Dubai's status as a Swiss-style safe haven begins to crack amid Iran war

Since the weekend, the UAE's financial hubs and holiday spots have been shaken as defence systems intercepted 165 ballistic missiles, two cruise missiles and 541 drones launched from Iran

By Lionel Laurent

 

Dubai and Abu Dhabi’s success in turning their country into the “Switzerland of the Middle East” can be counted by the number of hedge funds, influencers and white-collar expatriates who’ve been pouring in for the sun, sea and zero income tax. After the past few days, however, they’ve been tallying something very different: The number of interceptors left to counter Iran’s barrage of missiles as war engulfs the region. The safe-haven veneer of the United Arab Emirates and its neighbours is cracking badly. 

Since the weekend, the UAE’s Instagram-friendly financial centres (and holiday spots) have been rattled by the sight of fires and missile debris after defence systems scrambled to intercept 165 ballistic missiles, two cruise missiles and 541 drones from Iran. Supermarkets have been swamped by panic buyers, and Dubai International Airport, the world’s busiest travel hub, fell silent.

 

The Strait of Hormuz, a trade and oil-cargo waterway on which the UAE and other Gulf countries depend, is effectively closed. Despite Dubai’s nearness to Iran, the risk of war seems to have been seriously underpriced. At least when judged by the flood of wealthy arrivals and sky-high property prices. 

 

The UAE has been a missile target in the past, as have its neighbours, but this is a step change. Having the Israeli-US war with Iran turn up on their own doorsteps is something the Gulf monarchies have done their best to avoid through geopolitical hedging. Even with their spiralling defence budgets and hostility to the Islamic Republic, they’ve also had to keep one eye on their own citizens’ reactions to Israel’s increasing belligerence.

 

Now, they find themselves being pulled into a conflict that is starting to threaten the Gulf states’ critical infrastructure, such as desalination plants, shipping routes and data centres. It’s a long way from the model of “stability first” promoted by their leaders.

 

“What we’re seeing is unprecedented,” Bernard Haykel, a regional expert at Princeton University, tells me. “The UAE’s ability to survive on its old safe-haven model is at stake if the war lasts longer and life becomes unbearable.”

 

The damage and casualties so far (including three deaths) have been limited, but the nightmare of a long war would change that. Oil makes up only a tiny part of Dubai’s economy, which depends instead on transport, tourism, finance and a fragile-looking real-estate boom. Abu Dhabi has used its sovereign wealth to become a force in global capital and financial services to diversify away from hydrocarbons. And while the UAE has done a decent job defending its infrastructure and citizens from Iran’s missiles and drones, interceptors are said to be running low for the US and its partner countries in the region.

 

This doesn’t bode well for the wealthy exiles and disaffected graduates tempted by the tax breaks and lifestyle. The images of Dubai’s luxury hotels on fire, tourists seeking shelter in basements and online pleas for evacuation won’t be forgotten easily. Even brasher finance expats aren’t entirely relaxed. Chief executives and the high-net-worth crowd have been pushing to be evacuated, according to reports. While it’s an exaggeration at this stage to assume the migrant inflows from London’s Mayfair and other moneyed districts will simply reverse, Dubai and Abu Dhabi’s clout as financial hubs depend on getting more global talent to move there. This will get harder the longer the war grinds on. 

 

Then there are the grand strategies of rulers such as the UAE’s Mohammed bin Zayed Al Nahyan or Saudi Arabia’s Mohammed bin Salman. Both have massive wealth funds that have lavished investment around the world, and in return, they’ve wooed international backers for local ventures such as artificial intelligence infrastructure, which bolsters their image as promoters of security and economic stability (albeit alongside authoritarian rule and limited personal freedom). But this is hard to square with closed airports or Amazon.com Inc. data centres being attacked. Even with billions of dollars committed and partnerships with Microsoft Corp. or Alphabet Inc. signed, the tech bros might look at the Middle East map differently next time.

 

Much depends on how long the war lasts and the Islamic Republic’s capacity for retaliation. The death toll and targeting of civilian infrastructure in the Gulf certainly up the ante on last year’s 12-day war with Iran, which did little to dim Dubai’s appeal. And not all possible outcomes are bad: It may be foolhardy to put too much faith in US President Donald Trump’s hope that Iran will magically become a better place with new leaders, but there is at least the possibility of a defanged Tehran boosting the UAE in the long run, according to Christopher Davidson, author of several books on the region.

 

Still, as we wait for the war to unfold, there is a non-negligible risk of prolonged economic difficulty. This matters beyond the region. Dubai’s last meaningful downturn was in 2008, when the global credit crunch slammed the brakes on property speculation and over-ambitious building. The economy looks to be on a sturdier footing today, but those missile interceptors will determine exactly how steady. The real UAE influencers today are the ones urging Trump to find an off-ramp.  (Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper)