* 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 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
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
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
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.