When the American and French presidents visited the Gulf last month, both leaders received the same red-carpet treatment. Both met with their regional counterparts, both talked about politics and security, the need for finding peaceful solutions to the various crises troubling the Middle East and both called for stronger engagement and deeper ties between the two regions, their peoples and their economies.

But when it came to the business aspect of their respective visits, the differences could not have been greater.

As the main course, George W. Bush brought with him parts of a $20 billion arms deal with some GCC countries that had been announced in 2007. Saudi Arabia is to receive 900 Joint Direct Attack Munitions (JDAM) satellite-guided bomb kits worth $123 million, Kuwait and the UAE will acquire Patriot missiles worth $1.63 billion and $1.9 billion respectively, and the US will share its Littoral Combat System technology with the GCC. Together with other, unspecified packages it all adds up to $11.5 billion or slightly over half of the whole arms deal.

This arms sale is just a parcel of current US military contracts with Middle Eastern governments. Just days before Bush’s tour of the Gulf, the Libyan foreign minister, Abd al-Rahman Shalgam, was given a personal tour of the White House, meetings on Capitol Hill and a luncheon with Lockheed Martin, Boeing, Northrop Grumman, Occidental Petroleum and Raytheon, in a bid to convince his government to buy American hardware for the Libyan armed forces. This should increase the US-Libya trade volume from its 2006 level of $3 billion, 80% of which were oil exports to the US.

The only non-arms, private sector contract that was timed to coincide with Bush’s visit happened when indebted Gulf Air (solely owned by Bahrain since 2005), signed a $6 billion deal with Boeing for delivery of 16 Boeing 787 Dreamliners to begin in 2016. The deal also included an option for eight more planes as part of the airline’s plans to renew its current fleet of 25 aging aircraft and to grow to 45-50 planes by 2013. However, the airline is also in talks with Airbus to buy planes and thus Boeing will have to work hard to turn that option into a second sale.

Still, the Dubai-based American Business Group (ABG) is optimistic about US-Gulf economic ties, and especially about energy projects in the UAE. They are also excited about Emirati investments in the US, with hopes of bolstering the real estate sector after the sub-prime crisis. In 2007 the US-UAE Business Council, co-chaired by Joseph E. Robert Jr., chairman and CEO of JE Robert Companies, and Khaldoun al-Mubarak, CEO of Mubadala Development Company, was established in Washington, D.C. and is to become the main lobbying group to “resolve any misunderstandings regarding investments from the UAE,” according to Elias B. Sayah, vice-president of ABG.

Bush’s visit closes down Dubai

However, not everything went smoothly for Bush during his visit. After the American president’s remarks that $100 per barrel of oil is too high, the price did drop to $90 pb — mainly because of speculation that the US is going into a recession, but Gulf producers reacted coolly to, or even ignored, his demands that they increase production to lower oil prices permanently.

In the end, the big story during the American president’s visit to Dubai was not about business deals, or even politics, but about the emirate’s losses from the security measures put in place during Bush’s stay in Dubai that are said to have amounted to more than $118 million. And since the measures were done as an emergency shutdown, with businesses having had little to no time to prepare, lost opportunities add to that figure. DIFC and DIFX were closed, in addition to most businesses, except for neighborhood stores and restaurants.

Some analysts think that the long-term opportunities brought by the US president’s visit may outweigh the short-term losses, but in the short-term a lot of businessmen were very unhappy.

In contrast, Nicolas Sarkozy’s tour was a business tour par excellence. While his criticism of the high oil price — he said that “the realistic price for oil should be $70” — also did not result in any immediate policy shift of the Gulf producers, the answer he received — Qatar’s energy minister, Abdullah Bin Hamad al-Attiyah, responded to him by calling the $100 price a “fleeting development caused by the global market” — was a much more diplomatic response than the one his American counterpart got, and it exemplified Sarkozy’s reception and his visit as a whole.

