MIDEAST MONEY-Abu Dhabi financial zone to challenge Dubai
* Abu Dhabi zone may compete with Dubai in all areas
* Aims to recycle more of its own oil wealth
* Dubai has entrenched position, flexible management
* But Abu Dhabi has huge sovereign wealth fund
* Two centres may also cooperate
By Stanley Carvalho and Andrew Torchia
ABU DHABI/DUBAI, May 8 (Reuters) - For a decade, Dubai has prospered as the Middle East's top financial centre, handling tens of billions of dollars of oil wealth. That dominance may now be threatened as neighbouring Abu Dhabi demands a piece of the pie.
Last week, Abu Dhabi outlined plans for a full-service financial zone on an island near its downtown area that will have its own administration, court system and tax incentives to lure banks and other firms from around the world.
The announcement caused consternation among thousands of bankers, fund managers and other finance professionals in Dubai, some of whom may in future have to commute along the 130 kilometre (80 mile) highway linking the desert cities - or even move permanently to Abu Dhabi.
Dubai has big competitive advantages, including its entrenched status, a creative business culture and a cosmopolitan lifestyle which persuades many expatriate executives to settle there.
But Abu Dhabi has been narrowing the gap in many of those areas, and it has more money than Dubai, which it bailed out with $10 billion in emergency loans during the global credit crisis of 2009. If it deploys its money aggressively, financial firms will find it hard to resist.
"Abu Dhabi makes a tough competitor for Dubai," said Jim Krane, Gulf economic analyst at Cambridge University's Judge Business School in Britain, and author of "Dubai: The Story of the World's Fastest City".
Explicitly or implicitly, Abu Dhabi could use access to business with its state-owned institutions as a way to persuade financial firms to set up there.
"If Abu Dhabi plays tough, giving banks an ultimatum - move to Abu Dhabi or else - few of them will be able to resist, given the much larger economy and liquidity pool across the border."
Over the decades, several cities have laid claim to being the Middle East's top financial centre, including Alexandria in the 1950s and then Beirut until the Lebanese civil war in the 1970s allowed Bahrain to emerge.
Dubai snatched the title after the opening in 2004 of the Dubai International Financial Centre (DIFC), offering foreign investors benign regulation and efficient infrastructure.
The DIFC continued to grow during the global crisis and it has so far maintained its lead over nearby Qatar, which is also promoting itself as a financial centre. The number of registered firms in the DIFC rose 7 percent last year to 912, while workers at those firms jumped 16 percent to 14,000.
But Abu Dhabi, a fellow member of the United Arab Emirates, may pose a stronger challenge. The emirate has roughly the same population as Dubai, at just over 2 million, but it has massive oil wealth which Dubai lacks - its 2011 gross domestic product of about $220 billion was well over twice Dubai's.
Abu Dhabi has one of the world's biggest sovereign wealth funds, the Abu Dhabi Investment Authority (ADIA), with assets estimated at $400-600 billion. The UAE's two biggest banks by market value, National Bank of Abu Dhabi and First Gulf Bank, are headquartered in Abu Dhabi.
In last week's announcement, the Abu Dhabi government left no doubt that it was prepared to compete with Dubai in all areas. It said it would host various types of bank, foreign exchange and commodity trading firms, brokerages, pension and investment funds, Islamic financial firms and many others.
It even claimed that its new zone, to be launched in the fourth quarter of 2013, would fill the gap in the global trading day between when Tokyo starts to wind down and London gets fully underway - a role that Dubai says it already fills.
Niall O'Toole, managing partner at law firm Clyde & Co's Abu Dhabi office, said statements so far suggested the financial centre would have a legal system based on English common law, similar to global centres like the City of London and Hong Kong.
"The full arrangements will take years to implement but they are very serious about this. This is a very big initiative on the part of Abu Dhabi," O'Toole said.
Abu Dhabi is already spending billions of dollars to diversify its economy beyond oil, into areas such as tourism and light industry. By recycling more wealth within the emirate, the financial zone could provide a major economic boost.
"The locational advantage of such a new district is extremely important for Abu Dhabi," said Gurjit Singh, chief operating officer of Sorouh Real Estate, the second largest property developer in the emirate. "It will have a multiplier effect for real estate in Abu Dhabi."
Partly because of the presence of ADIA, one of the world's big portfolio investors, wealth management may be one area in which Abu Dhabi quickly lures some business from Dubai.
"The reality is that the liquidity and wealth is here and asset management companies want to be close to their clients," said Karim El Solh, chief executive of Gulf Capital, an Abu Dhabi-based firm which recently moved its offices to the future site of the financial zone.
Many big companies already have substantial operations in both cities and others may follow this model, adjusting their presence in line with changing business needs.
"Financial institutions and law firms that serve the oil and gas industry, for example, would likely open in Abu Dhabi's financial free zone whether or not they already operate in DIFC," said David Cynamon, managing partner at law firm Pillsbury Winthrop Shaw Pittman.
Bankers and analysts said competition between Abu Dhabi and Dubai would not necessarily be a zero-sum game. The ruling families of the two emirates are related, and have cooperated as well as competed since independence from Britain in 1971.
Abu Dhabi established its fast-expanding Etihad airline in 2003 without ending the explosive growth of Dubai's carrier Emirates. The two emirates have pushed ahead with massive plans to expand their ports, so far without any clear sign that they are creating overlapping capacity.
"There are synergies to be reaped from what may turn out to be a 'clustering' of financial districts," said Krane. "Even if Dubai loses some of its big bank headquarters, its more developed services sector will see gains from supplying specialised services."
Some bankers suggested the DIFC, which declined to comment on Abu Dhabi's plans, might benefit in regulatory areas from the existence of another financial centre in the UAE. Firms in the DIFC are subject to regulation by the UAE central bank and the federal Securities and Commodities Authority; the DIFC may now have an ally when it discusses policy with those bodies.
Nevertheless, even the Gulf's oil wealth is not unlimited, and Dubai will now have a powerful rival next door when it bids to store and manage those funds.
"Dubai's success has turned its neighbours into competitors," Krane said.