Saudi Arabia vs United Arab Emirates: a geo-economic competition in search of new balances in the Gulf region
For more than two decades, the Gulf monarchies have found themselves at the center of countless geopolitical, economic, and strategic challenges at the regional level. Among these, the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) have emerged as pivotal actors in the climate of strong transformations taking place in the whole MENA area. This trend has often led them to act and move in coordination but has also sometimes caused noisy and unthinkable misalignments. One of the most remarkable occurred in July during the summit of the Organisation of Petroleum Exporting Countries (OPEC), which was also extended to include international players who are not part of the world energy cartel. The reason for tension concerned the proposal – mainly supported by Saudi Arabia and Russia – to increase oil production to 400,000 barrels a day from August, combined with the idea of extending the agreement on production cuts (signed in April 2020) until the end of 2022. These two solutions would avoid large fluctuations in crude oil prices and keep them relatively high for the coming year, but they have been firmly rejected by the UAE. Indeed, Abu Dhabi is less dependent on oil revenues than its Saudi counterpart – the sector accounts for 42% of Riyadh’s gross domestic product (GDP), compared to 30% of Abu Dhabi’s GDP – and intends to use the discussion to achieve better terms within OPEC+.
These frictions appeared as unprecedented within the energy consensus, immediately driving up the price of oil to $81.13 a barrel (as it had not been since 2018) and prompting its members to quickly seek a compromise. Most importantly, the dispute also revealed different visions between the two major Gulf monarchies. Contrary to popular opinion over the years, Saudi Arabia and the United Arab Emirates have not always pursued similar objectives, both within OPEC+ and at the local and regional diplomatic levels. Conversely, the two monarchies have often found themselves in dissonance and competition, which have caused difficulties in finding common solutions to shared problems. While initially, these distinctions stood out above all on a historical-political level – with repercussions on the geopolitical strategies pursued in the regional chessboard – the impact of the Covid-19 pandemic has strongly sharpened the economic problems of the two Countries, unraveling their rivalry, especially on this aspect. Consequently, it is important to understand which are the major elements of discontinuity and economic-energy tension between the two Gulf monarchies, to analyze the repercussions and resonances also on the other countries of the region.
The arrival of the Covid-19 pandemic has left indelible furrows for the economic setup of Saudi Arabia and the UAE. Looking at today’s data, Saudi GDP has fallen to $677 billion from $708 billion in 2019, an aspect that is also reflected in a loss of outbound foreign direct investment (FDI) of $7,722 million, as well as the unemployment rate, to date at 12.2% (for a population of almost 36 million). The UAE’s current economic figures are also less than comforting, with GDP dropping to $354 billion (compared to $373 billion in 2019), a loss of inward FDI of $1,764 million, and an unemployment rate stuck at 2.6% (still a considerable figure considering the small Emirati population, which reaches only 10 million inhabitants). Furthermore, the general constraints imposed by the pandemic on a global scale – above all the halt to international trade and the strict imposition of lockdowns – have strongly highlighted the economic-structural problems already partly existing in the two Arab Monarchies, such as the need to free themselves from dependence on oil. The collapse in crude oil prices, accompanied by the changes that the two countries have had to undertake in the domestic labor market, have forced Riyadh and Abu Dhabi to strengthen the ambitious programs of structural reforms already launched in recent years, so as to diversify their economies in the shortest possible time and adapt them to a future less dependent on hydrocarbons (the peak of the oil demand is looming around 2030). These adjustments will lead the two countries to find themselves increasingly in competition, having to reconfigure an entire labor market by competing for a scarce resource. A first sign of change emerged last February 16, when Saudi Arabia asked its companies to relocate regional headquarters within the Kingdom’s territory, a move to reduce the UAE’s dominance as a commercial and tertiary hub within the Gulf Cooperation Council (GCC) countries. The Saudi goal is to attract up to 500 multinationals to its territory within a decade, thus attempting to rival the UAE, which holds the record on a regional scale by hosting around 140 companies. Despite the short time, the effects of this measure are beginning to be seen – twenty-four large international companies have already announced their intention to transfer their regional offices to Riyadh – and they are not the only wake-up call for the UAE. In fact, last July, Saudi authorities announced their intention to end preferential tariffs for Gulf states which purchase products in the region’s free zones, stating that all goods manufactured in those areas would no longer be considered as locally produced. Given their significant fiscal advantages, free zones abound on Emirati territories (to date, there are about fifty, the main ones being Ajman, Dubai, Ras al-Khaimah, and Sharjah) and are one of the drivers of the UAE’s economy, as evidenced by the case of Dubai, where these areas contributed 31.9% of the emirate’s GDP in 2018 (according to the Dubai Free Zones Council). Moreover, these areas have helped the Emirates become Saudi Arabia’s second-largest trading partner after China in terms of imports, a position that is now, however, severely compromised by Riyadh’s new trade policy.