On his first stop, in Saudi Arabia, he pushed for French companies to get a share of the kingdom’s $500 billion non-defense budget, especially in the energy, transport, and water distribution sectors. He also discussed $58.4 billion worth of contracts, among them a $15 billion security contract on monitoring KSA borders (previously known as MIKSA and now called “Saudi Border Guard Development Project”), $14.6 billion in railway and $2.25 billion in aviation contracts, as well as $9 billion worth of water and electricity contracts. The main companies to benefit are Alstom, Bouygues, EADS, Vinci, Veolia, Accor, Carrefour, Thales, Eurocopter, and Dassault Aviation. Among the projects under discussion are a high-speed rail link between Mecca and Madinah and a railway between Riyadh and Jiddah, the expansion of the French-built Jiddah airport, and an upgrade of the Saudi Airlines’ fleet. Saudi Airlines already concluded a deal in December 2007 with Airbus for twenty-two A320 aircraft, its first order with Airbus in two decades and at the Paris Air Show in June 2007, National Air Service (NAS) signed a deal for twenty A320s with an option for 18 more. Accor Hotels announced that it will be the first French hotel group to open in Makkah and Madinah and Total and Saudi Aramco join in a $13 billion project to build a 400,000 bpd heavy crude refinery in Jubayl.

In Qatar, the French president focused on energy, resulting in memoranda of understanding on cooperation on traditional energies and on nuclear/renewable energies and the announcement of major deals. Electricité de France (EDF) will cooperate on nuclear, solar and wind power for an initial feasibility study and Gaz de France (GDF), about to merge with Franco-Belgian Suez, signed deals with Qatar Petroleum International, the investment arm of Qatar Petroleum on international cooperation, whereby GDF will use Qatar as a focal point in Gulf.

French nuclear power contracts

Areva Transmission & Distribution, part of the world’s biggest producer of nuclear reactors, signed a $695 million electricity engineering project with Qatar’s Kahrama (Qatar General Electricity & Water Corporation) to supply 14 turnkey gas-insulated substations to develop and improve the electrical grid in the Doha region. These should be delivered in the first quarter of 2010. A second contract was also inked on technology in order to upgrade the National Control Center built by Areva in the late 1990s. Further accords, worth up to $9.3 billion were discussed but not specified.

By the time Nicolas Sarkozy made it to the UAE, the words “nuclear energy” had become the leitmotif of his trip. Having already offered French help in developing a civilian nuclear power industry in Saudi Arabia and including nuclear power in the French-Qatari feasibility study, before he touched down in Dubai rumors had been floated about a nuclear deal with the UAE. The ensuing results were not a disappointment.

In France’s third nuclear accord with an Arab country, after having signed the two others with Libya and Algeria, Areva, Suez and Total will possibly build two 1,600 MW EPR (European Pressurized Reactor) nuclear reactors and provide fuel-cycle products and services, Areva’s main product. Of course, the necessary groundwork — security, training and operational expertise — could take years. The current plan is to build the reactors by 2025. According to the agreement, Suez will hold equal shares with Total in the construction and operating consortium, at least 50% of which will be held by the Abu Dhabi Water & Electricity Authority (ADWEA). Total and Suez are already partners in the UAE’s Taweelah gas-fired power and desalination plant. The complete accord, including the training of local engineers in France and construction and other contracts bid for by French companies, could amount to up to $6 billion. As analysts have noted, this agreement could even provide the basis for a future nuclear accord with Iran, whereby nuclear material for Iranian nuclear power plants is enriched in the UAE under third-party supervision.

Concomitantly with the French president’s visit to the Emirates, Al-Yah Satellite Communications Company (Yahsat), a subsidiary of Mubadala Development Company, signed a letter of intent with Arianespace to launch the Yahsat 1A communications satellite, the UAE’s first satellite that is manufactured by EADS, Astrium and Thales Alenia Space. The satellite is due to be launched in the second half of 2010 from the Guiana Space Center — Europe’s spaceport — on an Ariane 5 rocket.

After laying the foundation stone of Paris-Sorbonne University Abu Dhabi, the first branch of the university outside France, built by Mubadala Development Company, Nicolas Sarkozy signed a defense cooperation agreement, following a 1995 defense accord, on the establishment of a permanent French military base in the UAE. On an invitation from the UAE, France will station 400 to 500 navy, army and air force personnel in the base. According to French sources, it is to have “a significant intelligence aspect” and will also serve as a maintenance station for French ships. An agreement on setting up a branch of the French military academy St. Cyr in Qatar, right next to the biggest US base in the region and coming on the heels of the France-KSA joint exercise accord, rounded up the French president’s checklist.

