Is Bahrain’s loss going to be the UAE’s gain as a financial centre?

After the tragic events of 9/11 the Middle East was temporarily destabilized and Citibank withdrew more than $40 billion from Bahrain. In due course the money was put back but the bank quietly moved its headquarters to Dubai in the United Arab Emirates and its operations grew substantially in the oil and real estate boom of the 2000s.

That boom came to a sudden stop in late 2008, just after the $21 million party to open the Atlantis Hotel on Palm Island. But some local analysts are beginning to ask whether the violence and protests in Bahrain over the past week are going to mark another decisive phase in the decline of Bahrain as a financial centre and the rise of Dubai, albeit the 3.7 per cent fall at the Dubai Financial Market on Sunday showed the impact of Arab unrest on regional trade is more of a consideration at the moment.

Revolutionary implications

The next issue of the ArabianMoney newsletter will be looking at the investment implications of the revolutions and protests across the Arab World, and will be making some interesting recommendations (sign-up here). But it is already clear that life in Bahrain is unlikely to be the same again.

Financial institutions are extremely risk averse. They worry about anything that might interupt business and are also very protective about their staff, both as human beings and as their biggest asset.

Post 9/11 there were plenty of declarations of support for Bahrain. Yet the reality was that the international financial institutions began to leave for the new Dubai International Financial Centre as soon as it was set up in 2002. More than 300 financial institutions are now registered in the DIFC although the local and global financial crises have hit this freezone hard with a long list of closures.

Financial infrastructure

The upshot is that Dubai has already built the infrastructure for a much larger global financial centre that is presently standing half-empty, just waiting for institutions that want to leave Bahrain to relocate. There is also plenty of high-quality, luxury accomodation for bankers and brokers available at prices far below global norms for a financial centre, and naturally no income, capital gains or sales tax.

Unless the UAE becomes similarly embroiled in social unrest – which seems most unlikely in the absence of significant disadvantaged minorities – then there ought to be a gradual drift, if not exactly a tidal wave of business relocation from Bahrain. For even if the authorities manage to address the demands of protestors today there will always be the worry about what might happen tomorrow.

Losing the opening Formula One race might just be the beginning rather than the end of a trend.