Dubai sees future as ally, entrepôt and playground

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Inhabitants of rival Gulf states scent hubris in the way Dubai has risen from the desert and grabbed the world’s attention with its futuristic tourism developments, proliferating skyscrapers and liberal use of superlatives to market each project.

Some doubtless relish the hostile scrutiny to which the emirate’s ambitions are being subjected in the US and particularly on Capitol Hill. But confronted by an American populist backlash against the prospect of Dubai Ports World (DPW) running US container terminals as part of its $6.9bn (£4bn, €5.8bn) acquisition of the UK-based P&O, the more common sentiment among Arab businessmen and officials is indignation.

Suspicions of Islamophobia aside, seen from the Middle East it is as if Dubai is being treated as an upstart long after much of the world has acknowledged that the city is a phenomenon to be reckoned with.

Among officials of the United Arab Emirates who run foreign policy for the federation of which Dubai is a part, there is also a sense of betrayal. As they watch US politicians cite a past decision to recognise Afghanistan’s Taliban regime as one cause for mistrust, they recall how the Clinton administration encouraged them, for its own purposes, to develop just such relations.

More than any Gulf state, the city has promoted itself as a natural home to multinationals and pragmatic ally of the west capable, in its pursuit of global status, of shrugging off vexed issues that have turned other parts of the region into cauldrons of anti-western sentiment. At a time when tackling the Middle East’s volatile mix of oil, authoritarianism and religious extremism is a priority for western policymakers, the Dubai emirate has provided a compelling example of an Arab city embracing modernity.

In four decades it has gone from being a pearl fishing and trading outpost to a regional centre for commerce, transport, tourism – and increasingly finance. City officials like to compare Dubai today to New York a century ago – a melting pot of creative

The emirate has seen its economy double in size in real terms within the last 10 years while its population, which by some estimates has reached 1.5m, is being boosted by immigration. Dubai’s allure is founded on a paradoxical blend of laisser-faire and rigid authoritarianism. Thus the ruling Maktoum family has brooked no dissent when it comes to enforcing the central principle that has distinguished it from its peers: allowing people to get on with it in a region otherwise intensely regulated.

But the frantic pace of the city’s development – which has accelerated exponentially since 1993, when Sheikh Mohamed bin Rashid al-Maktoum became de facto ruler – has exposed a host of other contradictions.

Dubai is one of seven emirates that, in a loose federation, make up the UAE. Brokered by the British at independence in 1971, the federation has been held together in large part by Abu Dhabi’s vast oil wealth. However, unlike the poorer emirates dependant on Abu Dhabi largesse, Dubai struck out early on its own path, playing the entrepreneur to Abu Dhabi’s oil baron, albeit with consent and substantial subsidies from its richer neighbour. Dubai’s own oil production now hovers somewhere below 200,000 barrels a day and, according to analysts, that will peter out after 2010.

Ever since Sheikh Rashid, the former emir, initiated plans in 1979 to build the world’s largest man-made harbour at Jebel Ali, the city has attracted sceptics. Yet city officials have developed a knack for generating substance from the hype.

The Jebel Ali port, from which DP World originated, is itself at the heart of the greatest irony in Americans’ concern about a state-owned Dubai company running their container terminals. Security at Jebel Ali is state of the art – as you would expect for the port outside the US that is most often visited by the US Navy.

In evidence to the Senate Armed Services Committee last month, Gordon England, deputy secretary of defence, noted that “the port at Jebel Ali is managed by Dubai Ports, so we rely on them, frankly, for the security of our forces there. There were 75 coalition partner ships there [last year].”

The economic logic behind Dubai’s transformation into an icon of urban capitalism lies in its abundant land, cheap energy and location in a region full of frustrated capital and labour. It needed a raison d’être as well as a revenue stream for when its own oil runs out. From south Asia it has hauled in a mass of indentured labourers to do the grunt work. Meanwhile a growing army of young professionals in search of career breaks – from South Africa to Turkey and the Levant – are joining the trail.

City officials argue that none of this would have been possible without the rapid-fire decision-making process that comes with autocratic rule.

Dubai’s system of government is in many ways unique among the Gulf’s dynastic autocracies. While state and ruling-family assets are at least as much entangled as elsewhere in the region, the bureaucracy is leaner and in general businessmen say government is far more efficient.

