DUBAI (Reuters) - Once filled with the cacophony of cranes and construction laborers, Dubai today hums to the work of a quieter crowd. The brash Gulf emirate, renowned for extravagant real estate projects and flashy living, has turned into a city of auditors.
As they pore over the detritus of last year's debt crisis, the city-state's accountants and lawyers face a task as huge as Dubai's ambitions. The emirate's flagship firm Dubai World has agreed to repay $25 billion of debt -- borrowings that nearly brought down the emirate's economy.
The auditors' task is to investigate exactly where the money went, who lined whose pockets, and what other financial landmines might lie in store. Forensic audits at state-linked firms, such as Dubai Holding, are part of a wider corruption probe that has targeted senior figures from Dubai's boom years.
But even as the accountants work to get to the bottom of the financial mess, Dubai is changing. Its rescue last year by Abu Dhabi -- details of which Reuters reports here for the first time -- has encouraged the city-state to become more conservative, both politically and socially. Dubai's crisis prompted a shift of power to the rulers in Abu Dhabi, the wealthiest of the seven states that make up the United Arab Emirates.
Now a chastened Dubai is recovering some of its confidence as it seeks to convince international investors it can deliver now where last year it failed.
Questions remain. With Dubai's old guard at the helm rather than the young high-flyers who many blame for the crisis, can Dubai ever achieve the sort of growth it once boasted? Or, given that the economy depends so heavily on trade and tourism, could it be tempted to return to the excesses of the past?
"The Dubai growth model that was talked about so much and propagated in the media -- all that has changed now," says Christian Koch, director of international studies at the Gulf Research Center. "The crisis forced Dubai to take on a much more realistic approach."
THE SHOCK OF NAKHEEL
Abu Dhabi's ascendancy began in the wake of 2008's global credit crunch. Reports about debt trouble in Dubai's flagship companies had been circulating within government from as early as 2005, though most people seemed happy to ignore them. In 2008, the end of a six-year oil-fueled boom burst Dubai's real estate bubble while the global financial crisis left the emirate unable to refinance looming debt obligations.
To help Dubai support its state-linked firms, the national central bank, which is based in Abu Dhabi, had bought $10 billion in Dubai bonds in February, 2009. But Dubai, which has little oil of its own and had embarked on a series of massive building projects to promote its trade and tourism, had much bigger problems.
Chief among them was Dubai World, which was struggling to pay its debts. Dubai World's lenders had been quietly rolling over loans since early 2009 and the state-linked company hoped to renegotiate terms, extend maturities and keep paying interest as it worked out a restructuring.
But that plan depended on knowing how much government support the company could obtain. Over the summer and through the Muslim holy month of Ramadan, the state committee set up to support Dubai's corporations was ominously quiet on the matter.
On November 25, when Dubai's liabilities had reached $59 billion, or nearly a quarter of the United Arab Emirates' federal Gross Domestic Product, officials finally sounded the alarm. The definitive story of how the rescue came together may never be written, but Reuters has pieced together some of the key details of those days.
At 6 p.m., as many Emiratis and expats were winding down after work, the Dubai government summoned advisers and senior Dubai World executives to the offices of government lawyers Latham & Watkins. Government officials told the gathering that they had sought a stay of payment on Dubai World's debts.
"No-one had anything to say," says one person who was present. Like most people involved in the rescue, they refused to be identified, either for fear of tarnishing their reputations or because they remain involved in the process and are not authorized to speak publicly.
"The announcement was a disaster for Dubai. They were told 'don't worry, Argentina has done this, Venezuela has done it. People forget and they start lending again.' But what they didn't take into account was that those are real economies. This is not a country.
"Dubai relied on global goodwill, if you will, and that was shattered."
The first repayment to be affected -- a $3.5 billion Islamic bond from Dubai World's real estate company Nakheel -- was due on December 14. But those in the meeting knew the payment was one that Nakheel, a developer of islands shaped like stylized palm trees and a map of the world, would never be able to make.
A former adviser to Dubai World puts it succinctly: "Nakheel was a pyramid scheme, basically. They took money from selling one big project, one palm island, and used it to pay for another."
The silence in that Dubai meeting became the standard setting over the next few days. Despite rumors in the global markets of a looming default, no official came forward to explain the situation until November 30. Financial markets looked to December 14 as a major test; bondholders, including aggressive hedge funds, smelled blood.
There was another option: Abu Dhabi. Officials in Dubai began hammering out a proposal to put to the larger emirate on how to deal with the looming default. On the evening of December 13, the night before the payment was due, they agreed on what the final proposal should say. Crucially, it would not involve a full repayment of the bond.
"Nakheel was a big massive shock," says a source familiar with the restructuring. "Dubai went to Abu Dhabi and said, we have this company called Nakheel that's so messed up it could take our whole economy down, and nobody knew about it.
"Nakheel's books were so screwed up it wasn't even funny."
'LET'S JUST PAY THIS THING OFF'
That evening, the weather in Dubai took an apocalyptic turn. Clutching the proposed deal and other documents, a banker from Moelis & Co, a U.S. investment bank that was advising Dubai, climbed into a waiting helicopter and took off for the capital.
