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Sanctions-busting is in Dubai’s DNA

Thursday, April 22, 2010

by Raymond Barrett,
for The Guardian

Dubai’s open-door policy has been a major factor in the failure of Iran sanctions and there’s little reason to expect this to change

For more than 30 years, US-led efforts to isolate Iran from the global economy have faced a constant weakness: the Dubai connection.

Dubai – separated from Iran by the waters of the Gulf – has excelled as a channel for circumventing the variety of international sanctions that have built up over the decades. Be it restrictions on badly needed aviation spare parts, “dual use” electronics or blackballed financial institutions, Dubai is one of several major ventricles through which contraband and money flow in and out of Iran.

Yet Dubai has always preferred the term “re-exporting” to “sanctions busting”, and the process itself is relatively straightforward. Iranian firms establish legitimate trading concerns in Dubai’s Jebel Ali Free Zone or in the bustling district of Deira close to the city’s famous creek; prohibited items are then purchased, with Dubai listed as the final destination on the manifest. Depending on the scale of the enterprise, cargo planes or diesel-powered dhows then transport the goods to Iranian ports such as Bandar Abbas or Kish.

Dubai has long been a vibrant regional entrepot for trade, both legitimate and illicit, and this was a natural role for it to assume. Along with an estimated 400,000 Iranians living in Dubai, around 40% of the “local” population are ajam – an Arabic term used to denote emigrants from the southern coast of Iran who moved to Dubai more than a century ago.

Over the years, this Dubai connection has morphed into a $10bn-a-year import/export industry vital to both parties and supplying Iran with everything from electronics to cosmetics.

While much of the re-export trade involves innocuous consumer goods such as air-conditioners and tyres, criminal cases in US courts occasionally shine a light on “sanctions busters”. In the eyes of the US department of justice, the big fish that got away must be AQ Khan, the father of Pakistan’s nuclear bomb, who sold centrifuges used to enrich uranium to Tehran while using Dubai as the trans-shipment point.

As America’s desire to pursue sanctions has waxed and waned under different presidents, Dubai has rolled with the prevailing winds. When the shortlived “Persian detente” of the latter Clinton years changed to the “axis of evil” mantra of the junior Bush administration, Dubai demurred accordingly. The local authorities were always most welcoming when US officials swept into town calling for tougher enforcement of export controls and financial transactions. While such visits were sometimes followed by minor crackdowns, words alone were never going to get of rid of a business model embedded deep in Dubai’s DNA.

Among the proposals that President Barack Obama is trying to sell this time round are increased restrictions on sea freight, fuel imports and banking services. There are also specific sanctions designed to weaken both the coffers (and the resolve) of Iran’s Revolutionary Guard Corps – the powerbase buttressing both the ruling clerics and President Mahmoud Ahmadinejad.

While there is no doubt that sanctions have inflicted serious damage to the Iranian economy, they have failed to land a knockout punch and bring about the regime change long sought in Washington.

Sanctions specifically targeting Iran’s nuclear programme have been in place for more than 15 years yet have not altered the behaviour of its leaders. And when it comes to issues of broader economic development, Iran is increasingly looking towards China for the technology it needs to develop its aging petroleum industry. In such a situation, Beijing’s continuing reticence is easy to understand.

But some commentators see the recent economic implosion of “Dubai Inc” as an opportunity to close Iran’s back door to the rest of the world. In the light of oil-rich Abu Dhabi’s recent $20bn bailout of Dubai – both are members of the United Arab Emirates – the US could push Abu Dhabi (which has its own outstanding territorial issues with Iran) to have a word in Dubai’s ear about its willing embrace of all things Persian.

Yet there is little indication that Dubai will alter the open-door policy it has practised for more than a century. Given the recent difficulties Dubai has encountered as it raced to develop a 21st-century economy, its more antediluvian trade links with Iran may prove a safer bet.

And in a region often rife with ideology, there is something refreshing about Dubai’s precariously balanced geo-political pragmatism. Over the years, it has welcomed the aircraft carriers and frigates of the US navy’s fifth fleet while simultaneously providing a home to financial institutions such as Bank Sederat Iran, which has (allegedly) directed money to both Hezbollah and Iran’s nuclear programme.

