Arab Gulf states have agreed to start negotiations with Iran on a trade agreement in the hope that this could help to ease diplomatic tensions in the region.

The Gulf Co-operation Council has begun a review of trade statistics between the two sides before launching the formal negotiations, requested by the Iranian government, an official told the Financial Times.

The GCC, comprising Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain, was formed in 1981 in the wake of the Islamic revolution in Iran and the outbreak of the Iran-Iraq war, in which the Gulf states backed the Sunni regime in Baghdad. They maintain close military ties with the US.

The US has called on its allies, notably Dubai and the UAE, to isolate Iran economically, but Dubai officials, while pledging to follow United Nations directives, generally defend business links with Iran.

The Gulf leaders’ balancing act comes amid strengthening economic ties between the GCC, especially the trade hub of Dubai, and Iran. Iran imported $10bn (€7bn, £5bn) of goods from Dubai last year, mainly re-exports from the trade hub’s ports.

“Because of their own inclinations and the influence of the US, the GCC’s desire is to engage with the Iranians but to put limits on any [perceived] Iranian diplomatic victory over the US,” says Neil Partrick, Dubai-based Gulf analyst for the International Crisis Group.

Diplomatic contacts between the Sunni-controlled GCC and Shia Iran have increased as both sides seek to reduce sectarian bloodletting in Iraq. But warnings from hardline Iranian politicians of potential retaliation against GCC targets in the event of a military strike on the Islamic republic mean Gulf decision-makers are likely to remain wary about anything that could jeopardise US military protection.

The GCC has yet to conclude long-running negotiations on trade agreements with economic blocs such as the European Union, as well as trade powerhouses such as China.

Some analysts therefore doubt that the trade pact proposal with Iran will progress beyond the drawing board. But the Iranian request and the GCC response are significant, given the history of tension between both sides.

Iran in April called for the formation of a security co-operation group with the GCC states to counter US influence in the Gulf.

“Iran, after ignoring its neighbours for many years, is beginning to realise the virtue of developing closer ties with regional countries to counter its deteriorating ties with the west,” says Narayanappa Janardhan, a Dubai-based political analyst. Broadening trade could also help Iran as economic sanctions against its financial system start to bite, say businessmen.

“It is natural for Iran to try to find a way to import goods when it is facing sanctions,” said Mohammad-Reza Behzadian, former head of Tehran’s chamber of commerce.

A Tehran-based business daily last week reported that Iranians had invested $120bn in Dubai, equivalent to about half the country’s budget, this year. With UN economic sanctions starting to impede the Iranian banking system, some companies are turning to Dubai-based banks to finance trade into the Islamic republic.

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