Table of Contents

Dubai’s historical trajectory and idiosyncratic political economy help explain its prominent role in facilitating international financial flows. The most populous emirate of the UAE, Dubai enjoys a symbiotic relationship with Abu Dhabi, the country’s political and petroleum powerhouse. However, because of Dubai’s mercantilist history, its relative political autonomy, and its emergence as a global commercial hub, the emirate has long resisted periodic attempts by the federal government in Abu Dhabi to impose greater cohesion in national policymaking.

Ruled since 2006 by septuagenarian Sheikh Mohammed bin Rashid Al Maktoum, Dubai has evolved from a regional trade hub into an aspirant global city. Unlike Abu Dhabi—which possesses over 90 percent of the UAE’s oil and gas reserves—Dubai is a post-oil state. After peaking at 410,000 barrels per day in 1991, its oil production fell sharply. As a result, Dubai became an early proponent of economic diversification, especially of construction and real estate.1 In 2000, Dubai ambitiously set a target to grow its gross domestic product to $30 billion by 2010, only to achieve it by 2005.2 Dubai was booming.

After peaking at 410,000 barrels per day in 1991, its [Dubai’s] oil production fell sharply. As a result, Dubai became an early proponent of economic diversification, especially of construction and real estate.

Nevertheless, the real estate crash precipitated by the 2008 global financial crisis left Dubai more than $120 billion in debt, necessitating a $20 billion bailout from Abu Dhabi to meet its immediate financial obligations. The debt crisis weakened Dubai’s political economy, shifting the balance of power in the UAE firmly toward Abu Dhabi in the 2010s. Unfortunately, the crisis also created space for less legitimate financial flows, which Dubai came to rely on to sustain its economy.

Historical Overview

Dubai was first populated in the eighteenth century but remained a small fishing village until the early 1830s, when the Al Bu Falasah section of the Bani Yas tribal confederation seceded to Dubai after disagreeing with the Al Bu Falah section about succession. Led by Maktoum bin Buti, the Al Bu Falasah settled in Dubai in 1833 and established the ruling dynasty that bears his name.3

Initially dependent on Abu Dhabi, the early rulers of Dubai lived a somewhat precarious existence. On several occasions, they were nearly dragged into a wider regional conflict between the Bani Yas in Abu Dhabi and the powerful Qawasim rulers in neighboring Sharjah. But by the early 1900s, Dubai’s economic importance had begun to grow. It was declared a free port in 1901 and subsequently received a major boost in 1903 when a string of Persian and Arab merchants migrated to the city from the Persian port of Lingah. Alienated by the Tehran government’s new regulations and higher taxation, the merchants brought their businesses and trading networks, which extended to India and beyond.4

Kristian Coates Ulrichsen
Kristian Coates Ulrichsen is a fellow with the Center for the Middle East at Rice University’s Baker Institute for Public Policy and an associate fellow at Chatham House.

For most of the seventy years that followed the 1903 influx, Dubai, rather than Abu Dhabi, was the region’s economic and commercial mainstay. Over the following decades, Dubai’s merchants and rulers derived their wealth from the fishing and pearling industries, as well as the trading of general goods across the eastern coast of Africa and the western coast of India. Even at this early stage, and in anticipation of its later geoeconomic role, Dubai’s rulers positioned the emirate as a transit center for regional trade and the reexport of goods to and from the Arabian Peninsula, Persia, and India.5 Successive Maktoum rulers in the early/mid-twentieth century continued to attract trade and business activity by reducing import and export taxes and placing merchants in senior government positions.6 Major infrastructural developments during the long rule (1958–1990) of Sheikh Rashid bin Saeed Al Maktoum, the father of current ruler Mohammed bin Rashid, included dredging of the Dubai Creek in the late 1950s and construction of the Jebel Ali port and free trade zone in the 1970s. These actions cemented Dubai’s preeminent regional status as a trade hub.7

Federal-Emirate and Abu Dhabi-Dubai Relations at Independence

On December 2, 1971, Dubai and five of the other so-called Trucial States—named by the British government—joined to create the UAE. This occurred two days after the British terminated treaties that protected each individual sheikhdom and as the British government withdrew its forces from all remaining positions east of the Suez Canal. (The seventh emirate, Ras al-Khaimah, initially remained outside the UAE, in the hope of discovering oil, but joined the federation in February 1972 after failing to do so.) The UAE came together after three years of on-off negotiations that at one point included the rulers of Bahrain and Qatar in a proposed nine-member Union of Arab Emirates. Bahrain and Qatar went their own way and declared independence in August and September 1971, respectively, and Sheikh Rashid briefly entertained the prospect that Dubai might also go it alone.8

From the beginning, power and authority in the UAE were shared between the federal and emirate levels and apportioned among the seven emirates based largely on population size.

From the beginning, power and authority in the UAE were shared between the federal and emirate levels and apportioned among the seven emirates based largely on population size. The discovery of enormous oil reserves in Abu Dhabi in the 1960s was followed by the ousting of its lackluster long-standing ruler—Sheikh Shakhbut bin Sultan al-Nahyan—by his dynamic younger brother, Sheikh Zayed bin Sultan, in 1966. Sheikh Zayed immediately accelerated the development of Abu Dhabi’s oil resources and used the surging income to modernize not only his emirate but also the five poorer “northern emirates” as well. His largesse and his conviction that the Trucial States must stick together meant that Sheikh Zayed was the natural choice as the inaugural president of the UAE, a position he held for thirty-three years until his death in 2004. His eldest son, Sheikh Khalifa bin Zayed, succeeded him as UAE president and ruler of Abu Dhabi.9

Dubai is represented at the federal level by its ruler, who has—by convention—held the position of vice president and prime minister of the UAE since 1971. He also sits on the seven-member Federal Supreme Council of rulers. While each council member has a single vote and procedural matters are decided by a simple majority, substantive issues require both Abu Dhabi and Dubai to agree.10 In addition to this effective veto over council decisionmaking, Abu Dhabi and Dubai also hold eight seats each in the forty-member Federal National Council; Sharjah and Ras al-Khaimah have six seats each, and the small emirates of Ajman, Fujairah, and Umm al-Quwain each have four. At independence in 1971, Dubai also received three prominent cabinet posts: defense, finance, and economy and industry. Abu Dhabi controls six cabinet posts, including foreign affairs and interior.11

Dubai is represented at the federal level by its ruler, who has—by convention—held the position of vice president and prime minister of the UAE since 1971.

The provisional constitution drafted in 1971 (made permanent in 1996) also established the separation of powers between federal and emirate institutions. It gave the federal government responsibility for nineteen issues—including foreign affairs, defense, finances, education, and health—while also allowing each emirate to exercise sovereignty over issues not under federal jurisdiction.12 This effectively allowed Abu Dhabi to retain control over its own oil and gas reserves.

Much of the UAE’s first two decades of governing focused on resolving lingering pre-1971 issues among rulers who were unaccustomed to sharing power in a centralized manner. One rift that persisted throughout the 1970s was over the degree of federal power and oversight: Dubai favored a looser arrangement, while Abu Dhabi supported closer integration. The disagreement led to a three-year constitutional crisis between 1976 and 1979, during which Abu Dhabi’s ruler threatened to resign as president of the UAE.13 Even after the constitutional impasse was resolved, it took another two decades to fully integrate other governing areas into the federal government. For example, the complete military unification of pre-1971 emirate forces did not occur until 1996, when the Dubai Defense Force and the Ras al-Khaimah National Guard were incorporated into the Union Defense Force.14

Dubai and Abu Dhabi in the 2000s

A feature of Dubai policymaking in the early 2000s was its unilateralism. Decisions often were taken with little or no deference to the federal government in Abu Dhabi, which, among other effects, undermined attempts to craft a coherent UAE foreign policy. This was evident, for example, in Abu Dhabi’s negotiations with the U.S. government on a “123” nuclear agreement that would secure U.S. support for the UAE’s civil nuclear energy program. Officials in Washington expressed unease about Dubai’s rapidly expanding reexport trade with Iran, which represented a loophole in the tightening noose of international sanctions. Abu Dhabi’s push for U.S. congressional approval of its nuclear plans exposed the sensitivity of such commercial ties, especially given the possibility that illicit trade in dual-use material could bypass or erode the sanctions regime on Iran.15

When Mohammed bin Rashid became Dubai’s ruler in January 2006—after the sudden death of his older brother, Sheikh Maktoum bin Rashid Al Maktoum—he also succeeded Maktoum as vice president and prime minister of the UAE. Over the following two years of Mohammed bin Rashid’s federal premiership, Dubai briefly became more influential at the national level.

