Dubai – The Antwerp of the East?

At three o’clock in the morning earlier this week, driving from Dubai’s airport to my hotel, I was amazed to see huge cranes actively operating in dozens of high rise commercial and residential construction projects. Operating in the middle of the night under huge lights!  Dubai is an Emirate in a hurry. Before it runs out of oil (in about 25 years), it wants to firmly consolidate its position as the principal trading and industrial center strategically located at the crossroads of commerce between Europe and the Far East, while also serving regional markets that include the Middle East, North and East Africa, Russia and, last not but not least, the Indian subcontinent. It needs ever greater infrastructures – thus it is building, around the clock in three shifts, super-modern skyscrapers in a matter of months rather than years.

One of the towers of which the construction is just beginning is the 65 storey- Almas tower, which is exclusively dedicated to diamond trading. It will also house the diamond exchange, but, in true Dubai style, will also feature an Olympic size swimming pool, sports facilities, restaurants, etc. enabling the easy mixing of business with pleasures.

The building, not unlike ancient fortresses, will be surrounded by a lake and gardens, allowing only one land entry into the secure project. In addition, another construction development, the Jewellery and Gemplex complex, which will provide space and accommodation for workers as well as luxury apartments to advance the growth of a diamond cutting and diamond jewelry manufacturing sector, is about to be inaugurated in early 2005. Needless to say that the project is in the vicinity of the Almas tower.

Next month, the Dubai Metals and Commodity Center, (DMCC), which promotes the Almas (meaning “diamond” in Arabic) Tower project, will selectively start selling office space. This gets us to an intriguing question: is Dubai just a “passing phenomenon” for the diamond trade or is there a long-term sustainable business out there? Will the Almas Tower become a white elephant or is the purchase of (large) office space an essential requirement for any international diamantaire who believes that there is a future in diamonds?

We have struggled with that question for quite some time and the on-site visit was mostly to gain a better understanding and to make some sense out of a plethora of facts, figures and myths.

For starters: in 2003 Dubai exported rough diamonds in excess of $1 billion and in 2004 this figure will exceed $1.2 billion. On paper, Dubai exports more (or almost as much) rough diamonds than producers such as Namibia, Angola, DRC, South Africa, Sierra Leone and others. The difference is that Dubai has oil, not diamonds.  We have written in the past that Dubai may well turn out be a temporary “specific purpose” phenomenon – with no long term justification as a rough trading center.

Meanwhile, many external events (the implementation of Supplier of Choice; repeated raids by tax officials on businesses in Antwerp, Mumbai and elsewhere; the increasingly more difficult European compliance issues; etc.) all seem to coalesce in favor of Dubai.  The strong political will of Dubai’s rulers and the visions of DMCC’s executives, CEO Tawfique Abdullah and COO Ahmed bin Sulayem, may well be stronger than the willingness of the traditional centers to fight for their own commercial survival. We don’t know. History has seen many rises and declines of diamond centers.

The rough trade in Dubai is partly a direct consequence of Supplier of Choice (SoC). De Beers wanted to see diamond companies with equity on their balance sheets. And De Beers wanted to see that equity fast. The company totally ignored that time-honored and agreed taxation systems in Israel and Antwerp doesn’t facilitate or contribute to massive capital formation.

The transfer pricing mechanism in Dubai facilitates the creation of (tax free) equity in Dubai. Through the consolidation of balance sheets, diamantaires can show a formidable asset growth in their total worldwide business without subjecting themselves to painful tax payments at home. By my calculation, in a two year period well over $1 billion of “new capital” has been created through Dubai. For De Beers this is “victory” – it proves that SoC works. Dubai has significantly broadened the officially available capital (the recorded assets) in the diamond industry.

Dubai was further a direct consequence of the financial directives of the European Commission, which doesn’t look friendly upon back-to-back arrangements in the banks’ extension of credits. The Belgian traders needed a solution – and Dubai filled that need. Family capital that has been with diamond companies in succession, but which was kept out of the balance sheets, was brought in. Undoubtedly, some reader might argue “but this amounts to money laundering” – how can you approve of what Dubai is doing? As a journalist I don’t need to approve or disapprove. What I do need – and I owe that to our readers -- is to understand what is happening. As the author of a book on the subject, I can see without hesitation that there is room for a legitimate argument on this issue. However, what is important is knowing the “source” of funds.

