Dr. Pshtiwan Faraj

The UAE escalates economic pressure on Iran as tensions over the Strait of Hormuz deepen, while Baghdad faces growing US-Iran pressure over militia disarmament.

The United Arab Emirates’ decision to suspend trade and financial transactions with Iran marks a potentially decisive escalation in the economic dimension of the war surrounding the Strait of Hormuz. What had once been one of Iran’s most important commercial lifelines is now becoming another front in the confrontation between Tehran and the Gulf states. On August 18, the UAE announced that it would halt trade and financial activity with Iran after accusing Tehran of launching missiles from Iranian territory toward the Emirates. Iran’s actions and the UAE’s response demonstrate that the struggle over Hormuz is no longer simply a dispute over maritime navigation: it is becoming a broader contest over whether Iran can impose strategic costs on the Gulf while preserving the economic networks that have helped it withstand international sanctions.

The timing is particularly significant. The UAE has repeatedly argued that the Strait of Hormuz is an international economic lifeline rather than an instrument that Iran can use for political coercion. The Emirati government has described the waterway as essential to global energy markets and has worked with international partners to reopen maritime traffic. The UAE previously warned that Iran’s attempts to restrict navigation threaten global trade, with the strait carrying a substantial share of global oil and liquefied natural gas shipments.

The new economic measures therefore represent more than retaliation for individual missile attacks. They are an attempt to change Iran’s strategic calculation by increasing the economic price of its campaign to exert control over Hormuz.

The UAE Is Targeting One of Iran’s Most Important Economic Lifelines

The economic significance of the UAE to Iran cannot be overstated. For decades, Dubai and other Emirati commercial centers have functioned as gateways through which Iranian businesses access international markets, acquire consumer and industrial goods, move capital and navigate around sanctions restrictions.

The World Bank has previously identified the UAE as Iran’s largest source of imports, accounting for approximately one-third of Iranian imports in 2022/23. The relationship is therefore structurally important: even when political relations deteriorate, geography and commercial interdependence have encouraged both sides to preserve economic channels.

That calculation is now being challenged.

The UAE’s suspension of trade and financial transactions threatens Iran at precisely the point where Tehran is already experiencing severe economic pressure. Cutting access to Emirati re-export networks can make imported goods more expensive, slow the movement of essential products and complicate the ability of Iranian businesses to settle international transactions.

It also strikes at one of Iran’s most important mechanisms for mitigating sanctions.

For years, Iran’s economic resilience has depended partly on its ability to exploit commercial intermediaries, alternative financial channels and neighboring markets. The UAE has been one of the most important nodes in that system. If that node is substantially closed, Tehran will have to rely more heavily on other channels, particularly through Turkey, Iraq, China and informal networks.

The problem for Iran is that replacing the UAE will not be simple.

The UAE combines proximity, financial infrastructure, shipping connectivity and commercial expertise in ways that are difficult to replicate. Tehran may be able to redirect some trade elsewhere, but doing so will increase transaction costs and reduce efficiency at precisely the moment when Iran's economy is under extraordinary pressure.

The UAE is consequently not merely imposing another sanction on Iran. It is attempting to remove part of the infrastructure that has allowed the Iranian economy to survive previous rounds of sanctions.

Hormuz Is Becoming an Economic Weapon

Iran’s strategic objective appears increasingly connected to the Strait of Hormuz.

The Iranian leadership has long understood that the strait provides Tehran with an asymmetric instrument. Iran does not need to permanently close Hormuz to create economic disruption. The threat of disruption can itself raise shipping costs, increase insurance premiums, frighten investors and force energy companies to reconsider their exposure to the Gulf.

This is why the UAE’s response matters.

Abu Dhabi is effectively attempting to demonstrate that economic coercion can work in both directions.

If Iran uses maritime pressure to increase the costs of Gulf states and international shipping companies, the UAE can use its commercial position to increase the costs imposed on Iran.

