The role of Iran may be the most overlooked in the Dubai debt crisis.
Of all the states of the United Arab Emirates federation, Dubai has maintained the closest ties to Iran. Indeed, as international pressure has built on Iran over the past decade, Dubai has prospered from those ties. It provides critical banking and trade links for Iran, often serving as the go-between for European or Asian companies and financial firms that want to do business with Iran without violating international sanctions.
Abu Dhabi, the wealthiest member of the UAE and a close ally of the US, may be pressuring Dubai to limit its links to Iran. Indeed, this pressure may be behind statements coming from Abu Dhabi about offering “selective” support for Dubai. Companies or creditors thought to be too linked to Iran could find themselves shut out of any bailout.
The United States government, which has remained somewhat taciturn throughout this crisis, is no doubt encouraging Abu Dhabi to apply this pressure. In part because of Dubai’s connections to Iran, US financial institutions are not among the biggest creditors to Dubai World.
It’s not all Iran, of course. The problems in Dubai, the member of the United Arab Emirates that has found itself in a dire financial crisis, closely mirror those behind the global financial crisis.
Over the past decade, the country attempted to diversify its economy away from dependence on its declining oil reserves—and largely succeeded. But, like a Wall Street investment bank attempting to overcome the decline of its traditional businesses by becoming heavily invested in leveraged real estate products, Dubai accumulated huge debt obligations—estimated to amount to some $80 billion. Much of Dubai’s assets were dependent on tourism, shipping, construction and real estate—which have been in trouble during the global economic downturn.
Like its fellow members of the UAE, Dubai is ruled by an expansive royal family. In this case, they are called Al Maktoum family. Exactly what counts as the personal property of ruling family and what is government owned in Dubai is more than a bit fuzzy. The Dubai government owns three companies: the Investment Corporation of Dubai; Dubai Holding, which is run by Mohammed Al Gergawi; and Dubai World, which is run by Sultan bin Sulayem.
Abu Dhabi has been trying to put pressure on Dubai to cut ties to Iran. The split between Abu Dhabi and Iran is in part rooted in an older territorial dispute, fear of Iran’s nuclear ambitions, religious differences between Shiites and Sunnis, and—importantly—Abu Dhabi’s close ties to Washington, DC.
The UAE is close to reaching a nuclear power cooperation deal with Washington, a move that many regional experts say would challenge the traditional Saudi hegemony in the Gulf. One sticking point in the negotiations with Washington has been concerns that Dubai could share US nuclear technology with Iran.
This power struggle between Abu Dhabi and Saudi Arabia is also playing a role. In May, the UAE pulled out of a proposed Gulf monetary union over Saudi insistence that it would host the regional central bank.
Dubai, which is a very open and tolerant place compared to Iran, is viewed by many Iranians as a place to let their hair down. It has a thriving Iranian ex-pat community. Iran is Dubai airport's top destination, with more than 300 flights per week.
More importantly, Dubai is a major exporter to Iran and a major re-exporter of Iranian goods. The trade between Iran and Dubai is one of the principal sources of Tehran's confidence that it can survive US-led sanctions. Iranian investment in Dubai amounts to about US $14 billion each year. US intelligence officials have long suspected that the Iranian government uses Dubai based front companies to get around sanctions.
Some of the banks said to have the largest exposure to Dubai debt have in the past been linked to Iran. Notably, HSBC, BNP Paribas and Standard Chartered came under investigation and pressure from US authorities in recent years to cut ties to Iran. Some US officials have quietly protested that these banks just shifted to doing business with Iran through Dubai. The US may want to see these creditors take losses from their Dubai exposure.
Make no mistake: the US government does not want to see the financial ruin of Dubai. Apart from its ties to Iran, Dubai is widely viewed as a model Islamic country. It has a relatively clean government, and there is a remarkable level of religious tolerance and progressive attitudes toward women for the region. American diplomats have held up Dubai as their model for a new Baghdad—progressive, tolerant, and capitalist.
What is most likely happening is more nuanced. The US and Abu Dhabi are hoping to use Dubai’s financial troubles as a way of finally severing the close ties to Iran. For years, Dubai has enjoyed the benefits of walking the line between its military and economic alliance with the US and economic benefits from banking and trade ties to Iran. The price of a bailout from Abu Dhabi may be having to finally choose to give up the Iran connection.