(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00587R000300350005-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: January 12, 2017
• Document Release Date: May 12, 2011
• Sequence Number: 5
• Publication Date: August 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
The United Arab Emirates:
Economic Ties No
Longer Bind
NESA 85-10166
August 1985
COPY 337
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Directorate of Secret
Intelligence
The United Arab Emirates:
Economic Ties No
Longer Bind
This paper was prepared byl (Office
of Near Eastern and South Asian Analysis. It was
coordinated with the Directorate of Operations.
Comments and queries are welcome and may be
directed to the Chief, Persian Gulf Division, NESA,
Secret
NESA 85-10166
August 1985
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Secret
Summary
Information available
as of 24 May 1985
was used in this report.
iii Secret
NESA 85-10166
August 1985
Longer Bind
The United Arab Emirates:
Economic Ties No
UAE under Abu Dhabi.
The economic interdependence that helped to unify the seven emirates that
make up the United Arab Emirates is weakening. The five small northern
emirates, once totally dependent on UAE federal funds supplied by the
largest and richest emirate, Abu Dhabi, are developing their own oil and
gas revenues and are emulating Dubayy (Dubai) in seeking greater
autonomy within the federation. The rulers of these emirates hope to gain
greater control over the federal budget and other federal decisions and no
longer passively accept their de facto status as second-class members of the
United Arab Emirates will remain a high-income economy.
looser. Despite the soft oil market and several years of recession, the
Despite the centrifugal economic forces, we doubt that the UAE federation
will splinter. The political and security advantages of the federation will
continue to outweigh the economic pressures toward autonomy brought
about by independent incomes. Instead, the federation's form will become
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Abu Dhabi: Mainstay of the UAE
The Northern Emirates: Seeking Financial Independence
15
Sharjah: Becoming Independent of UAE Funds
15
Ra's al Khaymah: Oil at Last
15
Umm al Qaywayn: Hoping for Oil Wealth
18
`Ajman: Tiniest Emirate Thinks Big
19
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Figure 1
la shark
Khark
ushehQ
Bp nda,- 'Abbas
yl
Juba Ilk
United
Arab Emirates
Saudi
Arabia
Persian
ANAMA Gulf
I1QatarlDOHA
no defined
boundary
People's Democratic
Republic of Yemen
(South Yemen)'!
Boundary representation is
not necessarily authoritative.
0 100 Kilometers
Miles
0 100
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Secret
The United Arab Emirates:
Economic Ties No
Longer Bind
Situated between Saudi Arabia and Oman, the UAE
is a wealthy OPEC member state consisting of seven
emirates in a fairly loose federation. The federation
has existed as a sovereign state only since December
1971, when the British departed from the Persian
Gulf and Abu Dhabi, Dubai, Ash Shariqah (Sharjah),
Ra's al Khaymah, Al Fujayrah, Umm al Qaywayn,
and `Ajman, which already had a loose association as
part of the UK-dominated Trucial States, joined to
form the UAE. At the peak of the oil boom in 1981,
the UAE boasted a gross domestic product (GDP) of
$33 billion and per capita income approaching
$30,000. Its leaders have since had to deal with falling
revenues, an overextended banking system, and reces-
sion brought about by three years of a glutted oil
market. Nonetheless, the UAE has fared better than
most oil producers because of its small population
(about 1.3 million including foreign workers) and
considerable foreign assets-about $35 billion as of
the end of 1984.
Abu Dhabi, the largest and richest emirate, has been
the mainstay of the UAE, but it is starting to lose its
dominant position. Its ruler, Shaykh Zayid bin Sultan
Al Nuhayyan, is the UAE's President; its capital,
Abu Dhabi, is also the UAE's capital. Abu Dhabi
emirate contains 87 percent of the UAE's land area,
43 percent of its population, and provided $2.6 bil-
lion-75 percent-of the 1984 federal government
budget.
Abu Dhabi's wealth and its large share of the UAE
budget have led to a continuing controversy within the
federation. The poor, non-oil-producing emirates in
the UAE expect-and get-support from Abu Dhabi.
At the same time, Dubai emirate-despite substantial
oil resources-contributes as little as possible to the
federal budget. Under the UAE federation agree-
ment, half of each local government's revenue is to be
contributed to the UAE Government. Abu Dhabi was
the only contributor until 1980, however, when Dubai
started to contribute. Persistent squabbles between
Abu Dhabi and Dubai have caused funding and
spending problems.
