Home The Washington Diplomat March 2010 Oil-Rich UAE, Reaching for Stars, Gets Pulled Back Down to Earth

Oil-Rich UAE, Reaching for Stars, Gets Pulled Back Down to Earth

Oil-Rich UAE, Reaching for Stars, Gets Pulled Back Down to Earth


Ambassador Yousef Al Otaiba of the United Arab Emirates says that despite Dubai’s recent financial woes, government-funded projects in the UAE are proceeding as planned — some $300 billion worth of infrastructure development such as the Dubai Metro mass-transit system and a new port between Dubai and Abu Dhabi.

The first time you meet Ambassador Yousef Al Otaiba of the United Arab Emirates, you can’t help but notice how much he looks like Adrian Fenty, the mayor of Washington, D.C. “Yeah, people tell me that all the time. Sometimes they even ask me for parking ticket favors,” he joked.

But the resemblance apparently works both ways.

“Mayor Fenty recently went to the UAE and caused a bit of a scandal,” said the ambassador. “He called me on the cell phone from Dubai and said, ‘Yousef, everyone here says I look just like you!’”

Al Otaiba celebrated his 37th birthday the day before we interviewed him at the opulent Embassy of the United Arab Emirates on International Court, just off Van Ness Street. Back in Dubai, the glitzy city-state was also doing some celebrating after a welcome respite from last year’s economic pounding.

The inauguration earlier this year of the world’s tallest building — Dubai’s 160-story Burj Khalifa, which rises 828 meters (2,717 feet) into the sky (more than 1,000 feet taller than its nearest rival) — was overshadowed by a frightening economic meltdown that had begun just a few months before, when state-owned conglomerate Dubai World shocked the globe by declaring a freeze on its repayment of more than billion in debts.

Crisis was averted only when oil-rich, politically conservative Abu Dhabi lent billion to its carefree neighbor, known for its extravagant spending on everything from indoor ski slopes and artificial palm-shaped islands to an underwater luxury hotel. Still, what was once touted as a model global city rising out of the sand quickly turned into a mirage in the desert for investors who became alarmed not only at the bursting Dubai bubble, but by the murky family ties among the ruling monarchy that the crisis exposed.

Yet the relationship between the two emirates is often misunderstood, according to Al Otaiba, who says the UAE’s fundamental economic strategy to diversify away from dwindling oil supplies remains solid.

“This is not Dubai’s financial crisis, it is the UAE’s financial crisis,” he explained over cups of traditional cardamom coffee. “The media perpetuates this myth of competition and rivalry between Dubai and Abu Dhabi, but at the end of the day, it’s one country, one leadership, and one voice — and our leadership will step in to ensure the country remains healthy. As bad as the situation may be in Dubai, the UAE economy is still forecast to grow between 2.5 and 3 percent in 2010.”

The UAE actually consists of seven emirates, not two, with Abu Dhabi accounting for 85 percent of the country’s land area and 90 percent of its oil and gas reserves. Dubai, by contrast, has little oil, so early on, it diversified into shipping, trade, tourism and other services, transforming itself from a sleepy fishing sheikhdom into an international financial and entertainment hub. Its free market capitalism, combined with some of the world’s most liberal tax, investment and residency laws, lured tens of thousands of American and European expatriates to move there.

The other five emirates — known mainly to stamp collectors from the days before oil was discovered — are Ajman, Ras al-Khaimah, Sharjah, Fujairah and Umm al-Qaiwain. The last is smaller than Gaithersburg, Md., and compared to Dubai and Abu Dhabi, none are economically significant.

On Dec. 2, 1971, Abu Dhabi, Dubai and its smaller neighbors joined to form the United Arab Emirates, and today the desert country has around 4.5 million inhabitants, 80 percent of which are foreigners (in Dubai, expats account for an astounding 95 percent of the population).

Annual per-capita income stands at around ,000, according to Al Otaiba, making native Emiratis among the richest people on Earth. The ambassador, who speaks English without the slightest hint of an accent, said his country’s relations with the United States are “extremely good, probably the best they’ve been in a long time.”