Economic growth was another feature of Dubai in the early 2000s. The emirate gained worldwide attention for its spectacular mega projects, including the Palm Islands and the luxurious Burj Al Arab hotel. Also during this period, Dubai relaxed a law that prohibited foreigners from purchasing real estate. Allowing them to buy properties in designated areas, without requiring residency as originally mandated, contributed to the rapid expansion of the real estate market in the mid-2000s. But the bursting of the real estate bubble in 2008 dealt a blow to both its economy as well as its political prowess.16

But the bursting of the real estate bubble in 2008 dealt a blow to both its [Dubai’s] economy as well as its political prowess.

Dubai’s liquidity and credit soon dried up, leading to a major debt crisis. In November 2009, the global holding company, Dubai World, requested a repayment standstill and a debt restructuring. The announcement came to symbolize the severity of the financial hit, as the emirate’s debts rose to more than 100 percent of the gross domestic product. Dubai raised money to meet its financial obligations by selling $10 billion worth of bonds to the UAE Central Bank (based in Abu Dhabi) in February 2009 and then securing a $10 billion loan from two state-owned Abu Dhabi banks in November 2009.17 Whether there was a quid pro quo for Abu Dhabi’s financial support is unclear, but in January 2010, the tallest building in the world—known throughout its construction phase as Burj Dubai—was suddenly renamed Burj Khalifa (after Abu Dhabi’s ruler) on the day of its grand opening.

The 2008 real estate market collapse reverberated across the economic landscape of Dubai. More than $300 billion in projects were scaled back, put on hold, or canceled.18 While the emirate’s government remained solvent, government-related entities, such as Dubai World and the property developer Nakheel, borrowed heavily to finance their activity. Dubai World’s requests for government assistance illustrate a key feature of the emirate’s political economy, namely the opaque nature of the ties among key stakeholders in the ruling family and the local business community. While the government announced that its Dubai Financial Support Fund would oversee the restructuring of $26 billion of Dubai World debt, it stunned financial analysts and investors by stating that it would not guarantee the debt itself. Many creditors assumed that it would do so given that Dubai World is wholly owned by the government.19

After 2008, Abu Dhabi wielded greater influence due to its economic leverage and the rise of Crown Prince Mohammed bin Zayed Al Nahyan, its assertive leader. Khalifa bin Zayed, Abu Dhabi’s ruler and the president of the UAE, had gradually withdrawn from public life due to ill health. Mohammed bin Zayed had worked closely with Mohammed bin Rashid in their capacities as deputy commander-in-chief of the UAE’s armed forces and defense minister, respectively. The two were known as the pioneers of the modern development of Abu Dhabi and Dubai, but it was Mohammed bin Zayed who came to dominate decisionmaking in Abu Dhabi (and across the UAE) through his take-no-chances, security-first response to the 2011 Arab uprisings.

Although there was virtually no unrest, or even threat of trouble, within the UAE itself, Mohammed bin Zayed constructed a sophisticated surveillance state and engaged in a campaign to push back against Islamist opposition—perceived and actual—across a broad swath of the Middle East and North Africa. Much of this regional campaign was undertaken in close coordination with Saudi Arabia, and the June 2018 launch of a Saudi-Emirati Coordination Council became a symbol of the new center of gravity. The crown princes of Abu Dhabi and Saudi Arabia, Mohammed bin Zayed and Mohammed bin Salman, were made council co-chairs, while Mohammed bin Rashid—who, unlike Mohammed bin Zayed, actually holds senior federal positions (UAE vice president and prime minister)—was nowhere to be seen at the inaugural meeting.20

Dubai’s Political-Economic Nexus

Dubai’s ruling family remains the emirate’s central decisionmaking authority, although this is sometimes hard to discern due to the different hats worn by Mohammed bin Rashid as the ruler of Dubai and the UAE’s prime minister and vice president. Indeed, Mohammed bin Rashid’s decisions often emanate from the prime minister’s office (located in Dubai) rather than from the Dubai Royal Court itself.