Dubai is the most independent emirate within the
UAE, and its actions serve as a model for the smaller
emerging oil-producing emirates. Dubai has a long
tradition as a bustling and autonomous trading center
that it developed under the British protectorate. Be-
sides refusing to pay its share of federation expenses,
Dubai also leaves it to Abu Dhabi to absorb the
federation's OPEC-mandated oil production cutbacks.
Abu Dhabi joined OPEC before 1971, and its mem-
bership carried over to the UAE upon its formation.
Dubai, however, never joined OPEC and does not
consider itself bound by the UAE's membership.
Dubai produces oil at near capacity, sells it at market
prices, and has little sympathy for Abu Dhabi's oil-
market-induced recession.
The five small northern emirates of Sharjah, Ra's al
Khaymah, Al Fujayrah, Umm al Qaywayn, and
`Ajman began a transformation from impoverishment
to prosperity following the creation of the UAE. Abu
Dhabi's multibillion-dollar contributions to the feder-
al budget provided these emirates with roads, harbors,
airfields, utilities, free health care, schools, and water.
Since 1982, Sharjah and Ra's al Khaymah have
developed significant gas and condensate production
as well as some minor crude oil production. The
petroleum earnings are reducing and may eventually
eliminate their need for federal subsidies. This is
weakening Abu Dhabi's financial leverage over their
policies and is adding to strains within the federation.
Since the federation's inception, the northern emir-
ates' economic dependence on Abu Dhabi has served
as a unifying force within the UAE. As the northern
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emirates achieve greater financial independence
through oil or gas discoveries, however, they will have
stronger economic reasons for putting distance be-
tween themselves and Abu Dhabi and the federation:
? If the northern emirates were to share the UAE
OPEC quota now upheld only by Abu Dhabi, they
would have to limit their output, and thus revenues,
to relieve the strain on Abu Dhabi. We believe the
northern emirates are unwilling to provide such help
to Abu Dhabi.
? Severe revenue losses by Abu Dhabi are likely to
cause it to exert pressure on the other emirates to
pay for projects in their territory that are now
funded by the federation budget and to contribute to
the federal budget. If Abu Dhabi changes its fiscal
policies, the northern emirates will have to choose
between making contributions and expanding their
influence in federal circles or pulling back to a
looser form of federation.
The economic shifts within the UAE are producing a
corresponding political realignment. The US Embassy
reports that there has been a dramatic improvement
in relations among the rulers of the five smaller
northern emirates and that these rulers are seeking a
more influential role in federal politics. According to
the Embassy, they are particularly critical of what
they see as a power vacuum in the federal government
created by President Zayid's absences from the deci-
sionmaking process as he prepares to pass on the reins
of power. They are also dismayed by the rivalry
between Abu Dhabi's heir apparent, Crown Prince
Khalifah, and Dubai's de facto ruler, Shaykh Mu-
hammad, whom some of them support.
? Ra's al Khaymah took the initiative to begin negoti-
ations for a nonlethal military equipment pre-posi-
tioning agreement with the United States. Federal
military authorities are only being informed of this
process instead of taking the negotiating lead, ac-
cording to US Embassy reporting.
We believe that as more non-Abu Dhabians enter the
job market, their expectations for better jobs and
greater influence may eventually cause them to press
for an expanded political process that includes greater
participation in government. The US Embassy notes
that the younger leaders in Abu Dhabi are more
isolated from their fellow UAE citizens and are
displaying less leadership than their counterparts in
the other emirates.
Despite these strains on the federation, all the emir-
ates-even Dubai-continue to recognize the benefits
of unity. These include:
? Common defense against external threats.
? Economies of scale in government services.
? A wide pool of federal jobs for talented UAE
citizens, especially those from the northern
emirates.
We expect that these benefits will continue to hold the
federation together despite conflicts over economic
and oil policies.
These political issues, as well as economic factors,
have contributed to the increasing tendency toward
independent action by the individual emirates:
? Sharjah plans to develop an independent defense
force, according to US Embassy reporting.
? The rulers of Dubai and Sharjah reached agreement
by themselves on new borders (and new oil conces-
sion boundaries) this spring. The bilateral bargain-
ing followed months of frustration in Sharjah be-
cause the federal government would not attempt to
resolve the longstanding border dispute.
