TEHRAN, Feb 25 (IPS) - Iran and the United Arab Emirates have begun top level talks to boost economic relations despite efforts by the United States to disrupt trade ties and an unresolved territorial dispute over the three strategic islands of Abu Mousa, the Lesser and the Greater Tunb in the Strait of Hormuz.

The UAE is already Iran's top trade partner with bilateral trade reaching 14 billion US dollars, according to official sources.

"The U.S. has tried to hurt the Iranian economy through unilateral sanctions. They consider U.N. sanctions too mild to achieve enough pressure on Iran to halt its nuclear programme. To bring the Iranian economy to its knees they have been encouraging and even putting pressure on all Iran's trade partners, including the UAE, to stop dealing with Iran. This can and has hurt much more than the U.N. sanctions," an observer in Tehran told IPS.

"Stopping trade with Iran is in no way in the best interests of the UAE that has the greater share of the lucrative trade relations and hence their big dilemma whether to relent to the U.S. pressure and keep Americans happy or serve their own national interests and economy," he added.

In May 2007, Iran's President Mahmoud Ahmadinejad became the first Iranian president since the Islamic Revolution of 1979 to visit the UAE.

It was reciprocated last week by Sheikh Mohammad bin Rashid, Prime Minister of the UAE and ruler of Dubai, in a rare, top-level visit. He reiterated his country's stance, expressed earlier at a joint press conference with Germany's Chancellor Angela Merkel, that Iran had a right to peaceful nuclear technology.

Importantly, the Sheikh also said Iran was no threat to regional states. "Allegations by aliens (U.S.) that Iran is a threat to the region are vague as regional states share a lot of historic and contemporary common grounds," the UAE premier was quoted by reporters as saying.

"The UAE Prime Minister's visit is proof that U.S. policies will not have any impact in the region," Ahmadinejad said during his meeting with Sheikh Mohammad.

Ahmadinejad has offered to provide regional Arab countries that have their own nuclear ambitions with Iranian nuclear knowhow. Referring to Iran's nuclear technology, he told the visiting UAE prime minister that Iran was fully prepared to 'put its valuable achievements' at the UAE's disposal.

The visit, a little more than a month after one to the UAE by U.S. President George Bush, sparked speculations about a nuclear message being relayed by the UAE prime minister to Tehran.

But, Iran's ambassador in the UAE, Hamid-Reza Assefi, rejected the speculations. "He just informed us of his country's stance regarding Iran's nuclear issue and said Iran had a right to have access to peaceful nuclear technology," the Iranian ambassador was quoted as saying by semi-official Fars News Agency.

The Gulf Cooperation Council (GCC), of which the UAE is a member, acknowledges all nations' right to peaceful nuclear energy, but has concerns about a nuclear Iran. Other members are Oman, Qatar, Saudi Arabia, Kuwait and Bahrain.

The U.S. intelligence bodies' report (NIE) in December 2007 seems to have put the minds of Iran's Arab neighbours at greater ease as to the nature of its nuclear programme. The report revealed that Iran's nuclear programme had not been of a military nature since 2003.

The NIE report has done little to alter Bush's policy towards Iran. In January during an official visit to the UAE, he accused Iran once again of sponsoring terrorism. The U.S. president said Iran's actions threatened the security of nations everywhere and promised that the U.S. was rallying friends to confront the Iranian danger before it was too late.

President Bush's customary rhetoric against Iran was not well received in the UAE and in other regional countries. "Unfortunately, the focus of this epoch-making visit to Abu Dhabi and Dubai has been on the U.S. preoccupation with Iran, rather than America's strong and healthy relations with the UAE and other Gulf allies," UAE's pro-government 'Khaleej Times' wrote.

"Just as the Gulf countries have healthy relations with the West, including the U.S., they also have historical, cultural and economic ties with Iran. The UAE happens to be Iran's biggest trading partner. This is why the UAE and other Gulf countries wouldn't want any more confrontation and conflict between the US and Iran. The Middle East and Gulf region, already suffering from two conflicts, cannot afford any more tensions. Peace and only peace is the way forward," the newspaper wrote.

The U.S. has been trying to paint Iran as a scarecrow to the Arab nations, particularly to the Persian Gulf states, an observer in Tehran told IPS. "But Arab nations seem to be increasingly disillusioned with U.S. policies. The GCC countries say they will not allow any attacks on Iran from their soil. They seem to be more worried by a nuclear Israel that is continuing its aggressive policies without any hindrance," the observer said.

"Before the U.N. began to impose sanction on Iran to stop its nuclear programme and the U.S. stepped up its unilateral sanctions, the thriving economy of the UAE, and Dubai in particular, was seen as a serious threat to Iranian economy here," he said.

"Capital flowed, and still flows, from Iran to Dubai in huge sums in search of safety and profits. Iranian investors are now holding somewhere around 300 billion dollars in capital in the UAE. The trade volume between the two countries was up by 25 percent last year. The Emiratis are profiting in terms of money while Iran benefits by the trade between the two countries that enables its economy to meet the domestic demand for imports," he added.

The greater part of Iranian imports from the UAE consists of re-exports from the country. This enables Iran to lay its hands on things the unilateral U.S. sanctions have made difficult or impossible to acquire from other sources. The fact is reflected in the figures for the trade volume in the Iranian fiscal year that ended in March 2007 during which the UAE's share of the 11.7 billion dollar non-oil exports between the two countries was 9.2 billion dollars.

U.S. lobbying has made things harder for Iranians and their trade partners in the rest of the world, but they have found ways of circumvention. Many Iranian companies have registered in the UAE to continue their business and unofficial money transfer channels have taken the place of banks.

"For quite a few years my firm has been importing machinery parts, re-exports from Europe and elsewhere in fact, from Dubai. Things went rather smoothly in the past, but recently one main Canadian supplier said they couldn't deal with us directly or they'd be boycotted by the Americans. They suggested that we register a company in Dubai. We had to find a local partner to hold 51 percent of the shares according to local regulations," the CEO of an importing company told IPS in Tehran.

"On the other hand, international banks where we had our accounts asked us to close our accounts and would no longer accept the letters of credit from our Saderat and Melli banks that have several branches in the UAE. This has made us deal in cash and use unofficial money transfer systems which raises the end price of the imported goods for us," he said.

Beside economy the issue of the disputed islands was brought up during the UAE premier's visit. Iran is prepared for talks with the UAE to 'remove misunderstanding over the Persian Gulf Island of Abu Mousa', foreign ministry spokesman Mohammad Ali Hosseini was quoted by Islamic Republic News Agency (IRNA) as saying following the UAE premier's visit.

The territorial dispute between the two countries over the three islands dates back to 1971 when the seven states comprising the UAE gained independence from Britain.

While insisting on its non-negotiable sovereignty over the disputed islands, Iran says it favours talks to resolve the issue. The UAE, however, has in the past sought to settle the issue of the islands that it calls 'occupied' through the International Court of Justice in The Hague.

In May 2005 the UAE officially appealed to the U.N. to arbitrate on the issue of the disputed islands. The UAE's claim has repeatedly been backed by the GCC members and other Arab states.