UAE Earns Big as Iran Sells Oil to China
Leaders in the United Arab Emirates are eyeing an economic windfall should the Biden administration succeed in its effort to return to the Joint Comprehensive Plan of Action (JCPOA). But they have not waited for the lifting of sanctions to begin earning billions from Iran.
During a press conference on Monday following consultations in Abu Dhabi, US Special Envoy for Iran Rob Malley told reporters that “all” of the Biden administration’s regional interlocutors had made clear they would seek “to find ways to engage Iran economically consistent with the lifting of sanctions that would occur” if the JCPOA were restored, a step that would also require Iran to return to full compliance with its nuclear commitments under the deal.
Malley added that should Iran and the P5+1 manage to restore the nuclear deal, it “would also allow countries in the region to develop closer ties economically with Iran.” Malley had understood from his conversations with GCC counterparts that this was “one of [their] goals.”
The comments were notable in light of recent developments in bilateral trade between the UAE and Iran. At first, the UAE was fully on board with the “maximum pressure” sanctions imposed by Trump on Iran in 2018 and so far maintained by Biden. In the Iranian calendar ending March 2019, roughly one year following the Trump administration’s decision to withdraw from the JCPOA and reimpose secondary sanctions on Iran, Iranian imports from the UAE declined 30 percent from around USD 8.2 billion to USD 5.7 billion, while exports to the UAE declined 11 percent from USD 6.7 billion to USD 6 billion. In this period, UAE leaders sought to tamp down on the burgeoning trade between the UAE and Iran, principally channelled through Dubai. Iranian companies and businesspeople were essentially hounded out of the country, as customers severed relationships and banks shut accounts.
But in 2019, the first signs of a change in policy began to emerge. Fearing a further deterioration in the regional security situation after limpet mines were detonated on commercial vessels in the Gulf of Oman in May and June of that year, the UAE opened a tentative dialogue with Iran. Trump’s Iran envoy, Brian Hook, traveled to Abu Dhabi in September 2019 to try and keep the UAE on board with the maximum pressure strategy. One month later, reports emerged that the UAE had released USD 700 million of Iranian assets that had been frozen as part of the UAE’s support for the U.S. sanctions campaign. A thaw in economic relations was underway.
In the Iranian calendar year ending March 2021, total Iranian imports from the UAE exceeded USD 9 billion, back to pre-sanctions levels. In the first five months of the current Iranian calendar year, imports have totalled over USD 5 billion, meaning that total annual imports are on course to exceed USD 12 billion by March 2022. The UAE is a major re-export hub, meaning that Iran sources goods from a wide range of countries from suppliers in the UAE. The growth in Iranian imports from the UAE has been so rapid that the Arab entrepôt has now replaced China as Iran’s top import partner.
In an interview in September, Farshid Farzanegan, head of the Iran-UAE Joint Chamber of Commerce, attributed the UAE’s rise as Iran’s top import partner to increased purchases of agricultural commodities from Dubai-based traders and an overall decline in China-Iran trade. But he also notes that the growth in imports is taking place despite continuing challenges in cross-border banking between Iran and the UAE related to the fact that US secondary sanctions remained in place. Moreover, the recovery in Iranian exports to the UAE has been comparatively modest—total exports are on track to be just USD 4.5 billion this year, still below their pre-sanctions levels. So how is Iran able to buy so much more from the UAE?
The answer probably has to do with the decline in China-Iran trade. Over the course of the last year, China has significantly increased its purchases of Iranian oil. These purchases, which are made in direct defiance of US secondary sanctions, are not reflected in the data produced by China’s customs authority. This is because Iran is not delivering oil directly to China. Iran’s deliveries are intermediated, meaning that the oil is taken to a third country, before being transferred onto tankers that deliver to Chinese refiners. When this oil arrives in China, it is declared as an import from the country serving as the waypoint. The two biggest countries playing that role are Malaysia and the UAE.
Looking at customs data for Chinese oil imports, the rise in imports from Malaysia and the UAE occurs precisely around the time that China begins to reduce direct imports of oil from Iran. At first glance, it might seem that China is simply buying more oil from existing customers as Iran ceases to be an option. But the volumes being purchased from Malaysia and the UAE are so great that the oil cannot come from the production of those two countries—it must be Iranian oil.
The amount of oil China is importing from Malaysia, estimated by dividing the monthly value of declared imports by the average monthly oil price is 94 percent higher so far in 2021 than it was in the six months leading up to the Trump administration’s full imposition of sanctions on Iranian oil in May 2019. Looking to the UAE, the same figure is 31 percent higher. Looking across the two periods, the crude oil price is just 4 percent higher meaning that the surge in the value of Chinese imports is not merely a function of higher oil prices.
The inclusion of Iranian oil in the Chinese customs data is even clearer when comparing that data to OPEC estimates for Malaysia and UAE oil exports. According to OPEC, Malaysia exported an average of 280,000 barrels per day of oil in 2020, the equivalent of just over 100 million barrels over the whole year. Based on the 2020 average market price of USD 41.75, China’s declared oil imports from Malaysia, which are valued at USD 13.6 billion, are the equivalent of 330 million barrels (some of this total is Venezuelan oil, also being imported by China via Malaysia). Doing the same calculation, the UAE’s export total, as reported by OPEC, is about 880 million barrels in 2020. The barrel equivalent of total imports declared by China is 290 million, meaning that China would account for one-third of all UAE oil exports—an implausible proportion.
Looking back to the significant trade deficit Iran is running with the UAE, the likeliest explanation for how Iran is able to finance this deficit, which may total nearly USD 8 billion in this Iranian calendar year, is that it is drawing on revenues related to the UAE’s role as an intermediary in oil sales to China. Iran is clearly not spending the money it is being paid by Chinese customers in China—there has been no rise in Iranian imports of goods from China in the period in which we know China has increased its purchases of Iranian oil. Rather, that hidden surplus in China-Iran trade is being spent, at least in part, in the UAE, and thereby making a direct contribution to the UAE economy during a critical period of post-pandemic recovery. Facilitating Chinese purchases of Iranian oil also allows the UAE to reduce the risks of regional escalation. Iran has repeatedly threatened to prevent exports by the UAE and other producers if its own exports are blocked by sanctions.
So it should be no surprise that GCC leaders told Malley that they seek to deepen economic engagement with Iran if the US lifts secondary sanctions. They have already increased economic ties to levels approaching those last seen before US sanctions were reimposed, even while sanctions remain in place. The thaw in economic relations between the UAE and Iran is an overlooked aspect of the recent developments in regional diplomacy and could prove an important driver for continued talks in bilateral and multilateral formats. The recent growth in trade also suggests that there has been a fundamental shift in the attitudes of Emirati policymakers, who rebuffed President Obama’s request for an increase in Arab diplomatic and economic engagement with Iran made during the 2016 US-GCC summit. In this way, the shared interests of Iran, China, and the UAE appear to be giving the Biden administration new and much-needed space to pursue diplomacy.
Photo: Chinese Foreign Ministry