Secret 2
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Abu Dhabi has been transformed in 25 years from an
impoverished British protectorate to a major oil ex-
porter with one of the highest per capita incomes in
the world. This oil wealth has enabled Abu Dhabi to
become the major supporter of as well as the domi-
nant force in the United Arab Emirates. Abu Dhabi's
rapid transformation. so far has generated little social
tension. The most contentious issues have been among
UAE members, especially sharing the financial bur-
den of the nonoil emirates between Abu Dhabi and
Dubai.
Lower oil revenues since 1981 have not caused Abu
Dhabi the serious problems faced by many oil export-
ers but instead have prompted it to focus its priorities.
The pace of new oil exploration and oil-derived indus-
trial development is being slowed, but so far water
resource development projects and consumer subsidies
have not been touched. Lower oil revenues have
enabled Abu Dhabi to begin reducing its large and
potentially destabilizing expatriate labor force.
The Abu Dhabi Economy
Before the start of oil production in 1962, Abu Dhabi
was one of the poorest regions in the world, with an
economy based on pearling, fishing, and subsistence
agriculture-nomadic grazing of small herds of goats
and camels. An increase in oil production. along with
the runup in oil prices in the 1970s boosted Abu
Dhabi's gross oil receipts from about $680 million in
1970 to a peak of $13.9 billion in 1980. The latter
figure compares with peak UAE gross revenues of $19
billion in 1980. The surge fueled an average annual
growth rate of 26 percent in real nonoil national
output in 1972-80 for the UAE.
Crude oil production remains the prime mover of Abu
Dhabi's economy. Although the emirate government's
estimated 1984 net oil revenue of $5.1 billion is far
below the 1980 peak, oil still provides most of the
government's revenue. Moreover, most industrial de-
velopment is derived from the oil sector-for example,
natural gas processing, refining, and the production of
ammonia and urea fertilizers
Although figures for Abu Dhabi's gross domestic
product are not published, we estimate that Abu
Dhabi's revenues from oil production generate about
one-third of the UAE's GDP. UAE GDP peaked at
$33 billion in 1981 and since has fallen, hitting $27.5
billion in 1983, the last year for which data are
available. UAE per capita GDP in 1983 was about
$23,000 a year. We estimate per capita income in
Abu Dhabi in 1983 was $30,000.
In addition to oil, foreign assets generate significant
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Figure 2
UAE and Abu Dhabi Crude Oil
Capacity and Production, 1980-85
Abu Dhabi
2,000 capacity
Abu Dhabi
Emirate
IIIII
0 III III lv l n
1980 81 82 83 84 85
we estimate that o cla investment
income for the UAE totaled $4.2 billion in 1984, up
from $3.6 'billion in 1982. We estimate that the
foreign asset base generating this income is roughly
$35 billion, an enormous cushion to offset low oil
revenues. We believe that at least half of the UAE's
official assets are held by Abu Dhabi.
According to the US Embassy, the economic slow-
down of the past several years is enabling Abu Dhabi
to reduce the number of foreign workers. Foreign-
ers-mostly without families-represented about 80
percent of the UAE population in 1982, according to
official estimates. There were nearly 1 million for-
eigners compared with 255,000 natives. According to
the 1982 data, Abu Dhabi had only 29 percent of the
UAE's indigenous population-about 75,000-al-
though it has the most economic activity and probably
Figure 3
UAE Official Investment
Income, 1979-84
0 1979 80 81 82 83 84
the largest share of foreign workers. According to US
Embassy and press reporting, Abu Dhabi has tight-
ened visa and work permit requirements, and this has
caused South Asian construction workers to depart
when their projects were completed rather than seek
new jobs.
Government Spending and Development Efforts
The Abu Dhabi budget process consists mainly of
collecting oil revenues, choosing a contribution level
for the UAE Government, and allocating the remain- 25X1
der locally or as foreign aid. Abu Dhabi's budget
revenues have fallen sharply from a peak of $10.8
billion in 1980 and 1981. They were estimated at only
$5.5 billion in 1984. The fall in revenues since 1981
pushed the budget into deficit by 1983 and forced
Abu Dhabi to reduce payments sharply to the UAE.
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Foreign aid was slashed to negligible levels in 1984
compared with $1.8 billion in 1981. Local expendi-
tures, however, have not been reduced, as Abu Dhabi
has upheld spending on consumer subsidies, educa-
tion, and health. (See appendix for UAE and Abu
Dhabi budget figures.)