The assertiveness of the new Saudi measures thus seems to bring concrete risks to the UAE’s economic superiority, prompting them to respond immediately with several policies benefiting foreign companies. Prominent among these is the UAE’s intention to reduce taxes by up to 94% for companies wishing to open an office in the Federation and invest there, proving how the UAE wants to focus on facilitation in the investment sector in order not to lose the comparative advantage it has held so far over its Saudi counterpart. To make itself attractive to global investment, up to now the Emirates have put an effort above all on guaranteeing a solid and coordinated supply of essential services for major centers, excellent communication systems, and a financial sector that is well structured and almost free from currency exchange constraints. Today, however, the government of Abu Dhabi wants to go further, aiming at the development of the real estate and infrastructural sectors – above all transport – in a sustainable manner (this aim clearly emerges with Expo 2020, through which Dubai aims to project a technological and sustainable image of itself). At the same time, also Saudi Arabia considers the attraction of international investors as a priority. However, Riyadh is still far behind Abu Dhabi, given that Saudi Crown Prince Mohammed Bin Salman announced the ambitious plan “Vision 2030” – which includes a willingness to boost the global investment market and an economic diversification strategy – in 2016 only. Nevertheless, Saudi authorities hope to catch up with the delay soon, also planning to implement new legal reforms based on credit structures.
At the same time, several other sectors could be subjected to the KSA-UAE economic competition. The first one is the touristic sector, where Saudi Arabia hopes to strategically insert itself. With its skyscrapers and luxury resorts, Dubai holds the regional record in the tourism industry (especially in the luxury sector), but many of the Emirate’s main attractions are beginning to be outdated, requiring costly renovations that would also involve foreign capital. Consequently, Riyadh would like to take advantage of this aspect to “steal” tourists from the UAE, also aiming at non-religious forms of tourism. Even though the Hajj and the Umrah, the famous pilgrimages to the holy cities of Mecca and Medina, continue to be a preferential channel for Riyadh (attracting in the per-Covid period up to 19 million pilgrims each year for a value of 12 billion dollars, 7% of the Kingdom’s GDP) the country has many natural sites in which to potentially invest and adapt to mass tourism. Many of these are located in the Aseer region, on the Saudi Red Sea coast, where the Kingdom has already started implementing high-profile financial infrastructure plans. Specifically, Saudi Arabia’s Public Investment Fund (PIF) has already launched a $3 billion investment project in February 2020, aiming to build 2,700 hotel rooms, 1,300 residential units, and 30 commercial and entertainment attractions in the region by 2030. In addition, on September 28, Crown Prince Mohammed bin Salman declared his intention to expand this project by injecting liquidity into the local market of up to 12 trillion riyals (approximately $3 trillion). Not to mention that, if the construction of the Jeddah Tower is completed in the short term, Saudi Arabia will possess the tallest tower in the world, a clear sign of its ambitions to become competitive in the luxury tourism sector as well. In this regard, another remarkable example can be found by looking at the case of al-Ula, a city in the northwest of the Kingdom. With more than 27,000 archaeological sites dating back to the Nabatean era, this city carved in stone was declared a UNESCO World Heritage Site in 2008. That is why, to increase its notoriety, Riyad is planning to build a luxury tourist resort within the site itself by 2024, with forty suites, three villas, a conference center, and fourteen private pavilions.
Furthermore, the defense system constitutes another sector Saudi Arabia wants to invest in, modernizing the Saudi Arabian Military Industries (SAMI) to compete with the Emirates Defense Industries Company (EDIC). Certainly, this sector has huge potential for the kingdom, but the UAE may still have a comparative advantage in it thanks to the Abraham agreements, which could give them the possibility to use Israeli military technologies that Saudi Arabia may not have direct access to.
Finally, it is impossible to omit the rising rivalry in attracting highly skilled foreign labor, needed by both countries to fill domestic labor and skill gaps. Indeed, the Gulf countries have always heavily relied on migrant labor to drive their economic systems forward. These migrants mostly come from the Middle East region (Egypt and Jordan mostly), South Asia (Pakistan, Bangladesh, India, and Sri Lanka), and Southeast Asia (Indonesia and the Philippines above all) but constitute essentially low-cost and low-skilled labor. In contrast, the ambitious economic diversification programs to which the petro-monarchies now aspire require cutting-edge skills, an aspect that compels both countries to seek strategies to attract qualified professionals with high skills. To date, both the UAE and Saudi Arabia have already issued special visas to this specific category of workers, and the Emirates have even considered offering them citizenship, a very rare concession in all GCC countries. These two decisions suggest that both Gulf Monarchies may continue to introduce such measures to facilitate the entry of foreign workers and advance their development models.
In conclusion, the highly evolving climate experienced in the Gulf area is spurring Saudi Arabia and the United Arab Emirates to undertake increasingly autonomous paths at an economic level. These discontinuities have been further accelerated by the Covid-19 pandemic, which has inaugurated an unprecedented climate of economic rivalry between the two main Arab members of OPEC+. The new commercial competition touches multiple sectors (tax system, business locations, investments, tourism, defense, labor) and seems destined to last, given the need for the two monarchies to readjust their economies to a post-hydrocarbon future. In this scenario, it is therefore foreseeable that the two countries will continue to undertake increasingly assertive economic strategies, which will also affect a growing number of labor and production sectors. Thus, all these elements could bring significant changes to the commercial and financial balance that the two Arab Monarchies have held so far, with repercussions throughout the entire Gulf region.
