The United Arab Emirates has taken increasingly bold foreign policy measures since the start of the pandemic. In a carefully crafted mix of economic and security measures, the UAE is not only on its way to repairing the economic impact of the pandemic but also to becoming a regional hegemon. The formal establishment of relations with Israel has significantly improved the UAE’s position in the short-term. However, the long-term benefit of this agreement for the UAE will depend on Iran’s security status, and whether the UAE can compete with Saudi Arabia to become the region’s economic heart. Writes Julia Keizer
The United Arab Emirates has taken increasingly bold foreign policy measures since the start of the pandemic. In a carefully crafted mix of economic and security measures, the UAE is not only on its way to repairing the economic impact of the pandemic but also to becoming a regional hegemon. The formal establishment of relations with Israel has significantly improved the UAE’s position in the short-term. However, the long term benefit of this agreement for the UAE will depend on Iran’s security status, and whether the UAE can compete with Saudi Arabia to become the region’s economic heart.
The coronavirus pandemic has brought economic and political blows to many states in 2020. Despite this, the United Arab Emirates has prevailed as an increasingly prominent regional powerhouse by expanding and exerting its foreign economic and security policy repertoire. In July, the UAE became the first Arab nation to send a mission to MarsSoon after, in September 2020, the country established full diplomatic relations with Israel, and most recently, announced that it would relax social and religious laws, pertaining to alcohol use and the ownership of property by foreigners. This overhaul of domestic social law reflects a radical shift in the nation’s vision for itself on the regional stage.
The UAE’s foreign policy evolution comes at a time when power in the region is shifting. Iran has largely resumed its enrichment of uranium after the US’ withdrawal from the Joint Comprehensive Plan of Action (JCPOA). The JCPOA had largely deterred the possibility of a nuclear Iran in the near future, but with the international agreement in flux, there is renewed possibility of threat to the UAE. Additionally, the Saudi-led coalition in Yemen, of which the UAE was part, has begun its slow withdrawal, signaling the start of the conflict’s resolution. The UAE’s increasingly active foreign policy stance brings about the question of whether the Emiratis have taken on too much regional responsibility. Up until recently, the UAE has mostly backed regional hegemon Saudi Arabia in terms of foreign policy. The Emirati decision to withdraw from Yemen signifies a break from Riyadh, and therefore, a more independent regional position for the UAE. Nevertheless, the impact of the UAE’s regional position will remain subject to fluctuations in regional security, particularly regarding the possibility of Iran developing nuclear weapons.
A New Beginning?
An assertive approach to foreign policy is not new for the UAE. In recent years, the UAE became an active regional player by joining the Saudi-led coalition in the war in Yemen, allowing them to throw their weight around in the regional trading bloc– the Gulf Cooperation Council (GCC). Since 2009, the UAE has significantly increased its foreign aid to countries in the region such as Egypt. Its aid contributions as a percentage of its GNI are currently higher than the average for OECD countries.
Perhaps more importantly, the UAE’s impressive economic growth has allowed it to evolve from a collection of modest desert towns to a glitzy global financial hub with a largely diversified economy. The UAE has become the example of modernity for many Arab states in the region, resulting in a large amount of soft power.
Nevertheless, the negative economic impact of the COVID-19 pandemic has created the need for continued foreign direct investment in the UAE’s tourism, oil, and financial services based economy. The UAE hopes that the recent reform of its social and cultural laws will create an attractive financial climate for Western investors and expats, especially when neighboring states in the region are also competing to be the regional economic hub. Saudi Arabia, for example, has its sights set on the same sectors to diversify its economy, and has engaged the UAE in a race to the bottom to become the region’s economic hub post-oil. Despite the regional competition however, the UAE’s growing regional power should be supported by its increasingly bold foreign policy approach, capacity for drawing in foreign investment and history of attracting white collar workers.
Escaping the Oil Curse
Whether the UAE can ultimately become more economically independent will partly depend on its capacity for economic diversification. The UAE has made huge strides towards diversifying its oil and gas-based economy in recent years. A Brookings report indicated that the UAE had reduced its revenues from hydrocarbons from more than 60% in 2012 to 36% in 2018 by increasing its economic activities in the tourism, financial services and real estate sectors. Saying this, oil and gas money continue to fund significant portions of the government’s projects in real estate, science and technology.