“People refer to our crown prince as the chief executive officer of Dubai. It’s because genuinely he runs government as a private business,” Saeed al-Muntafiq, head of the Dubai Development and Investment Authority, said in an interview before Sheikh Mohamed became emir following his brother’s death last year.

Recognising that the overall business of “Dubai Inc” has become too big for any one man to manage, Sheikh Mohamed has endowed loyal lieutenants with land and, to varying degrees, capital and mandated them to realise a “vision” of which, he says, only 10 per cent has so far been achieved.

The more publicity-grabbing and iconic real estate projects, and those that have established Dubai as a brand, have mostly been devised by his three most powerful subordinates. Their role has been to push – with state backing – the boundaries of what is possible, in turn encouraging the private sector to be more ambitious and competitive.

They have already built the world’s largest shopping mall, its most unlikely artificial ski resort (chilled under a glass dome in the desert) and – on artificial islands fashioned offshore into a map of the world – a playground for the super-rich. Now they plan to add the world’s tallest building.

In an interview last year, Mohamed Alabbar, who heads Emaar, the city’s biggest property developer, said the fate of big ventures is often determined by a mobile phone call among the big shots. “What matters is that you are equipped to participate with good decisions,” he said.

The Dubai phenomenon has proved infectious, stirring more cautious regimes in the neighbourhood to be more innovative. When Dubai announces a new project or adapts an old one to new tastes, others in the Gulf tend to feign scepticism, before finding a way to adapt and follow suit. Thus Bahrain, which never had much oil of its own, has had to promote its own more established financial sector with a new and flashy property development, while gas-rich Qatar has launched a rival to the Dubai International Financial Centre (DIFC).

The DIFC and associated DIFX exchange were conceived to provide a global financial market to match those of Singapore or Hong Kong, bridging geographic and time zones between Europe and Asia.

As the projects have grown in ambition, so have the contrasts between conspicuous consumption and the grim conditions of the immigrant labourers who, for tiny wages and from miserable work camps out of sight in the baking desert, make it possible. As Dubai has developed aspirations to “world-class” status, so the cracks in the system have become more exposed.

To date, each time Sheikh Mohamed has run up against restrictive federal laws that conflict with Dubai’s international aspirations, his tactic has been to hive off a new free zone. The empty desert has provided a tabula rasa on which he has drawn a slew of these, for health, media, education, technology, flower markets and many other sectors. The free zones are designed as a ready-made circuit board into which multinationals can plug in their regional operations. But they also reveal a certain schizophrenic character to Dubai.

Bankers and businessmen acknowledge that insider trading is rife on the local stock exchange, that some money laundering is an unavoidable by-
product of a tax-free system and that there are still no effective commercial arbitration methods in Dubai. International banks are nevertheless encouraged to trust that the same standards that regulate the London or Hong Kong stock exchanges will be rigorously applied in the DIFX.

When western visitors commend the city for its “liberal” attitudes, they are often talking about its striking tolerance of drinking, prostitution and bare midriffs in a region otherwise more obedient to Islam’s strictures. They are not referring to government attitudes to free speech.

Outside Media City, a district of air- conditioned offices with all services provided, where the regional press corps has been encouraged to make its base, journalists working for local newspapers are constrained by self-
censorship and archaic federal laws. Surrounded as they are by an all-
pervasive public relations machine, it is tough for journalists, and even to an extent investment banks, to provide the critical analysis that more developed international markets require.

Nor have UAE attempts at political reform matched even the timid efforts initiated in recent years by some other Gulf countries. Its response to outside pressure for change makes even Saudi Arabia’s limited experiment last year with municipal elections look progressive. In the UAE, royally enfranchised appointees will elect from among themselves members of an assembly with no real powers.

“There’s no one to say No. I think that is the principal Achilles heel of Dubai. These projects are so huge it could go wrong,” says a well-connected state employee.

At the same time, the Dubai leadership knows that if it invited more participation from the local population in decisions, many of the projects would not be happening at all. Dubai nationals are already feeling encroached on by so many immigrants.

Bankers believe that when the oil runs out and demands for more services grow, Dubai will begin to face budget deficits. With them, and the possible need for more conventional borrowing, demands for more transparent government and even eventually reconsideration of the city’s tax-free status may grow.

Such issues are beginning to come under greater international scrutiny as the city’s own companies, like DP World, expand aggressively around the globe.

But the concerns of the local Emirati population have remained barely audible. Many of the well-to-do are happy to wander among the many worlds on their doorstep. But others worry that their privileged place in a Dubai society that provides jobs, homes and welfare for life will eventually dissolve in the melting pot around them.