With this visit, part and parcel of Sarkozy’s activist foreign policy, the Gulf states are signaling a diversification, not only in matters of defense and security, but also in terms of energy policy and business. And France is on a path to move beyond its traditional regional spheres of interest — the Maghreb and Lebanon. The cultural/educational initiatives of the last years — bringing the Louvre to Abu Dhabi and dependencies of French universities to various Gulf countries — were only harbingers of a grander move by French companies and businessmen. The anecdotes about an increase of French-speakers in the lobbies of Dubai’s hotels and Abu Dhabi’s restaurants seem to confirm that perception. And the era of the Gulf as an anglosphere just may be over.

In a country where East meets West and modernism mixes with tradition, a permanent dialogue between cultures has been established, increasingly blurring legal boundaries for business owners. Today, the United Arab Emirates seem to be oscillating between Islamic shari’a and Western jurisprudence, with a business often left in a haze upon the death of one of its owners. Executive talked to lawyers and specialists to help make sense of the UAE inheritance system.

In the UAE, the transfer of legal ownership of a deceased’s assets to his heirs is built primarily on Islamic law, based on religious texts, mainly the Qur’an and the Sunna. Far from being a codified law, shari’a is subject to various interpretations and is often the source of much controversy. While shari’a is applied to UAE nationals, the UAE Civil Code also rules that, “inheritance shall be governed by the law prevailing in the country of the deceased at the time of his death, in a reference to the large expatriate community established all over the United Arab Emirates,” according to Elias Hanna from Al-Quari, Hanna, Harfouch and Boulos, a legal firm.

New probate law for foreigners

In 2005, a new law was introduced, providing residents with the option to choose between the law of their home country or the national laws of the UAE regarding matters such as divorce and custody of minors. “This has led to much debate within the profession, but we still ignore the full repercussions of the law in matters of inheritance, and whether it will be contested or not by concerned parties,” explained Hanna.

Within this particular framework, lawyers advise foreign clients inheriting a business or personal property in the UAE to obtain from their home countries a probate to settle the estate of a deceased person and distribute it accordingly, which will be executed by UAE courts. “This solution is much simpler than going through the actual process of proving and applying foreign law in local courts. This option is also ideal for Lebanese, Turkish or Moroccan Muslim nationals who can revert to the law of their country of origin,” Hanna added. The process includes an application for representation to be filled in the deceased person’s country of domicile. Once the probate is obtained, it will be notarized and legalized before it is recognized and validated by UAE authorities, who will grant trustees the power to administer the deceased’s estate.

For Muslims, however, estates are always ruled by shari’a, which rules that any assets owned by the deceased, such as money, property, stocks, shares, bonds or jewelry, will be included in the estate. Pensions, however, are excluded from an inheritance, while debts and mortgages are always settled in full before any heirs may claim their share. Every Muslim is also allowed to donate one-third of his possessions to charitable causes, while the other two-thirds are earmarked for its rightful descendants as recognized by shari’a.

Other exceptions are also mentioned in UAE laws such as Article 17-5 in relation to real estate property. The text states that: “The law of the UAE shall apply to wills made by aliens disposing of their real property located in the State.” Hanna explained, “When real estate property is included in an estate, heirs have to submit a copy of the UAE court verdict to the developer for obtaining a change in ownership. Nonetheless, this can only be applied to property purchased in freehold projects, which allow for foreign ownership. Foreigners married to Muslim nationals can only inherit property located in such projects.”

In the UAE, only citizens or GCC nationals are allowed to own immovable property. However, recent developments with respect to foreign ownership of land in Dubai have altered this position. In 2003, the emirate’s ruler, Sheikh Mohammed bin Rashid, created 100% freehold ownership projects, made available to all nationalities.

