Summer is sleepy in Dubai, a time when wealthy locals and expats flee for cooler climes. However, for the emirate’s estate agents, this was anything but bleak. The United Arab Emirates (UAE), a seven-member federation that includes Dubai, is projected to add 4,000 new millionaire residents this year, more than any other country. This is welcome news for a property market that contributes 8% of GDP, if not for agents who want to be on the beach.
These are difficult times for energy exporters in the Middle East. The Saudi economy is projected to grow by 7.6%, among the fastest rates in the world. The smaller Gulf states will have windfalls to pay off debt and boost sovereign wealth funds. Even dysfunctional countries like Iraq must have surpluses. But The United Arab Emirates, and Dubai in particular, do not only benefit from high energy prices. It also benefits from sanctions and geopolitical disruptions that helped drive up those prices. The city’s stock market is up 9% this year, compared with a 2% rise in Riyadh.
Even before Russia invaded Ukraine, Dubai was in a stronger position to grow as a financial center with giant and determined rivals battling it out. Hong Kong becomes less attractive as it falls further into China’s orbit. It has also suffered from the restrictions of Covid-19. Meanwhile, London has lost some of its luster since Brexit and no longer welcomes Russian capital. Dubai is the ultimate financial center where almost anyone can do business with almost anyone else.
This is most evident in the city’s property market. Russians bought more than twice as many homes in Dubai in the first half of 2022 as in the whole of last year. Betterhomes, a property firm, says they were the fourth largest group of buyers, up from ninth in 2021. Banking restrictions are no deterrent: one estate agent is said to have installed an ATM in his office to facilitate cash transactions. Many Russian yachts are moored in Emirati marinas, while private jets of oligarchs roam a previously little-used airport south of Dubai.
Firms, both local and multinational, are changing their operations. Banks such as Goldman Sachs and Bank of America have moved employees from Moscow to Dubai. Commodity firms are considering a move from Switzerland, which has joined EU sanctions against Russia. In Fujairah, on the east coast of the United Arab Emirates, local companies are flocking to the arbitrage business. They can buy Russian oil at a deep discount, refine it, and then sell the finished products at the market price. All this has been made possible by the neutral stance of the United Arab Emirates towards the war. Although a longtime Western ally, it has refused to join Western-led sanctions against Russia.
Dubai is not the only ‘pit’ available. Some Russians have decamped to Turkey; However, the country’s attractiveness is limited by a falling currency and rising inflation. The United Arab Emirates offers no such concerns. Its currency, the dirham, is pegged to the dollar and has not depreciated since 1997. Public debt is a manageable 32% of GDP; inflation is expected to peak at less than 4%. The banking system is reliable and well capitalized. The income tax rate is 0%. The scorching weather may come as a shock, but Dubai offers all the amenities Russian expats would expect: designer brands in malls, celebrity chefs in hotels, luxury homes with domestic help. Diners at a new restaurant in the financial district can order a baked potato topped with caviar for just 2,610 dirhams ($710).
These attractions have already lured business from elsewhere. Dubai has established itself as a financial center serving not only the Middle East, but Asian and African markets. Indian businessmen, for example, find much to like. They enjoy tax breaks and better schools and hospitals. Lawyers can fly in just three hours for international deals, a much shorter journey than to London or Singapore. Sovereign wealth funds are a major source of cash for private equity and venture capital firms. An Indian magnate says half his friends in south Mumbai have bought apartments in Dubai.
Along with legitimate business, there is also the more dubious kind, from Irish mobsters to Iranian traders seeking to circumvent sanctions. Establishments that cater to the rich, like a rooftop lounge on a man-made island in the Gulf, can have a Star-Wars bar vibe, albeit with $100 Wagyu steaks, $1,600 bottles of Cristal and less music. hilarious. The illegal gold trade alone was once estimated to be around $4 billion a year (although the government has taken some steps to clean it up).
Dubai’s loose political economy can cause tension. For most of the past decade, it was Abu Dhabi, the less commercial capital of the UAE, that set the tone for foreign policy. The Arab Spring of 2010-11 and the chaos it caused put the country on a war footing. The United Arab Emirates joined the Saudi-led invasion of Yemen in 2015 and sent weapons to an aspiring dictator in Libya. He also pushed for the embargo on Qatar in 2017, which saw four Arab states cut trade and travel links with the troublesome emirate.
Some of this was bad for business. Qataris bought many properties in Dubai, either as an investment or as a second home in a cheaper city. The blockade drove them out of the property market. Earlier this year, Yemen’s Houthis fired several rounds of rockets and drones at Abu Dhabi, a worrying development in a country that depends on a reputation for stability.
Since 2019, however, the United Arab Emirates has turned to the Dubai model. It withdrew troops from Yemen that summer and has scaled back its role in Libya. The blockade ended last year. This was pragmatism: neither the war nor the blockade brought the hoped-for benefits. Thus, tough foreign policy is out and economic diplomacy is in.
Take the sanctions-busting oil trade in Fujairah. Before they started importing Russian crude, firms there helped Iran sell its own oil. The commercial motive was straightforward: arbitrage is easy money. From the government’s perspective, the trade also served a political purpose. The United Arab Emirates was rattled by an Iranian-sponsored attack in 2019 on Saudi oil facilities, which briefly shut down half of the kingdom’s output. Acting as an intermediary makes the UAE useful to Iran and possibly reduces the risk of a similar attack.
In March, the Financial Action Task Force, the world’s leading anti-money laundering body, placed the UAE in “grey list” of problematic countries. The listing has no formal consequences and bankers say it has not changed the UAE’s reputation: anyone doing business there is already aware of the risks. But Emirates officials were upset by their inclusion (and hope to be delisted by the end of 2023).
Financial institutions are investigating their newest customers. The government has told them not to deal with Russians who are under Western sanctions. “Banks want to prove their compatibility in the future”, says a Dubai-based financial analyst. But there are still choices to be made. A Russian with a $1 million fortune probably isn’t worth the headache. One with $10 million? Maybe.
A more serious concern is dealing with US sanctions, which would be dire for a country with a large financial sector and a currency pegged to the dollar. However, America does not seem to want to take a close look at the UAE. Every few months a group from the Treasury department flies in to rebuke the Emirates. In June, Wally Adeyemo, the deputy secretary, told bankers to be careful with Russian clients. Apart from some symbolic sanctions on small firms – mostly over relations with Iran – America has done little more than talk. The United Arab Emirates has convinced many Americans that it is an indispensable partner in the region. Establishing diplomatic ties with Israel in 2020 was a master stroke.
This leaves Dubai in an enviable position. Whether America and Iran reach a nuclear deal or not, it could serve as an economic lifeline for Iran, as it has done for years. Even as the war in Ukraine progresses, it may now play much the same role for Russia. Standing on the sidelines is making Dubai the resurgent center of the world.
/Translated and adapted for Konica.al by “The Economist“