U.S. sanctions hit Iranian entrepreneurs in Dubai

DUBAI: This freewheeling boomtown has always been the place where Iranians go to escape U.S. sanctions. Since U.S. laws stopped the sale of American products to Iran in the 1980s, Iranian traders have made the short boat ride here to buy what they want. When the U.S. Treasury banned key Iranian banks a year ago, Iranian businessmen flocked here, to the financial capital of the Middle East, to open bank accounts.

But in recent months U.S. pressure has prompted a crackdown in the United Arab Emirates, Iran's largest trading partner and home to some 450,000 Iranian citizens.

After visits from President George W. Bush, Vice President Dick Cheney and the Treasury undersecretary, Stuart Levey, UAE officials have dramatically reduced the number of business licenses granted to Iranian citizens, according to U.S. officials and a Boston Globe analysis of business statistics.

Fewer than 1 percent of the 10,800 businesses registered in Dubai during the first three months of 2008 had an Iranian partner, according to an analysis of statistics from the Dubai Chamber of Commerce, down from about 6 percent in 2007 and 2006.

In addition, authorities in the trade-free zones have begun to refuse to register Iranian work visas, and most international banks in the UAE have stopped opening new accounts for Iranians, according to interviews with more than a dozen Iranian businessmen.

U.S. officials have praised the recent actions of the UAE, seeing the crackdown as a victory for U.S. policy, which seeks to use economic pressure to persuade Iran's regime to halt its controversial nuclear program.

"The UAE is taking steps to be vigilant," said Levey, a key architect of the banking sanctions, who has traveled to Dubai eight times about the issue. "They have a challenge there and they are starting to grapple with it."

But while intended to cripple Iranian banks and corporations connected to the regime, the policy also punishes small businesses owned by individual Iranians who have no political connections and are often at odds with their government.

"It's a difficult balance," said Ethan Chorin, a specialist on Middle Eastern economies at the Center for Strategic and International Studies, a think tank in Washington. "You want to keep the regime under pressure and you want to do it in such a way that you are" not targeting "the little guys."

The Iranian regime issues lucrative monopolies to a vast empire of parastatal companies, and controls an estimated 85 percent of Iran's economy. But many of the Iranian businesses in Dubai are run by small traders from Iran's tiny, struggling private sector, which is often at odds with officials in Tehran.

Ali Reza, a former student at the University of Tehran, came to Dubai after the government harassed him for participating in student protests. He found work at a small company owned by an Iranian that exported rice and mineral water to Iran.

The company struggled to survive as it tried to compete against politically connected figures who received special subsidies and customs exemptions from the Iranian government, Reza said.

But the real blow came in October, when Bush announced sanctions against Bank Melli and Bank Saderat, two top Iranian banks where the company kept its funds. As banks around the world cut off dealings with those banks, Reza's boss was unable to obtain credit to buy more supplies. He went bankrupt and fled Dubai in February, Reza said, adding that he knew of two dozen other small Iranian companies that also folded at that time.

"The restrictions the U.S. is putting - it is affecting only the people, not the government sector," Reza said.

A young Iranian sugar importer who asked that his name not be used said he had tried many times to get permission to bring sugar to Iran, but that the industry was controlled by a "mafia" with government ties who receive the only import licenses that are issued.

Those businessmen are still doing well, he said, despite the sanctions.

"Government businesses are not suffering," he said. But entrepreneurs like himself are finding fewer ways to survive. He recently tried to register a new company in a free-trade zone in Ajman, an emirate near Dubai, but was told that he will not be given a work visa until the situation between Iran and the United States "settles down."

"Ajman free zone was the easiest place to do business, but now, even that place has been closed off," he said.

Big Iranian firms with political ties are surviving in part because they can utilize underground networks developed over decades of U.S. sanctions to transfer money and goods. For example, a Globe reporter tracked down a senior official for the state-owned Islamic Republic of Iran Shipping Lines - which was sanctioned this week by the U.S. Treasury - working out of the office of an Indian shipping company.

U.S. officials say they have tried to design sanctions that will hit the Iranian government, not ordinary citizens. But they acknowledge that innocent Iranian entrepreneurs have been hurt by the sanctions. U.S. officials say the new hardships are affecting the entire Iranian economy and prompting debate in Iran about whether the nuclear program is worth the price.

"If you look at the debate about economic mismanagement in Iran, they are starting to blame those problems - unemployment and inflation - on the sanctions," Levey said. But Levey is banking on the hope that Iranians will blame their own government for their hardships, and that their complaints will influence the regime. So far, both remain to be seen.

Many Iranians expressed bitterness against Washington for their loss of status in the United Arab Emirates, where about 40 percent of locals trace their ancestry to Iran. Iranian traders, who helped transform Dubai from a desert backwater into a metropolis, have found welcome in Dubai.

But Kamyar Houbakht, a Web developer who grew up in Dubai, says he experienced a new feeling of discrimination when he applied to open a business with a British partner. He was told, "We cannot accept the Iranian," he said. His partner started the business alone.

Houbakht said he does not believe the new anti-Iranian atmosphere hurts the Iranian government. "I think they don't care if the sanctions are there or if it gets worse," he said. "When the economy is in crisis, it gives them more control. When others go out of business, they get more rich."