Israeli business has gotten a bad case of Dubai fever
The coronavirus has massively depressed air travel to and from Israel, except for one small sliver of the industry. Demand for business class seats on the Tel Aviv-Dubai route, spurred by a condition we’ll call Dubai fever.
Even before the two countries formally normalized relations, representatives of Israel’s top two banks were meeting their Emirati counterparts. More recently, tech investors like Erel Margalit and Jonathan Medved have been striking deals. Dubai companies have bid to buy an Israeli airline, reached a preliminary agreement to ship Abu Dhabi oil through an Israeli pipeline and have expressed an interest in bidding to buy the privatized Haifa Port. Israel’s diamond industry is already eyeing a piece of the action in the Gulf. Even wine from the (occupied!) Golan Heights will soon be available in Muslim Dubai.
It seems no one in Israel can resist the allure of the Gulf, and the Emiratis have played the role of willing partner. But how real is all of this? It’s one thing to make meetings and issue press releases, it’s another for real business to arise from it. There’s good reason to be skeptical that it will.
Right now, even the most even-keeled Israeli business people can’t help but be smitten by the UAE. It’s a thrill to find yourself an honored guest in an Arab country, a place that was officially off limits to Israelis until a few weeks ago.
Dubai’s glittering skyline, its super-luxury hotels and a cityscape dotted with construction cranes radiates money, success and a bright future. With sovereign wealth funds holding assets in the hundreds of billions of dollars, Abu Dhabi’s oil wealth looks ripe for the picking.
A lot of this is illusory. The coronavirus has taken a particularly heavy toll on the economy of Dubai because it is so reliant on revenues from tourism and logistics at a time when world travel and the global supply chain have been severely disrupted.
Standard Poor’s estimates that Dubai’s GDP will drop 11% this year and won’t rebound to pre-coronavirus levels until 2023. Its estimated debt burden of 148% of GDP is high enough that SP doesn’t rule out a bailout by Dubai’s richer cousin, Abu Dhabi.
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Abu Dhabi is in better shape, but the oil revenues it depends on are in a slump that shows no signs of ending anytime soon. The oil price is going to remain below the $70 breakeven level the UAE needs to cover its costs, meaning it will have to borrow money and tap into its sovereign wealth fund assets, according to the Economist Intelligence Unit.
If the UAE’s problems were only about the coronavirus, Israelis could be patient and wait for better times. But they are not.
Even before the onset of the pandemic, Dubai’s economic model of perpetual construction of luxury housing, showcase malls and ever taller skyscrapers was reaching the end of the line. There aren’t endless supplies of wealth expats to buy homes in the city state and shop in its malls. As a bleak sign of the times, the shareholders of Arabtec Holdings, which in its glory days built the Burj Khalifa, the world’s tallest building, voted last month to liquidate the construction company.
Dubai is doing its best to find new expats – its latest target market is wealthy pensioners – but it won’t be easy. The locals already feel crowded out by so many foreigners and the security apparatus frets about importing troublesome dissidents. In the meantime, the collapse of the construction industry and real estate sector is weighing down the entire economy.
Ironically, the structural problems facing the UAE economy offer Israel one opportunity. The rulers of Dubai and Abu Dhabi are keenly aware that they need to change their economic model – for Dubai, away from construction, for Abu Dhabi, away from oil – and Israel can lend a helping hand in developing a high-tech sector.
For that to happen, however, it will have to be a two-way street. It’s clear what the UAE would get if Israeli startups moved their research and development and maybe even the headquarters to the Gulf. It’s not obvious why Israeli tech companies would do it.
The UAE is spending generously to encourage tech startups but money isn’t at the top of the list of Israeli high-tech’s needs. Even in the depths of the coronavirus pandemic, it has been raising record amounts of venture capital. In the tech world, there are plenty of startups with second-string technology, poor management or a very risky idea that can’t get money except in the best of times. They are the ones that are likely to be tempted by the UAE’s cash and in the end the Emiratis will be disappointed.
What the Israeli tech sector does need is skilled employees to fill a critical labor shortage. To that end, companies have opened RD centers in Eastern Europe, India, the West Bank and even Gaza. But these are all places of low-cost and/or abundant talent. The UAE has neither.
That can’t be anything but a severe letdown. After years of peace and no trade with Egypt and Jordan, there’s finally an Arab country that wants to do business with Israel, but there’s little business to be had.