Abu Dhabi May Wrest Power from Dubai

Though they are kinsmen, the two emirates also are rivals. In return for its $10 billion bailout, Abu Dhabi may seek more control over its slicker cousin

By Ben Holland

(Bloomberg) — Four days before Dubai World sought to delay $26 billion of debt repayments last month, Sheikh Mohammed bin Rashid Al Maktoum set out to race his horse, Al Ayed, across 120 kilometers (75 miles) of Persian Gulf desert. He had to withdraw when the mount became fatigued.

Now Sheikh Mohammed must prove that the transformation of Dubai from fishing village to global business hub isn't also running out of steam. He has to find a way for oil-poor Dubai to cover at least $80 billion in debts and liabilities, a sign of the gap between his ambitions and the resources to fund them.

Sheikh Khalifa bin Zayed Al Nahyan of Abu Dhabi, who threw the state holding company a $10-billion lifeline yesterday, has no such concerns. He controls 8 percent of the world's oil and one of its biggest sovereign wealth funds. He's also Sheikh Mohammed's kinsman and, as president of the United Arab Emirates, his boss. Abu Dhabi's support may come with a price that undermines Sheikh Mohammed's go-it-alone vision for Dubai.

"This isn't no-strings-attached money," said Jim Krane, author of City of Gold: Dubai and the Dream of Capitalism. "This is the big chance for the Al Nahyan family to dragoon its maverick cousins back into the union. Most of all, Abu Dhabi wanted to avoid the embarrassment of Dubai looking outside for its bailout."

Dubai is using $4.1 billion of the Abu Dhabi money to pay off Islamic bonds of Nakheel PJSC, the Dubai World unit that's building palm tree-shaped islands off the emirate's coast. The rest will help meet Dubai World's costs as it negotiates with creditors. The company announced Nov. 25 it was seeking a six-month "standstill" on its debt. Dubai's eventual bill may be higher than the $26 billion announced on Dec. 1.

Debt Ahead

"It's not going to stop and go away," said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, Saudi Arabia. "There's still debt that needs to be settled in 2010 and 2011." Dubai must repay at least $55 billion in the next three years, Goldman Sachs Group Inc. (GS) said yesterday.

Abu Dhabi may increase its influence over Dubai's flagship companies, such as Emirates Airline and port operator DP World, Ltd., said Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd., which oversees more than $100 billion globally. They "are likely to become U.A.E. strategic assets rather than Dubai strategic assets," he said.

Khalifa's father, Sheikh Zayed bin Sultan Al Nahyan, was the prime mover behind the formation of the seven-emirate U.A.E. from a group of U.K.-allied sheikhdoms, and became the new state's first president in 1971. He died in 2004.

Abu Dhabi's rulers may see covering Dubai's debt as "a small price to pay if in the long term the goal is integration of Dubai into the federation," said Christopher Davidson, professor of Middle East studies at the U.K.'s Durham University.

Staying as One

Sheikh Mohammed's press office declined to comment on details of the bailout.

"What Dubai has is for Abu Dhabi and what Abu Dhabi has is for Dubai," because the two sheikhdoms "are one and we will stay as one," he told investors at a Nov. 9 Bank of America (BAC) Merrill Lynch conference in Dubai.

That version of the relationship, never enshrined in contracts, was taken for granted by the banks that lent Dubai billions to fund Sheikh Mohammed's projects, said Chris Turner, a former director of risk and asset management at Istithmar World, Dubai World's investment arm.

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