The GCC enjoys a considerable trade surplus in its trade relation with Iran. The GCC goods exports to Iran have increased from $1.26 billion in 2000 to a record $7.33 billion in 2007 which amounted to 12 percent of Iran's total imports. As a result the GCC registered a $5.7 billion trade surplus with Iran in 2007.

Two factors have encouraged Iran to expand its trade relations with GCC countries.

First, the growing economic and financial sanctions by European governments and European banks in the past two years have forced Iran to shift its trade away from Europe and look to other regions for its import needs. This has lead to an increase in trade with Asia and GCC, which have so far been more reluctant to go along with these sanctions.

Iran's second motive for expanding its trade with GCC countries is political. Iran is actively trying to discourage the GCC countries from joining the U.S. sponsored economic and financial sanctions or cooperating with any potential U.S. military operation against Iran.

In pursuit of this goal Iran has tried hard to expand its diplomatic and economic ties with GCC countries in recent years. Iran's largest trade partner in the GCC is the United Arab Emirates (UAE) which accounted for 72 percent of GCC's exports to Iran in 2007.

Aside from this large volume of exports, the UAE receives a large flow of private investment capital from Iran which has contributed to the strength of the real estate prices in Dubai in recent years.

However, this rapid increase in Iran-GCC economic relations has recently caught the attention of the United States. Realizing that trade with the GCC has enabled Iran to partially neutralize the impact of European financial sanctions, the United States has tried to persuade GCC banking institutions to sever their ties with Iranian banks and deny service to Iranian firms and businessmen. While so far the GCC governments have refused to impose formal economic sanctions on Iran, some financial institutions in Bahrain and the UAE have voluntarily complied with the U.S. demands.

Recent interviews with a number of Iranian businessmen have revealed that these steps have made it more difficult for them to trade with GCC countries. If the new round of negotiations between Iran and Western nations in Geneva proves fruitless, it is likely that the U.S. pressure on GCC-based banks will intensify in the coming months and can result in a reduction in Iran-GCC trade. This development will have an adverse impact on the Iranian economy, which imports a variety of electronic equipment and spare parts for heavy machinery from the UAE. It will also reduce Iran's growing exports of agricultural and handcraft products to Saudi Arabia and the UAE.

In order to further strengthen its economic ties with the GCC, Iran is also trying to export natural gas to these countries. Iran has recently announced a natural gas export agreement with Oman. After several years of negotiations and delays, it is also expected to start natural gas exports to the UAE in 2008. Negotiations are also underway for a Kuwait-Iran natural gas export deal. If these planned exports materialize they will make it more difficult for GCC countries to cooperate with the U.S. sanctions.

In recent years demand for natural gas has outpaced its supply in several GCC countries. Qatar, which is the largest natural gas exporter in the region, has been unable to fill this gap completely. Consequently they have turned their attention to Iran. These Iran-GCC natural gas agreements, however, remain vulnerable to U.S. pressure on Gulf countries which also maintain close economic and security ties with the United States. At the same time, Iran's ability to export natural gas to GCC countries has also been adversely affected by American sanctions. U.S. pressure on international oil firms that operate in Iran has limited Iran's ability to attract investment to its energy sector and boost natural gas output in the past three decades.

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Nader Habibi is Henry J. Leir professor of Middle East economies at Brandeis University.