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The Impact of Sanctions on Iran-GCC Economic Relations

The Impact of Sanctions on Iran-GCC Economic Relations

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In June 2010 the United Nations approved a fourth round of sanctions against Iran. One of the most important areas where these sanctions have been effective has been in Iran's trade with Gulf Cooperation Council (GCC) countries. In this Brief, Prof. Nader Habibi offers an overview of Iran’s economic ties with its GCC neighbors since 1980 and the ways in which these relations have been affected by the new cooperation of GCC countries with the current round of UN and US sanctions against Iran.
In June 2010 the United Nations approved a fourth round of sanctions against Iran. One of the most important areas where these sanctions have been effective has been in Iran's trade with Gulf Cooperation Council (GCC) countries. In this Brief, Prof. Nader Habibi offers an overview of Iran’s economic ties with its GCC neighbors since 1980 and the ways in which these relations have been affected by the new cooperation of GCC countries with the current round of UN and US sanctions against Iran.

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Published by: Crown Center for Middle East Studies on Nov 04, 2010
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The Impact of Sanctions on Iran-GCCEconomic Relations
Nader Habibi
n June 2010 the United Nations approved a fourth round of sanctions against Iran, and a few weeks later severalnations announced additional unilateral measures. Thereis now strong evidence to suggest that despite repeated denials by some Iranian leaders, these sanctions are imposinga heavy cost on the Iranian economy. Some of Iran’s majortrade partners, such as South Korea, are among the latestcountries to have introduced unilateral trade sanctionsagainst Iran. During the past two decades, imposition of thesanctions has evolved into a dynamic game between Iranand the United States: Every new round of sanctions by theU.S. or the international community has provoked a seriesof countermeasures by the Iranian government intended to neutralize them. The impact of this back-and-forth hasbecome highly visible in the economic relations betweenIran and the six member countries of the Gulf CooperationCouncil, or GCC (Bahrain, Kuwait, Oman, Qatar, SaudiArabia, and the United Arab Emirates [UAE]).
In the past, GCC countries often exhibited a lukewarm attitude both toward international economic sanctions and with respect to possible military actionagainst Iran’s nuclear program. While reluctantly going along with the UN-approved international sanctions (though the record varies from countryto country), GCC countries generally refused to cooperate with unilateralU.S. sanctions. It now appears, however, that since January 2010 some GCCcountries, particularly Saudi Arabia, have become more vocal in expressing their
November 2010No. 45
 Judith and Sidney Swartz Director 
Prof. Shai Feldman
 Associate Director 
Kristina Cherniahivsky
 Assistant Director for Research
Naghmeh Sohrabi, PhD
 Senior Fellows
Abdel Monem Said Aly, PhDKhalil Shikaki, PhD
 Henry J. Leir Professor of the Economics of the Middle East 
Nader Habibi
 Sylvia K. Hassenfeld Professor of Islamic and Middle Eastern Studies
Kanan Makiya
 Junior Scholar Fellows
Fuat Dundar, PhDLiad Porat, PhDJoshua W. Walker, PhD
 President of Brandeis University 
Jehuda Reinharz, PhD
Nader Habibi is theHenry J. Leir Professorof the Economics of theMiddle East at BrandeisUniversity and a seniormember of the CrownCenter research staff.
The opinions and findings expressed in thisessay are those of the author exclusively, anddo not reflect the official positions or policiesof the Crown Center for Middle East Studiesor Brandeis University.
concerns about Iran’s nuclear program and have offered greater cooperation withU.S. efforts to contain it. The growing cooperation of GCC countries with U.S. policies to isolate Iraneconomically represents a major setback in Iran’s economic and diplomatic effortsto improve its ties with GCC countries at the expense of the United States overthe last ten years. Economic diplomacy was an important pillar of Iran’s policytoward GCC countries during this period.
