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As Dubai Heats Up, Is Israel Frozen Out?

There are many factors pointing to Dubai’s emergence as a new Middle Eastern economic hub, but one particularly revealing item is the number of foreign visitors patronizing the city’s hotels.

SAND CASTLES: Dubai's rising skyline is a sign of the emirate's emergence as a regional economic hub. But with a boycott of Israel still on the books, analysts are asking how the shifting financial sands will affect the Jewish state.

Since 2001, the number of Americans staying at this Persian Gulf port city’s hotels has nearly quadrupled, while Iranian visitors have doubled and Sudanese travelers tripled. Indeed, these days the guest logs at Dubai’s hotels list a panoply of nations, with one conspicuous exception: Israel, against which the United Arab Emirates government has a legally enshrined boycott.

As a result mainly of the skyrocketing price of oil, the UAE’s twin metropolises of Dubai and Abu Dhabi have entered the big leagues of the world’s economic capitals. A handful of analysts are beginning to ask what it might mean for Israel — the region’s most vibrant economy over the past few decades — to be legally barred from what is fast becoming the Middle East’s new financial hub.

Israelis have been unable to attend international conferences recently held in Dubai, and a private equity firm has been questioned for its decision to set up a new fund that will target every country in the region except Israel. At the same time, however, the UAE’s growth appears to be prodding the government to open up a bit toward Israel; just this year, two delegations of Jewish organizations traveled to the UAE for the first time. Insiders say that amid all the growth, it is too soon to know what will happen with the murky relationship to Israel.

“If Dubai becomes a genuine place for capital — and Israel couldn’t share in that — then there would be consequences for Israel,” said Stanley Gold, who is president and CEO of Shamrock Holdings, an American private equity firm that invests in Israel.

Gold added, “This is something to keep your eye on.”

Economic antipathy toward the Jewish state is nothing new. In 1948, the Arab League first declared its boycott, with member countries adopting legislation barring local companies from any direct financial dealings with Israel — or even with companies that use Israeli parts or that do business with Israel. In 1979, the United States government passed legislation barring American companies from complying with the boycott in any way. Since then, the secondary elements of the boycott have been dropped by most countries, including the UAE, and it is widely known that many Israelis work around it by using non-Israeli passports.

Just this week, an Israeli real estate magnate announced a deal with a Dubai company to build a development in Singapore.

But the ban is still in effect. Statistics collected by the U.S. Department of Commerce show that companies from the UAE led the way in asking American companies to comply with the embargo. In 2006, American companies reported receiving 486 requests to comply with the boycott from companies in the UAE. That was more than three times the number of requests received from any other Arab League country. These figures have not gone unnoticed by Israelis.

“For a country that wants to be a leader — and an international financial center — it really behooves them to put this behind them,” Ron Dermer, head of Israel’s economic mission in Washington, told the Forward. “You’re either going to be in the 21st century or the seventh century. You’ve got a choice.”

Now that Dubai is not simply a source of capital but also a thoroughfare for commerce in the region, the boycott could take on even greater significance. This new status was apparent when Dubai’s government-owned stock exchange purchased a 20% stake in the Nasdaq — a move that is seen as a step toward developing Borse Dubai into a major international exchange.

Perhaps the clearest sign of the UAE’s arrival was the decision of The Carlyle Group — one of the most prominent private equity firms — to set up an office in Dubai and an investment fund for the region. Carlyle has drawn attention in the past for its ties to the Middle East, particularly when it emerged, after the September 11, 2001, terrorist attacks, that Osama bin Laden’s family had investments in the company. More recently, the Abu Dhabi Investment Authority purchased a 7.5% stake in Carlyle.

The new Middle East fund, which will raise $250 million for leveraged buyouts, has attracted scrutiny because of the announcement that it would be targeting investments in all the countries surrounding Israel — but not in Israel itself. Abraham Foxman, national director of the Anti-Defamation League, said he had received a number of calls about the fund and had made inquiries at Carlyle as to why the fund was not targeting Israel.

“We reached out to find out what the situation is,” Foxman said. “We have not come to a conclusion.”

Chris Ullman, a spokesman for Carlyle, said the fund is not investing in Israel because it is focusing on countries that are “less economically established than Israel.” He said that the Middle East fund, like all other funds, will not be barred from investing in Israel. Ullman also noted that, in the past, Carlyle had made $50 million worth of investments in Israel, and that it is currently looking to set up a fund to invest in Israel.

The head of Carlyle, David Rubenstein, worked in the White House office that helped establish America’s anti-boycott legislation in 1979. Stuart Eizenstat, who was Rubenstein’s boss at that time in the Carter administration, told the Forward that he has had conversations with Rubenstein about Carlyle’s Middle East fund and was convinced that the intention was not to isolate Israel.

“I think the fact that he is interested in creating a separate Israeli fund should mitigate any concern,” Eizenstat said.

For Laura Goldman, a former Merrill Lynch investor and a financial columnist in Israel, the bigger concern is what will happen when Carlyle begins purchasing companies in the region that are legally obliged to boycott Israel.

“Are they going to be investing in hotels that attract conventions that exclude Israelis?” Goldman asked.

Ullman said that Carlyle has not made any investments yet but will not do anything that violates American anti-boycott legislation.

Much of Dubai’s growth has been in the real estate, hotel and convention business. Last October, the annual meeting of the International Association for Freight Forwarders Associations was held in Dubai for the first time. The Israeli affiliate was initially told that it would be able to attend — with delegates even going so far as to book hotel rooms — but the visas never came through.

“It is sad that a political decision has damaged promising business relations, but that is life in this region,” said Barry Pintow, director general of the Israeli Federation of Forwarders and Customs Clearing Agents.

Israelis are not the only ones afffected by the barriers to business. Jane Kinninmont, an editor with the Economist Intelligence Unit, said that when she travels to the UAE, she frequently hears businessmen bemoaning the fact that they can’t do business in Israel. She added that while within Dubai there is little pressure to strengthen the boycott, there is a great deal of subtle pressure in the other direction from businessmen who want Israeli technology relating to water development and electricity.

“I think we’ve seen a clear trend over the last few years of the boycott becoming less extensive and there being more cracks in it,” Kinninmont said.

One sign of this thaw came when delegations from both the ADL and the American Jewish Committee journeyed to the UAE earlier this year. Foxman said that while there don’t seem to be open business deals between Arab and Israeli businessmen, he did hear that the two sides were finding creative, more covert ways to interact.

“They are making efforts to establish better contacts, and we are prodding them,” Foxman said. “That’s probably the best one can expect right now.”

Goldman is not so sanguine. “In the long term, Dubai is going to be what Switzerland was 10 years ago,” she said. “When that happens, Israel is going to be left out in the cold.”

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