That creates a dangerous feedback loop.

Iranian pressure on shipping encourages Gulf states to align more closely with Washington. Greater Gulf alignment with the United States encourages Tehran to perceive those states as participants in the American strategy. Tehran then has additional incentives to threaten Gulf infrastructure and maritime traffic, which in turn pushes the Gulf states further toward Washington.

The result is a regional security dilemma in which every attempt by one side to increase its security makes the other side feel less secure.

The UAE’s decision therefore has implications far beyond bilateral Emirati-Iranian relations.

Iran May Not Back Down

The most important question is whether economic pressure will cause Tehran to reconsider its strategy.

There are reasons to doubt it.

Iran’s current decision-making structure appears to place extraordinary influence in the hands of the Islamic Revolutionary Guard Corps. Major General Ahmad Vahidi was formally appointed commander-in-chief of the IRGC on August 10, following the death of his predecessor, Mohammad Pakpour. Analysts at the Critical Threats Project have assessed that Vahidi and his inner circle have played an outsized role in Iranian regime decision-making and that Vahidi has supported the use of force to achieve Iranian strategic objectives.

That matters because the IRGC does not necessarily evaluate economic costs in the same way as conventional economic policymakers.

For Tehran’s hard-line security establishment, economic pain may be acceptable if it produces a strategic gain.

This creates a fundamental contradiction between Iran’s economic interests and its security doctrine. The UAE is one of Iran’s most important commercial partners, yet the Iranian security establishment may increasingly view the UAE primarily through the lens of its relationship with Washington and its role in the regional military balance.

In other words, Tehran may recognize that severing economic ties with the UAE is damaging while nevertheless concluding that maintaining pressure on Hormuz is strategically more important.

That would make the current confrontation particularly dangerous.

Iran could respond to the UAE not by reducing pressure but by increasing it—through maritime harassment, missile threats, attacks on shipping, cyber operations, economic retaliation or pressure through regional partners.

The UAE would then face a difficult choice between absorbing Iranian pressure and responding with even greater cooperation with the United States.

The UAE-Iran Relationship May Be Entering a Structural Breakdown

For decades, the UAE-Iran relationship demonstrated how economic interdependence could coexist with geopolitical hostility.

The two countries disagreed over territorial issues, Iran’s regional influence and its relationship with the United States, yet commercial interests kept important channels open.

That model may now be collapsing.

The UAE’s decision represents a major psychological shift because it suggests that Abu Dhabi is increasingly willing to sacrifice economic benefits in order to impose strategic costs on Tehran. The Emirati government has already framed the Hormuz crisis as an international security issue rather than a bilateral disagreement with Iran.

That distinction is crucial.

If the UAE increasingly sees Iran’s actions as a direct threat to international navigation, then economic and military cooperation with Washington becomes easier to justify domestically and internationally.

For Iran, however, the consequences are potentially more profound.

The loss of the UAE as a relatively accessible commercial partner would push Iran further toward dependence on a narrower group of economic relationships. Tehran could become increasingly reliant on China, Turkey, Iraq and informal trading networks.

That may increase Iran’s dependence on states that can demand greater political concessions in exchange for continued economic access.

The paradox is striking: Iran may seek greater strategic autonomy through confrontation while becoming economically more dependent on a smaller number of partners.

Iraq Is Becoming Another Battlefield in the Contest

The consequences of the Iran-UAE confrontation are not confined to the Gulf.

Iraq is emerging as another critical arena because Tehran retains deep political and military relationships with Iraqi armed groups, while Washington is demanding greater control over weapons and preventing Iraqi territory from being used for attacks against regional states.

Prime Minister Ali al-Zaydi is therefore caught between competing pressures.

The United States wants Baghdad to dismantle or constrain armed groups capable of attacking American and regional targets. Iranian-backed Iraqi actors, meanwhile, are resisting meaningful disarmament and seeking to preserve their military autonomy.

