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In Dubai, the departure of Western law firms may only be the beginning

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Over the past two years, a series of large Western law firms have announced the closure of their offices in the Arabian Gulf. This is largely down to the oil price falling; falling some more; and then stubbornly refusing to rise back again. Many have moved staff back to the United States or Britain.

Simmons & Simmons, Latham & Watkins, Baker Botts, as well as Herbert Smith Freehills, have all closed or announced closures in Abu Dhabi and are confining their operations to Dubai. What many of these firms have found is that access to lucrative government contracts in Abu Dhabi is tightly controlled by nepotistic arrangements between the royal court and a clutch of well-established lawyers. Such contracts to one side, there wasn’t too much other work going. Moving to Dubai, where they can achieve economies of scale as well as have access to international jurisdictions, makes sense.

Now, though, Weil Gotshal & Manges, an American firm, is planning to leave Dubai itself. One of the most ferocious American law firms specialising in bankruptcy, private equity and mergers and acquisitions, its departure should concern Dubai’s rulers. Recent deals have included working on Dow Chemical’s $130 billion merger with DuPont; Intel’s $16.7 billion acquisition of Altera; and Verizon’s $4.4 billion acquisition of AOL. This is no small hitter, so a firm that should easily have been able to hold court in Dubai’s fiercely competitive legal market has clearly decided that the UAE is no longer a place worth doing business in. I have since spoken to one other American law firm with significant operations in Dubai, which says that its partners are now contemplating the same move.

The enduring low oil price is obviously a key driver, dampening the “deal flow” which law firms rely on to pay their bills. A barrel of oil now goes for less than half of what it would have fetched two years ago. “Our long-held forecast,” say Kuwait-based analysts the Quorum Centre, “is that oil’s recent rebound will be short-lived and it will resume its fall to the $30s where it will remain for several years. Should this forecast materialise, it will be devastating to Dubai and the entire GCC region.”

On top of this there is the currency situation; the US dollar has strengthened immeasurably in the past two years. With the dirham as a dollar-pegged currency, this has made the UAE a less attractive destination for expat-led companies.

Key sectors are all struggling. Abu Dhabi’s oil giant ADNOC has announced that it is cutting thousands of jobs. Budget deficits are opening up, with government deposits into the UAE banking system falling; a clear indication of a struggling public sector. Perhaps most concerning of all, the number of new loans — a sign of a growing economy — has also been falling.

At the same time, living costs in the UAE are rising dramatically. As of last month, the Dubai Statistics Centre said that housing and utility costs have risen by twelve per cent since 2014. New taxes will soon be introduced, with the GCC expected to implement a union-wide value added tax (VAT) by next year, as well as rising import and corporation taxes. Contrary to public perceptions, the UAE is not a zero-tax state; average real corporation taxes already sit at around sixteen per cent. Certainly, this is far more competitive than the rest of the region (which manage around thirty-two per cent), and the United States (which averages out at nearly forty-four per cent), but rising living costs are likely to hit UAE-based companies hard. Ten per cent of the annual amount of the rent of offices and warehouses is already being levied, and five per cent of the annual amount is paid by a company to accommodate its employees; they are taxes linked directly to sky-rocketing costs. And that’s before you factor in new cases.

There is a final hidden factor too; there is real concern about civil liberties for foreigners living and working in the UAE. The government has a well-honed international lobbying operation which seeks to present the country as a liberal paradise. Many foreigners arrive there thinking that they are in Marbella. The reality has always been very different; last April, for example, the ex-managing director of Leeds United Football Club, David Haigh, was apparently tortured in a Dubai jail. He was a member of the exact internationalist economic class profile that Dubai prides itself on accommodating. Haigh found himself in prison over a tweet, and it turned out to be a row with a Dubai private equity firm. He was acquitted and has since left the country.

Word travels fast in the tight world of international finance and management. Companies are afraid that their partners will happily relocate to Singapore or Hong Kong, but swerve round a posting in Dubai if they think a dispute with a local family could end, as it did with Haigh, by being tasered in a police cell and hit over the head with the back of a broom; all the while their own embassy will be looking on powerless or unwilling to help (as was the case with the British Embassy and Haigh).

Dubai faces the same problems as the other Gulf States: a persistent over-reliance on oil and gas, food and water security, and physical security from terrorism. In 2009, hundreds of cars were simply abandoned at airports as foreigners fled the country. The situation is perhaps not so grave as then, but it is certainly dicey. The government must be worried that the departure of Western law firms may only be the beginning.

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