Expecting him in Abu Dhabi were officials of the highest level, including Sheikh Mansour, half-brother of the ruler of the UAE and one of the most influential people in the federation today.
Rain and wind lashed the windowpanes of Dubai International Financial Center as the officials huddled, waiting. The banker had been instructed to call his team as soon as he left the Abu Dhabi meeting. Three hours on, there was still no word from him.
"We were so nervous, none of us had eaten all day," says the source familiar with the restructuring.
The phone call never came. Instead, they heard the returning helicopter. Landed, the banker was whisked off into a meeting room to confer with the two top officials of Dubai's Supreme Fiscal committee. Finally, the rest of the team were called in.
To everyone's astonishment, Abu Dhabi was offering to pay off the bond in its entirety.
"Abu Dhabi said, let's just pay this thing off until you come up with a better plan," the source familiar with the restructuring says. "They always said we are happy to help, we just want to see a plan."
A NOD AND A WINK
With hindsight, perhaps the officials need not have been surprised. Rightly or wrongly, lenders had always assumed Dubai World's government links would ensure repayment. Dubai later stated that its government had never backed the debts of state-linked firms such as Dubai World, and blamed investors for not reading the small print. But lenders put the blame firmly on the government.
In the UAE, ruling families keep their private lives out of the public domain aside from major weddings and funerals, and questions about who's really pulling the strings make intriguing gossip. But from a creditors' viewpoint they are crucial, because the buck stops with the highest guarantor.
It's common practice in the Middle East for borrowing to consist of loans signed with a nod and a wink on a 'name lending' basis.
In Dubai "in a sense the red line, the differentiator between the trader and the government institutions, became very murky," says Mohamed Yasin, chief investment officer at CAPM Investment in Abu Dhabi.
It's still uncertain how much Dubai's ruler, Sheikh Mohammed bin Rashid Al Maktoum, knew about the growing debt crisis. Some of those involved say he was only informed of the magnitude of the debt problem very late in the game. In his rare comments on the crisis, Sheikh Mohammed has maintained a stiff upper lip, saying the problem has been overcome.
"No-one knew the magnitude of what was owed, then the complexity of it," the former adviser to Dubai World says. "A lack of experience -- and ego -- made it hard to admit defeat."
The emirate's transformation into a boom town had relied on a generation of Emirati executives armed with big ideas and Western business degrees. Dubai's model involved 'soft support' -- free land, a high-profile appearance at the opening -- for people who came up with a project and funded it themselves. So they specialized in leverage to build "real estate, real estate, real estate, but with a different flavor or headline," says Yasin. State-linked firms borrowed at an alarming rate, with little oversight or coordination. Corruption was rife.
"Nobody at the time was going to the Dubai government and saying, 'this borrowing is happening based on the assumption that you are going to settle if we don't pay the money,'" Yasin says. "Who assumed that model? it was the lender."
So ultimately Dubai's debts were accrued on the assumption that in the event of distress, the government -- or big brother Abu Dhabi -- would pick up the tab. When Dubai's government distanced itself from the problem, it gave the larger emirate responsibility -- and power.
In return for saving its 'kid brother' from the embarrassment of default, Abu Dhabi's authority quickly became apparent. In what was seen by some as a gesture of humility, in January Dubai's ruler named the world's tallest structure Burj Khalifa, in honor of Abu Dhabi's ruler and the UAE president, Sheikh Khalifa bin Zayed al-Nahayan.
Seasoned UAE observers say the more outlandish rumors that circulated in the months after the Dubai World debacle -- that Abu Dhabi would swoop in and seize Dubai land and assets or that the ruling families were embroiled in interpersonal rivalries -- were always nonsense.
"The ruling families have no illusions whatsoever about what the role of each one is, who is the big guy and who is the second in line and so on," Yasin says. "In my opinion, it was the middle management, the second tier, the business people, those who are not related to the ruling families but who work for them, who generated these ideas."
Sometimes Abu Dhabi doesn't have to throw its weight around because Dubai has realized what it needs to do without being told.
The document for Dubai World's debt restructuring, seen by Reuters and agreed to by most of its creditors this month, outlines the city's plans to sell assets over eight years to generate as much as $19.4 billion and lists "investment assets" such as stakes in luxury retailer Barney's, Dubai-based Atlantis Hotel, and casino operator MGM Resorts International among those that could be included. Ports operator DP World is among the "strategic assets" which may generate up to $11.8 billion if put on sale.
Dubai's government has tightened the leash on borrowing for state-linked companies. Where previously, they were able to borrow unchecked, now they need to jump through a whole series of hoops before being given the green light for a loan.
Almost two-thirds of Dubai World's debt is held by six banks, four of them British: HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered, and local lenders Emirates NBD and Abu Dhabi Commercial Bank.
Has Dubai's payback gone beyond finances? Some observers believe so.
A U.S. ally, the United Arab Emirates has taken a tougher posture toward Tehran over the past year, under increasing scrutiny from Washington but also out of concern of the risks of a nuclear Iran on its doorstep. Dubai, which has a substantial population of Iranian expatriates and last year generated $5.8 billion in re-exports to Iran, has followed that lead.
Since a new round of United Nations sanctions against Tehran was agreed in June, the UAE central bank has asked financial institutions in the federation to freeze accounts belonging to dozens of Iran-linked firms, and a number have been closed down.
Ships visiting the UAE's ports are undergoing much more stringent cargo checks.
"I think (the crisis) has been good on a federal level, for example in terms of foreign affairs," says the Gulf Research Centre's Koch. "The emirates are working much more closely together. There is certainly a clear commitment in terms of implementing and meeting the requirements of the U.N. sanctions against Iran, and this effort is more centrally controlled."
Christopher Davidson, a historian at Britain's Durham University, goes further. "After November we saw a huge shift in what Abu Dhabi feels it can do on the international stage with regard to Iran and how close it can position itself with the United States," says Davidson, who believes that would not have been possible before the debt crisis, because Abu Dhabi would then have had far less leverage over Dubai.
"We've seen some incredibly hawkish comments which do everything to undermine Dubai's business links with Iran, so Abu Dhabi is in full control of the UAE foreign policy."
Not everyone shares that view. Some, including David Butter at the Economist Intelligence Unit, think the change simply coincided with a toughening of the international community's stance toward Iran.
Still, Dubai's ongoing debt problems mean the emirate has little power to deviate from Abu Dhabi's line. There is also no doubt that the Gulf Arab region as a whole is seriously concerned about the possibility of a nuclear-armed Iran. A rising number of countries have announced big new purchases of weapons in the past year, including Saudi Arabia which plans a $60 billion arms deal with the United States. Analysts say the six Gulf Arab states could spend as much as $100 billion in coming years to overhaul their armed forces.
A LINE IN THE SAND
Back in Dubai, there are signs confidence is beginning to return. Developer Nakheel, whose near-default propelled Dubai's banker on the November chopper ride to Abu Dhabi, has said it will begin building again next month.
After a year away, Dubai's government has returned to bond markets, launching a dual-tranche $1.25 billion bond. Early talk indicates the issue is heavily oversubscribed.
"The hard work has been sorting out Nakheel and Dubai World, and investors are more positive on Dubai because of its strong relationship to the rest of the UAE and as the legacy issues have been or are being addressed," says Aviva fund manager Jeremy Brewin in London.
Dubai World's debt repayment agreement on September 10 "draws a line in the sand to a significant part of the debt restructuring story," says V. Shankar, chief executive of Standard Chartered's Middle East, Africa, Europe and the Americas operations. "There are issues still to be sorted out with Dubai Holding but I think on the back of this, Dubai has a powerful tail wind."
Dubai seems focused on its core operations of logistics and trade. It recently opened the first phase of Maktoum international airport -- part of Dubai World Central's so-called "aerotropolis" complex, a shipping, air and road hub.
"Whilst no government can rule out future issues, we believe the most significant restructuring is behind us," a government representative responded to emailed questions.
Advisers to Dubai say Abu Dhabi is no longer as closely involved in its neighbor's financial affairs as immediately after the debt crisis. At the peak of the Dubai World turmoil, Dubai representatives were meeting with their Abu Dhabi counterparts on a weekly basis. These meetings have been scaled back to become, as one adviser put it, "courtesy" updates.
The government has embarked on a big push to create corporate governance structures, and most of its high-profile young executives are gone, sidelined in a putsch last November. Some, such as the head of Dubai's flagship Dubai International Financial Center, fell prey to corruption probes. Into their place have come more trusted, established and older names pushed aside during the boom years but now back in favor.
"The only criteria now is 'personal hygiene,' people who are clean," says a long-time Dubai observer, declining to be identified so he can speak freely about a sensitive topic. He argues that some of the old guard's lack of experience in modern finance may make them poorly equipped for the task of rebuilding Dubai's companies. Strategic, "bold, hairy, audacious" initiatives are needed, he says.
"Right now, it's the blame game."
HOW FAR CAN YOU GO?
There is no doubt Dubai needs to encourage entrepreneurship, and continue to give ambitious Emiratis who do not come from wealthy families the chance to make their own fortunes. Its past model is now cited as one of the causes for the endless real estate projects that led to its debt crisis, but parts of it may have to be reinstated if Dubai is to grow. How easily could Dubai slip back into its bad old ways?
"They believe that now the problem is solved," says the former Dubai World adviser, who is critical of creeping complacency just a year after the crisis. "The problem is not solved, they still owe the same amount of money. They will have to pay the same amount, only a little later."
Even with its wings clipped, the emirate is still making big plays. In July, Emirates airline -- one of Dubai's crown jewels and already the biggest customer for Airbus A380 superjumbos -- placed an order for 30 Boeing 777 jets in a deal worth potentially more than $9 billion.
"Everything is now very conservative, it's meant to be based on in-depth analysis of actual sectors," says the source familiar with the restructuring. "Given the chance, Dubai will take it to the same level as before. They will always try to go as far they can with something."