WARMING RELATIONS AND REGIONAL TENSIONS

The UAE and Iran are on opposing sides of the most intractable issues in the Middle East today. The UAE is a US partner, while Iran is one of the US’ foremost adversaries. The UAE also recently normalized relations with Israel, and the two states back opposing sides in the Yemeni civil war. Indeed, Houthi rebels backed by Iran launched attacks on Abu Dhabi and Dubai in early 2022, escalating the conflict for the UAE. Despite these disagreements, the two countries have forged an increasingly cordial relationship in recent months. 

The UAE recalled its Iranian ambassador in 2016 to protest a mob’s storming of Saudi Arabia’s Iranian embassy. For years afterwards, the relationship between the two countries was extremely cool. Relations began to mellow in 2019 as the UAE engaged Iran in the wake of the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA), seeking to maintain stability in the region and deter Iran from taking rash action. 

The UAE’s primary interest was maintaining a peaceful Gulf to facilitate oil exports, while Iran sought a source of foreign manufactured goods. Since then, economic ties between the two countries have grown precipitously, as the UAE acts as Iran’s primary source of foreign manufactured goods amid US sanctions. Setbacks to bilateral ties proliferate–for example, the UAE’s signature on the US backed Abraham Accords caused backlash in Tehran–but, in general, relations continue to thaw. 

PRAGMATIC TIES: TRADE AND BUSINESS DRIVE DEVELOPMENT

The UAE’s significant economic interests in Iran have been the primary factor driving friendly relations. The UAE is by far the largest exporter of non-oil goods to Iran, accounting for 68% of Iran’s imports. During a six month period in 2021, the UAE exported three times more goods to Iran than Turkey, the next largest exporter. The UAE’s exports represent $7 billion in goods, and that figure is likely an undercount, since many exporters refrain from declaring their goods because of sanctions. This quantity of exports is possible because the UAE has become Iran’s primary link to the global economy since the reimposition of stringent US sanctions in 2018. 

Companies in the UAE order manufactured goods from Western and East Asian firms and then profit by reselling them to Iranian customers at inflated prices. The arrangement works for both parties, as Iran does not have ready access to these goods from other sources, and Emirati companies make a large profit. Total exports to Iran are set to exceed $12 billion in 2022. Both countries are also keen to expand the relationship in the near future, pledging to increase trade to $30 billion by 2025. 

Aside from its direct economic ties to Iran, the UAE is also keen on using its engagement as a means of reducing the odds that Iran will destabilize the region. Iran has a history of seizing ships in the Gulf, and a flare up with Iranian proxies in Yemen could be damaging. With the US looking to lessen its commitments in the Middle East, a key pillar of regional security seems set to weaken. Iran may seek to exploit this and gain influence across the region, potentially increasing its presence in Iraq, Yemen, Lebanon, and other unstable states. This could provoke a reaction from Saudi Arabia and its Gulf partners. The UAE is seeking to lessen the odds of such conflict by deepening Iran’s dependence on its neighbors. 

The UAE is not alone in its desire for more friendly relations with Iran. Kuwait recently reinstated its ambassador to Iran, and Saudi diplomats are maintaining a dialogue with their Iranian counterparts. The Saudis are less keen to formalize relations with Iran, but share their interest in averting conflict. There are possible points of compromise and dialogue even between these two states, including through increasing social ties between their citizens, with Iranian worshipers traveling to Mecca. The major oil exporters of the Gulf require regional stability for their economic vitality, and a hostile Iran is bad for business. Political rivalries and historical animosity must be managed for the sake of maintaining vital oil revenue, UAE policymakers and diplomats suggest.

THE PATH FORWARD: ECONOMIC INTERDEPENDENCE AND REGIONAL FRICTION

Despite motivation to improve ties, tensions between the UAE and Iran caused by disagreements on regional conflicts are likely to continue. The UAE’s normalization of relations with Israel greatly offended Iran and will likely serve as an impediment to the further deepening of ties going forward. Relations with the US could also prove to be a sticking point, as US officials have been exerting pressure on their Emirati counterparts to enforce the sanctions regime more strictly. 

Regional conflicts in which the UAE and Iran are opposed will also continue to strain the bilateral relationship moving forward. The war in Yemen is the largest challenge facing Emirati-Iranian relations, but a pause in the fighting that has lasted since April spurs hope that a more permanent ceasefire, brokered by the UN, may be possible. If a deal is reached, it will make cooperation across the Gulf much easier and could allow the UAE and Iran to deescalate other bilateral disagreements more effectively. Currently, the proxy war in Yemen is at the forefront of both states’ regional policy, and their disagreement on how it should be resolved takes precedence over increasing cooperation. 

A resolution to the conflict would give both parties more latitude to deepen ties without the worry that a flare up in Yemen could lead to an unpredictable diplomatic row. If the fighting resumes, which is highly likely given the shaky nature of the truce, it may be more bitter than before and could lead to further attacks on the UAE by Iran-backed militants. This could also sour relations to the point where the newly appointed ambassadors could be recalled. While ties between the UAE and Iran will be heavily affected by the outcome of the negotiations in Yemen, their interlinking economic interests should allow them to remain cordial and suppress regional tensions moving forward.

At the same time, economic ties between the UAE and Iran are likely to continue deepening. There is ample room to grow the trade relationship between the two countries, particularly in the realm of natural resource extraction. Emirati firms have expressed significant interest in Iranian resources such as gold, diamonds, metals and metallic raw materials, and it is likely that in the near future they will step up investments in the extraction industry. In recent months Iran has attracted more than $300 million in foreign direct investment from the UAE, and this will likely continue increasing due to the underdeveloped nature of the Iranian economy. Many of these materials would likely be bound for export to the UAE, increasing Emirati investment in Iran, while also boosting Emirati imports of Iranian products. 

Similarly, the UAE is likely to continue increasing its exports of manufactured goods to Iran. Iran has few other sources from which to import these goods, and in the UAE, re-exporting goods to Iran has become a major industry. That industry is set to continue growing due to its highly profitable nature and the leverage it gives the UAE in its dealings with Iran. It would be difficult for Iran to disrupt the UAE’s economic activity when trade between the two states delivers most of Iran’s manufactured goods. This growth of exports could be in jeopardy if the US and Iran strike a new nuclear deal, however, as the lifting of US sanctions could give Iran access to cheaper manufactured goods from other sources. Nevertheless, such access is unlikely to emerge, given the current state of talks to renew the deal.