Our Opinion: 2024

Dubai’s growth continues apace

It is always a privilege to visit Dubai. The city continues to change and develop like no other. On this visit, I was struck by the growing influx of Russians and how the emirate is gaining by playing all sides.

The United Arab Emirates (UAE), a seven-member federation that includes Dubai, is forecast to add 4,000 new millionaire residents this year, more than any other country. That is welcome news for a property market which contributes 8% of GDP.

These are heady times for the Middle East’s energy exporters. The Saudi economy is projected to grow by 7.6%, among the world’s fastest rates. Smaller Gulf states will have windfalls to pay down debt and top up sovereign-wealth funds. Even dysfunctional countries like Iraq should run surpluses. But the UAE, and Dubai in particular, does not only benefit from high energy prices. It also gains from the sanctions and geopolitical disruptions that helped send those prices soaring. The city’s stock market is growing well.

Even before Russia invaded Ukraine, Dubai was in a stronger position to grow as a financial hub with giant, established rivals struggling. Hong Kong grows less attractive as it falls further into China’s orbit. It has also suffered from covid-19 restrictions. Meanwhile, London has lost some of its shine since compliance and regulations are often too onerous for international clients. It also no longer welcomes Russian capital. Dubai is the last financial hub where just about anyone can do business with just about anyone else.

This is most obviously visible in the city’s property market. Russians are currently the fourth-largest group of buyers, up from ninth place in 2021. Banking restrictions are not an obvious obstacle. Scores of Russian yachts are anchored in Emirati marinas, while oligarchs’ private jets loiter at a previously little-used airport south of Dubai.

Firms, both local and multinational, are shifting their operations. Banks like 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 on Russia. In Fujairah, on the east coast of the UAE, local companies are piling into the arbitrage business. They can buy Russian oil at a significant discount, refine it, then sell the finished products at market-price. All of this is made possible by the UAE’s neutral stance on the war. Although a long-time Western ally, it has declined to join Western-led sanctions on Russia.

Dubai is not the only bolthole available. Some Russians have moved to Turkey; the country’s attractiveness is limited, however, by a weak currency and surging inflation. The UAE offers no such worries. Its currency, the Dirham, is pegged to the dollar and has not budged since 1997. Public debt is a manageable 32% of GDP; inflation is expected to peak at less than 4%. The banking system is trustworthy and well-capitalised. The income-tax rate is a hard-to-beat 0%. Scorching summer weather might be a shock, but Dubai offers all the amenities Russian émigrés would expect: designer brands in malls, renowned chefs in hotels, luxury homes with domestic help.

These attractions have already lured business from elsewhere. Dubai has made itself a financial hub that serves not just 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 over in just three hours for international deals, a much shorter trip than to London or Singapore. Sovereign-wealth funds are a big source of cash for private-equity and venture-capital firms.

Dubai’s freewheeling political economy can cause tension. For much of the past decade it was Abu Dhabi, the UAE’s less commercial capital, which set the tone on foreign policy. The Arab spring of 2010-11, and the chaos it unleashed, put the country on a war footing. The UAE joined the Saudi-led invasion of Yemen in 2015, and sent arms to an aspiring dictator in Libya. It also pushed for the embargo of Qatar in 2017, which saw four Arab states cut trade and travel ties with the nation  only lifting as the World Cup took place.

Some of this was bad for business. Qataris used to buy lots of property in Dubai, either as an investment or as a second home in a more liberal city. The blockade cut them out of the property market. Increased tension in Yemen is a worrying event in a country that depends on a reputation for stability.

Since 2019, though, the UAE has swung back towards the Dubai model. It withdrew troops from Yemen that summer and has cut its role in Libya. Principled foreign policy is out and economic diplomacy is in. The UAE was unnerved by an Iranian-sponsored attack in 2019 on Saudi oil facilities, which briefly shut down half the kingdom’s output. Acting as a middleman makes the UAE useful to Iran, and perhaps reduces the risk of a similar attack.

The Financial Action Task Force, the world’s main anti-money-laundering body, puts the UAE on its “grey list” of problem countries. The listing has no formal consequences, and it has not changed the UAE’s reputation: anyone doing business there is already aware of the risks. But Emirati officials were upset by their inclusion and hope to have it removed imminently.

Financial institutions are investigating their newest clients. The government has told them not to deal with Russians who are under Western sanctions. Banks want to future-proof their compliance. But there are still choices to be made. A Russian with $1m in assets is probably not worth the headache. One with $10m? Maybe.

A more serious worry is running afoul of American sanctions, which would be dreadful for a country with a big financial sector and Dollar-linked currency. Yet the US does not seem to want to look closely at the UAE. Aside from a few token sanctions on small firms, mostly for dealings with Iran, America has done little more than talk. At the same time, the UAE has convinced many Americans that it is an indispensable partner in the region. Forging diplomatic ties with Israel in 2020 was a masterstroke, despite the obvious challenges in such a relationship.

This leaves Dubai in an enviable position. Regardless of how the war in Ukraine progresses, sitting on the side-lines is making Dubai the world’s resurgent home for those who need one.

8th February 2024