Iran and the GCC connectivity agenda: Implication for Washington’s Iran policy

Iran is possibly the only country that the United Arab Emirates can call an “enemy.” The two maintain a dispute over three islands in the Gulf — Abu Musa and the Greater and Lesser Tunbs — that Iran “seized” on Nov. 30, 1971, but the UAE claims as its territory. Yet there is another more significant and multilayered side to the UAE-Iran relationship, one that concepts such as political pragmatism or hedging alone cannot explain.

The prevailing political spirit in the Gulf region is presently one of de-escalation. In the case of the UAE and Iran, a number of existing connections could help hasten the process of de-escalation and enable it to happen faster than anywhere else in the region. The outcome should be of interest not only to the UAE and Iran but also to the United States given the latter’s long-standing efforts to shape Iranian policies.

The UAE’s bottom-line calculations

Territorial disputes have been a major reason for conflict throughout history, and today they are at the heart of the war in Ukraine and the tensions and militarization of the South China Sea. From the UAE’s perspective, Iran’s possession of the three islands could have been a source of conflict similar to the Lebanese-Israeli clashes over the disputed territory of Shebaa Farms in south Lebanon.

If one looks at the UAE’s defense budget, it is quite clear that Iran is a major concern. The UAE is the third-largest spender in the Middle East, with a defense budget in 2023 estimated at $23.2 billion. A big component of that is allocated to air defense. The UAE operates the U.S. Terminal High Altitude Area Defense (THAAD) and MIM-104 Patriot PAC-3 systems, along with the Russian-built medium-range Pantsir-S1. The UAE also recently signed a $3.5 billion contract to receive the South Korean-built II KM-SAM air-defense systems. All such air-defense investments are meant for one purpose: to deter Iran and its regional partners, such as the Houthis in Yemen.

Iran as a possible threat, however, is not the whole story. The UAE also looks at Iran through another prism, that of its “global connectivity agenda.” Looking at the four arteries of connectivity — trade, people, money, and information — trade connectivity is possibly the most obvious.

The UAE maintained its trade and people-to-people relationships with Iran even when diplomatic and security relations were strained. In fact, the UAE was Iran’s top trade partner during the period from March 21, 2022-Jan. 20, 2023, with 20.27 million tons of goods traded at a total value of $19.77 billion. That is more than double the trade that Iran had in the same period with Iraq ($9.08 billion), a country considered by many to be Tehran’s closest partner in the Arab world.  

The flow of people reflects a similar reality. There are around 480,000 Iranians living in the UAE, or about 4.76% of the total population. In comparison, Egyptians, account for about 4.23% of the UAE’s population.

Tourism is another indicator. The two countries recently agreed to increase flights from the UAE to Iran to 215 per week, to be operated by Etihad Airways, Emirates, flydubai, Air Arabia, and RAK Airways. The Arabian Peninsula state has also given permission to Iran Air, Mahan Air, Iran Aseman Airlines, Caspian Airlines, Kish Air, and Taban Air to operate flights to the UAE.

Meanwhile, even though the UAE is involved in enforcing international sanctions on Iran — including those related to non-proliferation through the actions of its Executive Office for Control and Non-Proliferation and its Central Bank — it continues to support non-sanctioned money transfers between the two countries. This includes enabling two major Iranian banks to operate in the UAE, Bank Melli Iran and Bank Saderat Iran, as well as allowing money exchange companies to carry out non-commercial transactions, including remittances to Iran by the UAE’s Iranian expatriate community.

The “information connectivity” with Iran is perhaps best represented by the UAE-Iran submarine cable that extends 170 kilometers between Fujairah and Bandar Jask. In addition, E-Marine, a subsidiary of UAE-owned telecommunication company Etisalat, has been working on extending submarine cables between Iran and Kuwait.

But it was not until the COVID-19 pandemic that information sharing became important to Tehran. The assistance that the UAE provided to Iran in the form of test kits not only helped the latter identify the extent of the spread of the virus in its population but also facilitated the transfer of that data to international health organizations.

Iran seemingly works hard to limit its connectivity to the world, blocking access to most foreign social media platforms. And yet, as of January 2022, internet penetration stood at approximately 84.1% and mobile internet penetration was 109.27%, while broadband download speeds were as high as 10.34 megabits per second (Mbps), as of May 2022. Iran also ranks 45th out of 100 countries surveyed on the Economist’s Inclusive Internet Index due to government efforts to improve fifth-generation (5G) technology for mobile networks. This indicates a push by Iran to increase its global digital connectivity, despite its contradictory moves to limit its citizens’ access to the internet.

As the UAE was approaching its 50th anniversary in 2021, its leadership started to take stock of what had been achieved and what still needed to be done. The new compass for its next half-century took the form of a document entitled “The 10 Principles for the Next 50 Years.” These principles, which stipulated that economic development was the supreme national interest, were the basis for the policy of de-escalation that the UAE started rolling out with Yemen, Israel, Turkey, Qatar, and Iran. This was spelled out clearly in the document’s fifth principle, which changed the parameters for security from building defense capability to investing in “good neighborliness.”

Iran’s “Neighborhood Policy”

In the case of Iran, the UAE will be looking for goodwill in kind. On paper, that should not be hard. Since coming to power in 2021, Iranian President Ebrahim Raisi has repeatedly claimed that Tehran wants to put economic cooperation at the heart of dealings with its neighbors in the region, an approach dubbed the “neighborhood policy.”