Dubai’s ruling family remains the emirate’s central decisionmaking authority.

Mohammed bin Rashid has been the dominant figure in Dubai since the 1980s—despite only becoming its ruler in 2006—and he continues to be the man most closely associated with the visionary development of the emirate. During the boom years in the early 2000s, his inner circle included nonmembers of the ruling family, but since the 2008 financial crisis, its members have mostly been key family members such as his uncle and sons (see Figure 1).21 His policymaking style includes playing key functionaries against each other to generate a competitive rivalry in project development and execution.

Although nine years younger, Mohammed bin Rashid’s uncle, Sheikh Ahmed bin Saeed Al Maktoum, was appointed the chairman of Emirates Airline in 1985 and later given additional senior roles that placed him at the forefront of Dubai’s 2008 postcrisis financial rehabilitation. In November 2010, he became the chairman of Dubai World, a year after the company’s inability to service its debts discredited its previous leadership.22 Eight months later, Mohammed bin Rashid appointed him chairman of Emirates NBD, the largest bank in the UAE and one of the largest investors in Dubai World.23 And in 2013, Mohammed bin Rashid entrusted him to lead the successful campaign to win the hosting rights to Expo 2020. Ahmed bin Saeed also now sits on the boards of the Investment Corporation of Dubai (the investment arm of the Dubai government) and the Dubai Executive Council’s Economic Development Committee.

As they came of age, two of Mohammed bin Rashid’s sons—Crown Prince Sheikh Hamdan bin Mohammed Al Maktoum and Deputy Ruler Sheikh Maktoum bin Mohammed Al Maktoum—assumed greater policymaking authority. Sheikh Hamdan’s major appointments have placed him at the helm of Dubai’s economic development. These positions include chairman of the Dubai Executive Council and co-leader (with Ahmed bin Saeed) of Expo 2020 Dubai. Sheikh Maktoum has been entrusted with chairing a new governing board for the flagship Dubai International Financial Centre (DIFC) and with supervising and coordinating the three so-called independent authorities affiliated with the DIFC: the DIFC Authority, the Dubai Financial Services Authority, and the DIFC Courts.

A March 2015 interview with Mohammed Alabbar, the founder and chairman of Emaar Properties—one of the largest real estate developers in the world—best exemplifies the cross-cutting nature of political and economic relationships in Dubai and the blurred lines between the public and private sectors. Emaar is considered a private company, yet it was originally founded with state funding. The Investment Corporation of Dubai, the government’s investment arm chaired by Mohammed bin Rashid, holds a 29 percent stake in Emaar. Alabbar stated that “I do not do anything without me talking to HH [His Highness], he is the man who gave me unimaginable opportunities, and he gave me a chance to be who I am. And to trust me.”25 Alabbar’s comments indicated that though some of the top policymaking figures changed after the financial crisis, the style of Mohammed bin Rashid’s decisionmaking remains broadly similar. In a 2006 interview, the head of a subsidiary of Dubai World also noted that whenever he passed on a request to the head of Dubai World, he got “an answer within thirty minutes. . . . Here [in Dubai] they are much more forward thinking, dynamic, and a lot more trusty.”26

Looking Ahead

Expo 2020 Dubai—with the slogan “Connecting Minds, Creating the Future”—will now run from October 2021 to March 2022 (delayed one year due to the coronavirus pandemic). Although part of the UAE’s fiftieth anniversary celebrations, the expo comes at a moment of renewed economic and geopolitical uncertainty. The expo may become a focal point for critics of the UAE since the country’s muscular approach to foreign policy has generated a degree of regional unease and its participation alongside Saudi Arabia in the Yemen war has drawn criticism—including some pushback from the U.S. Congress.

