The UAE, Russia’s Escape Hatch from International Sanctions

UAE

Politics & Governance

Commentary

Dr. Sergey Sukhankin

Russia’s unprovoked war of aggression against Ukraine that commenced on February 24 has provoked several waves of Western sanctions against Russia. While Russia’s economy suffers from the damage inflicted by international sanctions, the economic-political and business elite in Russia desperately searches for ways to mitigate their, as well as the country’s growing economic and political isolation. The Western sanctions regime, designed to reduce Russia’s ability to conduct international business activities and bar its oligarchs (who are tightly connected with Putin) from using their assets, may not be as impregnable as it appears. In addition to various loopholes and exemptions, many countries remain unwilling to join the West and its economic sanctions. Prominent among them is the United Arab Emirates (UAE), which has historically maintained lucrative and mutually beneficial economic and business ties with Russia.

A Safe Investment

In addition to having one of the most liberal business legislations for Russians, the UAE—unlike other financial safe havens— boasts exceptionally high living standards, political stability, and a (comparatively) liberal lifestyle. These factors combine to lure foreign capital to the UAE’s shores. Thus, even before the outbreak of the Russia-Ukraine war, the UAE had long served as a safe haven for wealthy Russians. At the same time, Moscow has used its various organs of public diplomacy to cement bilateral ties with Abu Dhabi. While cooperation at the official level has been strengthened through diplomatic channels, such as the recent meeting between Mikhail Bogdanov, the Deputy Minister of Foreign Affairs of Russia and Special Representative of the President of Russia for the Middle East, and the UAE Ambassador in Moscow Mohammed al-Jaber, the two countries maintain unofficial contacts through other channels. In addition to the aforementioned business connections, Moscow and Abu Dhabi maintain contacts through Chechnya – strengthened through personal ties developed by Chechen strongman Ramzan Kadyrov.

It is interesting to note that (on the surface, at least) anti-Russian sanctions have resulted in the apparent weakening of economic and business ties between Russia and the UAE. In late March, Mubadala Investment Company, an Emirati sovereign wealth fund, declared the discontinuation of investments in 50 Russian projects. In practice, this halted bilateral business cooperation that had begun in 2013. As menacing as this step might seem on the surface, a deeper glance at the state of UAE-Russia ties presents a somewhat different outlook. In effect, the UAE’s refusal to follow the course chosen by the West enhances its bilateral relationship with Russia in three central, significant ways.

Skirting Sanctions

First, the UAE may assist Russia in protecting its merchant fleet from international sanctions,. In an effort to hinder Russian exports, especially oil exports, Western sanctions have targeted Russia’s freighters and tankers barring them from entering American or EU ports and encouraging other countries to do the same. Transferring ship registration to third countries, a practice known as “reflagging,” could render such sanctions nearly impossible to implement.

Investigative journalists who specialize in economic sanctions have ascertained that the Russian state-owned shipping company Sovcomflot already relies on India, Liberia, and the UAE to evade restrictions on Russian-flagged oil tankers and other merchant ships. More specifically, the Indian Register of Shipping (IRClass), acting through SCF Management Services (Dubai) Ltd, a Dubai-based entity, has already certified more than 80 Russian ships. This scheme allows Russian ships to receive the necessary insurance (thereby meeting international maritime transport criteria) and gain access to ports banning Russian ships. As noted in another Russian study, this mechanism allows Sovcomflot to evade international scrutiny and thus avoid sanctions. The article claimed that the Organized Crime and Corruption Reporting Project (OCCRP) has located more than 18 Russian tankers belonging to Sovcomflot that continue transporting oil—worth at least $240 million—each day.

Second, the UAE may also help Russia’s rich relocate their yachts, private jets, and luxurious private property, which, unless hidden, could be subject to international sanctions and seizure. Shortly after Russia invaded Ukraine, reports began to emerge of Russia’s wealthiest oligarchs including –among others– Sergey Chemezov, Yuri Trutnev, Boris and Arkady Rotenbergs, and Roman Abramovich, fleeing Russia on private jets, headed for Dubai, where their private jets remain safe from seizure. In addition, as noted by other sources, “at least 38 businessmen or officials linked to Mr. Putin own dozens of properties in Dubai collectively valued at more than $314 million.” The large footprint of Russian oligarchs in the UAE almost certainly influenced Abu Dhabi’s decision to abstain from a U.S.-backed resolution denouncing the invasion. Emirati officials have consistently reassured their Russian counterparts that authorities in the UAE will not enforce sanctions unless mandated by the United Nations. Of course, Russia’s permanent seat on the UN Security Council ensures that it will never run afoul of UN sanctions. With any resolution to the Ukraine conflict far away, Western sanctions against Russia are likely to stay. The UAE is likely to be the ultimate beneficiary from this situation, as Russian wealth continues to pour into the country.

Right now, the UAE is rapidly transforming into Russia’s favorite area for real estate investment. If, prior to the outbreak of the war in Ukraine, Russia’s rich were primarily interested in acquiring property in the UK and countries of the European Union, these Russians look elsewhere today. In particular, two markets have risen to prominence for Russian real estate investment—Turkey, and the UAE (Dubai). However, as noted by Russian private property experts specializing in foreign property acquisition, “The UAE is definitely the champion here.” The UAE can not only boast very high living standards, but it also possesses a remarkably stable national currency; in short, the UAE is a safe bet for most Russians seeking to secure their assets.

The United States recognizes that it must root out Russian “dirty money” if it seeks to make sanctions against Moscow effective. The U.S. Department of the Treasury has launched an initiative for this purpose, with Deputy Secretary Wally Adeyemo traveling to Turkey and the UAE. However, unless the United States is willing to raise the threat of secondary sanctions, it will be difficult for Washington to apply pressure to safe havens like the UAE. As of now, it appears that the United States will not take this step—leaving the UAE and Russia free to exploit weaknesses in the international sanctions’ regime. “Switzerland” for traders of Russian commodities, is unlikely to revert its course of behavior using the current situation as a lucrative economic opportunity.

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