Previous Quarterly Editions
Expropriation Risk: 38 38 40 39 ▼Political Violence Risk:35 35 35 35 ►Terrorism Risk:20 20 38 38 ▲Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ►Sovereign Default Risk:15 15 15 15 ►
TREND ▲
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
The UAE’s relationship with the U.S. soured with President Joe Biden’s election to the White House. Citing human rights abuses related to the war in Yemen, one of Biden’s first presidential foreign policy acts was to freeze sales of advanced U.S.-made drones and warplanes to the UAE. This move was in stark contrast to the Trump years, when the UAE enjoyed a close working relationship with key Trump administration principals. As part of the Trump-brokered Abraham Accords, the UAE would be allowed to purchase the advanced F-35 warplane in exchange for normalising ties with Israel.
The USD23 billion F-35 deal remains off the table due to U.S. concern over the UAE’s increasingly strategic ties with China. In December 2021, the UAE suspended discussions over the deal, citing “sovereign operational restrictions”, a reference to an apparent U.S. pre-condition the Emirati government scale back its cooperation with China to clear the arms sale. Last year, at Washington’s behest, the UAE also halted works on a Chinese port project near the capital Abu Dhabi, the capital, which the U.S. suspects was a military facility. The U.S. fears a more militarised Chinese presence in the Gulf will serve China as a platform for spying on sensitive U.S. technology.
The UAE is pursuing strategic diversification not only of its oil-dependent economy but also of its relations with great powers. Whether to build up its military capabilities or localise technologies that will help move its economy away from hydrocarbons, the UAE is increasingly looking east to China. In the military realm, U.S. refusal to sell armed drones to Gulf states has forced the UAE to procure the weapons from China instead. The UAE is among the largest buyers of Chinese surveillance and cybersecurity technology which is both used to create digitally connected ‘smart’ cities but also to monitor Emirati society and control dissent.
Among the thorniest of policy issues in the UAE’s pivot to China is the former’s dependence on 5G telecommunications technology made by Huawei, the Chinese state-backed technology giant. Washington fears Huawei equipment, from data centres to surveillance camera systems, will be used by China to obtain sensitive information and sabotage critical infrastructure in the West and globally. Indeed, Washington has pressured the UAE to strip Huawei from its telecom networks.
China’s voracious need for energy makes it a crucial trading partner for the oil-rich UAE. This makes China and the UAE economically interdependent, with China also crucial to the UAE’s revenue security. To say, however, the UAE’s deepening cooperation with China amounts to a decoupling of the US-UAE economic and security relationship would exaggerate the shift underway. The UAE still attaches far greater importance to its relations with Washington than to its outreach to China. The UAE’s well-funded influence operation in Washington, which channels huge sums of money to think tanks, lobbyists, and public relations firms, exemplifies the enduring centrality of relations with the U.S. to the UAE.
TREND ▼
Expropriation risks are very low. In the energy sector, the Abu Dhabi National Oil Company (ADNOC) has opened itself to new financing sources, for example issuing bonds in 2017 and inviting investors to acquire stakes in its refining and pipelines businesses in 2019-21. These moves suggest the economy’s bedrock energy sector will be increasingly outward-looking.
ADNOC is also implementing a holistic gas strategy that will see Abu Dhabi ramp up production of natural gas. In addition, the firm is awarding international companies with several upstream investments at time when Europe is scrambling for new sources of gas, following the cut-off of Russian pipeline gas due to the Western response to the Russia/Ukraine crisis.
An initial public offerings rush is also underway with state-run companies such as ADNOC and Dubai Electricity and Water Authority. The rush is part of a broader regional competition with Saudi Arabia for foreign investment. This policy, spearheaded by national corporate champions, further suggests very low expropriation risks within the UAE.
TREND ►
There is regulated space for citizens to lobby government. The 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. 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 and its well-paid security forces and stringent vetting, alongside its strong civil surveillance, reduce the risk of successful terrorist attacks. Despite the UAE’s decision to draw down its military operations in Yemen against the Iran-aligned Houthis, the latter targeted Dubai and Abu Dhabi with missile and drone attacks in the first half of 2022.
These attacks are exposing the UAE’s vulnerability to non-state actors that are proxies of, or aligned with, Iran. Such risks could escalate if world powers and Iran revive the 2015 Iran nuclear deal or a variation of it, which could embolden Tehran’s armed forces and provide an oil windfall for Iran to finance its proxies and missile programme. The UAE is therefore purchasing advanced air defence systems from the U.S. and Israel, to defend against a resurgent Iranian threat.
The Abraham Accords’ sensitivity, the deal signed between Israel, the UAE, and the U.S. in 2020, means Abu Dhabi will continue strengthening its intelligence capabilities, emphasising cybersecurity and artificial intelligence-powered surveillance.
In an effort to avoid further Iranian retaliation, the UAE has concurrently pursued a diplomatic track with Iran. In August, the UAE returned its ambassador to Tehran for the first time since relations were broken in 2016, creating a potential pathway for de-escalation between the two neighbours.
The UAE’s development model is based on openness to global capital, so risk of capital controls or to the repatriation of profits is very low. The government’s robust reserves support this orientation, also providing confidence in the country’s ability to maintain its currency’s peg to the U.S. dollar. The dramatic rebound in oil prices in 2022 has strengthened the UAE’s financial position further still.
There is some trade sanctions risk as 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 U.S. goods, gold, and dual-use items subject to international sanctions. Irregular seizure of vessels by the Iranian coastguard in the Gulf indicates ongoing smuggling operations based out of the UAE.
‘Dirty money’ flows are another concern. In March 2022, the Financial Action Task Force (FATF) placed the UAE on its ‘grey list’ of countries assessed to have “strategically deficient” frameworks for anti-money laundering and countering the financing of terrorism.
The UAE’s recently formed Executive Office to Combat Money Laundering and Terrorist Financing has established a register of corporate beneficial ownership, which can supply requested information to international counterparties in three days. The UAE will be hoping to make enough progress on its frameworks by FATF’s next annual review in 2023. Revoking the designation will be important for the UAE’s reputation as the region’s finance hub.
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 GDP). 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 it is far more indebted than Abu Dhabi. The oil price collapse of 2020 and the pandemic have raised renewed concerns around Dubai’s debt sustainability; a broad assessment of the emirate’s public sector debt puts its debt burden at 148% of GDP. However, the implicit guarantee Abu Dhabi would shore up Dubai’s liquidity ensures sovereign default risks are contained. Furthermore, the windfall from 2022’s high oil prices has vastly strengthened Abu Dhabi’s financial position, giving the emirate the financial ballast to boost development spending and shore up some of the UAE’s less resource-rich emirates.
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