The latest American sanctions are having their intended effects – one of which is to make it more difficult for Iranian merchants and currency traders to do business out of Dubai.
Iran’s parliament summoned Foreign Minister Mohammad Javad Zarif to explain why the government is ignoring the worsening situation for Iranian merchants and currency exchanges in the United Arab Emirate (UAE) across the Persian Gulf. Zarif told parliament [Persian link] that, following a resolution passed by the National Security Council, the government is exploring alternative locations that can become new hubs for Iranian money changers. The search is the latest move in an ongoing back-and-forth between US sanctions and Iranian attempts to bypass the restrictions – compounded also by diplomatic tensions between Iran and the Emirates.
Iranian money changers in Dubai, one of the UAE’s two most prominent cities and a major regional hub, ran lucrative businesses for years. The financial restrictions imposed on Iran as part of earlier sanctions meant that the money changers became a crucial financial center for Iranians – but now Dubai has become a less hospitable trading environment. The situation has also damaged Iran-UAE trade.
What Is the Problem?
Zarif confirmed that some Iranian merchants and currency exchanges in the UAE are facing problems or have already left the Emirates. After the Saudi Arabian embassy in Tehran was attacked by supporters of Ayatollah Ali Khamenei in 2016, and set on fire, Saudi Arabia severed diplomatic relations with Iran. The UAE also withdrew its ambassador to Tehran and left only a Chargé d’Affaires – a diplomatic downgrade.
All this happened as international sanctions against the Islamic Republic were lifted after the 2015 signing of the nuclear agreement. Trade relations between Iran and the UAE expanded from $18 billion to $22 billion. And a number of international corporations returned to the Iranian market thanks to banking arrangements made through the UAE.
But after President Donald Trump decided to exit the nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA), in May 2018, and to re-impose sanctions, Iranian businessmen in the UAE who were involved in trade with Iran started to run into restrictions.
To begin with, the United States Treasury accused some UAE-based Iranian money changers of supporting networks of “terrorists connected to the Revolutionary Guards” when they exchanged Iranian rials into US dollars. Then the UAE itself put restrictions on the activities of the accused money changers and in some cases revoked their permits. The UAE also expanded its cooperation with the inter-governmental Financial Action Task Force (FATF) in enforcing measures against money laundering – so as to safeguard its position in the Persian Gulf region as the regional financial transactions hub. Enforcing these measures put yet more restrictions on the activities of Iranian money changers, so much so that even before the new American sanctions officially went to effect, many money changers had already been forced to leave the UAE.
The third were changes in the emirates were changes made to the UAE’s banking regulations imposing a five percent value-added tax (VAT) on all currency exchange transactions. The Iranian Foreign Ministry now says that it has taken measures to help money changers leaving the UAE to relocate to countries that, according to Zarif, have better relations with Iran.
Where to Now?
Top destinations for Iranian money changers are now Doha in Qatar, Muscat in Oman, and Sulaymaniyah and Erbil in semi-autonomous Iraqi Kurdistan.
Before the official American exit from the JCPOA, but when its imminent departure had already unsettled the Iranian economy, the central banks of Iran and Qatar reached an agreement to expand cooperation. Qatar itself has been sanctioned by Saudi Arabia and its allies and has no diplomatic relations with that country. Iran, meanwhile, has always maintained friendly relations with Qatar. Iran-Qatari relations have acquired a new importance for both sides since Saudi sanctions.
The first step was Iran’s announcement, earlier in 2018, that it had opened accounts for Iranian banks with Qatar’s central bank. Iran’s Parsian, Melli and Saderat banks were all included and are now processing currency transactions in Qatar. Last spring, the Central Bank of Iran expressed hope that Doha would replace Dubai as a center for Iranian currency exchange.
But historical relations between Iran and Oman are even warmer than those with Qatar. In March 2018, two months before the US pulled out of the JCPOA, Valiollah Seif, then-governor of the Iranian Central Bank, visited Oman and proposed the creation of a joint banking committee while also discussing a currency swap for banking transactions.
Seif also suggested connecting Iranian and Omani banking cards – so that citizens of both Iran and Oman could use their bank cards to conduct transactions in each country without needing to buy foreign currency.
Omani banks have also started to accept letters of guarantee from Iranian banks. Financial relations between the two countries has expanded. Most of Iran’s neighbors have announced that they will abide by American sanctions; Oman, however, has proposed to help Iran by “re-exporting” goods imported into Oman on to Iran.
“Re-exporting” was Iran’s method during earlier sanctions to purchase essential commodities. The commodities were sent to a port in Oman, where they were unloaded, before being re-exported to Iran. The relations between Iran and Oman gives the Islamic Republic a way to benefit from similar services and facilities that it previously enjoyed with the UAE. But Oman’s banking infrastructure is not as sophisticated as the UAE’s – and until Oman or Qatar catch up Iran cannot rely on just these allies.
Sulaymaniyah and Erbil, in Iraqi Kurdistan, are the newest destinations for Iranians who need to transfer their operations out of Dubai. The role played by Iranian money changers and the value of Iranian currency exchanges, in these cities, has expanded sharply in recent months. Sulaymaniyah and Erbil are also close to Iraq’s border with Iran – so they have become the centers where the exchange rate between the US dollar and the Iranian rial is determined.
Sending even small amounts of money from Iran to foreign accounts, for instance to accounts belonging to Iranian students abroad or to small merchants, has become very difficult in recent days. Using money changers in these two Kurdish cities is one of the few options that remain.
The Iranian Foreign Ministry’s Economic Affairs Department has also created a new agency, the Bureau to Fight Sanctions, which works to do exactly what it says. According to Foreign Minister Zarif, the Economic Affairs Department will directly work provincial administrations in Iran because, he believes, Iran’s provinces can help in bypassing the sanctions. Zarif recently visited Iraq, including Sulaymaniyah and Erbil, to explore new opportunities for Iran to evade sanctions.
“We have a duty to find any person, group or bank willing to cooperate with Iran. But we ourselves [the Foreign Ministry] cannot agree contracts with them,” Zarif told parliament. “It is necessary for other domestic individuals and organizations to work with them.”
Who Are These Money Changers, Anyway?
The Iranian currency merchants – who are now moving to Qatar, Oman and Iraqi Kurdistan – are the only and the last connection between Iran and international financial institutions. Without them, because the Islamic Republic is barred from directly buying or selling US dollars, Iran would be cut off from the financial and commercial life of the region and the planet. US dollars are essential when importing necessary goods and services and in other transactions.
Even after previous sanctions were lifted, Iran could not establish normal relations with major international banks because of weak Iranian anti-money laundering laws. Major international banks and financial institutions are concerned about the complicated, opaque and corruption-prone operations of Iranian banks; even when the former US Secretary of State, John Kerry, explicitly invited them to work with Iran, they stayed away.
At the time, Iranian banks created seemingly private currency exchanges outside Iran and provided, to some degree, the services needed by their clients which included the Iranian government. But in this round of sanctions, the situation is still worse, and it is harder for Iran to find ways to bypass US sanctions. And so we see the exodus of Iranian money changers from the UAE to new outposts across the Middle East.
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