Saudi Arabia and the UAE are on an economic collision course

For several years now, Saudi Arabia and the United Arab Emirates have been in lockstep on foreign policy. The close friendship of their de facto rulers, Saudi Crown Prince Mohammed bin Salman and Abu Dhabi Crown Prince Mohammed bin Zayed, is the Middle East's most important alliance. It allows them to boss around the Gulf Cooperation Council, to the disquiet of other members, and set the agenda for the wider Arab world.

Better known as MBS and MBZ, the two leaders share a fear of Iran and a loathing of Turkey and the Muslim Brotherhood. Their countries have formed coalitions with other Arab States to fight a war in Yemen and impose an (only recently lifted) embargo on Qatar. Beyond the Middle East, they have collaborated to broker a peace deal between Ethiopia and Eritrea and pursue military and security alliances in Asia and Africa. They have even, on occasion, pledged economic partnership, at home and farther afield.

Although they are mostly united by their mutual interests, there is one shared goal that threatens to divide them. Both are keen to reduce their dependence on hydrocarbon exports by diversifying their economies - and this puts them on a collision course.

The Saudis and Emiratis are pursuing diversification into the same sectors: tourism, financial services, logistics, petrochemicals, technology. Since they both lack the talent pools required to serve these industries, they must vie with each other for expatriate expertise as well as investment.

The contest is destined to grow fiercer as the Arab monarchies burn through the wealth accumulated from decades of oil and gas exports; the International Monetary Fund reckons their collective treasure chest will be empty by 2034. The pandemic's impact on oil prices has also concentrated minds across the GCC on the urgency of diversification.

The UAE has first-mover advantage here: The biggest emirates, Dubai and Abu Dhabi, have been attracting skilled white-collar workers for decades. The country has long been the preferred regional hub for multinational companies. Only over the past couple of years has there been an intense competition for talent between Dubai and the Saudis, with the latter offering a larger market to offset the UAE's more liberal lifestyle.

The Saudis have now raised the stakes: Starting in 2024, foreign companies seeking contracts from the government and its institutions will be required to base their regional headquarters in the kingdom. This is an unsubtle signal to companies currently based in the UAE: Move to Saudi, or miss out on opportunities worth trillions of dollars in the GCC's largest market.

The kingdom is offering carrots, too. MBS's social reforms have loosened some of the lifestyle restrictions - for instance, women can now drive and cinemas have been allowed to open - that made cities like Riyadh and Jeddah unattractive to expatriates and liberal-minded Saudis. The Red Sea city of Neom, the crown prince's pet project, is being touted as a more freewheeling place to live and work. There are even sporadic, tantalising rumours that the taboo on alcohol may soon be dropped.

The Saudis are hoping that this combination of come-on and or-else will accelerate a trend. At MBS's 'Davos in the Desert' investment conference in January, 24 multinational companies, including Deloitte, Bechtel and PepsiCo, said they were moving their regional HQs to the kingdom.

But analysts point out that some of these companies already have offices in Saudi Arabia, and may simply rename these as 'headquarters' while maintaining their dominant presence in the UAE. Others may avoid debate on terminology by running their regional operations from Europe. And it is very likely that some companies, especially those in sectors Riyadh deems critical to its diversification ambitions, will be able to negotiate exemptions.

The UAE, meanwhile, will undoubtedly respond with counteroffers. It is giving expatriates a bigger stake in its economy by amending laws to allow them full ownership of companies. Some categories of expats will soon have a path to citizenship, a move specifically designed to deepen its talent pool. More categories will likely be added to preserve the Emirati advantage.

The Emiratis will also count on the network advantages of Dubai and Abu Dhabi, where the size of the existing expat community - and the critical mass of social and cultural services catering to it - exerts a pull on foreigners looking to relocate to the region. It helps that the UAE has a well-established international image of being relatively liberal in practice, whereas Saudi Arabia has only recently begun to liberalise its laws.

But it is still only early days in the economic contest between the region's closest allies. Tougher tests of their partnership lie ahead. (Bloomberg)