Economic Statecraft and its Role in Russia-UAE Relations

UAE

Economy & Innovation

Geopolitics, Commentary

Dr. Diana Galeeva

“Economic statecraft” is usually described as a state’s use of economic tools to further its foreign policy goals. The most common forms of economic statecraft are foreign aid, foreign trade, and government policies that manage the global flow of capital. Each can be utilized as a political tool. They are represented in a variety of different economic tools, including both positive and negative sanctions. Negative sanctions are threatened or actual punishments, such as a refusal to import goods from (boycott), a refusal to export goods (embargo), an implicit refusal to trade (blacklisting), the confiscation of property (expropriation), the suspension of foreign aid, and the freezing of the second country’s assets. Positive sanctions are promised or actual rewards, including foreign aid, preferential tariffs, investment guarantees, subsidies, and preferential taxation of foreign investment.

Most analyses focus on economic statecraft as a distinctive feature of international relations. The first recorded example of sanctions can be seen in a decree of 432 B.C. that banned all trade between Megara and Athens. The most recent example of negative sanctions occurred when the West instituted unprecedented financial and economic sanctions against Russia after the start of the war in Ukraine, including freezing the overseas assets of the Russian central bank and some of its largest commercial banks, broadening financial sanctions against Russian individuals, and excluding most Russian banks from the SWIFT bank transfer authentication system.

The Limit of Sanctions

The Ukraine crisis has undoubtedly positively affected trade dynamics between Moscow and Abu Dhabi; non-oil trade increased by 57 percent during the first nine months of 2022. This increase reflects a trend of growing commercial ties. In 2021, bilateral trade turnover hit a record high level of $4bn, up from $3.3bn in 2020. Robert Mason referred to these relations even in 2021 as “monetization, economization and militarization in the Gulf and Red Sea,” highlighting the leading role of energy exports to increased collaboration.

Economic opportunities resulting from the conflict in Ukraine have facilitated Russia-UAE ties, as well. While oil prices climbed toward $130 per barrel in March, the UAE (and Saudi Arabia) rejected requests from the United States and the EU to ease pressure on the worldwide economy by increasing oil production. In fact, on October 5, OPEC+ announced a cut in oil production by 2 million barrels per day. OPEC+ members justified the move as a way to stabilize market and price.

In December, Russian President Vladimir Putin held discussions with his counterpart, Shaykh Mohamed bin Zayed Al Nahyan of the UAE, in which he praised OPEC+ cooperation and criticized an attempt to impose a price cap by some Western states, calling the limit contradictory to the “principles of global trade.” In one fell swoop, Dubai has strengthened its position as a financial hub, and Russian business has found a safe place to operate due to the city’s pro-business approach, low taxes, and laissez-faire attitude toward Western sanctions.

Connected to—and, in part, driven by—Western sanctions are ongoing discussions to conduct trade in UAE dirhams and move away from the U.S. dollar. In April, Russian Foreign Minister Sergey Lavrov stressed Russia’s wish to use non-Western currencies for trade with countries such as India, seeking to make payments in UAE dirhams. India, which has remained relatively neutral on the Ukraine crisis, also held talks with Russia for a potential ruble-rupee trade deal. Meanwhile, the UAE signed free trade deals with India, Israel, and Indonesia in 2022 to establish its position as a worldwide trade and logistics hub. As a center of global trade and finance, Dubai has especially enjoyed the increased investments from wealthy Russians. In the first quarter of 2022 alone, as wealthy Russians were forced to leave their properties in Europe, real estate purchases in Dubai by Russian nationals increased by 67% year-on-year. More than 4,000 businesses from Russia entered the UAE market, enjoying the benefits of the impact of recent liberalizing reforms, including relaxed entry visa requirements and statutes allowing foreigners to own 100% of Emirati-registered businesses for the first time. The UAE also remains a travel hub for Russians, as its airlines are among the few key carriers that are continuing commercial flights to Russia during the war.

Commercial Partners of Convenience

Domestic dynamics have naturally interwoven with the current geopolitical climate. The recent mobilization in Russia contributed to Dubai emerging as a business project hub for Russians as young men fleeing Russia escaping from recruitment. Furthermore, the financial crisis in 2008 and the annexation of Crimea in 2014 drew attention to the importance of Islamic finance and banking as an alternative to the Western financial system. In November 2022, a review of the development of Islamic banking was submitted to the State Duma, which is negotiating the introduction of an experimental legal regime for partner financing in four regions of Russia with large Muslim populations. If the proposal is approved, this initiative will start on February 1 2023 for a period of two years. Given the ongoing efforts in this direction between Russian Muslims and the UAE government even prior to the war in Ukraine, it is expected that Dubai might emerge as a hub for Islamic finance and banking for Muslim Russians, too. Weiss and Alexander-Greene stress Russia’s opportunistic inroads with Saudi Arabia and the Gulf Arab states, emphasizing the importance of commercial considerations—not just national security concerns—as the driving factor behind Moscow-GCC relations.

In the context of economic statecraft, sanctions have closed doors to collaboration between much of the West and Russia. They have also opened a path to a proliferation of Russia-UAE economic engagement. Russia is attempting to diversify its markets, developing oil and non-oil trade deals, and to move away from the U.S. dollar, which has been the key impediment to investment in Russia in recent years due to the currency’s ubiquity in international finance. Meanwhile, the UAE, especially Dubai, seeks its own dividends—not with a particular interest in Russia, but rather to further develop its title as a global financial, business, and travel hub. Shared Muslim identity has made the UAE an Islamic banking and finance hub for Russian Muslims, who number over 20 million. Economic statecraft is a balance; while negative sanctions are in place between certain states, positive engagements can develop elsewhere.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.