DUBAI, Feb 18 (Reuters) - The United Arab Emirates is
vulnerable to any fallout from tension over Iran's nuclear
programme, which has escalated after Tehran threatened to shut
the Strait of Hormuz and stop the flow of the bulk of the
region's oil.
Any move to obstruct Hormuz could spark a wider military
confrontation. The United States has said it would not tolerate
the strait being blocked.
On the domestic front, the UAE has escaped the upheaval that
has shaken the Arab world, but the case of five activists
convicted of insulting the country's rulers suggests the oil
producing state is not immune to calls for reform.
UAE President Sheikh Khalifa bin Zayed al-Nahayan pardoned
the five, a day after a state security court sentenced them to
prison terms ranging from two to three years.
The case had been seen as a gauge of how the oil-producing
Gulf Arab state, which allows no political parties, responds to
hints of dissent after uprisings toppled other Arab leaders.
The UAE has also shown little tolerance towards Islamists.
It stripped six nationals suspected of links to an Islamist
group of their citizenship late last year.
The UAE is among the world's top five oil exporters and its
small local population has one of world's highest per capita
income, estimated at $66,625 in 2011, according to the IMF.
The emirate of Dubai, which built itself into a finance and
trade hub only for its real estate bubble to burst in 2008-09,
faces possible debt refinance and investor flight risks.
Below are some of the risks facing the UAE:
DOMESTIC UNREST
Chances of protests in the UAE are widely considered lower
than in other Arab states due to the small indigenous population
and huge oil wealth, especially in the emirates of Dubai and Abu
Dhabi, where the federal capital is located.
But Emirati activists have been calling on the Internet for
a greater say in government, legislative powers for the
40-member Federal National Council (FNC) and less censorship.
In December last year, the UAE revoked the citizenship of
six nationals whom it said posed a threat to national security.
The men, affiliated with an Islamic organisation, said they were
being punished for demanding political reform.
Observers suggested that besides Iran, the UAE's top
security concern was a potential rise of political Islam.
Islamist parties won parliamentary elections in Egypt, Tunisia
and Morocco and are expected to play a major role in Libya.
UAE rulers increased the number of hand-picked voters for
FNC elections held in September to 129,000 - or about 25 percent
of would-be eligible voters - but did not grant the council
binding legislative power.
In December, the UAE set up a 10 billion dirham ($2.7
billion) fund to help pay low-income citizens' debts and
announced plans to raise wages of some state employees, which
may support its economy but also increase the fiscal burden.
Any unrest would likely emerge in one of the five northern
emirates, whose citizens have benefited less from Abu Dhabi's
vast oil wealth or Dubai's trade - and property-fuelled
development. Northern emirate Ras al-Khaimah has seen small
protests, quickly crushed by security forces.
But even there, Abu Dhabi is spending billions of dollars to
improve the living conditions in these less developed emirates.
What to watch:
- Whether the government will grant the FNC more powers
- Increased public debates over political reform
- Widespread arrests that could trigger local protests
- More moves against Islamist activists
DUBAI DEBT AND FINANCIAL WOES
The UAE economy is expected to grow by around 3.1 percent in
2012, according to a Reuters poll in December, down from last
year, but higher than the 1.4 percent in 2010 when Dubai
struggled to restructure its debts.
Dubai's finances remain a concern after the global financial
crisis burst its property bubble, shelving multi-billion dollar
projects and leading to thousands of job cuts in 2008-09. The
property sector is still suffering from over-supply, but the
economy has picked up.
The emirate rattled markets in 2009 when Dubai World
, one of the government's three flagship holding
companies, sought a delay in repaying $26 billion of debt linked
mainly to property units Nakheel and Limitless.
Abu Dhabi, home to most of the UAE federation's oil wealth,
lent Dubai $10 billion, helping avert default on a bond issued
by Nakheel. Dubai World and Nakheel have both reached agreements
to restructure about $41 billion in debt.
A year-end rally in Dubai-related bonds sends a positive
signal for 2012, suggesting more investors are becoming
convinced the emirate can arrange smooth refinancing for
state-owned firms next year.
But there are still major doubts.
Government-related entities in Dubai have bonds worth $3.8
billion maturing in 2012. With the real estate market still
sagging, the stock market moribund and many banks reluctant to
lend because of global financial instability, investors have
worried that some of those bonds might be restructured, with
changes to repayment terms that disadvantage creditors.
The crisis has strained relations with the wealthier but
more staid Abu Dhabi, which is itself tightening the purse in
its territory and shelving non-essential projects.
The two emirates have shared the financial and political
reins of the UAE since its inception in 1971, but further
assistance to Dubai could boost Abu Dhabi's role and upset the
delicate power balance.
What to watch:
- Will Dubai's government-linked firms be able to make their
debt repayments?
- Will Abu Dhabi have to intervene again to meet any Dubai
debt obligations?
REGIONAL ISLAMIST MILITANCY
The UAE has so far been spared any attack by al Qaeda. But
Dubai, a business and tourism centre that attracts many
Westerners, could make an attractive target for Islamist
militants.
In 2009, al Qaeda's Yemeni and Saudi branches merged into a
regional arm. They claimed responsibility for a failed plot in
October 2010 to send two parcel bombs to the United States that
were intercepted in Britain and Dubai.
Al Qaeda in the Arabian Peninsula (AQAP) has threatened to
attack Westerners in the region and has said it sees the UAE as
its fourth target after the United States, Saudi Arabia and
Britain.
UAE's tight security may have helped it prevent attacks.
What to watch:
- Any expansion of al Qaeda attacks in the region could put
other Gulf countries, including the UAE, at risk.
IRAN ESCALATION, SANCTIONS
The strategic Gulf Arab region could be affected if the
dispute between Iran and Western powers over Tehran's nuclear
programme escalates into armed conflict.
Tensions are on the rise, with the European Union agreeing
in principle to an embargo on Iranian oil exports and Iran
blaming Israel for the assassination of an Iranian nuclear
scientist last month.
Iran has carried out naval exercises in the Strait of Hormuz
- where a third of all seaborne traded oil passes - and
threatened to close it if its own exports were interrupted.
In addition, Iran has started enriching uranium at an
underground bunker and has sentenced an Iranian-American citizen
to death on spying charges.
A U.N. nuclear watchdog's report suggested Iran's nuclear
programme could have a military nature. Tehran denies this.
Following the report, Britain and the United States
introduced tougher sanctions on Iran. The UAE's foreign minister
said on Nov. 30 that his country only supported U.N.-imposed
sanctions and it was up to private sector companies to choose
whether to abide by other sanctions.
Dubai has strong trade links with Iran.
A leaked U.S. diplomatic cable
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