However, the global financial crisis in 2008 has shown us that the UAE’s overindulgence in grand real estate projects can also compromise its economic sustainability. After the burst of the real estate bubble, Abu Dhabi was forced to bail out neighboring emirate Dubai, which was on the brink of defaulting on real estate bonds. The UAE therefore might find its economic strength in the region limited by both its continued dependence on oil and gas revenue as well as overzealous investment in the housing market.
In March 2021, the UAE’s second wealthiest emirate, Dubai, announced in an ambitious plan that the city was to boost beach space by 400%, and more than double the amount of hotels and expand the city’s public transport. However, if tourists continue to avoid visiting Dubai even after the pandemic eases, the adverse effect on Dubai’s economy will harm the economic health of the entire UAE. This would suggest UAE’s efforts to diversify its economy might be limited by long-term damage inflicted by the pandemic on the tourism industry.
To make matters worse, international pressure is mounting on the UAE to clean up its shadow economy, especially with regards to commercial money laundering. Rating agencies have downgraded several large UAE-based property firms downgraded several large UAE-based property firms to “junk status,” fueling Emirati impatience to jump-start the economy as soon as possible.
A repeat of 2008 is not unthinkable should the pandemic continue to damage Dubai’s economy, particularly if combined with the UAE’s panicked efforts to uphold an image of strength and stability to foreign investors, regional allies and foes alike. In the short term, the UAE’s efforts to conceal its current bout of economic instability will not resolve the structural economic weaknesses that will be obvious to international and regional investors. Yet, the UAE’s medium-term economic stability is likely to improve providing the UAE develops and maintains an astute diversification strategy. At the same time, regional security is likely to remain stable providing the UAE maintains and reinforces positive diplomatic relations with Israel and the US.
The Role of the UAE in Gulf Security
The establishment of full diplomatic relations with Israel is in fact a key component of the UAE’s economic reopening plan, along with its vaccination program. The agreement has proved a smart piece of diplomacy by leading to an influx of Israeli investments and tourism.
Arab states, especially in the Gulf, have grown frustrated with the Palestinian stalemate, but their staunch non-recognition of Israel has served little political benefit. The UAE’s establishment of relations with Israel serves several security purposes. Both states are fearful of Iran, and their public formalization of relations symbolizes a united front against their common enemy that should serve to deter Iranian aggression in the short term. Through the deal, the UAE acquired Israeli and American weapons, technology and fighter jets, which symbolize military strength and therefore as a deterrent to the Iranian state.
Arab states are likely to follow the UAE’s lead by establishing relations with Israel. Bahrain and Sudan have already done so, and Oman is a possible contender. However, for now, Saudi Arabia is unlikely to follow suit. While intelligence sharing and trading between Saudi Arabia and Israel takes place tacitly, the initiation of formal relations would likely lead to radical reform of the regional power structures, and perhaps bring an end to the Palestinian quest for statehood. The normalization of relations between Saudi Arabia and Israel would strip Saudi Arabia of the significant leverage it holds over many countries in the Islamic world that are against the recognition of Israel. The UAE on the other hand, does not have a regional role opposing Israel. It can therefore discreetly mobilize its formalized relationship with Israel to leverage soft power, primarily by increasing its diplomatic standing with Western states that have close ties to Israel.
While the UAE’s deal with Israel is promising, the long term challenge to the UAE’s regional strength will be offsetting the damage that the deal with Israel causes to the indirect trading relationship with Iran, as many Iranian businesses operate in the more liberal Dubai. Emirati decision-making will likely aim to leave enough breathing space for Tehran and protect the trading relationship to ultimately avoid direct confrontation with a valuable economic partner.
The UAE’s future regional dominance will ultimately depend on the state’s capacity to restart and further diversify its economy. Achieving this objective will require careful navigation of its new relationship with Israel and refraining from unscrupulous investment in real estate.