As Karim Ghandour, managing director of Money Line, explains, regardless of the legal framework, the death of a shareholder holds three serious consequences for businesses: (1) the personal repercussions the death of a shareholder may have on the owning family, (2) the financial costs that dovetail such an occurrence, and (3) time-consuming administrative paperwork. When a family is involved, death of one of the shareholders weights heavily on a company and may often cause its demise when an amiable distribution of the deceased estate is impossible to achieve. As he pointed out, “It is a time bomb slowly ticking away,” adding, “The administrative costs incurred can also be massive. As an example, a widow of one of our foreign clients who owned a training company in Knowledge Village, had to allocate as much of her late husband’s company capital to insure ownership transfer.”

Foreign ownership structure

According to the specialists, most companies with foreign ownership in the UAE are structured following a simple 49/51 rule, whereby 49% of the company’s shares are owned by an expatriate while 51% are “owned” by a local partner. Two contracts consolidate the partnership: a power of attorney that grants full voting rights and managerial power to the foreign shareholder, and a loan agreement whereby the expatriate “lends” an amount of the capital’s money to the local, which “allows” him to set up the company. In this particular structure, two scenarios may take place depending on which shareholder — the foreign or local partner — will first pass away. In the first case, the power of attorney ends with the death of the foreign associate and his or her heirs have no other choice but to wait until completion of the estate’s probate. In the second case, when death of the local partner is somewhat expected, the foreign partner may be able to transfer the power of attorney to another local partner. “However, when death comes unexpectedly, the foreign associate has no other choice but to wait for the estate’s probate, which is always a lengthy process and has no quick solution,” said Ghandour.

Hanna advises business owners to set up an offshore company which will own 49% of the UAE company and will help circumvent the first scenario. “Perpetuity is one of the advantages offered by attributing ownership of a local company to an offshore mother company. In this case, the death of the foreign associate will not impact the company and its daily operations. In the UAE, offshore companies are also allowed to own property purchased in freehold projects such as ones developed by Emaar and Nakheel.” Ghandour concurred on the many advantages of owning an offshore company, which falls naturally under the jurisdiction of the country where the company has been established.

“Our advice to business owners is to establish an offshore company that will own UAE local operations, thus insuring perpetuity of the structure. This is one of our industry’s golden rules,” he said. The specialist also recommends taking the process one step further by creating a trust fund, which, in addition to safeguarding contracts underlying the company structure such as the power of attorney, the partnership and the loan agreement will also put an end to the question of asset distribution in case of death. “Well structured trust funds are bullet proof.”

There were no celebrations, media coverage was minimal, and border crossings weren’t noticeably busier than any other New Year’s Day. But there is a flag, there are plans for a common currency, and there is certainly much ambiguity in the air about the launch of the Gulf Cooperation Council Common Market, which, for the lack of an official abbreviation, will be referred to as the Gulf Common Market (GCM).

The GCM came into effect on January 1, 2008, after 27 years in the pipeline, with the lofty aim of becoming the region’s equivalent to the European Union. At present the common market resembles the European Economic Community (EEC), the forerunner of the EU, or for that matter other regional blocs, such as the Central American Common Market (CACM), the Association of South East Asian Nations (ASEAN), and the Union of South American Nations (Unasul).

The GCM has a structure, a secretariat, a Supreme Council, and free trade, but like other regional blocs the goal of greater economic and political unification appears to be years away despite this year’s development.

Indeed, since the establishment in 1981 of the Cooperation Council for the Arab Gulf States, to use its official title, the regional body has to a large degree failed in its objectives, which, much like the EEC, were initially not about economic unification but rather to act as a forum for conflict prevention. After all, the body was established following a proposal by Saudi Arabia for an internal security pact among the Gulf monarchies after the Iranian Revolution in early 1979 and the Mecca rebellion later that year, and given further impetus after the Iran-Iraq war erupted in 1980.

The objectives of the council were to coordinate internal security, procurement of arms and national economies of member states, and to settle border disputes under the leadership of the Supreme Council. Yet despite the creation of a Saudi-led Rapid Deployment Force in 1984, the GCC could not broker a ceasefire between Baghdad and Tehran, and failed to present a united front in 1990 when Iraq invaded Kuwait. Even a committee to facilitate talks between Iran and the UAE over Iranian military exercises in the Strait of Hormuz in 1999 came to nothing.