Awarding of the expo to Dubai in November 2013 seemed to symbolize the emirate’s return to economic good health, but growth has slowed in the wake of the UAE boycott of Qatar and the spike in regional tension with Iran. Economic growth slowed from 3.1 percent in 2017 to 1.9 percent in 2018, which is the weakest return since 2010. The finance, mining, and manufacturing sectors performed especially badly.27 The UAE’s participation in the Saudi-led blockade of Qatar (ongoing since June 2017) meant the loss of a significant trade and investment partner and the sudden severance of political ties. And consequently, both Dubai’s economy and its reputation as a place to do business unencumbered by political or geopolitical considerations have suffered. Likewise, a spate of maritime attacks on tanker shipping near the Strait of Hormuz in May and June 2019—allegedly masterminded by Iran—has raised the specter of an asymmetric regional conflict, which dramatically increases the risk of doing business in and with Dubai.28

Awarding of the expo to Dubai in November 2013 seemed to symbolize the emirate’s return to economic good health, but growth has slowed in the wake of the UAE boycott of Qatar and the spike in regional tension with Iran.

What does Dubai’s increasingly precarious economic and geopolitical position mean for international policymakers engaging with the emirate and the UAE? First, they must keep in mind that federal government officials in Abu Dhabi may not necessarily speak for government officials in Dubai. Second, the degree of pressure that the federal government and/or emirate authorities in Abu Dhabi can exert on Dubai depends greatly on internal political dynamics and power relationships within the UAE. Lastly, because Dubai’s authorities view the forthcoming Expo 2020 as a global platform to showcase their brand, they will be keen to minimize international criticism of their shortcomings.

Notes

1 Gerald Butt, “Oil and Gas in the UAE,” in Ibrahim Abed and Peter Hellyer, eds., United Arab Emirates: A New Perspective (London: Trident Press, 2001), 237.

2 Ulrichsen, The United Arab Emirates, 93.

3 Christopher Davidson, Dubai: The Vulnerability of Success (London: Hurst & Co, 2008), 13.

4 Fatma al-Sayegh, “Merchants’ Role in a Changing Society: The Case of Dubai, 1900–90,” Middle Eastern Studies 34, no. 1 (1998): 89–90.

5 Michael Quentin Morton, “The British India Line in the Arabian Gulf, 1862–1982,” Liwa: Journal of the National Center for Documentation and Research 5, no. 10 (2013): 50.

6 Pardis Mahdavi, Gridlock: Labor, Migration, and Human Trafficking in Dubai (Stanford, CA: Stanford University Press, 2011), 46–47.

7 Donald Hawley, The Trucial States (London: George Allen & Unwin Ltd, 1970), 244.

8 Simon Smith, Britain’s Revival and Fall in the Gulf: Kuwait, Bahrain, Qatar and the Trucial States, 1950–1971 (Abingdon: Routledge, 2004), 103–104.

9 There is nothing in the UAE’s constitution that specifically allocates the presidency to Abu Dhabi’s ruler other than the convention that, so far, has only been tested once in 2004. Article 51 of the 1971 temporary constitution, which was made permanent in 1996, notes only that “the Supreme Council of the Union shall elect from among its members a President of the Union and a Deputy”; the rulers of the seven constituent emirates or their representatives make up the Supreme Council.

10 Khalid S. Almezaini, The UAE and Foreign Policy: Foreign Aid, Identities and Interests (Abingdon: Routledge, 2011), 32.

11 J.E. Peterson, “The Future of Federalism in the United Arab Emirates,” in H. Richard Sindelar III and J.E. Peterson, eds., Crosscurrents in the Gulf: Arab Regional and Global Interests (Abingdon: Routledge, 1988), 208.

12 United Arab Emirates Constitution of 1971, with amendments through 2004, available at constituteproject.org.

13 Abdullah Omran Taryam, The Establishment of the United Arab Emirates, 1950–1985 (London: Croon Helm, 1987), 234.

14 Davidson, Vulnerability of Success, 294. An incident in 1973 in which a helicopter carrying Mohammed bin Rashid, today the ruler of Dubai and vice president of the UAE, was shot at forty-three times by a detachment of the Sharjah National Guard illustrated the striking patchwork of forces still within living memory. The disagreement was over the construction of a road in disputed Dubai-Sharjah territory, and while Mohammed bin Rashid was then (as now) the UAE defense minister, it was the Dubai Defense Force that he had ordered into the disputed area.