For proof, he said, “We have 750 U.S. companies operating in the UAE, and in the span of a year we’ve invested at least billion in U.S. projects” —from the .5 billion CityCenter project in downtown Las Vegas to a .5 billion microchip factory in upstate New York.

In 2007, oil-services giant Halliburton moved its corporate headquarters from Houston to Dubai. Other Fortune 500 companies already have their regional headquarters in Dubai, including Turner Broadcasting System, Oracle, Microsoft and Coca-Cola.

At the same time, the wealthy Gulf nation is now the largest single customer for American exports in the Middle East and North Africa (.8 billion in U.S. purchases in 2008). And Jebel Ali — located along the Persian Gulf roughly halfway between Dubai and Abu Dhabi — is now the busiest port of call for U.S. naval ships outside the United States.

Until very recently, roughly one-quarter of the world’s construction cranes were in Dubai, frantically erecting skyscrapers and luxury apartment buildings in a boom that was never supposed to end. But it did end, and now billions of dollars are leaving the UAE in a regional crisis that has also affected nearby Kuwait, Qatar, Bahrain and Saudi Arabia.

Pleasure boats and yachts dock in the harbor along Dubai Creek, which is surrounded by luxury high-rise apartment buildings, above, while cranes rise over a clinic under construction at Dubai Healthcare City, top right. The city-state’s construction boom came to a screeching halt last year when state-owned conglomerate Dubai World declared a freeze on its debt repayment, though Abu Dhabi eventually bailed out its extravagant neighbor.

“There’s definitely a slowdown in the construction sector,” Al Otaiba told The Washington Diplomat. “But a lot of these projects on hold are private recreational projects,” he added. “All the government-led projects — infrastructure development like highways and bridges — are still going on, about 0 billion worth.”

Some of the enormous schemes that have not been cancelled include the Dubai Metro mass-transit system, a new port under construction between Dubai and Abu Dhabi, and the world’s largest aluminum smelter, located just outside Khalifa Port.

“There’s definitely a glut of jobs. In Dubai, one of the largest employers was the financial sector, and with this crisis, a lot of those jobs are slowly disappearing. But we’re having a hard time finding housing for all the people moving to Abu Dhabi,” said the ambassador.

“In the long term, there won’t be a big impact,” he predicted. “As the global economy picks up, which I expect will happen in a year or two, it will swing back in the other direction. As long as oil prices are relatively stable — at least a barrel — we’ll be in good shape. We have a vast investment portfolio out-side the UAE which helps cushion blows like this. Overall, I expect Dubai to pull out of this in the next few years.”

Indeed, while property values in Dubai have plummeted by as much as 50 percent since the global financial collapse, Abu Dhabi’s bailout of its indebted neighbor has calmed jittery investors and signs of recovery have emerged, with Dubai-based Emaar Properties, the Middle East’s largest property developer, recently reporting a doubling of its full-year profit for 2009 thanks to rising revenue from hotels and shopping malls.

And despite criticism of Dubai’s unrestrained growth under its ambitious ruler, Sheikh Mohammed bin Rashid Al Maktoum, the larger vision of making the UAE an economic powerhouse independent of its oil wealth remains on track. To that end, one of the country’s main goals is to reduce its reliance on oil and gas exports by intensively developing other industries like manufacturing, aerospace, information technology and renewable energy.

“Today, the percentage of GDP derived from oil and gas is 35 percent,” said Al Otaiba. “Obviously, in Abu Dhabi it’s higher because most of the oil comes out of Abu Dhabi. Our strategic goal is to drive that number as low as we possibly can.”

But that doesn’t mean slashing production. On the contrary, the UAE hopes to boost daily output from 2.5 million barrels now to 4 million within 15 to 20 years.

“We’re going to focus quite a bit on our downstream activities. This is a very long-term, ambitious plan,” the ambassador explained. “The idea is to sell 3 million barrels of crude, and 1 million barrels of refined products — like methane and other petrochemicals — simply because that’s extremely profitable. With the onset of our nuclear program, we’ll also have more crude to export because we won’t need as much for domestic use.”

