Iran and the UAE agree to use the UAE dirham to de-dollarise trade in MENA
The dirham is pegged to the dollar and the US can exercise significant pressure on the UAE central bank to deter it from facilitating such trade.
Iran has reportedly agreed with the UAE to use the Emirati dirham in bilateral trade (20 billion USD in total in 2022) instead of the US dollar to bypass western sanctions. Iran also has asked that Iraq uses the dirham to settle outstanding debts to Iran (10 billion USD in total).
Iraq has struggled to repay its debt to Iran due to pressure from the US. The government has previously discussed using the euro to settle Iranian debt. The use of national currencies was also discussed, but ultimately dropped under US pressure. Earlier last month, Iraq said it would trade with China in yuan.
India and Russia have also used the dirham as a medium of payment to bypass western sanctions despite several US appeals to the UAE to refrain from facilitating such transactions.
Overall, the UAE does not view western sanctions on Russia, China, or Iran as sustainable and is hedging and pivoting to accommodate a new world reality that is characterised by multipolarity.
Notably, the dirham is pegged to the dollar. Thus, the US can still exercise significant pressure on the UAE central bank. Therefore, the UAE-Iran agreement may lead to worsening ties between the UAE and the US with the latter applying further pressure on the former's financial system.
Lastly, the groundbreaking agreement is allied with a broader regional trend to de-dollarise part of trade and use national currencies instead. As I reported earlier, Saudi just completed its first loan transaction in the Chinese yuan while Iran is now conducting its trade with China and Russia in national currencies.
Business implications
More expansive western sanctions on the UAE will increase companies' exposure to compliance risks.