related to Hizbollah, the Tehran-backed Shia group.
United Against a Nuclear Iran, a US lobby group, has launched a campaign against the Lebanese economy, insisting that Hizbollah was engaged in a money laundering scheme to help facilitate Iran’s evasion of sanctions – a charge that the Lebanese central bank has vehemently denied. The US organisation has called on holders of Lebanese sovereign debt and other securities to divest their holdings.
With US sanctions tightening the noose far beyond its borders, Iranians trying to go about their daily business abroad will have to be ever more creative to keep their livelihoods profitable and their finances safe.
Additional reporting by Roula Khalaf in Beirut