The overall proportion of oil and gas in the economy is expected to decline as other sectors skyrocket in importance. Until recently, construction was the Emirates’ largest non-oil activity, though the country’s future economy is likely to be dominated by activities like manufacturing, which is concentrated in huge industrial parks like the Jebel Ali Free Zone, already home to some 6,000 companies.

“Through programs we’re developing now — like the nuclear program — we plan on bringing industries into the Emirates, so that in five, 10, 15 years from now, we’ll have a qualified pool of Emirati talent where we no longer have to rely on external labor,” Al Otaiba said. “We must be self-sufficient, in order to prevent bringing in all these foreign laborers. We no longer have the option of sitting back and not working.”

Al Otaiba certainly can’t be accused of being lazy. The ambassador is no stranger to Washington, having lived in the nation’s capital twice before — first as a student at Georgetown University, where he got a degree in international relations, and later as an international fellow at the National Defense University’s Industrial College of the U.S. Armed Forces.

Al Otaiba previously served for seven years as director of international affairs for the crown prince of Abu Dhabi, Gen. Sheikh Mohammed bin Zayed Al Nahyan, who is also deputy supreme commander of the UAE Armed Forces. In this role, Al Otaiba was the country’s principal security, anti-terrorism and defense liaison to other governments — and he was heavily involved in diplomatic efforts to improve regional security and defense cooperation. More recently, he helped to guide Abu Dhabi in multinational discussions on best practices for sovereign wealth funds (the Abu Dhabi Investment Authority is rumored to control one of the largest sovereign wealth funds in the world).

Yet by the time Al Otaiba became ambassador to the United States in July 2008, his country had already suffered its first major defeat on Capitol Hill. Two years earlier, Dubai Ports World bought British shipping giant P&O. As part of that sale, DP World was to assume P&O leases to manage major U.S. port facilities in New York, New Jersey, Philadelphia, Baltimore, New Orleans and Miami, as well as operations in 16 other ports.

However, once the transaction was made public, controversy erupted, with Democrats in Congress — along with a few powerful Republicans — questioning the deal on the grounds that it could make the United States more vulnerable to terrorism.

In February 2006, then-President Bush threatened to veto any legislation passed on Capitol Hill to block the deal, a veto that would have been his first. In the end though, Bush never had to wield his veto threat. DP World eventually backed off from its plan, transferring operations to an unspecified American entity. Al Otaiba described that whole fiasco as “essentially a wakeup call” for the UAE.

“What we learned is that Congress does not know very much about us,” he said. “DP World does a fantastic job running ports, and many Americans who have seen security procedures at Jebel Ali are extremely impressed, saying these procedures are better than at many U.S. ports. DP World operates in 19 countries, and there’s never been a security incident in any of them. Yet the facts became obsolete and this became a political issue between the Democrats and Republicans. Unfortunately, we were the punching bag here.”

UAEAmbassador3Al Otaiba was determined not to let that happen again. Last December, the UAE and the United States signed a landmark accord on peaceful nuclear cooperation. The new deal, known as the 123 Agreement, establishes a legal framework for Washington to transfer sensitive information and materials, like nuclear fuel, to the Emirates — in return for a promise to abide by nonproliferation agreements.

Unlike the case with other “123 agreements” with other allies, this pact gives the United States the right to stop nuclear cooperation and require the return of materials or technology if the UAE changes its mind.

Emirati officials say the country needs nuclear power to keep up with rising energy demands — but not everyone is happy about the UAE’s goal of becoming the first Arab country to harness nuclear energy on a commercial scale, citing the UAE’s proximity to Iran, whose nuclear ambitions have worried Israel and other U.S. allies in the region.

“We are the first Arab country to really seek a modern nuclear program, but we had to convince everyone that it’s purely for energy needs. This is hard when you have countries like Iran pursuing a very ambiguous nuclear program,” said Al Otaiba, who signed the accord on behalf of the UAE, along with U.S. Deputy Secretary of State James Steinberg.