Tightrope walking is a skill all Middle Eastern enterprises must learn in order to succeed, and Dubai seems poised to continue its own particular high-wire act for some time to come.

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Beware the Gulf’s legal gradations

Tuesday, April 13, 2010

The Guardian
by Raymond Barrett

Britons fall foul of the region’s legal system not because of its ‘draconian Islamic laws’, but its pecking order of privilege.

British citizens have yet again fallen foul of the law in the Arabian peninsula for “crimes” that barely seem to warrant the designation. In Dubai, a tourist was recently sentenced to a month’s imprisonment for allegedly kissing a gentleman friend while dining out in the expat enclave of Jumeirah. Meanwhile, a British expatriate faces six months in prison for allegedly “giving the finger” to an Iraqi resident of the Gulf emirate.

Despite the red-top outrage engendered by such examples of “draconian Islamic laws”, the whimsical nature of such prosecutions points towards a perennial problem for those living in all the Gulf states: fundamental difficulties with the rule of law coupled with a legal process that is opaque, capricious and lacking in equality.

The most common criticism levelled against the region is that of a two-tier legal system – one set of rules for nationals and another for foreigners. However, the reality is more a vertiginous wedding-cake structure: a pyramid scheme of legal gradations constructed from a complex blending of nationality, race, religion, diplomatic clout, social class and personal connections.

Perched clearly on top of the cake are members of the various ruling families, who can (literally) almost get away with murder. In one notorious incident, the brother of Abu Dhabi’s crown prince recorded himself brutally torturing an Afghan grain merchant who had supposedly cheated him. When pressed on the issue, the authorities said the matter had been “settled privately” and that the sheikh’s actions were not part of a “pattern of behaviour”.

Next in the pecking order of privilege are the “commoners”. Citizens of countries such as Kuwait and Saudi Arabia clearly enjoy a de facto (if not de jure) advantage over non-nationals in the eyes of the law.

This is due in no small part to a particular phenomenon common to all the close-knit, tribally oriented Gulf countries, known in Arabic as wasta. This is the ability to use extended family or personal connections to influence or subvert due process when dealing with state institutions, be it making speeding tickets “disappear” or bypassing government red tape when conducting business. Thus, for foreigners engaged in contract disputes against nationals with substantial wasta, there is often little hope of victory, even if they are the aggrieved party.

Occupying the lower rungs of the legal ladder are non-nationals. Across the Gulf you can find a myriad of expatriates from across the globe, yet there are marked differences in how they are treated by both the police and the courts. While a domestic servant from Sri Lanka may be prosecuted for a particular crime, a British school teacher may not.

Take the perennial favourite of adultery, which is still a crime in much of the Gulf region. While Asians in domestic service are routinely prosecuted for engaging in sexual relations outside of marriage, it is rare for a westerner to face such charges. And if such charges do arise, it is usually because an aggrieved lover or employer has filed a case with the police; as a rule, the authorities don’t go around knocking on bedroom doors.

When cases such as those making the news in Dubai do end up in court, they often involve either citizens or other Arabs who feel they have been “insulted” or “offended” in some way. These particular cases went to trial only after individuals had filed complaints, not because a passing policeman deemed the behaviour of those involved to be of a criminal nature.

Further complicating these multi-levelled layers is a shadowy parallel legal process operating behind the scenes, where political priorities can sometimes trump the pursuit of justice. Given the control that the ruling families exert over the justice system, the decision to prosecute or not is open to considerable outside influence.

One of the most egregious cases in recent years was the arrest and conviction of a number of British expatriates in Saudi Arabia over a series of bombings in the kingdom. While the authorities claimed the attacks were part of a “turf war” between rival bootleggers, subsequent attacks by al-Qaida against westerners stretched the credulity of the charges to breaking point. Were the Saudi authorities so loath to admit the presence of any internal opposition they sent innocent Britons to prison as scapegoats?

Conversely, outside pressure can sometimes work in favour of the accused, provided one occupies a suitably important perch. Despite Dubai’s much-trumpeted zero-tolerance drug policy – four-year sentences are common for carrying even a scintilla of cannabis – a celebrity music producer from the US charged with cocaine possession received an immediate pardon upon his conviction. Of course “brand Dubai” relied on the power of celebrities to promote its superlative-strewn development model and sending the rich and famous to prison didn’t fit the emirate’s marketing plan. Allowances were made accordingly.