Emiratis now make up less than 10 per cent of Dubai’s population. At 110,000, there are now almost as many British. Local ambivalence is encapsulated by an Emirati university professor, who says: “There are few success stories in the Arab world and we are proud that Dubai is one of them. But many of us feel that success is coming at too high a price.”

When addressing a clientele outside the region, the city’s image launderers like to promote the idea that it has outgrown its turbulent neighbourhood and now lies somewhere beyond. Thus Dubai has doubled up as a Costa del Sol for the British package holidaymaker, a seven-star destination for the super-rich global jet set and a parachute for Iranians and Saudis hedging against future turmoil in their own countries.

The same facilities – the banks, trading and tax-free status – that make Dubai an obvious regional base for the global business executive also make it convenient for the Mumbai gangster, Russian oligarch, African smuggler and international terrorist.

In this context, the DP World saga has been a rude reminder for Dubai of how difficult it is to be all things to all people – and nowhere more so than in the charged atmosphere of the Middle East.

Additional reporting by Steve Negus

Openness creates a difficult risk to manage

The US national commission that investigated the September 11 2001 attacks found that in the months leading up to the onslaught, the United Arab Emirates was “both a valued counterterrorism ally of the United States and a persistent counterterrorism problem”, write Edward Alden and Steve Negus.

That image, of a friend in the Arab world with an uncomfortably close association with America’s enemies, has been difficult for the UAE to shake off in spite of what US officials say has been an extraordinary level of co-operation between the two governments since the attacks.

The issue has come to the fore this year over Dubai Ports World’s acquisition of the UK’s P&O, which operates terminals at five US ports, with some lawmakers arguing that the US should not trust a country that was exploited so easily by the al-Qaeda operatives who planned and executed the attacks. “It is still a large financial centre that is open to commerce from all parts of the world and that creates an inherent risk,” acknowledges a senior US official. “It’s a difficult risk to manage.”

Since US officials began tracking the financing of terrorism following a deadly al-Qaeda attack on US embassies in Africa in 1998, Washington has pressed the UAE to crack down on the problem. US officials who travelled to the UAE at the time found flimsy financial regulation and no control over charities that were suspected of financing al-Qaeda, according to Daniel Benjamin and Steven Simon, senior White House officials in the Clinton administration.

In preparing for the September 11 attacks, several of the hijackers were able to move freely through the UAE, while Dubai-based banks were used to funnel money to them once in the US.

But the UAE was far from alone in its failure to recognise the al-Qaeda threat and has made strides since. “The worst that could be said [of the period before 9/11] is that the government did not realise the danger and didn’t have the systems to control it,” says a long-time foreign resident of Dubai. “Since then, they have put in place means to track investment flows.”

Since the attacks, say current and former US officials, few countries have worked as determinedly to shut off financing for al-Qaeda. “When you look at the UAE compared to the Saudis, the Saudis would always talk about doing things but didn’t follow through. The UAE was the direct opposite,” says Dennis Lormel, former head of the terror financing unit at the Federal Bureau of Investigation and now senior vice-president at Corporate Risk International, a security consultancy.

According to the 9/11 commission, the UAE central bank did everything that US investigative teams requested following the attacks, opening millions of pages of bank records and allowing tens of thousands of pages to be copied and sent to the US for examination. “The emirates made a decision, I think in large part due to their own commercial interests as well as their geopolitical interests, that they needed to be as open and transparent with us as they could be,” says the senior US official.

The authorities also acted to keep tighter control over money flows through Dubai. The government tracks withdrawals of cash above a low threshold and requires banks to investigate their customers before opening accounts and report suspicious transactions – in line with standards set by the United Nations and the Organisation for Economic Co-operation and Development.

Dubai has also acted to regulate the informal hawala sector, which is used by many foreign workers to transfer money inexpensively to their families but has also been exploited by terrorists to move funds without leaving a paper trail. While individual transactions may still be untraceable, Dubai has required all hawala operators to take out licences. The UAE has also taken a larger role, drawing up the first set of principles for regulating hawalas.

Experts say Dubai faces a delicate task in curbing abuses while maintaining the light regulatory hand that has allowed it to prosper. “If you regulate it too hard, the whole thing might dry up and blow away,” says Patrick Jost, a terror finance expert with Risc Global, the UK consultancy.

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