Dubai: Closing the back door

the Financial Times

For close to 30 years business conditions have been good for Morteza Masoumzadeh. The Dubai-based Iranian national has run a successful shipping operation, trading steel and plastics across the narrow strip of the Gulf.

But those waters have become choppier. As global efforts to halt Iran’s nuclear enrichment programme through economic sanctions are stepped up, business is feeling the pinch. The trading wing of Mr Masoumzadeh’s Jumbo Line Shipping Agency has all but collapsed, prompting his group’s overall revenues to plummet from Dh300m ($82m, €65m, £54m) last year to about Dh175m this year.

He is not alone. For the thousands of the Iranian-backed companies operating in the emirate, he says: “It’s very tough now and there are very rough days ahead.”

Mr Masoumzadeh is a voice for the 8,000 members of the Iranian Business Council, for whom in recent years financial sanctions have staunched credit. Concerns about smuggling of “dual-use technology” – which can be used for civilian and military purposes – for the Islamic Republic’s nuclear and ballistic missiles programmes have had an impact on legitimate traders operating out of Dubai.

The commercial hub of the United Arab Emirates has historically been a haven for Iranian businessmen, a place where they could escape the economic disarray of their homeland. Hundreds of thousands have been attracted to settle by the entrepreneurial spirit of the city a short six-hour sail from the nearest Iranian port and by its laissez-faire attitude. It has become a magnet for Iranian capital and, during the pre-crisis boom, home to 9,000 Iranian companies.

Most importantly, it has become one of the the main routes for consumer and other goods – from electronics to food – entering the Islamic Republic, a role magnified in recent years as Tehran’s isolation has deepened.

Today, however, Dubai has become a major front in the effort to impose international sanctions on Iran to halt the nuclear programme it says is for civilian ends but many believe is for military purposes. It is a struggle fought with UN measures bolstered last month by a fresh resolution, and with a raft of unilateral US sanctions that have discouraged financial dealing with Iran in many jurisdictions around the world.

Adding to the pressure, US Congress passed into law the harshest American sanctions yet, which punish international companies that sell Iran refined petroleum products or help to upgrade the country’s refining infrastructure. These have had an immediate effect, with western oil companies refusing to refuel Iran Air aircraft. They also include measures against countries that fail to prevent passage of dual-use technology to Iran, a point of concern for places such as Dubai.

“These new US sanctions are very potent – companies in jurisdictions that do business in Iran will have to spend more time to ensure compliance if they want to avail themselves of the US financial system and markets,” says Farhad Alavi, a Washington-based trade lawyer.

On one level, this confrontation involves the pursuit of a constantly shifting web of front companies and middlemen tied to the Iranian regime and suspected of using Dubai to import parts for the nuclear programme. In 2007, Dubai authorities stopped a ship carrying banned substances to an entity barred under UN sanctions. Last year, the UAE stopped a ship carrying North Korean arms to the Islamic Republic.

UAE officials maintain that the federation will maintain healthy ties with Iran while abiding by sanctions. “We are not breaking any laws. All products to Iran are normal consumer products,” Sultan al-Mansoori, the economy minister, said in May.

But the UAE has come under pressure from western governments that goes beyond compliance with inspections and financial strictures against Iranian businesses. There is also a demand for a crackdown on visa issuance to make life tougher for Iranian businesspeople in Dubai.

Western diplomats and Gulf officials say Iran’s Revolutionary Guard – the elite military wing that has become one of the main engines of financial and commercial power in the republic – has become expert at establishing fake businesses in the UAE that secure precision equipment from well-known western suppliers.

“There is a regular change of managers of companies, and new front companies set up,” says one person familiar with UAE investigations. “It’s complicated and the Iranians are not dumb. They are thinking very smartly and always evolving along with the sanctions.”

UAE authorities have closed dozens of companies over illicit business with Iran. They have also stopped 30 suspicious shipments in recent months, many of them air cargo.

The blow to legitimate Iranian business, though unintended, has been severe. “When I moved here, the Revolutionary Guards barely existed – now our business is being hit by sanctions on them,” complains Mr Masoumzadeh.

Over the past decade, as Iran’s nuclear programme has progressed and international pressure has mounted, Iranian trade with Europe has declined while trade with the UAE – most of it through Dubai – has grown phenomenally. According to the International Monetary Fund, Iranian imports from the UAE rose from $1.8bn in 2002 to $13bn in 2008. Dubai figures show that in 2009, Iran accounted for 18 per cent of Dubai’s total re-exports – goods that transit through the Emirates en route to other destinations – but just 3 per cent of direct exports.

The IBC, however, says that the value of Dubai exports to Iran fell to about $8bn last year, and could drop to about $6bn this year as sanctions bite. Statistics released by the Dubai chamber of commerce this week show that the value of trade with Iran was 8 per cent lower last month than in June 2009.