Despite the negative publicity inevitably associated with such cases, it would be unfair to portray the entire region as tightly controlled and legally rigorous. In fact, day-to-day life in many Gulf countries is characterised by a certain playful anarchic insouciance towards state restrictions such as speed limits, planning permission and parking restrictions. However, those planning to visit the region should remember that what is acceptable for some, may not be permissible for all. Guests of the nation would be well-advised to take heed of the Arab proverb ya gharib kun adib: a foreigner should be well-behaved.

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Israel’s ‘wall of disengagement’

Thursday, March 11, 2010

Haaretz
By Raymond Barrett

As the shock waves from the assassination in Dubai of Hamas commander Mahmoud al-Mabhouh continue to resonate, the long-term implications of the Mossad’s (alleged) Gulf sojourn are becoming clear: Israel’s dual citizens are now no longer welcome in Shangri-la and must look elsewhere if they want to sunbathe on air-conditioned beaches or hit the ski slopes amid the ocher sands of the Arabian Desert.

While the murder operation itself was a rip-roaring success, it constituted what was essentially a diplomatic “middle finger” to Dubai. With few regional friends, those responsible for foreign policy in Israel have apparently sent a rather crude message of disengagement to those in the Arab world who have sought rapprochement with the “Zionist entity.”

Despite the convenience of the narrative, the Arabian Peninsula is not a single seething agglutination of rabid anti-Israeli sentiment. There have been a number of high-profile (if isolated) interactions with the seven-member federation of the United Arab Emirates, to which Dubai belongs. Israel’s infrastructures minister, Uzi Landau, attended a conference on renewable energy in the UAE capital Abu Dhabi in January, while tennis players Andy Ram and more recently Shahar Peer have competed in Dubai. More importantly, a number of long-term, if less publicized, relationships have developed behind the scenes over the last decade.

Given Dubai’s aspiration to be the global capital of all things “bling,” it’s fitting that diamonds brought about its engagement with Israel over the past decade. Striving to become a major player in the global diamond trade, the emirate sought to court the influential Johannesburg-Antwerp-Tel Aviv-New York gemstone nexus, and there was no room for the anti-Zionist rhetoric beloved of other regional governments. So it came to pass that Jewish and Israeli businessmen began to attend trade conferences and open luxury hotels in the gilded Gulf city-state.

This willingness to forgo political rancor for economic accord embodied the much-trumpeted vision of Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, who realizes there is little profit to be made in Middle East politics. In this context, Israeli involvement in this killing could be seen as a violation of trust, the snubbing of an outstretched hand of friendship.

Such a slight is unlikely to be forgotten soon, though others insist Dubai is just shedding crocodile tears of outrage, given its past readiness to accommodate those who operate in the shadows of the global economy.

Dubai has long been a freewheeling haven for arms dealers and sanctions busters: Speculation is that Mabhouh was in town specifically to organize an Iranian arms shipment to Hamas. Iran certainly has a record in this regard as it deals (and banks) with the rest of the world through Dubai. Tehran also acquired elements of its current nuclear capabilities by way of Dubai, supplied by the network organized by A.Q. Khan, the father of Pakistan’s atomic bomb. And the 20 or so supposed Mossad agents identified by the Dubai authorities were certainly not the first people to enter Dubai on “questionable” passports – nor will they be the last.

Historically, in fact, questionable characters have found Dubai to be a welcoming center of operations. Viktor Bout, the notorious arms dealer dubbed the “Merchant of Death,” transported Taliban gold, and Liberia-bound armaments paid for with conflict diamonds, out of neighboring Sharjah while banking in Dubai. Furthermore, Dawood Ibrahim – alleged king of the Mumbai underworld – found a welcoming sanctuary there until supposed links to the Pakistani intelligence services, Al-Qaida and the 1993 Mumbai train bombings caused him to outstay his welcome.

Just last year a Chechen warlord was gunned down in the parking garage of a luxury apartment complex in Dubai, as part of an ongoing power struggle for control of the former Soviet republic.

Given that the collapse of its much-hyped property market has made Dubai even more dependent on welcoming all forms of trade, perhaps the authorities will allow Israelis to return once things cool off. In the interim, commentators are still divided over whether the assassination can be designated a success.

