* Sanctions reverse long expansion of economic ties
* Two U.S. banking measures do most damage
* Changing politics in UAE may also be responsible
* Even small-scale trade on dhows being hit
* Iran likely to seek channels outside Dubai
By Humeyra Pamuk
DUBAI, Feb 15 (Reuters) - Reza, an Iranian businessman in his mid-thirties, moved to Dubai 10 years ago to make his fortune. For a while, he succeeded — annual sales at his machinery trading firm reached $70 million. Over the past 18 months, most of what he built has crumbled.
Tightening international sanctions against Iran over its disputed nuclear programme have culminated in making it impossible for Reza to send payments through banks. That has forced him to fire 22 of 26 staff and to sever business ties with machinery making giants such as Japan’s Komatsu, he says.
“If I can’t move any money, how can I do business?” said Reza, who declined to give his full name because of concern that publicity could cause political problems for him inside Iran.
“As of a month ago, the business is officially dead. We’re now in a situation where even if we hand the banks actual cash in return for a credit or as actual payment, they won’t take it if the goods are going to Iran.”
The United Nations and Western countries have imposed an escalating series of economic sanctions against Iran over the past five years. Business with Iranian companies linked to the nuclear programme was banned and their assets were frozen; trade and investment involving Iran’s energy industry were restricted.
But Iran’s trade boomed with the freewheeling commercial hub of Dubai, 150 kilometres (100 miles) across the Gulf in the United Arab Emirates — in fact, the sanctions may have had the effect of pushing more business through Dubai.
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, latest data from the UAE customs authority show. It did not give an annual growth rate, but in the first half of 2011, Iranian re-exports rose 36 percent from a year ago to 19.5 billion dirhams.
That was a significant share of Iran’s non-oil foreign trade; its merchandise imports were $70 billion in the fiscal year to last March 20 while non-energy exports were $26.3 billion, according to International Monetary Fund estimates.
In the last three months, however, the sanctions have started to bite in Dubai, because of new U.S. rules that are freezing Iran out of much of the global system for financing trade. 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.
Mehdi, an Iranian national who works in a money-exchange business in Dubai’s bustling Deira district, which is filled with small merchant shops and trading firms, said money flows to and from Iran had slowed dramatically since late last year.
“Things have changed now. People are afraid,” he said.
Iran sanctions graphic: link.reuters.com/qeh85s
Iran could limp along under sanctions:
At the sharp end of Iranian sanctions:
TAKE A LOOK-Iran nuclear dispute:
The sanctions are reversing over a century of deepening ties between Iran and Dubai. In the late 19th century, Persian merchants crossed the Gulf to Dubai, then little more than a fishing village, and helped lay the foundations for its vibrant trading community. The chaos of Iran’s Islamic Revolution in 1979 triggered a fresh wave of Iranian immigrants to Dubai.
Around 8,000 Iranian traders and trading firms are registered in the emirate, according to the local Iranian Business Council. Ethnic Iranians are estimated to account for roughly 10 percent of its population of 2 million.
More than anything else, two U.S. steps have damaged the relationship. On Nov. 21, 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.
And on Dec. 31, U.S. President Barack Obama signed into law a bill imposing sanctions on financial institutions that deal with Iran’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. The UAE’s central bank responded by telling local banks to stop issuing letters of credit for Iranian business, commercial bankers said.
Changing political winds within the UAE may have contributed to the ban. Karim Sadjadpour, Iran expert at the Carnegie Endowment for International Peace, a global think tank, said that until recently, Dubai differed with Abu Dhabi, the other major power in the UAE, over how to deal with Tehran.
“Dubai preferred a more accommodating, business-first approach; Abu Dhabi had grave concerns about Iran’s nuclear program, its “imperialist” ambitions in the Persian Gulf, and the growing population of Iranians residing in the UAE.”
The tightening of international sanctions, and Abu Dhabi’s increased influence in the UAE since it bailed Dubai out of a corporate debt crisis in 2009, mean the UAE now “speaks with one voice, that of Abu Dhabi, in its dealings and disputes with Tehran”, Sadjadpour said.
In Dubai’s gold souk, a regional centre for trade in jewellery, dealers say difficulties in transferring money are drying up their Iran business.
“We used to send 100 kilos (220 pounds) of gold...to Tehran. Two months ago it stopped. I can’t send anything now. Wholesalers in Iran are now buying from Turkey instead,” said an Iranian dealer.
Trade is also suffering at the Dubai Creek, a shallow waterway snaking through the northern part of the city, where wooden dhows wait to be loaded with boxes of clothing and household electronics before heading across the Gulf to Iran’s Bandar Abbas and Kish Island ports.
This is simple, straight-forward trade, in which merchants send goods and receive cash in return. But even that business is weakening, said a trader visiting a dhow to check on his shipment. “The number of trips has decreased and collecting money from Iran has become harder.”
There is considerable speculation among Dubai’s merchants over how Iran will seek to circumvent the obstacles to its trade. Some think it will 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. Iranian importers may resort to barter trade.
There is talk that Turkey could 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 play a bigger role.
Either way, Dubai’s Iran business looks set to suffer. That will not be crippling for the UAE economy as a whole, which saw its exports including energy rise above $220 billion in 2010, but it is a heavy blow for the Iranian diaspora in Dubai.
Mehdi predicts several money exchanges in Deira will shut down if the situation continues. “We can only make transfers (to Iran) up to $10,000 dollars and even then, we have to answer so many questions. For businesses, $10,000 is nothing.”
His shrinking business has prompted him to question his life in Dubai. “I came here seven years ago. There was no future for me in Iran,” he said. “It is a luxurious life here in Dubai, nowhere like Iran. But now we are afraid.” (Additional reporting by Amena Bakr and Mirna Sleiman; Editing by Andrew Torchia)