Iran Pulse

How Trump is prompting Iran to improve ties with its neighbors

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Article Summary
Iran’s long-touted motto of prioritizing good ties with immediate neighbors is finally taking shape in apparent response to US-led pressure.

Successive Iranian governments have underlined for decades that Iran’s top foreign policy priority is to have close relations with all immediate neighbors. However, in the past few years, deteriorating relations with Saudi Arabia and the United Arab Emirates have been a major impediment to a more constructive set of regional relations. From a trade and investment point of view, the hiccups in the Iran-UAE relationship — and especially Iran-Dubai ties — have been more damaging, especially as Dubai has played a key role as a regional hub for Iranian imports and financial transactions.

In the past two decades, the UAE has regularly been one of Iran’s top trading partners, mainly because during the sanctions years a considerable segment of the country’s imports were routed through Dubai. After the lifting of nuclear-related sanctions, Dubai was fully equipped to take advantage of Iran’s growing external trade. Furthermore, Dubai has always been the first port of call for financial transactions between Iran and the rest of the world. Dubai had always benefited from its developed infrastructure, but also from hosting so many Arab families of Iranian descent — a fact that increased the efficiency of economic and cultural relations. Therefore, the recent political climate has been a major impediment to Iran’s international economic relations. Abu Dhabi’s insistence on reducing relations with Tehran has also been disappointing to many Dubai stakeholders.

Though some regional experts, such as journalist and Middle East expert Mohammad Saleh Sadaghian, believe that in the post-Islamic State regional scene, Saudi Arabia will try to de-escalate and Tehran’s relations with its Arab neighbors will return to normal, the practical bottlenecks in managing trade have compelled the Iranian government and companies to look for new regional partnerships to facilitate trade and financial transactions.

In February, the Central Bank of Iran’s deputy for international affairs was quoted as saying that Emirati banks had created obstacles for Iranian merchants and that Iran was looking for alternative routes. There were also suggestions that interruptions in transactions between Emirati and Iranian banks contributed to the recent devaluation of the free market value of the Iranian rial.

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Iranian businesses that had chosen Dubai as a regional base for operations have felt the unfavorable conditions in Dubai over the past few years, especially because their various licenses as well as their residency permits could be revoked at any time without sufficient prior notice. It is valid to argue that the deterioration of ties with the UAE has compelled many Iranian companies to shift their operations, and especially re-export hubs, away from Dubai.

Indeed, a number of active importers and exporters interviewed by Al-Monitor have indicated that the main focus of trading activity has moved to Turkey as well as to the Caucasus, namely Azerbaijan and Georgia. Undoubtedly, the infrastructure of the latter countries cannot compete with Dubai. This is why the respective governments are also investing accordingly. On March 15, the foreign ministers of Turkey, Azerbaijan, Georgia and Iran gathered in Azerbaijan’s capital, Baku, to sign an agreement on projects to create a transportation and transit corridor between the Indian Ocean and Europe. Within this undertaking, the Rasht-Astara railroad, which is being built by Iran and Azerbaijan, will be connected with the Baku-Tbilisi-Kars railroad, which became operational last October. A transit land corridor will also be built, starting from the Iranian ports of Chabahar and Bandar Abbas and extending to Europe. The multilateral agreements also envision closer cooperation between the business communities.

Focusing more on the financial dimension of international and regional trade, Iranian authorities have focused on Oman as a regional hub. On March 16, during an official visit by Omani Foreign Minister Yusuf bin Alawi bin Abdullah, the two sides signed a number of significant agreements with the core element being closer banking cooperation, including the acceptance of Iranian bank guarantees by Omani banks and the possibility of transactions in local currencies. A joint banking commission will take these decisions forward and implement the needed regulations. Tehran and Muscat have also decided to promote Oman as the re-export hub of Iranian exports to international markets as well as pave the way for joint investments between their respective companies, especially with a focus on petroleum and petrochemical projects. Iran is already set to export gas to Oman to use the excess Omani capacity to produce liquefied natural gas, and one can expect further such investments in the future.

Oman has been a reliable regional partner for Iran for decades. During the harshest phase of external sanctions, Muscat always facilitated Tehran’s relations with international banks and organizations. Oman has also maintained a level of cordial political relations with Iran despite pressure within the Gulf Cooperation Council to distance itself from Tehran. Therefore, it is clear that Iran would reward Oman in its expanding international trade and financial transactions. However, the Iranian business community will miss the advanced infrastructure in Dubai, which Oman cannot offer at the current juncture.

These developments are happening amid worsening ties between Iran and the United States. In deliberations in the Iranian parliament’s Foreign Policy and National Security Commission with regard to the country’s strategies should Washington withdraw from the nuclear deal, the parliamentarians urged the government to focus on immediate neighbors in its foreign relations strategy. Furthermore, Alaeddin Boroujerdi, who chairs the parliamentary commission, has stated recently that Iran must strengthen its ties with Russia and China in light of growing hostility from US President Donald Trump. The combination of both statements means a much greater focus on Russia, which is technically a neighbor to Iran through the Caspian Sea.

The fact is that Tehran needs to prepare for different scenarios, especially a potential tightening of external sanctions. That translates into the establishment of alternative routes for trade and financial channels that can replace Dubai’s traditional role. The abovementioned actions indicate that the Iranian government and business community alike are looking for multiple channels to reduce dependency on one country. For now, Oman will play an important role, while other routes and channels will be tested and developed.

All in all, Tehran’s core strategy will be to distance itself from the regional sphere under Riyadh and Abu Dhabi’s influence and deepen trade and economic ties with all other neighbors. As part of this regional strategy, Tehran will also look for opportunities to increase energy and economic interconnectivity between the targeted neighbors and Iran. Fortunately for Iran, the country has an increasing amount of natural gas surplus that can be exported in gas or in electricity form. As Iran-Turkey relations have proven, a larger degree of interdependency can help Iran and its neighbors overcome their political differences and possible tensions. There is also no doubt that such regional relations will allow Tehran to contain the negative impact of escalating pressure by the Trump administration.

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Bijan Khajehpour is an economist and a managing partner at Eurasian Nexus Partners, a Vienna-based international strategic consulting firm.

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