Previous Quarterly Editions
Expropriation Risk: 38 38 38 38 ► Political Violence Risk: 35 35 35 35 ► Terrorism Risk: 20 20 20 20 ► Exchange Transfer and Trade Sanction Risk: 45 45 45 35 ▼ Sovereign Default Risk: 15 15 15 15 ►
TREND ▼
The United Arab Emirates (UAE) has moderated the more confrontational elements of its foreign policy. The country has scaled back its military operations in Yemen and Libya and has restored trade and diplomatic ties with Qatar. UAE officials have also held high-level talks with Iran’s new president to de-escalate regional tensions and are openly engaged with Turkey.
The shift in approach came largely in response to the election of Joe Biden as president in the United States, who has made restoration of the 2015 Iran nuclear deal a foreign policy priority. Citing the humanitarian costs of the UAE’s intervention in Yemen, the Biden administration had also threatened to reverse USD23bn in arms sales (agreed in the Trump era) to the UAE before then approving them in April.
As the transition to renewables gathers pace, the oil-dependent UAE has also adopted a greater emphasis on economic diplomacy in its foreign posture. Under new directives from the UAE’s foreign affairs ministry, the country’s diplomats and embassies will be more heavily judged on their ability to attract foreign investment. This approach appears to be paying off, with inward Foreign Direct Investment (FDI) increasing 11% in 2020 to USD20bn, despite the chilling economic effect globally of the COVID-19 pandemic.
The UAE’s more conciliatory regional posture is partly also motivated by the US retreat from the region, epitomised by its disorderly withdrawal from Afghanistan in August. With a weakening US security guarantee in the Middle East, the UAE is seeking to dial down tensions in order to minimise risks to its own security and commercial interests -- most notably, maintaining the stability of shipping lanes in the Persian Gulf, which has been negatively affected by the state of Iran-Israel tensions.
The opening of an Israeli embassy and consulate in the UAE in June consolidated the two countries’ political ties, though tangible economic cooperation has fallen short of expectations, with key deals being scuppered. Intelligence cooperation between the UAE and Israel is likely to intensify in the aftermath of the Taliban’s takeover in Afghanistan as the US withdrawal from that country emboldens extremist groups. The UAE’s extensive use of the Israeli surveillance software Pegasus against political opponents, journalists and human rights activists, however, will remain a source of reputational risk.
The UAE has embraced an active mediation role in several flashpoints, reinforcing its recent shift towards de-escalation. The country has leveraged its economic muscle to intervene in a border dispute between Sudan and Ethiopia and has even played a mediating role in the high-stakes conflict between Pakistan and India over Kashmir. The UAE has also mediated the safe passage of Afghan refugees out of Afghanistan, earning it goodwill in Washington. However, the country’s decision to host the deposed Afghan president, Ashraf Ghani, will be viewed as a provocation by the Taliban.
More broadly, the UAE’s anti-Islamism and rejection of the Arab Spring’s legacy will remain foreign policy tenets. Tunisian President Kais Saeid’s power grab and his pursuit, on charges of corruption, of members of the Islamist Ennahda party (Tunisia’s largest) has been celebrated in Abu Dhabi as another blow to political Islam. Having reluctantly agreed to end the boycott against Qatar, the UAE has yet to name an ambassador to Doha, which it views as part of a Qatar-Turkey axis that has championed the cause of political Islam in countries affected by the Arab Spring.
Domestically, competition between Abu Dhabi and Dubai will be limited to the commercial sphere, as both seek to be magnets of business and talent; given Dubai’s indebtedness to Abu Dhabi, its leadership will continue to defer to the capital on most political matters, domestic and foreign.
TREND ►
Expropriation risks are very low. In the energy sector, the Abu Dhabi National Oil Company has opened itself to new financing sources, for example issuing bonds for the first time since 2017 and inviting investors to acquire stakes in its refining and pipelines businesses in 2019-20. These moves suggest the economy’s bedrock energy sector will be increasingly outward-looking.
In June, under an amendment to the Commercial Companies Law, the UAE began permitting 100% foreign ownership of companies anywhere in the country, compared with previous rules that restricted foreign ownership to designated free zones.
There is regulated space for citizens to lobby the government. The UAE government classifies all forms of anti-state dissent as terrorism and is likely to increase surveillance of residents amid strengthening ties with Israel and the resurgence of the Taliban in Afghanistan. The government will watch for any Islamist organising (for which it has zero tolerance). In parallel, Abu Dhabi, through the federal budget, will increase fiscal transfers to the less-developed northern Emirates, to pre-empt any social instability over wealth disparities.
The UAE’s intelligence-sharing with regional allies, its well-paid security forces and stringent vetting, alongside its strong civil surveillance, reduce the risk of successful terrorist attacks. In terms of cross-border threats, the country’s decision to draw down its military operations in Yemen against the Iran-aligned Houthis should reduce risks stemming from there.
The Abraham Accords’ sensitivity (the deal was signed between Israel, the UAE and the United States in 2020) means Abu Dhabi will continue strengthening its intelligence capabilities, emphasising cybersecurity and AI-powered surveillance.
The UAE’s development model is based on openness to global capital, so the risk of capital controls or repatriation of profits is very low. The government’s robust reserves support this orientation: between sovereign wealth fund assets and the UAE’s central bank, the country has about USD1.6tn, providing confidence in the country’s ability to maintain its currency’s peg to the US dollar.
There is some trade sanctions risk: Dubai is a transit point for weapons and drugs smuggling by criminals and militants based in South and Central Asia, East Africa and the Middle East. Dubai’s ports have also been used by Iranians to smuggle banned US goods, gold and dual-use items subject to international sanctions before the 2015 Iran nuclear deal was originally agreed. Irregular seizure of vessels by the Iranian coastguard in the Gulf indicates that there are ongoing smuggling operations based out of the UAE.
‘Dirty money’ flows are another concern. In April 2020, the Financial Action Task Force (FATF) warned that the UAE must increase measures to stop money laundering, or risk inclusion on the international watch list. In this regard, the UAE is requiring more than 500,000 companies to submit registers on their beneficial owners, a step aimed at enhanced monitoring for tax evasion, money laundering and terrorist financing.
AA-rated Abu Dhabi enjoys positive credit ratings by the main rating agencies, owing to its strong financial buffers and low government debt (under 15% of Gross Domestic Product (GDP); the AA-rated median is 29%). However, the economy’s concentration in hydrocarbons is a downside risk, as it makes growth and revenue strength vulnerable to the likely long-term decline of oil prices.
Dubai’s model of credit-fuelled development and its much smaller oil and gas reserves means that it is far more indebted than Abu Dhabi. The oil price decline and COVID-19 have raised renewed concerns around Dubai’s debt sustainability; a broad assessment of the country’s public sector debt puts the country’s debt burden at 148% of GDP. However, the implicit guarantee that Abu Dhabi would shore up Dubai’s liquidity ensures that sovereign default risks are contained.
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