POSSIBLE UNSCR 1737 (IRAN) ECONOMIC IMPACT ON UAE

S E C R E T SECTION 01 OF 02 ABU DHABI 000054

SIPDIS

NOFORN
SIPDIS

TREASURY FOR U/S LEVEY, U/S ADAMS
STATE FOR NEA/IR, NEA/ARP
STATE FOR ISN/CPI
NSC FOR ABRAMS

E.O. 12958: DECL: 12/18/2014
TAGS: PARM ETTC PREL MNUC IR AE
SUBJECT: POSSIBLE UNSCR 1737 (IRAN) ECONOMIC IMPACT ON UAE

Classified By: Ambassador Michele J. Sison for reasons
1.4 (b),(d),and (h).


1. (S/NF) Summary: Iran is one of the UAE's major trading
partners, taking about 11 percent of the UAE's 2005 non-oil
exports. Implementation of UNSCR 1737 is likely, therefore,
to have some impact on the UAE trade. Thirty four percent of
the UAE's exports to Iran fall into the category of
machinery/electrical, which sets a probable upper bound on
the exports that could be affected by the sanctions, but this
figure also captures significant legitimate trade. Given the
targeted nature of the UNSCR sanctions, however, the direct
impact is likely to be minor. It is more difficult to assess
the financial impact of sanctioning the named Iranian
entities and individuals on the UAE, since most are likely to
be operating through front companies, and may not be easily
identifiable. Iranian retaliation is likely to be limited,
both because the UAE will be acting under UN cover rather
than bilaterally and because the Iranians need the UAE as a
trading partner and investment destination. Dubai and the
northern emirates will feel the impact of the sanctions more
than will Abu Dhabi. Without Abu Dhabi pressure, and
possibly financial compensation, their implementation could
be spotty. Given the relatively limited potential impact of
the sanctions, however, any necessary compensation is likely
to be less than some Emiratis believe. End Summary.


2. (C) On December 23, the UN Security Council passed
resolution 1737 to prevent Iran's efforts to develop nuclear
weapons and their delivery systems. Embassy and Consulate
General present the following initial analysis of the
potential economic impact of these sanctions on the UAE, one
of Iran's major trading partners. (Note: The UAEG does not
provide a break out of oil/natural gas exports, so these are
not included in the figures below. However, we do not assess
oil/natural gas exports to Iran to be significant. End Note.)

Trade Impact
--------------


3. (U) Iran is a major trading partner for the UAE.
According to the UAEG's 2005 trade data, UAE exports and
re-exports to Iran in 2005 were $3.5 billion, about 11% of
total non-oil exports. For the same time period, imports
from Iran were $481 million. (Note: IMF figures show a
higher figure for 2005 non-hydrocarbon exports of $63 billion
or about 53 percent or total exports, but don't give a
breakdown of where the exports go. End Note.)


4. (U) Almost all of the UAE's exports to Iran (92 percent)
are re-exports. Almost 95 percent of the exports come from
or through Dubai and represent about 14 percent of total
Dubai exports. Although exports to Iran from other emirates
are much smaller, they represent about 31 percent of Ajman's
exports and 32 percent of Fujairah's exports.


5. (SBU) UNSCR 1737 controls are targeted on nuclear
technology and on missile technology. Because the control
lists use a classification system that is different from the
Harmonized System (HS) Codes that the UAE uses to measure
trade, it is difficult to assess exactly how much of the
trade going through the UAE would be controlled. The HS
categories of Machinery/Electrical (84-85) appear to capture
most of the UNSCR controlled items, as well as a significant
number of non-UNSCR controlled items. Thirty four percent of
the UAE's exports to Iran fall into this category, which sets
a probable upper bound on the exports that could be affected
by the sanctions. Since this figure also captures
significant legitimate trade, the amount that is likely to be
affected will be much smaller.


6. (SBU) Although exports to Iran will likely decline, the
direct financial impact of this decline will be limited,
because of the composition of the exports (i.e., re-exports).
The UAE economy adds little value to the exports and its
earnings come from transit fees, warehouse rentals, and other
services.

Targeting Iranian Companies
--------------


7. (S/NF) UNSCR 1737 lists 10 organizations and 12
individuals in its Annex for states to freeze assets and
report on individual travel. To our knowledge these

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organizations do not have offices in the UAE to close ) they
operate through front companies that are not immediately
apparent and whose connections can be difficult to &prove8,
meaning many states --including the UAE -- will be reluctant
to take the required action. As for the individuals listed
in the Annex, post does not have details on their financial
assets in the UAE. It is likely their financial activity
outside Iran is shrouded in much the same way as the
entities. Although the Central Bank has said that it
monitors the Iranian banks operating in the region, its
ability to closely scrutinize disguised assets is likely to
be limited. The UAE has already closed more than 20 Iranian
front companies ) which has not had a &significant economic
cost8 for the UAE.

Comment
--------------


8. (S/NF) Embassy and Consulate General assess that the
direct economic impact of UNSCR 1737 on the UAE is likely to
be small, given the targeted nature of the sanctions on Iran.
If the UAE aggressively targets the financial assets of the
named entities, this could have a greater impact on the
financial system. However, given that these entities likely
operate through front companies, making it difficult to
target them, the economic impact on the UAE is still likely
to be limited.


9. (S/NF) There is a potential for Iranian economic
retaliation either through putting limits on the considerable
Iranian investment in the UAE or through searching out other
trade partners. (Note: An Iranian businessman recently
claimed that Iranians were switching their investment focus
from the UAE to Bulgaria and Kazakstan. End Note) We assess
the potential for Iranian retaliation as limited, however,
for two main reasons. One: the UAE will be operating under
the umbrella/cover of a UNSCR resolution, and is not likely
to "get out ahead" of that resolution. Two: Iran continues
to depend on the UAE as a trading partner and a destination
for investment. UAE Foreign Minister Sheikh Abdullah bin
Zayed Al-Nahyan (AbZ) recently told Ambassador that he did
not think that the Iranians would limit investment in the
UAE, because they were making money in various real estate,
trade, and investment dealings.


10. (C) The impact of the sanctions will be --
disproportionately -- felt by Dubai and the northern
Emirates. This raises the possibility that implementation of
the sanctions is likely to be spotty in those parts of the
UAE, absent Abu Dhabi pressure, and possibly compensation.
The amount of financial compensation needed, however, is
likely to be less than some Emiratis believe, given the
relatively limited economic impact of the sanctions on the
UAE.

End Comment
SISON