Congressional aides were invited to attend briefings on nuclear energy issues held by the US-UAE Business Council, according to foreign agent registration records. Formed nearly three years ago and affiliated with the U.S. Chamber of Commerce, the council promotes business activities between the two countries. Among its corporate members are Akin Gump and DLA Piper, which together were paid class=”import-text”>2010March.UAE.txt.6 million to lobby hard for the nuclear deal. A third K Street lobbying firm on the council, Patton Boggs, doesn’t represent the UAE government but maintains offices in Abu Dhabi.

“With any group of people, you’ll always have skeptics, but thanks to the public diplomacy campaign we came up with, I think we created a much more understanding, willing audience in Congress. This was reflected in how well the 123 Agreement went through,” the ambassador said.

“We are not seeking any uranium enrichment program or any spent-fuel rods for reprocessing. We are purely interested in power generation,” he stressed. “You have it stated in three documents that the UAE commits to this, giving them the reassurance they needed, and a very high benchmark. So the next country that comes along and wants to do this, the U.S. will say that if you want a nuclear program, this is what you’ll have to do too. That makes us relatively unpopular in our part of the world.”

Al Otaiba said the program will cost around billion, though some estimates put the number as high as billion. It consists of four nuclear power plants, each producing 1,400 megawatts of power. All four will be located in Abu Dhabi and should be online by 2017.

Yet nothing in the 123 Agreement guarantees that U.S. companies will get a piece of that lucrative pie (a South Korean-led consortium won the contract to build the four nuclear plants). Al Otaiba conceded that on Capitol Hill, the deal was loudly criticized by Reps. Ileana Ros-Lehtinen (R-Fla.), Ed Markey (D-Mass.) and Frank Lautenberg (D-N.J.), “and one I refused to meet with” — Brad Sherman (D-Calif.) — “because I was sure he was going to twist whatever I said,” Al Otaiba told The Diplomat.

“They claimed we were too close to Iran, and that the program would eventually leak out to the Iranians. It’s a valid concern if you look only at proximity,” he said. “But we are concerned about the Iranian nuclear threat far more than the United States is, so it’s in our main interest to make sure nothing illegal gets into Iran.”

In fact, Al Otaiba says the UAE’s proximity to Iran, located less than 100 miles across the Strait of Hormuz from Dubai, is precisely what worries him and his countrymen.

“Iran is dangerously close. Unfortunately, we all sort of woke up to this issue a little late. We started actively getting involved in this just over a year ago,” he said. “To us, a nuclear-armed Iran is extremely dangerous to the entire region. Absolutely, without a doubt, this is the biggest problem we face internationally. We talk to Iran every day, but we don’t seem to make much progress.”

To that end, some speculate that the United States is aiding the UAE specifically to hedge its bets against Iran. For one thing, the UAE has agreed to abide by stringent nonproliferation safeguards and oversight, so the U.S.-UAE nuclear pact could serve as a model for providing nuclear energy to Middle Eastern countries — and a rebuke to Iran.

The Obama administration has also been beefing up missile defense shipments to Gulf states — the UAE, Bahrain, Kuwait and Qatar — to allay fears that Tehran might react to sanctions by striking at U.S. allies in the region. In the last two years, the UAE has snatched up billion worth of fighter jets, weapons and other defense-related items.

Al Otaiba said his country has three major problems with Iran: its nuclear program, its hostile “behavior” in the region — particularly Iranian influence in Iraq, Bahrain, Yemen, Lebanon and the Gaza Strip — and finally, its occupation of three small islands in the Persian Gulf that are also claimed by the United Arab Emirates.

Asked if diplomatic efforts to isolate Iran should be abandoned, Al Otaiba shot that down quickly. “As a diplomat, I can’t say that. I don’t think we should ever turn our back on diplomacy,” he told us, “but we’re getting dangerously close to a point where we have to draw a line in the sand. The international community must make very clear to the Iranian regime what is acceptable and what is not.”

The Jumeirah Business Centre Towers is under construction in Dubai, where property values have plummeted by as much as 50 percent since last year’s financial collapse.