If so, this would represent a major shift in Iran’s regional policy. Since 1979, the ruling Islamists in Tehran have often spoken about regional solidarity and stability but de facto pursued ideological aims that relegated economic cooperation to the margins. The key stated principles guiding Iran’s regional policies, as articulated by its leadership, have in the past included such controversial steps as support for Shi’a Islamist movements in Arab countries (such as Bahraini or Saudi Shi’as); support for Sunni Islamist movements (like Hamas and Palestinian Islamic Jihad); and efforts to push the U.S. out of the Middle East and confront Israel. For the UAE, as for all other Gulf states, this was tantamount to interfering in internal Arab affairs and crossing a red line. 

Given the UAE’s close relations with the U.S. and its decision in 2020 to establish diplomatic ties with Israel, Tehran’s anti-U.S. and anti-Israel postures were another complicating factor in relations to say the least. But this was never allowed to entirely shape the UAE’s approach to Tehran. Iran is simply too big of a neighbor to brush aside.

The same is true for Iran as well. For example, Iran never made the issue of Israel into a deal-breaker when it came to relations with the UAE: Iran bemoaned the UAE’s decision to join the Abraham Accords, but it has since downplayed the issue. 

Above all, the Iranians wanted the UAE to facilitate greater bilateral economic relations, with a particular emphasis on the banking sector. After the Trump administration began the “maximum pressure” campaign against Iran in 2018, then-President Hassan Rouhani launched an initiative to establish closer banking relations, as part of the agenda he announced during the second session of the Iranian government’s conference titled “Development of Cooperation with Neighbors.”

Rouhani’s pitch to the region was a combination of an appeal for help from Iran’s neighbors and a promise of dividends for those who aided it. The pitch also included a warning as well. As he put it, “We must work with all our brothers in the region with sincerity to develop the whole region. A coordinated and shared economy in the region will help ensure peace and security.” The Iranian president had no choice. Donald Trump’s Iran policy had shocked Tehran on a number of levels, including severely limiting the amount of crude oil it could sell, hampering Iran’s access to the international financial system, and severely restricting its ability to transfer foreign currency, especially American dollars, to Iran. This unprecedented U.S. campaign required a creative Iranian response.

In short, due to U.S. sanctions, Iran’s neighbors could not officially transfer international currency, especially dollars, to Iran for any exchange of goods. As a result, the Iranians began to look to neighboring states for alternative solutions, including strengthening bilateral economic ties using national currencies, signing free trade agreements, and working to boost exports, some of which was meant for further re-export of Iranian goods.

Considering the problems that sanctions created, Iran had almost no other choice than to develop its non-oil exports and focus on neighboring countries and the region. Geographical proximity to neighboring states reduces costs and facilitates the transfer of currency or goods in barter transactions. In addition, the closer the economic ties between neighbors are, the more political goodwill can be created. This was certainly what Tehran hoped.

And as the U.S. sanctions on Iran remained in place under the Biden administration, and the Iranians continued to struggle to secure access to hard currency, the role of UAE banks as facilitators for Tehran became more pressing. U.S. sanctions had put a lot of pressure on the rial, and the Raisi government kept printing money to pay for its national budget. Since Iran did not have sufficient hard currency to back up the rial, the currency depreciated, fueling inflation.

Securing access to U.S. dollars became critical for Tehran, and recent visits to the Gulf states by top Iranian officials have to be seen in this context. During his January 2023 visit to the UAE, Mohammad Reza Farzin, the head of the Central Bank of Iran (CBI), pushed for closer “economic, monetary, and banking relations” with the Gulf countries. Earlier in January, Farzin had visited Doha on a similar mission.

Besides seeking access to U.S. dollars from UAE banks, this Iranian banking delegation’s visit had a number of other objectives as well, including “providing the necessary [financial] resources for Iranian businessmen” in the UAE as a top priority. According to the Iran-UAE Chamber of Commerce, a growing number of Iranian companies are registering businesses in the UAE. This reflects Tehran’s desire for stronger ties between the Iranian business community and the Gulf states, with small businesses as a new backbone of relations.

On top of that, there has been an increase in the volume of properties purchased by Iranians in the UAE. Accordingly, stronger banking channels are needed to handle the increase in capital moving between the two countries. And yet Iranian officials accept that Iran-UAE economic relations will never realize their full potential while Iran is still under sanctions or until it signs international anti-money laundering agreements with entities like the Financial Action Task Force (FATF).

US options in this Iranian-UAE juggling act

The UAE’s de-escalation policy toward Iran does not only impact Iran-UAE relations but also benefits the entire region, as well as American interests. De-escalation in the Gulf region can reduce the cost for the U.S. of maintaining security and free it up to “pivot to Asia” or focus more on Russia. It can also reduce the threat to Israel, as both Iran and Israel become more connected to the Gulf Cooperation Council (GCC) countries. In a more economically connected region, the everyday value of economic benefits becomes much higher to Iran than that of its “deterrent nuclear capability.”

The Iran policy the UAE seems to be adopting is part of a broader “neighborhood policy” of investing in regional stability. For the UAE, an Iran that is interconnected with the region and the world will only strengthen efforts to maintain global energy supply, food security, and supply chains between Central Asia, Europe, and Africa.

In other words, the UAE sees Iran through the prism of its connectivity agenda, but it remains to be seen if Iran views the UAE and the rest of the Arabian Peninsula in the same way or if it instead sees those states as an area of influence or simply a group of economies that provide it with short-term benefits as Tehran strives to free itself from the burden of American sanctions.

Mohammed Baharoon is the Director General of the Dubai Public Policy Research Center (B’huth).

Alex Vatanka is the Director of the Iran Program at the Middle East Institute.

Photo by AFP via Getty Images