Zaydi has already taken steps intended to strengthen state authority over armed groups. Iraqi sources have reported that his government has considered measures involving Jurf al-Sakhr, a strategic area south of Baghdad that has remained under the influence of Kataib Hezbollah for years.

The significance of Jurf al-Sakhr extends beyond the geography of central Iraq.

It represents one of the clearest examples of the Iraqi state’s difficulty in exercising sovereign authority over territory controlled or dominated by powerful armed organizations.

Reports that Baghdad has considered deploying security forces around the area appear designed partly to pressure militias into accepting state authority without immediately triggering a major confrontation.

That balancing act is becoming increasingly difficult.

Tehran Is Moving to Protect Its Iraqi Network

Iran has not remained passive.

The Islamic Revolutionary Guard Corps has reportedly engaged Iraqi actors over the disarmament process, while IRGC Quds Force commander Esmail Qaani traveled to Baghdad amid reports of possible Iraqi action against militia strongholds.

This demonstrates the central dilemma confronting Baghdad.

Iraq formally possesses sovereignty over its territory, but the Iraqi government operates within a political system in which powerful factions maintain close relationships with Tehran.

The result is a state caught between external pressure and internal armed power.

Iran's interest is straightforward: it cannot afford to lose its Iraqi network while simultaneously confronting the United States, Israel and the Gulf states.

Iraq provides Tehran with strategic depth.

It also provides political influence, logistical pathways and armed partners capable of imposing costs on American and regional interests.

For that reason, Iranian officials are likely to continue discouraging Baghdad from undertaking military action against the militias.

Ghalibaf’s Baghdad Role Signals Tehran’s Concern

The reported involvement of senior Iranian officials, including Parliament Speaker Mohammad Bagher Ghalibaf, is another indication of how seriously Tehran views the Iraqi disarmament question.

Ghalibaf’s political position is particularly important because Iran needs to manage two objectives simultaneously: preventing an internal Iraqi confrontation and preserving the operational capabilities of its partners.

Iran cannot easily afford an open confrontation between the Iraqi government and powerful militias at the same time that Tehran is fighting a much broader regional conflict.

Such a confrontation could destabilize Iraq, threaten Iran’s influence and potentially create opportunities for the United States to expand its leverage.

Consequently, Tehran is likely to favor negotiated arrangements that allow Baghdad to claim progress on disarmament without fundamentally dismantling the military power of the most important Iran-aligned factions.

That is essentially the logic behind proposals involving the transfer of weapons into the formal Popular Mobilization Forces structure.

But this approach contains a major weakness.

If weapons are simply moved from one militia structure into another without changing the political allegiance of the armed groups, then Iraq may achieve administrative consolidation without achieving genuine state control.

The distinction between disarmament and reorganization will therefore become critical.

Washington’s Pressure and Tehran’s Pressure Are Colliding in Baghdad

Zaydi's government is consequently facing pressure from both directions.

Washington expects Baghdad to demonstrate that the Iraqi state controls armed force and that Iraqi territory will not be used to attack American or regional interests.

Tehran wants Baghdad to prevent the dismantling of the armed networks that provide Iran with strategic depth.

The Iraqi prime minister's political survival may depend on his ability to navigate between those demands without allowing either side to conclude that he has become an outright instrument of the other.

That explains the cautious Iraqi approach.

Rather than immediately launching a large-scale military operation against Jurf al-Sakhr, Baghdad appears more interested in surveillance, pressure, negotiations and the deployment of selected security forces.

Earlier reports indicated that the Iraqi government preferred diplomacy and calibrated pressure over an immediate assault, even while preparing options should the militias refuse to cooperate.

This is rational from Baghdad's perspective.

A direct assault against a major Iran-backed militia stronghold could trigger an armed confrontation that the Iraqi state may not yet be prepared to win.