Indeed, US attempts to dissuade banks from dealing with Tehran has meant that securing credit to fund trade has become almost impossible. Most is now funded in cash upfront, adding costs to businesses.

Rather than spend time and money trying to work out whether their clients’ activities are legal, banks are dropping some Iranian customers. “Basically, if a client is doing a lot of business in Iran, we might close down their accounts as it is incumbent on us to know that they really are engaging in legal activity,” says a representative of an international bank in Dubai.

Some Iranian traders based in Dubai who still have access to finance will – for a cut – lend their names to struggling compatriots. Other businesses are simply folding.

US officials laud the UAE as a strong ally while also highlighting their business-friendly policies as a model for the region. “They don’t want to serve as Iran’s back door to the financial system,” says a senior American official. “When we point to illicit activity they work with us.” The US consulate in Dubai includes a team dedicated to monitoring domestic developments in Iran, where the US has no direct diplomatic presence.

But the pressure has gone beyond the financial sphere – and beyond illicit business. Many Iranian residents have been prevented from renewing residence visas in Dubai, and gaining access to visitor visas has become trickier.

Meanwhile, says a Dubai-based Iranian businessman, the intended targets circumvent the sanctions. “The Revolutionary Guard have their own money and banking channels.”

Ironically, observers in the UAE say many Iranian businesses in Dubai are close to Akbar Hashemi Rafsanjani, the former president and main supporter of the reformist opposition movement that led last year’s unrest – the most serious challenge to the regime since the 1979 revolution.

US officials acknowledge the difficulty in distinguishing between legitimate and illegitimate businesses. But, fearing that companies engaged in genuine trade could be exploited by the Tehran regime, they have included in sanctions elements that have affected the broader business community. Ambiguity was built into last month’s UN resolution, which calls on states to prevent the provision of financial services to people or services that “could” contribute to Iran’s nuclear programme.

Pressure on Iranians in Dubai is partly the result of dogged American lobbying. Stuart Levey, the Treasury undersecretary who has led the US sanctions drive, has been a regular visitor, arguing that trade with Iran could damage the city’s reputation as it seeks to become a globally recognised financial centre.

Dubai has been working to improve its image, clamping down on financial flows following the September 11 2001 attacks on the US amid allegations of laxity towards terrorism funding. It was also embarrassed by the discovery in late 2003 that front companies working for Pakistani scientist AQ Khan’s illegal nuclear procurement network were based in the emirate.

More importantly, however, the hardening of attitudes towards Iranian business stems from the recognition in Abu Dhabi, the UAE capital, that Iran’s pursuit of a nuclear programme, and its potential acquisition of a nuclear weapon, are threats to national security.

Tensions between the UAE and Iran periodically flare up over the disputed Gulf islands of Abu Musa and the Greater and Lesser Tunbs. But Abu Dhabi also holds some of the most hawkish Arab views towards the Islamic Republic, fearing that it would flex its muscle more forcefully in the region and destabilise the Middle East if it were nuclear armed. Youssef al-Otaiba, UAE ambassador to Washington, caused a stir last week when he was heard at a conference endorsing the use of military force against Iran’s nuclear sites.

Abu Dhabi has launched its own nuclear programme but, unlike Iran, it has pledged not to enrich uranium, the technology that could lead to nuclear weapons capability. Diplomats expect that Abu Dhabi, which has the upper hand in the federal relationship since bailing out Dubai last year, could secure even tougher constraints on dealing with Tehran.

Theodore Karasik, a security analyst in Dubai, says the window for high-tech exports to Iran via Dubai is indeed closing. “This crackdown has been going on for a year now, and all sorts of companies that want to do business in Iran are having second thoughts as they don’t want to get caught up in breaking sanctions,” he says. “Over past year, front companies have been shut down and visas have been rejected – and this is being done not only on federal level but also by Dubai itself.”

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Iranian businessmen warn that the city’s indispensability is declining. “Limited access [to its financial resources] and slow speed are undermining Dubai. Meanwhile, other regional countries like Qatar and Oman are growing,” says Mehdi Fakheri, deputy head of Iran’s chamber of commerce for international affairs. Traders, he adds, are also shifting to other UAE states, such as Sharjah and Fujairah, in search of lighter scrutiny.

Some businessmen in Dubai, meanwhile, say they are moving operations further afield. “In countries like Malaysia and Turkey, there are much less difficulties in acquiring residence visas, opening letters of credit and registering businesses,” says one trader of long standing in the emirate.

US officials admit that Iran has learnt its way around sanctions and shows no sign of abiding by international demands to stop its uranium enrichment programme. Nonetheless, says one senior American official, the republic is now “constrained in its ability to conduct financial transactions, and relegated to narrow conduits in financial markets”.

For now, Mr Masoumzadeh is resigned to battling on even as the trading environment moves from bad to worse. “What else can we do?” he asks. “This is home.”

With reporting by Najmeh Bozorgmehr in Tehran