Located on the Arabian coast of the Persian Gulf, surrounded by mighty neighbors, the UAE gained independence in 1971. Since then, the security and oil resources of a little federation comprised of seven emirates have been constantly threatened by its neighbors. At first, by Saudi Arabia, which once claimed part of the territory of the emirate of Abu Dhabi. Then by Iran, which pursues an aggressive regional foreign policy and develops nuclear weapons. Add to that constant threat of drone and missile attacks from Houthis in Yemen and radical ideologies and organisations which over the last decade turned the Middle East into a big powder keg.
Oil revenues have allowed the UAE to become one of the richest countries in the world and provided financial resources for building a national security system. But the oil rent is not endless and the country desperately looks for new sources of income.
Today economic leadership ultimately depends on technological superiority and human capital, so the UAE has been one of the first in the Arab world to start transforming its economy. In the complex external environment, the UAE is trying to build a new economic model based on knowledge and innovation.
In this regard, the history of Israel, a country that has managed to create an advanced economy in an extremely aggressive environment, provides the tiny federation with an example of how to overcome regional challenges. Now the UAE and other countries of the Persian Gulf are striving to emulate Israel’s model, informally called the Start-up Nation. The UAE, in its turn, created its own program, dubbed Entrepreneurial Nation). Israel already has a large tech cluster in the Negev desert, and high-tech companies account for 15% of GDP, 43% of exports, and pay 25% of the country's taxes.
To start a new Silicon Valley, three conditions are necessary: significant financial resources, which act as investment capital; a large number of skilled labor, especially in IT (this can be either migrants or citizens, which requires a high level of education); good business climate and good regulation for startups.
All these factors are present in the UAE, but all to a different extent. UAE is one of the richest oil monarchies. Its investment funds, which previously channeled their financial resources to the Western markets, now see growing opportunities at home.
As for regulation, the UAE has always attracted entrepreneurs from around the world with its free economic zones that allow for 100% foreign ownership of the company and have no corporate tax. Thus, in 2020, the country was ranked 16th in the Doing Business ranking, which assesses business conditions in 190 countries.
Human capital is probably the UAE's weakest point. Migrants comprise 88% of the country’s population, and most of them are low-skilled workers from South and Southeast Asia. Currently UAE is heavily investing in its own citizens but much skilled labour should be imported anyway. The country is now looking to attract new talent through various programs. Recently, the gulf country changed its visa system: starting from April 18, qualified employees can obtain “Green residence” - a new type of visa that provides a 5-years residency for skilled employees, without sponsor or employer. This is particularly important for freelancers and self-employed individuals. Moreover, a new type of visa has been introduced - the "Job Exploration Entry Visa" that does not require a sponsor. It can be granted to the individuals classified in the first three levels (out of five existing to date) as per the Ministry of Human Resources and Emiratisation as well as fresh graduates of the best 500 universities in the world.
The new visa policy was introduced right at the time when the UAE became a safe haven for many Russian programmers, fleeing from the economic effects of the Ukraine crisis. So, apart from Russian oligarchs buying property in Dubai, the UAE has been welcoming many highly qualified tech specialists, with Google’s Russian division employees being the most obvious example.
Another way to attract talent is to create accelerators that invest in new companies at an early stage. Thus, in 2019, Abu Dhabi created a new technology accelerator called Hub71. It aims at supporting promising startups that deal with electronics, biotechnology and artificial intelligence. Being a joint project of Abu Dhabi’s second largest sovereign fund Mubadala, Japanese holding company Softbank and Microsoft, the accelerator places a particular emphasis on attracting foreign startups to the UAE.
Yet, the UAE is only beginning its journey into the amazing world of startups and VC. In 2021, Emirati startups raised just $1.2 billion in funding, while Israel, the UAE’s main rival in this field, got $25 billion. Moreover, the UAE is home to only four unicorns, while Israel has 48. In general, the MENA region accounts for just a small share of global startup funding investment, with North America and East Asia leading the way.
However, the gulf country has an edge that could play a key role in turning it into a new financial and tech hub. As national regulators around the world tighten rules on cryptocurrency, crypto exchanges and mining companies are looking for a new safe haven, i.e. a country with an attractive investment climate and the prospect of maintaining a low level of regulation. In MENA, until recently, it was Bahrain that led the way, but the UAE has much more potential.
As the number of cybercrimes grows, crypto companies strive to move to jurisdictions where their activities will be generally regulated, but the level of control will remain low. The UAE is eager to fill this niche and provide the best conditions for the crypto industry. In early March, Dubai approved a new law on virtual assets, giving a huge boost to the local cryptoscene. Many of the world's largest crypto exchanges immediately set up their offices in the emirate, with Binance being one of the first. Drawing an analogy to the center of traditional finance in New York, Binance CEO Changpeng Zhao (aka CZ) has even described Dubai as the future “Wall Street of Crypto”.
Following the approval of the law, the Emir of Dubai, Sheikh Mohammed bin Rashid Al Maktoum said: “Today, we are designing the future of virtual assets globally. Dubai will provide the most advanced virtual asset ecosystem in terms of organisation, governance and security.” The law provided for the establishment of a new agency, the Dubai Virtual Assets Regulatory Authority (VARA). It will control the issuance and circulation of cryptocurrencies, monitor the protection of users’ personal data, and monitor cryptocurrency platforms and digital wallets.
Binance, according to FT, was the main lobbyist of the law, so it comes as no surprise that CZ called it “very excellent”, and praised Dubai authorities as “the smartest regulators and government officials any place in the world.” He recently moved to Dubai himself after Singapore regulators, where he resided previously, tightened their grip on cryptocurrencies.
The adoption of the law provoked a surge of interest in cryptocurrencies in the emirate. One of the main Dubai developers Damac Properties announced that it would start selling houses for bitcoin and Ethereum. The largest airline in the Middle East, Emirates, announced it would accept payment for tickets in bitcoin. Emirates has become the first major airline in the world to accept payments in cryptocurrency. Recently, small companies in Dubai have also embraced bitcoins.
Another emirate, Abu Dhabi, tries to keep up: the administration of Abu Dhabi Global Market (one of the emirate’s leading free economic zones) began issuing licenses for the operation of crypto exchanges. In April, one of the fastest growing crypto exchanges, Kraken, opened its Middle East office there.
In 2021, the turnover of crypto exchanges amounted to more than $14 trillion. The concentration of such financial flows in one country promises to make it the future financial hub and bolster its investment potential.
Crypto companies need a large number of highly qualified IT employees and will attract a significant number of new workforce and talent to the UAE and thus help address the UAE’s shortage of skilled labour.
However, it’s worth reiterating that the UAE operates in an extremely negative external environment. This is the main challenge for its rapid transfromation from oil kingdom to a digital paradise.