However, this time the GCC’s objectives deal with economics and the free movement of people, aims the region has been moving towards following a customs union agreement in 2003, a condition set by the EU for a FTA between the two blocs. For the GCM that means GCC citizens are now able to: live in any of the GCC countries as well as work in either the private or public sectors; buy and sell real estate; freely move capital; access preferential taxation details; own stock and form corporations in any member state; and access education, health and social services.

This is all very commendable, and the GCM certainly has a lot going for it, with a population of 35.1 million people, a combined economy of $715 billion, and an estimated 484 billion barrels of oil, more than half of the oil reserves of the Organization of Petroleum Exporting Countries (OPEC). Furthermore, with booming economies on the back of high oil prices, in addition to massive government surpluses, the GCM has real potential to succeed, at least on paper. But as analysts and businessmen point out, there is a great deal of difference between rhetoric and the facts on the ground.

“The GCM is supposed to create more business, more movement, but so many things have to be leveled and if not enough awareness is created, will not leverage the benefits of a common market,” said Dr. Fadi Makki, senior associate with Booz Allen Hamilton.

Time to unite

The biggest stumbling block of the GCM was evident at the very meeting that decided on the market’s launch this year. The annual GCC summit in Doha, in December 2007, failed to provide any leadership on the challenges the Gulf is facing, namely a decline in currency values and rising inflation. For the GCC, Qatar and Dubai in particular, these dual issues are of major importance, making the region less competitive in attracting skilled foreign labor. Equally, the depreciation in the dollar has had an impact on unskilled workers, with laborers striking last year in the UAE over the greenback’s slump (two years ago the Indian Rupee was valued at 44 to the dollar, compared to the current 39 Rps).

What the summit did achieve was a controversial proposal, by Bahrain, for a six-year residency cap on unskilled expatriate workers, and a focus on rapprochement with Iran. Indeed, Iran attended the summit for the first time, a significant indicator of the current, and future, importance of solid relations between Tehran and its southern neighbors. Equally, with the Bush administration still keeping pressure on Tehran — the use of force, we are told, is still on the table — Iran’s attendance sent mixed signals from the Gulf, particularly at a time when the region is acquiring $20 billion in arms from the US.

Just as puzzling as the summit’s inability to tackle pressing financial issues were the statements about a common currency for the GCC, the “Gulf Riyal”. Although Gulf leaders issued a public communiqué at the summit that reaffirmed commitment to a 2010 deadline for a monetary union, a classified document leaked to UAE daily Emirates Business 24/7 showed that finance ministers had told heads of state that the GCC would not be ready by 2010. No deadline was given in the report, but if an interview given by the governor of the UAE Central Bank late last year is anything to go by, he said the GCC was unlikely to have a single currency by 2015.

This is not overly surprising, given Oman’s decision in 2006 to opt out of the common currency over concerns that spending targets would constrain economic growth, and last year’s decision by Kuwait to de-peg its currency from the greenback, citing inflationary pressure.

Therein lies the crux of the problems the GCM faces: Gulf countries are still acting independently of one another on economic and political policies.

“There is of course a large degree of liberalization, on tariffs (to zero), on services, establishing a business in another GCC country,” said Makki. “But now there is more work to be done, just as when the European market started, through stronger institutions, which have to be put in place. This will be essential to keep the momentum going, otherwise there is a tendency for capital protectionist initiatives. And a lot of things will have to be done differently, such as trade agreements being done separately, that will have to come to an end.”

Indeed, some developments currently underway in the region are at odds with the very aims of the GCM. Bahrain for instance has just proposed a dual price plan where non-nationals will be charged more for basic commodities than Bahrainis. Although aimed at expatriates, the proposal is for nationals only, not GCC citizens, flying in the face of the rights entitled to them under the GCM.

Then there is an issue that goes to the very heart of the GCM — the movement of people and goods, which was supposed to have been fast tracked when a customs union was introduced.