And yet, Al Otaiba said a possible Israeli strike against Iranian nuclear facilities “would have very negative consequences” for the Middle East. “Countries will react differently. There would be relief in some countries and fear in others,” said the ambassador, who has no official contact with the Israeli Embassy right down the street. “You’ll have some countries claiming this goes against all international law, others will say this was the West’s intention all along and that the Americans knew about this. There will be a lot of conspiracy theories, and it’s going to fuel the East-West debate again, and so there is no good answer. We all need to sit down and ask what we’re prepared to live with and what we’re not.”

Lately though, attention in the UAE has been focused not so much on Iran, but on Israel — following the very public assassination of a top Hamas operative in Dubai, whose police insist they are “99 percent” certain that Israel’s famed spy agency, the Mossad, carried out the hit. Following its policy of ambiguity, Israel has generally refused to comment on the uproar, although the international backlash threatens to further sour relations between the Jewish state and moderate Arab nations such as the UAE. Dubai has even demanded that Interpol issue an arrest warrant for the head of Mossad. Although that’s unlikely to happen, the city-state’s vow to pursue the case has put an added spotlight on Israel’s unilateral military actions in the name of national security.

“We fully intend that those responsible are brought to account for their actions. The UAE firmly believes that relations among nations should be conducted on the basis of respect for sovereignty, mutual trust and within the framework of international norms,” Al Otaiba told The Diplomat. “Like all civilized nations, we abide by these principles and we will deal with this criminal act within the international framework expected of civilized nations.”

Although crime is extremely rare in the UAE, the country has had its own fair share of controversy as well, particularly given its notorious human rights record. In January, the UAE’s highest court acquitted Sheikh Issa bin Zayed Al Nahyan — a member of the country’s ruling monarchy — on charges connected to the brutal beating and torture of an Afghan grain dealer that was captured in a graphic three-hour video.

U.S. Rep. James McGovern (D-Mass.) said he’s worried this kind of behavior is acceptable in the UAE and fears that the country’s image of moderation and tolerance is nothing more than a façade.

“I chair the human rights commission here in Congress, and I am very, very concerned that there is culture of impunity that still exists in the UAE,” McGovern told the Voice of America during recent testimony in connection with the nuclear accord. “That some people appear to be above the law is of great concern to me, and I think it should be of great concern to the United States.”

But it’s not just foreign executives who appear to have been targeted by powerful Emiratis, especially when business deals go sour. Far more common is construction workers and nannies being deprived of their rights. In fact, the UAE’s dismal human rights record — especially with regard to some Dubai-based companies’ treatment of construction workers from India, Bangladesh, Nepal and the Philippines — is so bad that not even Al Otaiba attempts to whitewash it.

“The government of the UAE recognizes that this is a problem. I’m not going to sit here and lie to you,” he said. “It’s absolutely horrendous and bordering on inhumane.”

Al Otaiba added: “We’re addressing this problem to the best of our abilities,” but he said it’s an uphill battle. “The government is essentially the supervisor. We have passed regulations, standards, codes of conduct and procedures for companies to follow. The problem is with private companies that cut corners by squeezing 10 people to a room instead of one, or having one bathroom instead of four. They don’t build camps up to code. We’re trying to crack down on them. In fact, the Ministry of Labor [headed by Saqr Ghobash, a former UAE ambassador in Washington] has come down quite harshly on construction companies. Many of them have been fined.”

And with the financial crisis in Dubai deepening, said Al Otaiba, many companies have not been paying their workers on time, “so we created a virtual bank where companies pay the Central Bank, which then sends electronic payments to employees.”

The ambassador also noted that “a lot of companies have maintained the practice of keeping passports so the employees don’t run out on them. Is that legal? No, but the law is not en–forced. We honestly don’t have the capacity to go and check on every single company. We’re also working on legislation in the UAE to make sure there are standard contracts for domestic workers — providing days of leave, work hours, etc. But as you can imagine, culturally this is quite complex, so it has to be done in a sensitive way.”

About the Author

Larry Luxner is news editor of The Washington Diplomat.