In December 2007, during a trip to Dubai, I explored the enormous mall-hotel-ski resort, Mall of the Emirates, with my uncle Amir. An Iranian businessman, Amir was buying construction parts in Dubai for his business back home. I remarked that I had never seen anything like it in my life. He looked stunned.
“Behnam, did you hear him? He says this mall is as big if not bigger than any mall in America,” he said to his friend as he pointed to me
“Yeah, it’s big. Really big,” Behnam, a well-to-do government official in Iran, responded. Their voices were full of pride, excited that a city in the Middle East had beaten America at its own game: capitalism.
At the time, if you turned on the TV in Iran, loud, boisterous pitchmen promoted deals on apartments and buildings in Dubai. By catching a flight just longer than those between LA and San Francisco, Iranians could visit Dubai to purchase the Western goods that allowed them to transform their Tehran homes into a page out of an IKEA catalog. But trips to the UAE were more than vacation getaways for Iranians. The relationship between them and the Emirate was symbiotic: we buy your goods, you let us get around the sanctions to bring them home. As Iranian-expert Vali Nasr once noted, “Dubai is the best city in Iran.”
But what happens now that Dubai’s economy has collapsed? As the city, often referred to as the Las Vegas of the Middle East, struggles with the reality of its economic situation, how will its failed economy affect Iran? The ramifications for Iran are staggering.
For starters, trade between Iran and the United Arab Emirates is enormous. Non-oil trade between the countries was $9.2 billion in 2007, a figure that does not include black market trading. In a world in which Iran’s former trading partners have turned their backs, the UAE became Iran’s best and most capable economic friend – it was Iran’s number one trading partner last year.
In a historic visit to Iran in May of 2007 by Dubai’s ruler and UAE prime minister Sheikh Mohammed bin Rashid, Ahmadinejad put words to the growing relationship that helped his country cope in the face of sanctions: “The UAE prime minister’s visit is proof that US policies will not have any impact in the region,” he said.
Ahmadinejad’s fiery rhetoric has increased in the past few years, perhaps because of his confidence that Iran’s relationships with countries like the UAE would allow the Iranian economy to prosper despite sanctions. Trading and investing through Dubai provided the Iranian government and Ahmadinejad the opportunity to interact economically with the outside world. Iran used Dubai to trade with other countries, set up non-private businesses, import goods and get international currency. Therefore, the sanctions aimed at reprimanding Iranian policy and rhetoric were no longer as effective, allowing Ahmadinejad to continue his heated speeches against countries that criticized his government.
As a result of the Bush Administration’s policies in 2003, it became impossible for Iranian businesses to get dollars to buy goods on the international market. Soon, Euros too proved elusive. Before long, most countries stopped working with Iranian banks altogether, making the purchase of outside goods even more difficult. Iranians use their businesses in Dubai to get credit from international banks, purchase goods from abroad, import them into the open Dubai ports, and then re-export them into Iran. With the economic collapse in Dubai, it is likely that this lifeline will be severely constricted for Iranian businesses, leading to a cascade of Iranian business failure both in Iran and abroad of which we have yet to see the repercussions.
And the relationship seemed to be going well for both countries before Dubai’s recent economic collapse. 450,000 Iranian citizens currently live in Dubai and more than 300 flights into Dubai are from Tehran, more than from any other city in the world. Iranian money flooded the Dubai market: Iranians reportedly own 10% of property in Dubai and $300 billion of Iranian investments are tied up in Dubai’s economy. To put this in context, some have calculated $300 billion to be about a third of Iran’s oil revenue. Currently, there are 9,000 registered Iranian-owned businesses in Dubai, providing a vital connection between Iranian business and the outside world.
Just weeks after Dubai’s economic collapse, the businesses that provided jobs are no longer flourishing in Dubai. The once-thriving property market that was key to Dubai’s success has stalled with countless building projects on hold. As one Iranian woman living in Dubai told Reuters, “I wanted to profit from my Dubai apartment to buy one in Tehran,” she said. “But now, it is not clear when the project will even be finished.”
In a December 2009 article, The Tehran Times reported that Iranians can now be seen loading their freight onto boats in preparation for their departure. The Times also noted that 30 percent of expatriates living in Dubai have now returned to Tehran. More importantly, the Iranian investments tied into the Dubai markets are likely no longer generating revenue. With hundreds of billions of dollars tied into toxic assets, Iran’s economy is in for a severe and sudden jolt.
It is widely known that Dubai’s elder-brother Abu Dhabi looked down on the city’s foolish investments, and while it has decided to finance Dubai’s debt, Abu Dhabi is significantly more conservative with regard to its economic dealings and culture. As one resident of Abu Dhabi said, “I’ve never been to Dubai. I don’t plan to go there. They don’t represent our morals.”
Abu Dhabi and its Western-friendly foreign policy seem to have bailed the country out of an embarrassing economic situation, but it may seek to curb Iranian investment, trading, and access to its market to please Abu Dhabi’s friends in the West. If Abu Dhabi limits Iranian banking and cuts off exports to the country, economic conditions will surely worsen in Iran, even if Dubai can recover.
Inevitably, increased economic turmoil will have political consequences for the Ahmadinejad regime. It was clear in the recent Iranian election that Iranians were anxious about their economic stability. With inflation rising, oil revenue decreasing, and Iran’s increasingly isolated status internationally, Iranians wanted a change. Now, even the Iranians who escaped the Iranian markets in are in trouble. If history has shown us anything, it is that the Iranian Bazaar, or the business class, has the power to set the stage for popular dissent. An unhappy Bazaar can persuade Iranian citizens to head for the street.
To keep its businesses afloat, the Iranian government must look to other markets to invest and from which they can import goods and secure lines of credit. With another round of sanctions potentially in store, the possibility of Iran to finding additional markets looks slim. Certainly there is no other partner that can provide the opportunities that Dubai’s look-the-other-way policies allowed.
In an already perilous political climate, Ahmadinejad will need to abstain from his firebrand speeches to assuage international fears in hopes of relieving cutoff Iranian markets. If he does not, and sanctions remain in place or worsen, the economic consequences will be more crippling than when Dubai was there to cushion the blow. The economic impact will trickle down to the beleaguered working class, which, coupled with the already alienated business class, will leave Ahmadinejad and the Iranian government with nowhere to turn. If the Islamic Republic of Iran continues down the same path it is on, it will surely find itself even more isolated, but now Dubai will not be there to loosen the stranglehold on Iran’s economy.
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