by Esfandyar Batmanghelidj
As the world teeters on the edge of another financial crisis, few places are being gripped by anxiety like Dubai. Every week a new headline portends the coming crisis in the city of skyscrapers. Dubai villa prices are at their lowest level in a decade, down 24 percent in just one year. A slump in tourism has seen Dubai hotels hit their lowest occupancy rate since the 2008 financial crisis, even as the country gears up to host the Expo 2020 next year. As Bloomberg’s Zainab Fattah reported in November of last year, Dubai has begun to “lose its shine,” its role as a center for global commerce “undermined by a global tariff war—and in particular by the U.S. drive to shut down commerce with nearby Iran.”
Dubai, an entrepôt where the workers are migrants and where property is king, is especially vulnerable to global recessions. In the immediate aftermath of the global financial crisis in 2009, Dubai’s real estate market collapsed, threatening insolvency for several banks and major development companies, some of them state-linked. Abu Dhabi, which controls the UAE’s vast oil wealth, threw Dubai a lifeline with an initial $10 billion bailout, later expanded to $20 billion.
But there was a second, hidden “bailout” that helped keep Dubai afloat. When the Bush administration enacted the Iran Sanctions Act in 2006, deepening Iran’s economic turmoil under President Mahmoud Ahmadinejad, there was a significant increase in the already significant volume of capital flight from Iran, most of which landed in Dubai. One 2009 estimate places the total value of Iranian investments in Dubai at $300 billion.
While global investors pulled their capital out of Dubai in the aftermath of the global financial crisis, the Iranian business community mostly stayed put, maintaining their deposits in Dubai’s teetering banks. Iranians continued to invest in Dubai’s ailing property market and used Dubai’s ports to conduct re-exports as sanctions restricted Iran’s direct access to global markets. For Iran’s captains of industry and finance, Dubai was not some far flung emerging market, but a vital channel to the global economy in the face of tightening sanctions. As Iranian economist Saeed Laylaz smartly observed in 2009, “Dubai is the most important city on earth to the Islamic Republic of Iran, with the exception of Tehran.”
The financial crisis and U.S. sanctions had served to deepen the mutual dependence between Dubai and Iran—an outcome that ran counter to the goals of policymakers in both Abu Dhabi and Washington.
The Crown Prince of Abu Dhabi and the defacto ruler of the UAE, Sheikh Mohammad bin Zayed (MBZ), has long seen Iran as a rival. MBZ is hostile to Iranian influence over Dubai, where many of the leading trading families can trace their roots to Iran, a legacy of centuries of trade in the Persian Gulf. MBZ’s dream of an assertive UAE would have been undercut had Dubai continued to develop into the Hong Kong to Iran’s China.
The Obama administration’s effort to build a multilateral sanctions campaign offered MBZ the opportunity to curtail Iran’s presence in Dubai’s economy. As they sought to isolate Iran economically, U.S. officials traveled to Dubai to meet with banks and companies to discourage them from engaging in commercial activities with Iran. Rather than resisting U.S. interference in the UAE’s economic sovereignty, Abu Dhabi amplified the American message– the bailout had put Abu Dhabi in a position to dictate policy to Dubai. The new policy called for Dubai to close its doors to Iranian money.
In subsequent years, the presence of Iranians in Dubai’s economy has diminished significantly. Trade persists, but banks refuse Iran-origin funds, close the accounts of Iranian companies, and deny services to individuals who maintain Iranian citizenship. More recently, as the Trump administration cultivated ties with MBZ, the UAE began to reject more Iranian applications for residency and business visas were routinely denied. Nearly 50,000 Iranian residents have left the UAE in the last three years.
But there are new signs that Dubai may be seeking to repair its trade relationship with Iran. In a recent interview, Abdul Qader Faghihi, president of the Iranian Business Council in Dubai, declared that a “space for trade between Iran and the UAE has been reopened.” Though any opening remains in its initial stages, Faghihi referred to negotiations with “the rulers of Dubai” in which Dubai authorities “accepted that Iranians who have the capital and intend to conduct legitimate trade with the UAE will be granted business visas and that banks will open accounts for these Iranians on instruction from Dubai authorities.”
This small opening may be related to efforts to reduce tensions around the Strait of Hormuz as Abu Dhabi reconsiders its regional entanglements and the risk of conflict in the region—it is unlikely that Dubai would be able to extend an olive branch to the Iranian business community without the consent of Abu Dhabi. But economic fears, and not security concerns, provide the clearest reason why a change in policy may be on the cards—Dubai will soon need another “bailout” from Iran. Farshid Farzanegan, head of the Iran-UAE Joint Chamber of Commerce, recently stated “The UAE’s behavior towards Iranian businessmen has changed… and moves are being taken to resume relations… As the UAE economy slumps, officials have decided to cooperate with Iran.”
Ten years on from the last financial crisis, Dubai is still repaying its debts to Abu Dhabi. As the UAE braces itself for the next global recession, Iran remains the only country capable of injecting significant capital into Dubai at a time when global investors will pullback. Iranian business leaders in Dubai are wondering—how long can Abu Dhabi afford to freeze them out?