Sanctions meant to weaken Iran as it enters negotiations with world powers over its nuclear program are choking smaller, legitimate companies, but in some cases allowing those that feed the regime to continue to flourish.
Today, the success of sanctions rests largely on what happens in the glittering Gulf sheikdom of Dubai, a lifeline for Iran that has long served as a lucrative haven for legitimate Iranian businessmen but has also been a convenient base for the Iranian Revolutionary Guard Corps (IRGC). The powerful branch of Iran's military has transformed itself in recent years into a multibillion-dollar business empire with a vast network of front companies that use the United Arab Emirates, of which Dubai is one, to sidestep sanctions.
Part of the reason why sanctions have been historically difficult for the West to realize is that they rely on the willingness of Tehran's trading hubs to enforce them. For years, intermediary countries have been reluctant to part with billions of dollars reaped in profit from trade with Iran.
In Dubai, the sanctions themselves have become tougher, and so has their enforcement. In the process, the UAE has become a crucial front line in world efforts to stymie Iran's nuclear ambitions. The West's crackdown on trade and financial transactions is being most keenly felt among the Iranian traders that call the UAE home, with hundreds of legitimate companies that trade with Iran being forced to shut down and, in some cases, IRGC companies being driven further underground.
Authorities in the UAE have shut down dozens of companies illegally trading with Iran. The United States has also singled out specific Dubai-based banks, recently forcing Noor Islamic Bank to cease channelling billions of dollars from Iranian oil sales through its accounts. Despite these measures, some IRGC companies have simply found new ways to circumvent sanctions.
"Business has never been better," said the finance manager of one Iranian company, controlled by the IRGC, with a satellite office in the Dubai World Trade Centre.
In an extensive interview with The Globe And Mail, he detailed how his company uses a front company in the Dubai Free Zone headed by an Iranian with a Swiss passport to launder its financial transactions, which total $1-billion a year. Shipments from Tehran are relabelled in Dubai to suggest they originated from there. The company's shipments then proceed, unhindered, to countries including Pakistan, India and China.
The finance manager, speaking on condition of anonymity, said the sanctions have simply forced his company to "get more creative with its accounting," funnelling money through parallel accounts at those Iranian banks, which still operate in Dubai, for instance.
The UAE has always been a vital trading route for Iran, a crucial source for consumer and other goods.
According to the International Monetary Fund, Iranian imports from the UAE rose from $1.8-billion (U.S.) in 2002 to $13-billion in 2008. Today, official trade between the two countries, according to UAE foreign ministry figures, ranges around $10-billion a year. Illegal trade through IRGC front companies in the UAE accounts for billions more, according to analysts. Ten per cent of the UAE residents hold Iranian passports.
The main reason why sanctions have been so difficult to enforce in the UAE is because the rulers of its separate emirates have been torn between competing allegiances. Abu Dhabi, a staunch ally of the West, is intensely fearful of Iranian aggression and has lobbied the United States to consider all options – including military intervention – to halt Iran's nuclear program. Dubai, on the other hand, has been reluctant to enforce sanctions because they would throttle lucrative business with one of its biggest trading partners.
The conflict between the competing emirates was resolved, in a roundabout way, by the financial crisis of 2008 when Abu Dhabi rescued debt-ridden Dubai with a $10-billion bailout package. The intervention prevented a wider regional crisis that would have threatened Dubai's reputation as a global economic power. But evidently the rescue came with strings attached. The Burj Dubai, the tallest building in the world, was renamed the Burj Khalifa after Abu Dhabi's ruling family. More significantly, Abu Dhabi's increased leverage over Dubai forced a reckoning with its Iranian interests that undermined sanctions.
"For years Dubai was a huge headache for the administration because it was unwilling to enforce sanctions," said Mark Dubowitz, executive director of the Foundation for Defence of Democracies in Washington, and an adviser to the Obama administration on its sanctions policy. "That's changed."
Iran's willingness to take part in a fresh round of talks with world powers in Baghdad next month is being hailed by some as proof that it has suddenly become serious about negotiating on its nuclear program. But experts say Tehran's engagement is hardly a gesture of goodwill. Rather it's an act of economic desperation.
"I think there's no doubt that the Iranians are right at the table because of sanctions, particularly the ones in recent months which have been very punishing," said Mr. Dubowitz.
Sanctions against Iran were dramatically intensified over the last year by the Obama administration and successive rounds of United Nations resolutions to hone in on the financial transactions that are crucial to trade. This unprecedented wave of international economic sanctions is poised to come into full force by summer.
In many cases, the wide-ranging sanctions have punished the wrong people – the legitimate Iranian business people in Dubai.
Thirty years ago, in the wake of Iran's revolution and the onset of the first Persian Gulf War, Morteza Masoumzadeh traded the misery of Tehran's blackouts and food shortages for an uncertain future in Dubai, then a desert backwater, but just a two hour flight away.
From modest beginnings he built a vast fortune through a successful shipping line, ferrying everything from timber and tires to rice and refrigerators across the Persian Gulf to his homeland. At its height, Mr. Masoumzadeh's Jumbo Shipping Line pulled in $150-million of business a year. Today, however, 70 cent of his trade has collapsed.
"It has been devastating for us," said Mr. Masoumzadeh from his company's headquarters, which overlook the Dubai Creek. He currently serves as an executive on the Iranian Business Council, which represents 8,000 Iranian businesses in Dubai. Last year, about 600 of them closed down as access to credit, bank guarantees and insurance dried up.
The crackdown is intended to isolate Iran through economic sanctions, but affects virtually anyone doing business with the Islamic Republic. Suddenly, legitimate businesses like Jumbo Shipping Line that have thrived for years in the free-wheeling port city are fighting for survival. American efforts to bar banks from dealing with Tehran have meant that securing credit to finance trade has become virtually impossible.
"Legitimate traders in the UAE are so-called collateral damage," explained Karim Sadjadpour, an Iran expert at the Carnegie Endowment of International Peace in Washington. "They would like to see U.S. and international sanctions target Iranian government entities, rather than paint such a broad brush which hurts those whom we're ostensibly trying to help."
For his part, Mr. Masoumzadeh is resigned to the fact that his business will likely peter out, the casualty of the cold war between the West and his homeland.
"We know that world powers have no other option. We know their intention is not to put us out of business, but they are forced to, so they can achieve a greater goal," he said.