By Hani Sabra and Willis Sparks
For the past several years, it's been easy to tell these brothers apart. Within the United Arab Emirates, Abu Dhabi is the serious, sober, more responsible one. Dubai is the flashy, free-spending younger sibling, rolling its eyes at big brother's conservative ways. Until 2007, the Dubai brand was synonymous with opulence; it boasted the world's tallest skyscraper, its first seven-star hotel, ostentatious housing developments marketed to Hollywood stars. The word Dubai began turning up in rap songs.
But when Dubai World, the emirate's largest state-owned conglomerate, requested a "standstill" of subsidiary real estate company Nakheel's bondholders last week, perceptions of Dubai took a serious hit. The brand had already suffered this year after the global financial crisis rolled through, capsizing the local real estate market and halting the flow of credit. But media coverage of Dubai over the past week has been especially harsh, and the emirate hasn't taken the criticism well. London's Sunday Times was removed from UAE newsstands last weekend for an article (and accompanying graphic) entitled "How Dubai's dream sank in a sea of debt."
Since last Wednesday, the other media focus has been on Dubai's relations with Abu Dhabi. Despite the Western media's fascination with Dubai's showmanship, Abu Dhabi has always been the dominant emirate. It's the capital of the country, the largest of the emirates and controls nearly all the country's oil. Abu Dhabi's ruler, Sheik Zayed bin Sultan al Nahayan, is the UAE's founder. It has already provided billions in financial aid and will now probably step in with billions more.
The most pressing question for policymakers and investors is this: How much authority is Abu Dhabi buying with this next expected bailout? In the short term, its influence will be significant, but not overwhelming. Officially, each of the emirates will remain quasi-sovereign. But the UAE will now look more like a federation and less like a confederation, as Abu Dhabi centralizes more of the country's political and economic decision-making power. The al Nahayans have long had issue with Dubai's profligacy and its debt-fueled growth model. (Abu Dhabi has typically made longer-term, more conservative and sustainable investments.) And Dubai will now have to adopt a more conservative financial model. But socially, Dubai will remain the more liberal hub of the UAE. The country needs tourism and new investment. That means that Abu Dhabi needs Dubai to be Dubai -- not another Abu Dhabi.
Beyond the economic issues, Abu Dhabi sees an opportunity to limit rival Iran's influence within the Persian Gulf. Dubai helps Tehran evade international sanctions by offering Iran the banking services that others deny them. Iran invests billions of dollars there each year, and Iranian citizens and businesspeople escape tensions in Tehran by hopping a quick flight to Dubai. As Abu Dhabi establishes tighter control of UAE foreign policy as the price of its financial generosity, Iran will find it increasingly difficult to use Dubai as a trading hub.
Ultimately, the relationship between Dubai and Abu Dhabi is not nearly as simple as it's portrayed in international media. Once the immediate danger of default begins to ease, tensions between the two ruling families will rise. In months to come, there is sure to be a tug of war over who controls what. But tomorrow we're likely to see the two ruling families use the UAE National Day holiday to affirm their solidarity. Until the risk of default is officially a thing of the past, Dubai and its (now wealthier and more powerful) sibling will stand together for an uneasy family photo.
Hani Sabra and Willis Sparks are analysts at Eurasia Group.
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