Are Saudi Arabia and the UAE heading from friendship to rivalry?

Saudi Arabia economically challenges the UAE

Saudi Arabia has amended its rules on imports from other Gulf Cooperation Council countries to exclude goods made in free zones or using Israeli input from preferential tariff concessions, in a bid to challenge the United Arab Emirates’ status as the region’s trade and business hub.

Despite being close allies, Saudi Arabia and the neighbouring UAE are competing to attract investors and businesses. Saudi Arabia – the biggest importer in the region – is trying to diversify its economy and reduce its dependence on oil, while providing more jobs for its own citizens, a point also covered by the rule changes announced at the weekend.

The two countries’ national interests have increasingly diverged, such as in their relations with Israel and Turkey. They have also faced off in the last few days about a proposed OPEC+ deal to raise oil output.

Saudi Arabia will henceforth exclude from the GCC tariff agreement goods made by companies with a workforce made up of less than 25% of local people and industrial products with less than 40% of added value after their transformation process.

The ministerial decree published on the Saudi official gazette Umm al-Qura said all goods made in free zones in the region will not be considered locally made.

Free zones, a major driver of the UAE’s economy, are areas in which foreign companies can operate under light regulation, and where foreign investors are allowed to take 100% ownership in companies.

According to the decree, goods that contain a component made or produced in Israel or manufactured by companies owned fully or partially by Israeli investors or by companies listed in the Arab boycott agreement regarding Israel, will be disqualified.

“The idea once was to create a GCC market, but now there’s the realisation that the priorities of Saudi Arabia and the UAE are very different,” said Amir Khan, senior economist at Saudi National Bank.

“This regulation is putting flesh on the bone of these political divergences,” he said.

In February, the Saudi government said it will stop giving state contracts to businesses that base their Middle East hubs in any other country in the region. That was a blow to Dubai, one of the UAE’s emirates, which has built its economy on its open-for-business credentials and the promise of a glitzy lifestyle for well-heeled expatriates.

Saudi Arabia has announced the latest rule changes despite the fact that UAE is its second-biggest trade partner after China in terms of import value, based on recent Saudi trade data.

It is also a major re-exporting hub for foreign products to Saudi Arabia, including Turkish goods – which have been under an unofficial boycott by Riyadh.

Saudi-UAE OPEC spat

OPEC+ ministers called off oil output talks on Monday after clashing last week when the United Arab Emirates balked at a proposed eight-month extension to output curbs.

Saudi Energy Minister Prince Abdulaziz bin Salman on Sunday called for “compromise and rationality” to secure a deal after two days of failed discussions last week.

But on Monday, OPEC+ sources said there had been no progress in resolving the matter and Monday’s meeting was called off. No new date was agreed.

The failure of the talks, sources said, means an expected increase in output from August will not take place – and this helped drive up international benchmark Brent oil, which was trading one percent higher at $76.95 a barrel.

Oil prices have already prompted concerns about inflation derailing a global recovery from the coronavirus pandemic.

OPEC+ ministers agreed to record output cuts of almost 10 million barrels per day (bpd) last year as the pandemic hit. They have been gradually relaxed and stand at about 5.8 million bpd.

The UAE, according to sources, on Friday went along with Saudi Arabia and other OPEC+ members on a proposal to raise output in stages by about 2 million bpd from August to December, but rejected extending remaining cuts to the end of 2022 from a current end date of April.

The UAE is upset about the baseline from which its production cuts are being calculated and wants it raised. Abu Dhabi has invested billions of dollars to increase its production capacity and says its baseline was set too low when OPEC+ originally forged its pact.

The UAE has also said it was not alone in requesting a higher baseline as others, including Azerbaijan, Kazakhstan, Kuwait and Nigeria, had requested and received new ones since the deal was first agreed last year.

Decisions in OPEC+, which groups the Organization of the Petroleum Exporting Countries with Russia and other big producers, must be unanimous.

Potential outcomes, OPEC+ sources said, include raising output from August, or raising output from August and extending the remaining cuts with a new higher baseline figure for the UAE.

OPEC+ could also go ahead with the deal as is until April 2022 and discuss a new UAE baseline as part of a new deal, the sources said.

The dispute reflects a growing divergence between Saudi Arabia and the UAE.

The two nations had built a regional alliance, combining financial and military muscle to fight a conflict in Yemen and project power elsewhere. But the UAE has withdrawn from action in Yemen, while Saudi Arabia has sought to challenge the UAE’s dominance as the region’s business and tourism hub.

The UAE in August 2020 also agreed to normalise relations with Israel, while Saudi Arabia has no official diplomatic relations with Israel.

Why Saudi Arabia is countering the UAE

Saudi Arabia has grown increasingly hostile and geopolitically distanced from the UAE in recent months. There are several possible drivers of this development. One of them is the UAE’s increasing geopolitical influence in the Middle East in recent years, possibly even overtaking Saudi Arabia as the leading power of the Gulf.

The UAE’s increasing geopolitical significance in recent years has made it a point of interest for both the US and Israel, who increasingly view the former as the most valuable strategic partner in the Middle East.

One of the prizes of normalisation for Abu Dhabi is its new ability to acquire F-35 fighter jets from the United States. Following the Abraham Accords, Israel removed its objections to the arms purchase.

While defence deals between the two countries can now be announced in public, it was an open secret that the UAE and Israel had an ongoing relationship based on the sector going back decades.

Saudi Arabia risks being excluded of this new power dynamic in the Middle East, and it has taken the route of economic diversification, and increasingly individualization of its foreign policy, including blocking avenues for the UAE to further extend its advantage in those areas.

A deterioration in Saudi-Emirati relations has combined with the UAE’s determination to expand production capacity to support oil diversification plans. The power struggle between Opec members now threatens the cartel’s ability to unify in the longer term and deliver stability to oil prices.

The UAE in 2019 withdrew most of its military forces from Yemen, leaving Saudi Arabia alone in its battle against Iran-backed Houthi rebels. Southern separatist forces allied to the UAE then clashed with Saudi-backed Yemeni government forces. While the UAE has accepted a Saudi-led effort to end the trade and travel embargo on Qatar, Abu Dhabi has been alarmed at the speed of the reconciliation with Doha. Similarly, the UAE’s embrace of Israel in the wake of normalising relations last year has raised eyebrows in Saudi Arabia. A different handling of the pandemic has also been a source of frustration in both states. Riyadh from Sunday has decided to bar travel to and from the UAE, where the Delta variant accounts for a third of all new cases. Saudi Arabia has not approved the Chinese-produced vaccine on which the UAE has largely depended for its mass vaccination. Saudi Arabia’s threat to cut off multinationals from lucrative government contracts if they do not relocate their headquarters to Riyadh has been perceived as an implicit attack on Dubai, the UAE’s commercial hub where most are based.

Saudis play down talk of tensions, pointing out that Opec spats are “business” and that coronavirus restrictions are about “safety”, not politics. “For over the past 40 years the UAE consistently followed the Saudi lead in Opec,” said Abdulkhaleq Abdulla, a Dubai-based political science professor. “But lately, the UAE has been more adamant about its just quota and is now flexing its muscles on this front”.

While the personal relationship between Mohammed Bin Zayed and Mohammed Bin Salman seems to be holding the two countries together for now, a further deterioration in ties could mean that Saudi Arabia and the UAE could soon become geopolitical rivals.