The long-term development goals of Abu Dhabi are to
diversify from crude oil exports to refining and
energy-intensive export industries, approach self-suf-
ficiency in agriculture, reclaim desert land through
forestry, and promote economic development in the
nonoil emirates of the UAE. The soft oil market has
prevented Abu Dhabi from pursuing all these goals,
and it is completing existing projects while postponing
most new ones:
? According to the Abu Dhabi government, current
priorities are the development of water resources,
electric power, urban infrastructure, transport, and
communications. These categories absorb nearly
three-fourths of Abu Dhabi's development budget.
? Official project spending on the oil sector, industry,
and commerce is negligible because this falls in the
domain of the government-owned Abu Dhabi Na-
tional Oil Company-ADNOC-or the private sec-
tor. For example, ADNOC has announced plans to
spend $5 billion in onshore development during
1984-87, down sharply from earlier years.
? Expenditures on housing and public buildings,
which peaked in 1981 at $138 million, have plunged
to about $55 million. With housing provided for the
small indigenous population, funding this sector has
lost its urgency.
? With the basic infrastructure in the city of Abu
Dhabi completed, the focus of development activity
has moved to the agricultural center of Al `Ayn and
the industrial city of Ar Ruways.
Shaykh Zayid wants to make Al `Ayn, an oasis town
near the Omani border, an academic, agricultural,
and administrative center:
? The Al `Ayn international airport-which will be
Abu Dhabi's second-largest airport-is scheduled
for completion this year.
Shaykh Zayid's dream of turning the desert into
croplands and forests faces a considerable challenge.
Annual rainfall in Abu Dhabi ranges only between 19
and 100 millimeters, coastal areas are primarily salt
marshes, and daytime summer temperatures average
49 degrees Celsius. Although agricultural conditions
elsewhere in the UAE are more favorable-for exam-
ple, in mountainous, less and Al Fujayrah-Abu
Dhabi leads the other emirates in agricultural devel-
opment and reforestation.
Between 1972 and 1980, average annual growth of the
UAE's agricultural sector approached 25 percent.
Most of the increase occurred in Abu Dhabi, where
heavy subsidies were provided to farmers and fisher-
men. For a few months of the year, the UAE is even a
net exporter of fresh fruits and vegetables.
Water is the key agricultural constraint. Agriculture
accounts for 73 percent of water usage, and under-
ground water resources-estimated at 10 billion cu-
bic meters-are being depleted at a rate of 700
million cubic meters per year. Although 22 new water
desalination plants are proposed for construction in
the next 10 years to slow the depletion of ground
water, lower oil earnings and more emphasis on water
conservation are likely to delay this program.
? The existing Al `Ayn-Abu Dhabi highway is being
repaired and widened.
? A 115-kilometer, four-lane Al `Ayn-Dubai highway
is under construction.
Water development projects at Al `Ayn are attempt-
ing to rectify past overdrilling and ensure supplies for
the agricultural center. The water supply at the oasis
used to support Abu Dhabi's only significant farming
area and supply water by pipeline to the capital.
Uncontrolled drilling, however, caused a drastic drop
in the water table in the late 1970s and raised water
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salinity. The number of wells increased from 23-
supplying 2.9 million gallons per day-in 1975, to
106-supplying 13.9 million gallons per day-in
1980.
Located about 250 kilometers west of the city of Abu
Dhabi on a coastal salt marsh, Ar Ruways contains
most of Abu Dhabi's heavy industry. The city is
adjacent to the oil export terminal at Jabal az Zannah
and has access to natural gas from nearby onshore
oilfields as well as from the recently developed Tha-
mama C gasfield. Ar Ruways contains the larger of
the UAE's two refineries, with a capacity of 120,000
b/d. The refinery is being upgraded to produce a
wider range of light petroleum products. Completion
is planned this year. Ar Ruways Fertilizer Industries
(Fertil)-a joint venture of the Abu Dhabi National
Oil Company and Compagnie Francaise des Pe-
troles-completed construction in January 1984 and
began producing ammonia and urea fertilizer for
export.
Development at Ar Ruways is being slowed by falling
oil revenues and the worldwide petrochemical glut.
Five years ago Ar Ruways was envisaged as a petro-
chemical and industrial center like Al Jubayl in Saudi
Arabia, but we do not expect this to occur any time
soon. Despite readily available feedstocks, Fertil has
no plans to expand its facility. Plans for a petrochemi-
cal industry and a steel mill also have been dropped.
