“Dubai Inc.”, the corporate definition and image that for years has held together the many components of the territory’s much vaunted economic model, is in trouble. The foundation of its success - the nexus of big umbrella companies that used their perceived government backing to court investors from all over the world - has, with the desperate debt-restructuring appeal by the Dubai World conglomerate on 25 November 2009, now been revealed as an empty shell.
It was not meant to be like this. Dubai’s ruler since 2006 (and before that its crown prince), Sheikh Mohammed bin Rashid Al-Maktoum, had given constant indications that “Dubai Inc.” would enjoy the unswerving support of the ruling family. For a long time it appeared to work. But with most of the energies of the post-oil Dubai economy devoted to building up a real-estate industry, luxury tourism, and a financial sector, all the umbrella companies relied on a continuous stream of foreign direct investment and perpetually easy access to cheap international credit. In these circumstances, and especially after the worldwide financial meltdown of 2007-09, the model was always bound to fail (see Dubai: The Vulnerability of Success [C Hurst & Columbia University Press, 2008]).
The empty shell
The long-awaited moment when reality overtook the dream arrived on 25 November 2009. That day, the debt-ridden Dubai World - seemingly cast adrift by the government of Dubai and certainly disowned by the ruling family - released a terse statement to the effect that it would need to restructure massive debts that were due for financing, including those accrued by Nakheel (the developer responsible for the environmentally sinful manmade Palm Island trilogy).
In a venerable tradition of disguising sensitive news, the information was slipped out under the cover of the Eid Al-Adha festival and the United States’s thanksgiving holiday. But investors were alerted to the subterfuge, and rightly interpreted Dubai World’s crisis as a sovereign default. The result was a global-market panic amid fears that a wave of such defaults would spread to other emerging markets as well as within Dubai.
But in many ways the biggest immediate shock was the indifference of Abu Dhabi, the super-wealthy neighbour who was widely expected (not least by the ruler of Dubai) to lend support to its stricken partner. After all, Abu Dhabi’s huge oil-and-gas reserves and command of the world’s largest sovereign wealth funds (totalling perhaps $1 trillion) could easily have underwritten all of Dubai’s debts overnight. More importantly, it could have done this much earlier and “under the table”, thus averting crisis and saving faces. The fact that it chose not to do so reveals the politics - and to a degree the personalities - that lie at the true heart of spectacular Dubai’s collapse.
Inside the bubble
The two emirates, formed after Britain’s departure from the Persian Gulf in 1971 and with respective ruling dynasties that hailed from the same Bani Yas bedouin tribe, long co-dominated the seven-member federation of the United Arab Emirates (UAE). These intimate bonds help explain why investors, citizens, and expatriates alike long evaded Dubai’s economic woes. If they noticed the fragile foundations of the economic “miracle” at all, they assumed that Abu Dhabi had the ability to bail out Dubai’s failures, and to do so before these became public knowledge.
This mood of blithe optimism was enough to keep Dubai afloat for most of 2009 - even amid crashing property prices, slumping hotel occupancies, and the conspicuous cancellation of billions of dollars’ worth of construction projects. It was obvious to informed observers that Dubai’s business model had already collapsed, but a stream of soothing noises from the very highest levels in Dubai kept the bubble intact and critics at bay.
Truly, a Potemkin village of brotherly solidarity was being built. In November 2009, the ruler of Dubai - having earlier stated that he had made no mistakes in his stewardship of the economy - rallied dispirited investors by telling them that what belonged to Dubai was Abu Dhabi’s, and what belonged to Abu Dhabi was Dubai’s. Those who disagreed with this rationale, he informed stunned delegates, should “shut up”.
To batter the point home, he despatched his hitherto unblemished crown prince to the World Economic Forum meeting on 21 November 2009 to state that all was well and that the economy was “humming along”. If investors needed even more encouragement, then they received that too when the architect of much of Dubai’s property-industry madness (and current chairman of its biggest developer, Emaar Properties) announced that the emirate’s economy would “grow by 5% in 2009.” It seem that enough of his audience - including many who should have known better - were fooled.
What became, then, of the phantom Abu Dhabi guarantee? Surely if Dubai was so convinced it would receive support then there must have been a prior agreement? Also, with an imploding Dubai on its doorstep, surely Abu Dhabi stood so much to lose? After all, the reputation of the entire UAE, built up so carefully by Abu Dhabi’s erstwhile ruler – Sheikh Zayed bin Sultan Al-Nahyan – is now very much at stake. Property prices are falling in Abu Dhabi too, and its stock exchange has crashed just as hard as Dubai’s.
Perhaps most perilously, just one month into its hard-won nuclear-technology agreement with the United States, Abu Dhabi now faces a potential security liability within the UAE. The US congress was reluctant to pass the legislation given the UAE’s proximity to Iran, but was eventually appeased. Yet if Dubai cannot get credit from anywhere else, then it is reasonable to assume that it may turn to its greatest trading partner across the Gulf (see Abu Dhabi: Oil and Beyond (C Hurst & Columbia University Press, 2009).
At last, opportunity
The answer to this conundrum lies in both the past and the present, as an age-old rivalry has resurfaced that sees Dubai unwilling to part with its autonomy and come to the table. Dubai, after it broke away from the sheikhdom of Abu Dhabi in 1833, survived repeated attempts at reintegration only because of its peace treaties with Britain. Even in the 1940s, with Britain fully engaged in the second world war and less able to give attention to the region, there was an armed conflict between the two sheikhdoms. In 1979, just eight years after the UAE was formed, a constitutional crisis threatened to break the UAE apart, with Dubai resentful of increasing Abu Dhabi-led centralisation. It is remarkable that Dubai agreed to merge its armed forces - the Dubai Defence Force - into the federal military only in 1996.
In the light of this history of some tension, Abu Dhabi has taken an unexpectedly shrewd stance on the financial disaster. Its thinking appears to be that Dubai’s bad debts really are bad, and could well end up becoming black holes. Moreover, if Abu Dhabi gets involved now, then the lawsuits that will almost certainly be coming Dubai’s way may land on the desks of the federal government or even those of Abu Dhabi.
There is a deeper point. Sheikh Mohammed, his crown prince, and his top lieutenants are now all exposed as having long circumvented the truth; as a result, the ruling family has suffered a massive loss of legitimacy, both internationally and in the eyes of Dubai’s business elite and citizenry. Yet at the time of writing there have been no signs of humility; on the contrary, the ruler stated on 1 December that investors “do not understand anything”.
With such leadership in place, can the UAE remain strong? It is more than likely Abu Dhabi doesn’t think so and will encourage change. In that case, and if as a result Dubai can be brought more fully into the fold, then its financial implosion could represent a golden opportunity for Sheikh Zayed’s dream of a solid, cohesive federation finally to be realised.