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Dubai’s Woes, Iran’s Headache

Aspirin tablets / Photo: wikimedia commons

Aspirin tablets / Photo: wikimedia commons

Dubai has celebrated the opening of the world’s tallest skyscraper, the Burj Dubai, with a spectacular – not to mention costly – fireworks display. But the 10,000 fireworks did not blind us from the fact that the city and those who have put their hopes and money into Dubai are hurting. We all know who the main losers are:

    • The all-too-credulous investors willing to give cheap loans to Dubai World and Nakheel assuming their loans were guaranteed by the governments of Dubai and Abu Dhabi: A significant amount of this debt is believed to be bad debt (read: not backed by viable assets) – Moody’s has put the figure at about USD25 billion.

 

    • The city of Dubai itself, whose debt load – depending on whose estimates you are referring to – amount to between 100 and 200 percent of Dubai’s USD82 billion GDP: And it is not over yet – real estate prices in Dubai are expected to decline even further in 2010 as investors are abandoning their construction projects.

 

  • Dubai’s political independence within the UAE’s loose federation: Dubai has been enjoying special sovereign rights, such as control of customs, over parts of the judiciary and of its stock market. The UAE’s oil-rich capital Abu Dhabi’s offer to partially bail out its broke neighbor will most likely come at a political price. It is likely that Dubai will have to relinquish some of its sovereign powers to federal authorities.

Yet another loser, less talked-about but most significant in geopolitical terms, could be Iran.

During the Iran-Iraq war, Dubai was one of three UAE emirates that leaned more toward Iran, and it has continued to maintain the closest ties to the country among all UAE emirates. Iran is one of Dubai’s major trading partners. Both benefit tremendously from this relationship. As one observer states, “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.”

Some banks have been accused by the US government of indirectly doing business with Iran through Dubai-based institutions. Vice versa, Tehran has been accused of circumventing sanctions by doing business through Dubai based front companies.

Abu Dhabi has long resented Dubai’s ties to Iran. The UAE fears Iran’s regional ambitions and nuclear program, and it still has a territorial dispute over three UAE islands currently occupied by Iran. Besides, Dubai’s closeness to Iran is an embarrassment to the UAE in its close relationship with the US.

Dubai’s financial crisis is putting Abu Dhabi into the enviable position of being able to attach strings to its bailout offer. Although the US has kept mum about it in public, no doubt Washington encourages Abu Dhabi to make bailout money dependent on Dubai severing commercial ties with Iran.

And as Dubai is tightening its belt, Iran may find it just a little harder to circumvent international sanctions.