Dubai’s castles made of sand

3 12 2009

Earlier this year in Paris, while in transit on my way to Beirut, I struck up a conversation with a man who was moving back to the United States from Dubai. Interested in how the current economic calamity was effecting business there,  I asked him if he thought that the party was starting to wind down in the tiny Emirate. He said wistfully that “the party” was already over. And this was back in March.

While Arabs have never been shy about making deposits in Western banks, there has always existed a demand for a strong financial hub in the Middle East. For decades until the late 1970’s, that place was Lebanon’s capital, Beirut.

Beirut was known as the “Paris of the Middle East” because of its cafe culture and vibrant night life, a place where East met West and anything could be  bought for the right price. But another common nickname for Beirut was “the Switzerland of the Middle East”, because of its strong financial institutions and their secret banking policies,where vast monies could be hidden from either government or spouse.

While Beirut was thriving, Dubai was little more than a dusty port city. The discovery of oil in the early 1970’s helped change that. Suddenly there was money for investment, and the steadily rising price of oil began to transform Dubai.

But contrary to popular belief, Dubai doesn’t have all that much oil, especially when compared to its neighboring Emirate, Abu Dhabi. The royal family, headed by Sheik Mohammed, understood that what little they did have was not going to last forever or be enough to enable them to continue there lifestyles in perpetuity. So a plan was hatched to invest heavily in construction projects to bring in a new industry: finance.

During  Lebanon’s catastrophic civil war, leaders and planners in Dubai saw an opening to supplant the troubled country as the banking center of the Middle East.

The lure of Dubai is that the salaries for Westerners are very high, there is no income tax, and cheap labor from southern Asia  and Africa insures that you will never have to vacuum a floor, make a bed, or cook a meal. With all your extra time and money, people are free to party.

It was an enticing offer, and soon people from all over started flooding in to seek their fortune. And along with them came the help. As a result, today Dubai’s population in less than ten percent Emirati. The rest are highly paid professionals from all over the world, the help that serves them, all the construction workers who  had been assembling the dozens of new skyscrapers, and all the people that keep Dubai looking clean.

In the fall of 2008, the world economic situation began to deteriorate rapidly. The US and European  financial sectors had invested vast sums of money in real estate and assets that derived their value from the real estate market. When property prices started to plummet, the effects rippled through the financial world at an alarming rate. Soon it was clear that one could be  exposed to such risky investments even if one never purchased a single share just by investing in a company that did. And the effect continued to spread. Dubai was clearly at risk, and soon the construction came to a halt there as well.

Next to Dubai is Abu Dhabi. Abu Dhabi and Dubai are two very different places. The Abu Dhabi government is more conservative both morally and financially, and Abu Dhabi is much larger geographically. Abu Dhabi also  has a lot more oil than Dubai. The combination of conservative investing and vast oil reserves translates into a country that is healthy with cash.

Today, Dubai is in the opposite position.  Dubai and its government owned companies are swimming in debt from billions of dollars borrowed to finance its construction and investment spree. The Emirate is believed to be dangerously close to not being able to meet its debt obligations. If push comes to shove, it is believed that Abu Dhabi will likely come up with the cash to help its tiny neighbor avert disaster, but such a bailout would come with a price.

If Abu Dhabi does bail out Dubai, they will likely demand more influence in the affairs of the troubled Emirate. This could include curtailing the liberal party city’s laws that govern social activities, including drinking  and the mingling of unmarried men and women. With an ailing banking system and tightened party laws, it could start becoming difficult to draw people there.

Also, Lebanon seems to be weathering the current world economic crisis fairly well. Its banking system, having avoided the more risky investment vehicles, is in position to once  again become the center of finance in the Middle East. With a strong banking sector, and a night life that shows no signs of slowing down, Lebanon could see a rush of money from investors who are looking for more stable assets, yet want their money to remain in Middle Eastern banks.

Dubai faces some massive challenges, including a collapsing real estate  sector, high levels of public debt, a resurgent competitor in Beirut, and the possiblility of being purchased outright by Abu Dhabi if Dubai succumbs to the first three challenges.

So is this the end of the Arabian Disneyland? It’s too soon to tell. But it’s important to remember that Dubai as a modern city has been around for less than fifty years, and now more than ever it seems the desert is finally gaining the upper hand in the battle to reclaim the land. Until then, the cranes in the sky remain idle, waiting for the cash to be able to resume their Sisyphean chore of building a city on top of sand.

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