Economic Outlook
Despite further revenue declines, Abu Dhabi is un-
likely to experience serious economic stress because of
its large financial reserves. Its oil revenues and its
share of the UAE's GDP are likely to decline signifi-
cantly in 1985. It will probably absorb all of the
OPEC-mandated production cuts for the UAE. More-
over, it probably will have to offer price discounts to
sell its oil in the glutted world market. Lower oil
revenues will reduce job opportunities for foreign
workers, and perhaps as many as 200,000-one-fifth
of the expatriates-could depart the UAE this year, a
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large share from Abu Dhabi. Construction on existing
projects will be slowed, except for water and power
facilities, and few new projects will be started.
If the price of oil tumbles, Abu Dhabi will face major
decisions about oil production levels, import cuts, and
foreign asset drawdowns. Unlike some oil producers,
Abu Dhabi has substantial excess oil production
capacity and is likely to boost output. An oil produc-
tion level of 585,000 b/d implied by OPEC's quota set
in November 1984 would represent only 30 percent of
Abu Dhabi's 2-million-b/d maximum sustainable ca-
pacity. For example, with oil priced at $20 per barrel,
Abu Dhabi could easily increase output by 350,000
b/d to maintain annual oil revenues.
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Dubai has emerged from a long history of commercial
leadership in the Persian Gulf to become an oil-rich
city-state that serves as the headquarters for many
trading companies doing business in the Persian Gulf
and beyond. Dubai's gross income for 1984 was
roughly $8 billion, about a third of the UAE's
estimated GDP. (Dubai refrains from revealing its
budget, share of the UAE's GDP, population, per
capita income, foreign assets, and investment income.)
The largest component of Dubai's output is the
petroleum sector-which represents a little less than
half the emirate's gross income. Crude oil production
in 1984 of about 340,000 barrels per day yielded gross
oil revenues of approximately $3.5 billion. Services
earnings-trade, finance, insurance, and ship re-
pair-make up the next largest component. Industry
is limited to the Dubai Aluminum Company, which
imports alumina and produces annually about
150,000 tons of aluminum ingots worth about $180
million.
Dubai ranks near the top worldwide in per capita
income. With a population of 400,000, Dubai has a
per capita income of roughly $20,000. We estimate
Dubai's foreign assets account for about $13 billion of
the UAE's $35 billion in foreign assets at the end of
1984. This is a comfortable financial cushion for the
emirate in the event of a decline in oil revenues.
Dubai's Independent Petroleum Policy
Dubai has suffered the least of the Persian Gulf
producers from the soft oil market because OPEC
production cutbacks for the UAE have been borne
solely by Abu Dhabi. Dubai does not believe that it
must uphold the federation's OPEC role. Crude oil
production in Dubai has averaged about 350,000 b/d
since 1978, except for a slight drop to 330,000 b/d in
1983. Current production of 350,000 b/d, if sus-
tained, would yield gross crude oil revenues of $3.6
billion for 1985 at current prices. If prices fall,
Dubai's oil revenues will decline because it lacks the
excess capacity needed to raise output.
Dubai also produces small quantities of liquefied
petroleum gas and condensate for export and uses
natural gas-both associated gas from crude oil fields
and nonassociated gas from the newly developed
Dubai Creek-Archaeologists have found evi-
dence that this fine natural harbor has been in
use since 2000 BC. Ancient-style dhows now ply
Gulf waters with high-powered engines and mod-
ern telecommunications, then dock at the foot of
skyscrapers.)
onshore Margham field-for domestic consumption.
The Dubai aluminum smelter, several water desalina-
tion plants, and electric power plants are consuming
all available gas. To meet growing demand, a linkup
to neighboring Sharjah is under way to exploit that
emirate's excess gas supply. Dubai emirate has no
refineries or petrochemical plants.
The Dubai Petroleum Company (DPC), a foreign
consortium, is responsible for all oil production in
Dubai. The Dubai government closely controls the
DPC's pricing, production, and development policies.
Reflecting the government's penchant for secrecy, the
DPC does not publish revenues, expenditures, or field
data.
25X1
25X1
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Figure 4
Oil and Gas Fields and Installations in the United Arab Emirates
L~'
Saudi
Araba
Uinited Arab Emirates
i'r~h-ye
eshm
lazireh-ye ?' toiifie/d uMina' Sa~fi~
laziieh,yee Abu Musa o
C i 1
Haq/ Fath Umm al Uaywayn
ni Hama? Dh ' -
~Ar Ruways ---~-
=-_ Thamama C -''
gasfield- Sab at as Salamiyah
(salt marsh)
Sabkhat Mali
(salt marsh) 64
Ra".S al?