15 Elena McGovern, “Export Controls in the United Arab Emirates: A Practical Manifestation of a Strategic Dilemma,” Stimson Center (blog), February 1, 2009, https://www.stimson.org/2009/export-controls-united-arab-emirates-practical-manifestation-strategic-dilemma/.

16 One of the first examples (in the entire Gulf let alone the UAE) of a luxury property development being targeted at international buyers was the 1997 launch by Emaar Properties of the Emirates Hills residential project in which direct foreign ownership was not only marketed but encouraged.

17 “UAE, Abu Dhabi Roll Over $20Bln of Dubai’s Debt,” World Bulletin, March 16, 2016, https://www.worldbulletin.net/economy/uae-abu-dhabi-roll-over-20-bln-of-dubais-debt-h131197.html.

18 Shalendra Sharma, Global Financial Contagion: Building a Resilient World Economy After the Subprime Crisis (New York, NY: Cambridge University Press), 274.

19 Andrew Petersen and David Jones, “A Dubai World Debt and Nakheel Sukuk—Apocalypse Now?” K&L Gates Distressed Real Estate Alert, December 10, 2009, https://studylib.net/doc/13688361/distressed-real-estate-alert-a-dubai-world-debt-and-nakhe....

20 Shireena Al Nowais, “First Meeting of Saudi-Emirati Coordination Council Takes Place in Jeddah,” National (UAE), June 7, 2018, https://www.thenational.ae/uae/first-meeting-of-saudi-emirati-coordination-council-takes-place-in-jeddah-1.737716.

21 Simeon Kerr, “Bin Sulayem Exit Ends Tumultuous Era,” Financial Times, December 13, 2010, https://www.ft.com/content/b722858a-06ec-11e0-8c29-00144feabdc0.

22 Raissa Kasolowsky, “Dubai Ruler Names Sheikh Ahmed Dubai World Chairman,” Reuters, December 12, 2010, https://www.reuters.com/article/idINIndia-53511220101212.

23 Arif Sharif, “Dubai’s Sheikh Ahmed to Head Emirates NBD in Board Reshuffle,” Bloomberg, June 26, 2011, https://www.bloomberg.com/news/articles/2011-06-26/sheikh-ahmed-appointed-chairman-of-emirates-nbd-replacing-ahmed-al-tayer.

24 The co-author of this report, Jodi Vittori, created the diagram based on information gathered from the following sources: Almezaini, The UAE and Foreign Policy, 32; “UAE, Abu Dhabi Roll Over $20Bln of Dubai’s Debt”;

Petersen and Jones, “A Dubai World Debt and Nakheel Sukuk—Apocalypse Now?”; Nowais, “First Meeting of Saudi-Emirati Coordination Council Takes Place in Jeddah”; Kerr, “Bin Sulayem Exit Ends Tumultuous Era”;

Kasolowsky, “Dubai Ruler Names Sheikh Ahmed Dubai World Chairman”; Sharif, “Dubai’s Sheikh Ahmed to Head Emirates NBD in Board Reshuffle”; Anil Bhoyrul, “Exclusive: Mohammed Alabbar—Uncensored,” Arabian Business, April 12, 2015; and interview with Geoff Taylor, chief executive officer of Dubai DryDock, cited in Martin Hvidt, “The Dubai Model: An Outline of Key Development-Process Elements in Dubai,” International Journal of Middle East Studies 41, no. 3 (2009): 403.

25 Bhoyrul, “Exclusive: Mohamed Alabbar—Uncensored.”

26 Interview with Geoff Taylor, chief executive officer of Dubai DryDock, cited in Martin Hvidt, “The Dubai Model: An Outline of Key Development-Process Elements in Dubai,” 403.

27 Abeer Abu Omar and Netty Idayu Ismail, “Dubai’s Long-Awaited Stats Show Economic Growth Slowed Below 2%,” Bloomberg, March 27, 2019, https://www.bloomberg.com/news/articles/2019-03-27/dubai-s-long-awaited-stats-show-economic-growth-slowed-below-2.

28 Anjli Raval, “Shipping Industry Grapples With Threat in Strait of Hormuz,” Financial Times, July 21, 2019, https://www.ft.com/content/0eb38854-aafd-11e9-8030-530adfa879c2.