Riyadh takes a shot at Dubai with an ultimatum to foreign firms on moving their Middle East headquarters to the Kingdom.
Until the mid-1960s, the currency in circulation in the tiny states, which now constitute the United Arab Emirates, was the Gulf rupee. It was printed in India.
This fact illustrates how the UAE, and particularly Dubai, have historically relied on international trade and used the concept of global connectivity to shape their economy, says Martin Tronquit, Managing Partner of Infomineo, a research consultancy.
Before the oil boom transformed the desert into an oasis of glitzy skyscrapers, luxury hotels and a police that patrols the streets in Lamborghinis, Dubai was essentially a trading hub.
“Dubai was built around a port. They have a heritage of being open to businesses and offering incentives,” Tronquit tells TRT World.
Since then, the emirate has become a preferred destination for tourists, wealthy Asian businessmen looking for a second home and multinational corporations that have their regional headquarters there.
Around 47 top Fortune 200 companies have regional offices in Dubai, making it the most favored city in the Middle East among corporate bosses, according to a Infomineo survey.
But Saudi Arabia, which wants to diversify its economy away from oil, wants to challenge Dubai’s status as a home for blue chip firms — even if it requires a bit of arm twisting.
On February 15, Riyadh issued an ultimatum to foreign firms, saying that if they want lucrative government contracts then they better relocate regional offices to the kingdom by the beginning of 2024.
“I think Saudi Arabia is attempting to further the diversification of its economy, but this decision is also reflective of how that does include an increasingly competitive angle between Gulf Arab states,” says Ryan Bohl, a Middle East expert at the risk consultancy Stratfor.
“There can be only so many Dubai success stories per region.”
Exact details are yet to be released and Saudi Arabia has stressed that this rule does not apply to companies that want to do business with the private sector. But Riyadh is planning to offer corporate tax holidays and other incentives to woo the firms.
The Saudi statement has unnerved business leaders and executives in neighboring UAE. The Saudi government plays an outsized role in the economy, accounting for most of the spending.
In coming years, Riyadh plans to pump tens of billions of dollars into infrastructure projects as part of Crown Prince Mohammed bin Salman’s Vision 2030 programme.
Global financial institutions will also be vying to do business with Saudi Arabia’s $400 billion sovereign wealth fund, the Public Investment Fund.
“This is certainly an aggressive move,” said David Butter, a political analyst who focuses on the Middle East.
“But what happens if a company sets up a regional office in Saudi Arabia with just a few employees to please the authorities while keeping most of its staff in Dubai?”
What comes with a regional HQ?
Saudi Arabia, the region’s largest economy, has embarked on an ambitious reform agenda under the watch of bin Salman, the kingdom’s de facto ruler, also known as MBS.
Last month, 24 foreign firms including Pepsi, oil services provider Schlumberger and Bechtel, an American project management company, announced they’d be moving their offices to Saudi Arabia.
MBS has vigorously promoted a campaign dubbed ‘Programme HQ’ to convince blue chip companies to relocate to Riyadh.
Hurt by the fluctuation in oil prices, the Saudis have been betting on attracting foreign firms which can create jobs for a burgeoning young population - more than two-thirds of Saudis are under the age of 35.
The matter has become pressing as joblessness in the kingdom has touched 15 percent and the government has been forced to introduce unpopular austerity measures.
Saudi attempts to woo businesses with big events such as the Davos-like investment conferences have faced setbacks.
“Saudi Arabia has been hurting on bringing in FDI (foreign direct investment) for several years now,” says Bohl.
“That's in large part because investor sentiment is not yet convinced that projects in Saudi Arabia have the promised returns, and that investing in Saudi Arabia comes with reputational risks because of Riyadh's human rights record.”
MBS has introduced liberal reforms in the religiously conservative country, which is home to Islam’s holiest site. Along with allowing cinemas to reopen after 40 years, women can now drive cars and people can now attend concerts.
When it comes to political freedoms, both Saudi Arabia and UAE are monarchies where dissent is hardly ever tolerated.
But the 2018 murder of Washington Post columnist Jamal Khashoggi inside a Saudi consultate in Istanbul underscored the great lengths to which Riyadh can go to silence its critics. That incident badly damaged the Saudi government’s reputation globally.
For Saudi Arabia, convincing a multinational firm to set up a regional office can bring financial rewards especially as companies in the Middle East tend to register their profit at the regional hub, said Tronquit.
For instance a bank may have offices and sales operations in Oman or Bahrain but it records the profit in Dubai for tax reasons.
Tronquit said one reason Dubai was able to withstand the shock of the pandemic had to do with foreign executives and their families who continued to spend money locally.
Why they opt for Dubai
“This news is highly disturbing for me,” says a banker who has been living and working in Dubai for more than seven years.
“I understand why Saudi Arabia wants to do this. They have a large young population and they can’t depend on oil forever. But as a woman I have a lot of freedom in Dubai. I can go have a coffee with a male colleague anywhere without worrying about anything.”
More than 85 percent of UAE’s 9.7 million population is made up of expatriates who have brought valuable knowledge and expertise.
“What doesn’t get talked about a lot is the lifestyle aspect,” says Tronquit. “When a senior executive moves to a country, he thinks about his family and what matters for the family is security, education, healthcare and leisure.”
To cater to expat needs, a host of health and education establishments have sprung up including American and British schools.
“Security in Dubai is amazing, much safer than many countries in the Middle East and way safer than most in Africa,” said Tronquit.
Dubai is far more liberal when it comes to individual freedoms — people can drink and women can wear bikinis at the beach.
“Finally it’s about leisure — what do you do on your weekend — and Dubai has plenty to offer,” said Tronquit.