When engaging an enemy, military commanders speak of tactical, operational and strategic objectives. While there is little doubt that the assassination was a tactical and operational success, it cannot, and should not, be deemed a strategic one, particularly if the long-term objective of Israel’s leaders is to normalize relations with the rest of the Arab world.

Mabhouh is certainly another notch on Israel’s bedpost – another in a long line of conquests that includes Abu Jihad, Sheikh Ahmed Yassin and Imad Mughniyeh; sadly, he will not be the last. For that, Israel needs a different set of partners, Arab states prepared to embrace the reality of Israel, outside of the historical paradigm of opposition, confrontation and violence.

Dubai had the potential to be a bridge of engagement, but it seems that this government has chosen ostrich diplomacy instead: ignoring rather than engaging with the reality that surrounds it. Along with the actual wall it has built on the West Bank, Israel has now erected a metaphorical “wall of disengagement” with one of the few Arab entities willing to engage with it at all.

Raymond Barrett is an Irish writer and journalist specializing in the Middle East. He is the author of the recently published book “Dubai Dreams: Inside the Kingdom of Bling” (Nicholas Brealey).

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Karzai takes control of election complaints

Sunday, February 28, 2010

Sunday Business Post
By Raymond Barrett in Washington

Afghan president Hamid Karzai has strengthened his control on the country’s political infrastructure by wresting control of a key component of the electoral system from the United Nations.

Karzai issued a decree last week giving himself the power to appoint all five members of the Electoral Complaints Commission (ECC), the organisation charged with monitoring elections and ensuring fairness and impartiality.

The move has raised eyebrows among diplomats and security experts, who have consistently touted electoral transparency and combating corruption as the long-term solutions to Afghanistan’s ongoing civil strife.

With this decree, Karzai has established himself as both gamekeeper and poacher of any future elections. During the tainted presidential elections held last August, which were riddled with accusations of corruption, the EEC ruled that nearly a million votes cast in favour of Karzai were fraudulent.

At that time, three members of this five-person commission were UN appointees, and their ability to challenge Karzai was heralded as a small step in the right direction for a nascent democracy.

However, British foreign secretary David Miliband echoed the concerns of many Nato members last Thursday, when he spoke before the House of Commons foreign affairs committee.

‘‘The ECC played a very important role in exposing the fraud that took place in the presidential elections,” he said.

‘‘With parliamentary elections planned for this September, it is very important that that sort of check continues to be able to exercise an influence.”

The controversy comes as the Nato-led International Security Assistance Force (ISAF) is involved in major combat operations against Taliban militants in the southern Helmand province.

Another key goal of Operation Moshtarak is to improve security for the civilian population and thus deprive the Taliban of support from the local population. However, the effectiveness of this counter-insurgency strategy will certainly be compromised if the Taliban can portray the Afghan army and foreign troops as allies of a corrupt and illegitimate president.

Furthermore, a suicide attack last Friday in the capital Kabul, which killed 17 (and later claimed by the Taliban), showed the difficulty of defeating an enemy that prefers ‘asymmetric’ warfare.

Since grasping the reins of power in December 2001,Karzai seems to be morphing from a reformer lauded by western governments into yet another regional autocrat, increasingly tainted by allegations of corruption and scandal. The Afghan government (including Karzai’s own brother) has been linked to the opium trade.

Miliband echoed broader concerns among the international community that Karzai may not be the ideal partner as they pursue their ‘nation building’ project in Afghanistan.

‘‘We will have to see who he appoints, because that will be an important indication of the kind of independence that might exist or not,” he said. ‘‘I think that it is very important that we are able to have Afghan partners – led by the president – who are able to deliver on the commitments that they have made.”

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Dubai seeks Mossad chief’s arrest in assassination case

Sunday, February 21, 2010

Sunday Business Post
By Raymond Barrett in Washington

The fallout over the murder of a senior Hamas commander in Dubai continued last week as the city’s police chief said the head of Mossad – Israel’s intelligence service – should be arrested.

CCTV footage released by the Dubai authorities revealed that 11 people travelling on forged Irish, British, French and German passports tracked Mahmoud al-Mabhouh to the luxury Al Bustan Rotana hotel last month.