“They implemented GCC customs unification four years ago, and there are still hiccups,” said Ahmad Hammauda, assistant managing director of Global Logistics Services and Warehousing in Kuwait. “If we go to Dubai today, as a Kuwaiti company — a GCC company — we cannot have our own trucks in Dubai, you have to have an Emirati with you. The same was true for Saudi Arabia but the law was changed five months ago, now allowing GCC trucks into Saudi. We are building a depot in the Dubai World Center, but that is a free zone, whereas in Dubai we can’t — how free is that?”

Furthermore, the construction of barriers in the Gulf is presenting, quite literally, a physical obstacle for the GCM, with Saudi Arabia to spend between $10-$15 billion to secure its 6,500 kilometer border, which includes three GCC countries, the UAE, Kuwait and Oman, and potential future GCM members Yemen and Iraq.

“I’m pessimistic for security reasons. Saudi Arabia is building a wall with Iraq, Kuwait with Iraq and maybe there will be one between Syria and Lebanon. All this putting up of walls is not good for removing borders,” said Hammauda. “We hope that things will be easier. It would be great if goods can move freely within the GCC, but I don’t think that will happen anytime soon. In my book, the common market is similar to the EU or the US — a common market without borders,” he added.

Indeed, the postponement of the EU-GCC FTA is not only over the EU adding new conditions. Notably, the EU have pointed out a lack of coordination and uniformity among GCC countries as well as differences between governments in certain sectors such as labor laws, copyright and property rights.

As Eckart Woertz, program manager in economics at the Gulf Research Center, pointed out: “Legal codes and judicial regulations all need to be amended.”

Gulf Cooperation Council — quick facts

Boom times ahead?

The need to amend GCM laws is crucial for the common market to flourish, particularly inter-regionally. Currently, trade between GCC states represents about 10% of overall foreign trade, which is expected to surge to 25% in the next two years, according to Bahrain’s Chamber of Commerce and Industry, bolstered by the new common market.

The GCM is also expected to be a boon for neighboring countries.

“It will encourage countries to go in the same direction,” said Makki.

“The GCM is symbolic, the first of its kind in the area, moving towards ever closer coordination and countries giving up some of their sovereign powers — that is very significant.”

But before this happens along the lines of the EU — with the potential for expansion of the bloc on the cards, as the EU has done in the past decade — the GCC will need to liberalize further.

Woertz thinks that cross-border mergers are likely to improve if capital markets get closer together, or even establish a GCC integrated stock market.

“It would help if there were some inter-linkages, trading platforms and so on. At the moment it’s pretty much fragmented. If they wanted to develop and attract international investment, the GCC would need to do something there,” he said.

Equally, the free movement of capital needs to be addressed by regulatory authorities, as a true common market would allow banks and financial services to set up in any GCC country.

The aim of giving GCC citizens equal rights in buying and selling property as well as shares also needs to be addressed. Currently, Dubai and Abu Dhabi allow international investors to buy combined stakes of 49% in listed companies, while certain companies are restricted to UAE citizens. Saudi Arabia, however, the seat of the GCM, has allowed GCC citizens to buy and sell shares since September last year, and Qatar allows foreign investors up to 25% of a company’s shares. But only four bourses allow cross-listing of shares — Bahrain, Dubai, Abu Dhabi and Kuwait.

This will all change though when institutions are created to unify the GCM, such as a central bank, courts of justice and a country chosen to represent, on a rotational basis, leadership of the GCM.

“Imagine how the GCM can negotiate with just one negotiator. They would have a lot of weight in a number of international institutions — the WTO, future trade negotiations with the EU and the US, and elsewhere,” said Makki. “Even in non-trade related institutions, the IMF, World Bank, OPEC. The GCC role in all these financial institutions is likely to grow, and grow significantly, but it all depends on how coordinated their stance is vis-à-vis the issues that are at stake, so really the sky is the limit.”

Ultimately, the GCM has a lot going for it — a common language, bourgeoning economies and the ability to act as powerful bloc on the world stage. But before the GCM can progress, the political will needs to be there, along with a clear vision for GCC citizens of what the common market is all about.

“What does this common market mean? I’ve not heard much,” admitted Hammauda. “I heard one currency, and moving goods without documentation, but that is not there. We haven‘t heard anything that this might change. To be frank, I don’t know what the GCM means.”