By increasing its volume of trade and investment with GCC countries, Iran was hoping to enhance its value to thesecountries as an economic partner. And aside from this deliberate policy, Iran wasalso forced to rely more on trade with GCC countries—the UAE in particular—asa result of the escalating sanctions. The difficulties that sanctions caused for Iran intrading with Europe and even with some Asian countries forced Iran to rely moreand more on re-export opportunities vis-à-vis its Southern neighbors. This Brief offers an overview of Iran’s economic ties with its GCC neighbors since1980 and of how these relations have been affected by United States sanctionsagainst Iran. It reviews first diplomatic and then economic relations between GCCcountries and Iran after the 1979 Islamic Revolution and then considers the impactof the multiple rounds of anti-Iran economic sanctions on Iran-GCC relations.
Iran-GCC Diplomatic Relations
With the exception of Saudi Arabia and Oman, the members of the GCC arerelatively young states. Kuwait gained independence from the United Kingdomin 1961; Bahrain, Qatar, and the United Arab Emirates were established in 1971after several decades of domination by the United Kingdom. During the 1970sthe Shah of Iran acted as the gendarme of the Persian Gulf with the military and political support of the United States. The GCC states reluctantly accepted thedominant role of Iran, but at the same time they received direct military protectionand diplomatic support from the United States and the United Kingdom. Thisarrangement came to an end with the overthrow of the Shah and the emergence of the Islamic Republic of Iran.Overall, post-1979 relations between Iran and the GCC countries can be divided into three distinct phases. The first period, from 1980 to 1989 was dominated bymutual hostility and distrust. While Iran’s interference in the domestic affairsof these countries was initially ideologically motivated, it assumed a strategicdimension during the second half of the Iran-Iraq war as Iran sought to eliminateGCC support for Iraq by fomenting religious uprisings and instigating regimechange.Soon after returning to Iran from exile and establishing a new government,Ayatollah Khomeini questioned the legitimacy of the ruling families of theneighboring Arab sheikdoms and openly called for replacing these regimes withIslamic governments. This militant attitude deteriorated the relatively cordialrelations that the countries that would unite to form the GCC had developed withIran in the 1970s. The rulers of these countries felt threatened by the open hostilityof Iran’s Islamic regime and responded with three distinct policies. They closed ranks and created the Gulf Cooperation Council in 1981 as a security pact againstthe perceived threats from Iran (and, to a lesser extent, from Iraq). They intensified their security and military alliances with the United States. And they offered sizeable financial support to Iraq during the 1980–88 Iran-Iraq war.
The death of Ayatollah Khomeini in 1989 and the ascentof Ali Akbar Hashemi Rafsanjani as Iran’s new presidentresulted in a pragmatic change in Iran’s Middle East policyand launched the second phase of Iran-GCC relations,extending from 1989 to 1997. Under President Rafsanjani,Iran abandoned its “regime change” objectives vis-à-vis theGCC countries and focused instead, during the first yearsof Mr. Rafsanjani’s presidency, on improving diplomaticrelations with its Arab neighbors, with the strategicobjective of encouraging the GCC countries to abandontheir security arrangements with the United States and enter instead into a regional security alliance with Iran. This objective proved unattainable, however. Still skepticalof Iran’s motives, the GCC countries remained committed to their military alliances with the United States.
Iraq’sinvasion of Kuwait in 1990, which was defeated by U.S.-led international forces, strengthened U.S.-GCC relations,much to Iran’s displeasure. Nevertheless, although itmaintained neutrality during this war, Iran opposed theIraqi occupation of Kuwait, and this posture provided an opportunity for a partial improvement in Iran-GCCrelations. Iran and Saudi Arabia restored diplomaticrelations in 1991, though those relations remained relativelycold during the remaining years of Mr. Rafsanjani’spresidency. Iran maintained independent diplomaticrelations with the other, smaller GCC countries, but theserelations were often influenced by the state of Saudi-Iranrelations. The third phase of Iran-GCC relations began in 1997 whenIran hosted the annual meeting of the Organization of theIslamic Conference (OIC) only a few months after theinauguration of President Mohammad Khatami. Hostingthe conference increased the legitimacy of the Islamicgovernment of Iran among Muslim nations and paved theway for a further improvement of relations between Iranand Arab countries.