Al-Mabhouh was debilitated with a stun gun and then smothered to death in his room.

The killers flew out of Dubai to various European destinations within 24 hours of the assassination.

While concrete evidence has yet to emerge, Dubai’s police chief, Dahi Khalfan Tamim, was unambiguous in revealing the chief suspect believed to be behind the killing.

‘‘Investigations reveal that Mossad is involved,” he said. ‘‘It is 99 per cent, if not 100 per cent, certain that Mossad is standing behind the murder.”

While Israel rarely claims responsibility for such extra-judicial killings, it certainly has previous form in such matters.

In the years following the murder of 11 Israeli athletes by Palestinian militants during the 1972 Munich Olympics, Mossad assassinated a number of Palestinians across Europe, including at least one innocent man who was misidentified.

More recently, Hamas leaders in Jordan and Syria also have been targeted for assassination.

The use of forged passports (two assassins who entered Jordan in 1997 posed as Canadian tourists) is necessary as Israeli passport holders are generally not allowed to enter Arab countries.

While the Dubai murder itself was reminiscent of a spy thriller, the location and background to the killing has led to even further conjecture, much of it rife with political intrigue.

Dubai has long been a freewheeling haven where those who operate in the shadows of the global economy – such as arms dealers and those seeking to evade international sanctions – can do business.

The Persian Gulf city is the place through which Iran deals (and banks) with the rest of the world, and the possibility that al-Mahbouh was in the city arranging an arms shipment has been widely reported. Israel has long accused the Iranian government of supplying weapons to Hamas.

But the arrest of two Palestinians living in Dubai over alleged collaboration with the killers has also fuelled speculation that elements of Fatah, the party of Palestinian Authority chairman Mahmoud Abbas, may have been involved. The Palestinian movement is currently split in two – Fatah in the West Bank and Hamas in Gaza and there is deep-seated enmity between the two groups.

Ireland’s foreign affairs minister Micheál Martin stated last week that the government ‘‘takes grave exception to the forgery and misuse of Irish passports’’, but this is not the first incident to damage relations between Ireland and Israel.

When two Irish UN peacekeepers, Thomas Barrett and Derek Smallhorne, were kidnapped and shot dead in southern Lebanon by a Christian militia group in 1980, an Israeli military officer was allegedly present during their murder.

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Baghdad carnage a sign of growing unrest

Sunday, January 31, 2010

Sunday Business Post
By Raymond Barrett

A coordinated series of attacks against hotels used by foreign journalists and Iraqi politicians left nearly 40 people dead in Baghdad last week. Gunmen and suicide bombers targeted three hotels in and around the heavily fortified green zone, which is home to both the US embassy and the Iraqi parliament.

Although an al-Qaeda affiliate known as the Islamic State of Iraq claimed responsibility for the blasts, such bombings are another indicator of just how the insurgency in the country has evolved since the US added an extra 20,000 troops to the capital region and surrounding provinces in 2007.

Over the last year, al-Qaeda in Iraq (AQI) has preferred to use large car bombs against ‘soft’ civilian targets, such as hotels and government ministries.

Nearly 130 people were killed in one day during a series of attacks in December. The most recent attacks came in the same week as the execution of Ali Hassan al Majid.

A senior figure in the regime of Saddam Hussein, al-Majid had been linked to a number of atrocities. Known as ‘Chemical Ali’, he was found guilty of crimes against humanity and genocide – the most infamous crime being the gassing of 5,000 civilians in the Kurdish town of Halabja in northern Iraq in 1988.

Since the US military adopted a new strategy of coopting former Sunni insurgents into the Iraqi security establishment through the establishment of ‘Awakening Councils’, attacks against coalition soldiers have dropped significantly. Last year, coalition forces suffered a total of 149 fatalities, compared with around 900 in 2007.

Ranj Alaaldin, an Iraq specialist at the London School of Economics, told The Sunday Business Post that ‘‘the insurgency, comprising a combination of AQI and Ba’athist/ Sunni extremists, is morphing in accordance with the changing realities on the ground’’.

The most urgent ‘‘reality on the ground’’ is the withdrawal of US troops, scheduled to take place in 2011 and 2012.While Iraqi prime minister Nouri al Maliki has insisted publicly that his Shi’ite-led government is capable of maintaining security, fear of renewed sectarian violence remains.

