Bailout may come at high price for Dubai

Four days before Dubai World sought to delay US$26 billion ($36 billion) of debt repayments last month, Sheikh Mohammed bin Rashid Al Maktoum set out to race his horse, Al Ayed, across 120km of Persian Gulf desert.

He had to withdraw when the mount became fatigued.

Now Sheikh Mohammed must prove that the transformation of Dubai from fishing village to global business hub isn't also running out of puff.

He has to find a way for oil-poor Dubai to cover at least US$80 billion in debts and liabilities, a sign of the gap between his ambitions and the resources to fund them.

Sheikh Khalifa bin Zayed Al Nahyan of Abu Dhabi, who threw the state holding company a US$10 billion lifeline on Monday, has no such concerns.

He controls 8 per cent of the world's oil and one of its biggest sovereign wealth funds.

He's also Sheikh Mohammed's kinsman and, as President of the United Arab Emirates, his boss.

Abu Dhabi's support may come with a price that undermines Sheikh Mohammed's go-it-alone vision for Dubai.

"This isn't no-strings-attached money," said Jim Krane, author of City of Gold: Dubai and the Dream of Capitalism.

"This is the big chance for the Al Nahyan family to dragoon its maverick cousins back into the union. Most of all, Abu Dhabi wanted to avoid the embarrassment of Dubai looking outside for its bailout."

Dubai is using US$4.1 billion of the Abu Dhabi money to pay off Islamic bonds of Nakheel, the Dubai World unit that's building palm tree-shaped islands off the emirate's coast. The rest will help meet Dubai World's costs as it negotiates with creditors.

The company announced last month it was seeking a six-month "standstill" on its debt. Dubai's eventual bill may be higher than the US$26 billion announced on December 1.

"It's not going to stop and go away," said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, Saudi Arabia.

"There's still debt that needs to be settled in 2010 and 2011."

Dubai must repay at least US$55 billion in the next three years, Goldman Sachs Group said yesterday.

Abu Dhabi may increase its influence over Dubai's flagship companies, such as Emirates Airline and port operator DP World, said Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management, which oversees more than US$100 billion globally.

They "are likely to become UAE strategic assets rather than Dubai strategic assets," he said.

Khalifa's father, Sheikh Zayed bin Sultan Al Nahyan, was the prime mover behind the formation of the seven-emirate UAE from a group of British-allied sheikhdoms, and became the new state's first President in 1971. He died in 2004.

Abu Dhabi's rulers may see covering Dubai's debt as "a small price to pay if in the long term the goal is integration of Dubai into the federation", said Christopher Davidson, professor of Middle East studies at Britain's Durham University.

"What Dubai has is for Abu Dhabi and what Abu Dhabi has is for Dubai," because the two sheikhdoms "are one and we will stay as one", Sheikh Mohammed told investors at a Bank of America Merrill Lynch conference in Dubai.

That version of the relationship, never enshrined in contracts, was taken for granted by the banks that lent Dubai billions to fund Sheikh Mohammed's projects, said Chris Turner, a former director at Istithmar World, Dubai World's investment arm.

"It was just a general assumption," Turner said. "It's how business is done in Dubai. One does not push the government for specific pieces of paper."

Sheikh Mohammed's public image suggests a man of action more than a paper-pusher. He often spends weekends racing horses at Endurance City, a desert course 30 minutes from the city.

As he and his son, Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, speed away, an entourage of white four-by-fours drives alongside, the occupants waving and cheering.

The course has chalets for friends and family to eat and relax after each race leg.

At Sheikh Mohammed's Zabeel Palace in Dubai, a statue of white horses greets visitors and pheasants walk the grounds.

The sheikh holds dinners there to break the Ramadan fast, cracking jokes and quoting his own poetry to guests.

He often attends thoroughbred auctions in Newmarket, England, to add to his stable of racehorses, the world's largest.

In October, wearing reading glasses, a blue cap and MBT trainers, he flicked through sales catalogues and spoke to his bloodstock advisers, sometimes wandering into the auction ring when his agent was bidding.

Sheikh Mohammed's returns were the lowest among the 18 biggest buyers of one-year-old thoroughbreds at United States auctions from 2004 to 2006, according to data compiled by the Blood-Horse MarketWatch.

Sheikh Mohammed, 60, says speed is central to his governing style, and cites the influence of his father, Sheik Rashid bin Saeed Al Maktoum, who died in 1990.

"I follow his example," Sheikh Mohammed says on his website. "He would rise early and go alone to watch what was happening on each of his projects. I do the same. I watch. I read faces. I take decisions and I move fast. Full throttle."

Abu Dhabi's rulers are more inclined to apply the brakes.

Sheikh Khalifa, born in 1948, is "more your typical sphinx-like ruler who's well-respected but doesn't say much in public", Krane said.

He has become known in the world of philanthropy. Sheikh Khalifa is donating an undisclosed sum to fund a cardiovascular and critical-care building for Johns Hopkins Hospital in Baltimore.

The gift came after Johns Hopkins treated UAE patients, including members of the royal family, for two decades, and is "among the most significant Hopkins has received", Hopkins Medicine magazine Dome reported in June 2007.

Sheikh Khalifa's younger brother, Crown Prince Sheikh Mohammed bin Zayed Al Nahyan, who hosted an April 2007 ceremony for Johns Hopkins officials in Abu Dhabi, is a key decision-maker there and more inclined to emulate Dubai's global glitter, Krane said.

Abu Dhabi is building branches of the Louvre and Guggenheim museums, and held its first Formula One Grand Prix last month at a new desert racetrack. Beyonce and Aerosmith played at the closing concert.

Abu Dhabi's rescue helped pare losses on the region's stock market.

Still, Dubai's benchmark DFM General Index is down 9.6 per cent, while Abu Dhabi's index has fallen 2.5 per cent, since the November 25 announcement.

Sheikh Mohammed said at the Merrill conference on November 9 anyone who doubted the solidarity of Abu Dhabi and Dubai should "shut up".

Two months earlier, he sparked a local market rally by telling reporters at the Zabeel Palace: "We are all right, the UAE is all right, and we are not worried" about debt payments.

"In the last few months his statements have been misleading at best, actually quite duplicitous," Davidson said.

"How do you recover from that? I'm not sure you can. And I'm not sure Abu Dhabi wants him to."

LIFELINE
* Abu Dhabi on Monday gave Dubai a US$10 billion injection.
* US$4.1 billion has been allocated to pay off immediate Dubai World debt.
* The rest will help meet Dubai World's costs as it negotiates with creditors.

- BLOOMBERG