Investors worry whether UAE backs Dubai
Relationship between competing emirates can be complex

By Andrew England and Simeon Kerr
Saturday, November 28, 2009

Since the full-scale of Dubai's huge debt mountain hit home late last year, many investors who have sunk billions of dollars into the emirate's extravagant projects have been seeking reassurance from Abu Dhabi, capital of the United Arab Emirates.

For years, as Dubai built one grandiose scheme after another, there was the assumption -- unwritten but widely believed -- that Abu Dhabi would be on hand to pick up the pieces if the emirate's bubble burst.

But with Dubai raising the possibility that one of its flagship investment vehicles may default, attention is now focusing on just how far Abu Dhabi is willing to go to bail out its smaller brother. Underlying the uncertainty is the widely held thought that Abu Dhabi officials were caught unaware by Dubai World's dramatic statement, which came just hours after two Abu Dhabi-controlled banks had agreed to subscribe to a $5 billion Dubai bond issue.

Seasoned observers of the Persian Gulf point out that the affair is a wake-up call to investors who expected Abu Dhabi to write a blank check for Dubai, saying they failed to understand the complex dynamics of the relationship between the UAE's two largest and often competing emirates.

While Dubai has grabbed the headlines, Abu Dhabi is the undisputed financial heavyweight. Yet all of the UAE's seven emirates enjoy -- and pride themselves on -- a large degree of autonomy, as Abu Dhabi has no legal liability to support its poorer neighbors.

Since the economic crisis struck, Abu Dhabi officials have repeatedly talked up the strength of the union and insisted they would not allow another member of the family to fall.

Bankers also say that it would damage Abu Dhabi if Dubai -- just a 90-minute drive from the capital -- imploded, particularly given the significant exposure of Abu Dhabi entities, investors and banks to Dubai.

Abu Dhabi officials have previously said support for Dubai would be forthcoming if needed. But it has also been clear that the capital would not simply pour money into Dubai without scrutiny, particularly for development projects it considered white elephants.

-- Financial Times

England reported from Abu Dhabi and Kerr from Dubai.

© 2009 The Washington Post Company