Despite a decrease in civilian casualties in recent months, Alaaldin said he expected even more attacks on government institutions from AQI, ahead of a general election in March.

‘‘As the state becomes more assertive, [AQI will] respond by deploying sporadic, high casualty, high-profile mass terror attacks. These attacks will aim at undermining the government, particularly in the run-up to the elections and as US troops begin to withdraw,” he said.

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Burj rename a telling insight into Dubai’s economic reliance

Sunday, January 10, 2010

Sunday Business Post
By Raymond Barrett

The full extent of Dubai’s financial implosion was revealed this week as the world’s tallest building was officially opened amid much fanfare in the small Persian Gulf emirate. At a height of 828 metres – twice the height of the Empire State Building – Burj Dubai was meant to be the crowning glory of a decade-long economic boom that saw the former fishing village morph into a global financial and leisure hub.

However, as parachutists dived from its upper floors and fireworks exploded around the iconic structure, Dubai’s ruler Sheikh Mohammed Bin Rashid Al Maktoum announced that the iconic tower had been renamed Burj Khalifa in honour of the ruler of neighbouring oil-rich Abu Dhabi, which has bailed out Dubai to the tune of $25 billion over the last year.

While some commentators described the sudden name change as a ‘nod’ to UAE President Sheikh Khalifa Bin Zayed Al Nahyan, in truth it was more of a genuflection.

In its quest to establish itself as a global player an array of companies owned by the Dubai government have run up debt obligations of at least $80 billion. The Burj Khalifa cost $1.5 billion and stands above a fountain estimated to have gobbled up $200 million alone.

But after defaulting on repayments towards the end of last year, Dubai turned to Abu Dhabi and its sovereign wealth fund of around $700 billion for help. The price Abu Dhabi seems to have extracted for its billions is the renaming of Dubai’s most illustrious architectural achievement.

This will no doubt have been galling for Dubai’s ruling Maktoum family, who have traditionally asserted their independence within the United Arab Emirates (UAE).

However, Sheikh Mohammed asserted that the underlying economic structure of the UAE was resilient enough to deal with the current global economic crisis.

‘‘This is yet another proof that our national economy is robust and that our leadership, institutions and private sector are capable of surmounting difficulties and confronting challenges with resolution, fearlessness and confidence,” he said.

Global capital markets will have been reassured somewhat by these words which suggest that Dubai is rekindling a more acquiescent relationship with cash-rich Abu Dhabi.

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Dubai World creditors must wait it out

Sunday, December 6, 2009

Sunday Business Post
By Raymond Barrett

Creditors of Dubai World are assessing their options in light of the announcement that the state-owned company is suspending repayments on debts of someUS$60 billion.

British banks such as HSBC, RBS and Lloyds, along with the US hedge fund QVT, have considerable exposure to Dubai’s flagship holding company – the force behind the still incomplete ‘mega-projects’, such as The World and the Palm artificial islands.

Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, sought to shore up shaky investor confidence last week, claiming that the media had exaggerated the scale of the crisis.

‘‘We in the Emirates, and in Dubai in particular, are strong and tenacious and we have the determination and strength of will to confront all challenges. It is the fruit-bearing tree that becomes the target of [stone-]throwers,” he said.

But this unexpected round of debt restructuring has raised serious questions about the solvency and the corporate structure of ‘Dubai Inc’ – the sobriquet earned by the free-wheeling Gulf emirate as it pursued a path of highly-leveraged expansion over the last decade.

Without the oil reserves of neighbouring Abu Dhabi, Dubai’s ruling Maktoum family followed an aggressive acquisition policy that was financed by large borrowing.

The government of Dubai – one of seven semi-autonomous emirates that make up the United Arab Emirates – now oversees an intricate web of seemingly ‘private’ entities across the globe, through a number of holding companies.

Dubai World is now heavily involved in maritime operations, transport and logistics, financial services and – most critically – property development and construction, while its flagship Emirates Airlines is run by the Investment Corporation of Dubai.

Sheikh Mohammed’s personal fortune (estimated at around $16 billion) is controlled by another entity, Dubai Holding.

While these companies look and act like ‘private sector’ organisations, it is not uncommon for their chairmen to double up as de facto government ministers.