Better relations with Iran were alsopartly due to the rising power of Crown Prince Abdullah,who had been serving as the de facto leader of Saudi Arabiasince 1995 and was interested in strengthening SaudiArabia’s regional ties. Former Iranian president Rafsanjanivisited Saudi Arabia in 1998, and this visit—the first high-ranking Iranian visit to the Saudi kingdom since the 1979revolution—led to a further warming of relations. SaudiArabia also encouraged other GCC countries to improvetheir ties with Iran. The expansion of diplomatic and economic ties betweenIran and Saudi Arabia during the third phase was moresubstantial than before and included several diplomaticvisits. One important area of cooperation pertained tocrude oil policy within OPEC. Saudi Arabia and Iran wereboth suffering from the low price of oil in the mid-1990s(when prices fell below $10 per barrel in some months).Improved relations allowed for better coordination of OPECproduction quotas, which eventually led to higher oil pricesafter 1999. Another benefit of improved Iran-Saudi relationswas the resumption in September 1997 of direct flightsbetween Tehran and Jeddah for the first time in eighteenyears.Iran’s relations with other GCC members have alsoimproved in recent years, but they remain sensitive tospecific bilateral concerns. Among GCC countries, Omanand Qatar have maintained the warmest diplomaticrelations with Iran since the 1979 revolution; both countriessought normal and cordial relations with Iran despite beingclose allies of the United States. By contrast, Bahrain’sruling regime has had a tense relationship with Iran onaccount of its own ethnic mix. While the ruling regimebelongs to the Sunni sect, Shiites constitute the majorityof the population, and the ruling al-Khalifa family, whichmaintains close ties with the United States and GreatBritain, is concerned about Iran’s influence among BahrainiShiites. Furthermore, until the late eighteenth centuryBahrain was periodically under Iranian rule before it becamea British protectorate
. After Iran’s Islamic Revolution, someShiite clerics in Bahrain called for the creation of an Islamicgovernment, but their political aspirations have beenfrustrated by the al-Khalifa ruling family. In recent monthsthe government of Bahrain has arrested many Shiite activistsand revoked the citizenship of a prominent Shiite clergy,Ayatollah Hossein Mirza Nejati, but Iran has maintained a neutral stance and refrained from offering any formalsupport for the political struggle of Bahraini Shiites.Iran has a minor territorial dispute with Kuwait and amore serious dispute with the United Arab Emirates. TheIran-Kuwait dispute revolves around an offshore gas field called Arash by Iran and al-Durra by Kuwaitis.
The field isclaimed by both nations, and in recent years Iran has tried toresolve the dispute by calling for its joint development. Iran-Kuwait relations deteriorated after the Islamic Revolution,but in recent years both countries have taken positive stepsto improve their diplomatic and economic ties. Iran and the UAE have an unresolved dispute over threesmall islands in the Persian Gulf. Iran occupied the islandsof Abu Musa, Greater Tunb, and Smaller Tunb in November1971, a month before the British withdrawal from the PersianGulf and the creation of the UAE as an independent nation.At that point the emirate of Sharjeh claimed sovereigntyover Abu Musa, while the emirate of Raas-al-Kheimahclaimed the Tunb islands. As Sharjeh and Raas-al-Kheimahbecame part of the UAE, the islands dispute evolved into anIran-UAE dispute that is yet to be resolved.
In spite of this dispute, Iran and the UAE have maintained diplomatic relations in the past three decades, and theUAE has emerged as one of Iran’s largest trade partners—aseeming contradiction that is explained, perhaps, by

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