But excessive caution creates the opposite danger: it can convince militias that the government lacks the political will to enforce its own decisions.

The September Deadline Could Become a Flashpoint

The Iraqi government's September 30 deadline for militia disarmament is therefore becoming increasingly important.

The deadline coincides with the planned withdrawal of US-led international coalition forces from Iraq, creating an unusual strategic convergence.

Washington wants the Iraqi state to become more capable of independently controlling armed groups.

Iranian-backed factions may interpret the withdrawal of coalition forces differently: as an opportunity to consolidate their position once American forces are reduced.

The coming weeks could therefore determine whether Iraq moves toward greater state consolidation or deeper militia autonomy.

The worst outcome would be a confrontation in which the Iraqi government attempts to enforce disarmament, Iranian-backed militias resist, and Tehran intervenes politically or indirectly to prevent Baghdad from succeeding.

Such a crisis would not remain confined to Iraq.

It could quickly become another front in the wider Iran-US-Gulf confrontation.

Kurdistan Could Become Increasingly Important

For the Kurdistan Region of Iraq, these developments deserve particularly close attention.

The region has already been exposed to the wider Iran-related security environment and remains strategically important to the United States because of its military, logistical and political position.

If tensions between Baghdad and Iranian-backed militias escalate, the security consequences could spread northward.

Kurdistan could face increased pressure from armed groups operating elsewhere in Iraq, particularly if militia networks attempt to demonstrate that they retain the ability to strike American interests.

At the same time, Washington's continued reliance on locations in the Kurdistan Region could increase the region's strategic importance within the broader American-Iranian confrontation.

This creates both opportunity and risk for Erbil and Baghdad.

The opportunity lies in demonstrating the value of functioning state institutions, secure infrastructure and reliable partnerships.

The risk is that the Kurdistan Region could once again become caught between larger powers competing for influence across Iraq.

The Bigger Strategic Picture

The UAE's economic break with Iran and Iraq's struggle over militia disarmament may initially appear to be separate developments.

They are not.

Both are manifestations of the same regional contest: who controls the mechanisms through which Iran projects power beyond its borders?

In the Gulf, the contest centers on maritime access and the Strait of Hormuz.

In the UAE, it centers on financial and commercial networks.

In Iraq, it centers on armed groups and state sovereignty.

In Syria and Lebanon, similar questions revolve around Iranian-backed networks and strategic depth.

The Iranian leadership appears determined to preserve these instruments even at considerable economic and military cost.

The United States and its regional partners are increasingly attempting to dismantle or constrain them.

That is why the UAE's decision is potentially more important than the headline suggests.

It represents the transformation of economic interdependence into economic warfare.

The UAE once served as one of Iran's most important commercial gateways. Now it is becoming one of the states most determined to impose costs on Tehran's regional strategy.

Iran will have to decide whether the strategic value of controlling or threatening Hormuz is worth sacrificing one of its most important economic relationships.

If Tehran concludes that it is, the region may be entering a much longer period of confrontation.

And if Iran responds to the UAE's economic pressure with greater military pressure, the Strait of Hormuz could become the point where economic warfare, maritime conflict and regional proxy warfare converge.

That would make the crisis much harder to contain.

For Iraq, the danger is even more immediate.

Baghdad is being asked to prove that the Iraqi state controls its territory and weapons at precisely the moment when Iran needs its Iraqi network more than ever.

Zaydi's government therefore faces a historic test: whether it can transform the Iraqi state's constitutional authority over armed groups into actual authority on the ground.

The outcome may determine not only Iraq's relationship with Iran and the United States, but also the future security architecture of the wider Gulf.

Dr. Pshtiwan Faraj is the founder and editor of Kurdish Policy Analysis, an independent geopolitical and policy analysis platform focused on Kurdistan, Iraq, Iran, the Middle East, security, energy and regional geopolitics. His work examines how local political developments intersect with wider international strategic competition.

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