For example, the chairman of Dubai World, Sultan bin Sulayem, has also served on the emirate’s executive council.

Despite the Byzantine structures at play, Dubai engenders a certain degree of confidence among the global financial community, otherwise it would never have received such large lines of credit in the first place.

In 2009, Transparency International ranked the UAE 30th in its annual corruption index, considerably higher (ie, less corrupt) than its regional neighbours Iran and Iraq, who were placed 168th and 176th respectively. However, this is not the first time Dubai World has courted controversy.

In 2006, a planned takeover of ports in the US fell apart amid security concerns in Washington.

The company found itself in the middle of a ‘public versus private’ debate last year when the European Union proposed to regulate the activities of sovereign wealth funds. European lawmakers were concerned that entities such as Dubai World were political as well as financial vehicles, and so needed greater oversight.

While the government of Dubai can leech funds from the various conglomerates it owns, the powers that be seem less inclined to embrace their debts.

Last week, the UAE’s economy minister Sultan bin Saeed al-Mansouri dropped a big hint that there would be no state bailout of the stricken company.

‘‘Dubai World’s debts do not affect the economic performance of Dubai or the UAE, and it is a matter of time before the company restructures its debts and honours its commitments as per a scheduled plan,” he said.

Dubai World’s creditors clearly do not share the same sense of optimism, and will doubtless be eyeing up any ‘jewels in the crown’ that could be sold off if the restructuring plan fails.

In a worst-case scenario, the Maktoum ruling family maybe prepared to let the foreign banks which backed Dubai World with massive loans lose out, for they will undoubtedly have ring-fenced as many of their prized assets as possible.

But these anxious creditors still face one unavoidable problem: the property, leisure and financial holdings that underpin much of this $60 billion debt are now worth drastically less than when these loans were issued, even if buyers can be found.

Now, where have we heard that before?

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Financial markets rocked as Dubai economy falters

Sunday, November 29, 2009

Sunday Business Post
By Raymond Barrett

Many analysts wrongly thought Dubai had sufficient funds to cover debt repayments for the current year, writes Raymond Barrett.

Dubai, once the posterchild of the global economic boom, looks like becoming the symbol of its collapse, with major question marks over its financial health.

The Persian Gulf emirate that became known for its record-breaking property and infrastructure developments rocked global confidence with the announcement that its Dubai World conglomerate is postponing debt repayments for six months.

The government-owned holding company, which oversaw such marquee ‘mega-projects’ as The Palm Jumeirah and The World, said the move was necessary as it sought to restructure $60 billion in debt. Sheikh Ahmed bin Saeed AlMaktoum – a leading member of Dubai’s ruling family – released a statement saying the move was ‘‘carefully planned’’ and claiming the fundamentals underpinning the multi-faceted company were strong.

‘‘We understand the concerns of the market and the creditors in particular. However, we had to intervene because of the need to take decisive action to address its particular debt burden,” he said.

But analysts said the development raised major questions about Dubai’s ability to weather the global recession. The fact that the Dubai World announcement came during the Eid al Adha Islamic holiday, when regional stock markets were closed, indicates that the Dubai authorities feared the news would further pummel already weak investor confidence.

Financial markets reflected this lack of confidence by pushing up the prices of credit default swaps – the cost of insurance against Dubai defaulting on its debt – and ratings agencies downgraded a number of companies with close ties to the Dubai government.

Dubai is believed to have debts of at least $80 billion, but analysts say it is difficult to get an exact figure because of lack of transparency and a labyrinthine corporate structure. The fact that a large percentage of the debt is owed to the Royal Bank of Scotland has also raised eyebrows and depressed stock markets in Asia and Europe, including Ireland.

Many analysts and observers thought Dubai had sufficient funds to cover debt repayments this year, after neighbouring Abu Dhabi bought $10 billion of Dubai bonds last February. That move was effectively a bailout for Dubai and must have proved extremely embarrassing for the fiercely independent Al-Maktoums, who will undoubtedly cede some prestige to Abu Dhabi as their financial predicament increases.

This imbroglio throws a harsh light on the ambitious plans of Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, whose pro-business stance and ‘can-do’ attitude earned the emirate the unofficial title of ‘Dubai Inc’ during the boom of the last decade.

Dubai is probably the best-known of the seven emirates that constitute the United Arab Emirates (UAE) – a federation of semi-autonomous sheikhdoms formed when Britain ceded control of a number of protectorates along the Persian Gulf region in 1971.

But unlike oil-rich Abu Dhabi, Dubai has few natural resources, and sought to diversify its economy by establishing itself as a luxury tourist destination and a logistical and financial hub. This development model called for rapidfire expansion fuelled by massive borrowing.

Despite its lack of petroleum reserves, Dubai benefited from the soaring price of oil in recent years – $147 per barrel in 2008 compared with $80 today – as it created vast excess liquidity in the neighbouring Gulf states, for which the emirate was a willing home.

Dubai’s massive Jebel Ali port also connected producers in Asia with consumers around the world. But as global recession reduces consumption and production, Dubai Inc is completely dependent on a turnaround in the global economy to rescue it from the crisis.

In the long term, Dubai’s best hope rests in its ability to differentiate itself from its surrounding political and ethnic mixes. None of these has Dubai’s reputation of a freewheeling entrepot where business is allowed to flourish – never mind the infrastructure or the mindset.

However, in the short term, the outlook is bleak. The emirate’s over-the-top construction industry was built on a tsunami of borrowed money which created a property bubble of staggering proportions. Even the planned opening of Burj Dubai – the world’s tallest building, at over 800 metres – next January carries an ominous portent.

Peter Cooper, a Dubai-based business journalist and entrepreneur who cashed in his chips at the top of the market, describes in his book Opportunity Dubai: Making a Fortune in the Middle East how even a notable achievement such as this could be a bitter pill.

‘‘The completion of tall buildings almost always marks the top of the business cycle. The Empire State Building was completed in New York in the early 1930s during the Great Depression, and remained half-empty for a decade.”

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Corruption is the cost of doing business in Afghanistan

Sunday, November 8, 2009

Sunday Business Post
By Raymond Barrett

Afghan President Hamid Karzai has secured a second five-year term after a controversial run-off election scheduled for yesterday was cancelled by the country’s independent electoral commission.

Former foreign minister Abdullah Abdullah withdrew from the contest a week before the second round of voting, questioning the impartiality of the electoral process and alleging widespread corruption within the Afghan government. An outright victory for Karzai in an election last August was overturned after allegations of electoral fraud.

Corruption was largely ignored by the Nato-led International Security Assistance Force during the president’s first term. A certain amount of graft was seen as the ‘cost of doing business’ in a war-ravaged tribal society where former warlords had morphed into ‘provincial governors’.

However, regional experts say this ongoing corruption has been giving succour to the Taliban insurgency in recent years and is now affecting the international community’s previously fawning view of Karzai.

The main factor fuelling a culture of widespread malfeasance is opium. The UN Office on Drugs and Crime reports that, since the overthrow of the Taliban in 2001, poppy cultivation has increased from 8,000 to 123,000 hectares.

The profits from this massive drug trade are believed to permeate every facet of political and civil life, from cabinet ministers to regional police chiefs. The economic realities make for sobering reading. In 2008, total GDP was estimated at around $10 billion, while the combined export value of Afghanistan’s opium industry was valued at $3.4 billion.

Vanda Felbab-Brown, author of the forthcoming Shooting Up: Counterinsurgency and the War on Drugs, pointed to the blurred lines within the country’s drug enforcement agencies.

‘‘Many power brokers in Afghanistan – including some of today’s staunchest eradicators of the poppy crop and members of the Ministry of Interior’s counternarcotics section – have been involved in the drug trade,” she said.

Targeting opium profits has also proved difficult. A highly-organised ‘narco-commodity exchange’ launders money through regional trading centres such as Dubai, allowing for payment through wholesale consignments of consumer goods and construction materials.

The most embarrassing example of this institutionalised corruption has been the accusation levelled at the president’s brother, Ahmed Wali Karzai, of profiting from the drug trade. Earlier this year, president Karzai pardoned a man convicted in 2007 of using a police truck to smuggle drugs – the nephew of the president’s campaign manager.

Keeping one’s own supporters happy is an essential political lubricant in a tribal society such as Afghanistan. But as their commitment increases, the UN and Nato will simply have to roll up their sleeves and get their hands dirty.

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