In Dubai, through transfer pricing, “paper profits” are created – profits from taking funds off-balance sheets and turning them into balance-sheet (official) capital. Isn’t that money laundering? No, it is not – because we know (or the banks know) the SOURCE of these funds. They are not derived from illegal or criminal activities.

In India, until recently, the diamond sector was exempt from tax payments. In Israel and Belgium profits are declared following an agreed assessment period. Surplus profits don’t appear on balance sheets. Dubai has enabled the bringing in of these funds. Is it proper? I can’t think of any government objecting to bringing existing funds into one’s official business. A year ago, we were convinced that – after a transition period significantly widening the equity base of the worldwide diamond industry – the need for Dubai would evaporate.

This isn’t the case. De Beers, Rio Tinto, BHP Billiton and others are increasingly insisting on good governance, audited financial results, full transparency, etc. The major (or maybe I should say “most’) diamond manufacturers and traders have the same objectives. However, this may not be consistent with tax assessment agreements in force between the industry and some stakeholder governments.

Dubai, however, has no personal income tax, it has no corporate tax, and it is willing to guarantee that this situation (for diamond companies under the DMCC or similar free trade zone umbrellas) will not change for the next fifty years. This raises the question whether there are companies which can afford NOT to work in Dubai? Isn’t this almost too good to be true?

Look at the situation today. Out of the 84 DTC Sightholders, there are already some 35 that have some form of presence in Dubai. The total number of rough and polished diamond traders in the Dubai market comes to some 150-200 players. The ABN AMRO Bank’s International Diamonds and Jewelry Group, presently headed by Loet Kniphorst, has a presence in Dubai. What may be even more significant – and that may be news to our readers – is that the Antwerp Diamond Bank (ADB), which finances over 50% of the industry in Belgium, has been given the green light by its KBC parent company to explore the possibilities in Dubai. ADB is set to finance clients in Dubai – especially transactions between India and Dubai – and is therefore looking for something more substantial than a representative office. Like the proverbial horse and the wagon, the banks follow their clients – they don’t run in front of them. If ADB opens up in Dubai that means that a specific demand for this has originated with their clients.

The great advantage of Antwerp was always seen as the ample bank financing available. With both ABN AMRO and ADB in Dubai, more rough and polished trading business will be diverted to this market. How fast will all these shifts take place? This depends on a number of factors – and the skill of the DMCC in selling the Dubai concept also plays a big role. We expect that a lot will depend on the behavior of the Indian diamond community.

Today there are some 400 Indian families in Antwerp, representing some 300 diamond companies. Most of these companies already have a representation in Dubai. But also many Bombay-based companies have joint ventures with Dubai companies. All companies (whether Indian, Belgian, or Israeli for that matter) will probably reiterate their commitment to “stay where they are” – and the shifts will be more subtle. Companies may decide to move more and more of their business to Dubai, without necessarily eliminating their presence in other centers. In Dubai, the Indian community is the largest ethnic group in the country. It is also closer to home. Dubai certainly represents an attractive work and home environment to the Indian industry players.

And then there is a De Beers factor. The DTC has a full time representative in Dubai, Jonathan Chippindale, who is mostly looking after the polished trade of their clients. Many DTC sight boxes pass through Dubai. Jonathan serves on the Advisory Board of the DMCC. The DTC isn’t an “uninterested” party as to what is happening – or will be happening – at the DMCC.

The DTC’s Worldwide Director of Marketing, Stephen Lussier, was in Dubai last week. According to a report in “Gulf News”, Lussier was quoted as saying “we have plans to bring our clients here to explore greater business avenues in diamonds,” and he heaped praise on the DMCC. (Lussier stressed that the UAE was among the first countries to become Kimberley Process compliant.) The DTC director also disclosed that he expects that at least two DTC Sightholders will shortly get involved in manufacturing.

There seem to be some good reasons to expect that Dubai will become an ever more meaningful player in both rough and polished – representing sustainable long-term business. But it still too early to make “definite statements” – far more research is needed here. But the sale of space at Almas will serve an as an important gauge. Within a few months we’ll see who has purchased space – and how much – in Dubai’s Almas Tower; we’ll know who bought manufacturing capacity; we’ll know whether the 150-200 present players are moving to the Almas building or staying where they are now; and whether they are expanding their business, And, finally, we’ll also know if the DTC has moved its Dubai (temporary) offices to the Diamond Tower – something which will definitely be seen as a telling signal to many.

These words are typed while in the air on the way back. It may well be that things may look different from the ground. Time will tell – and we’ll come back to the issue.

Have a nice weekend.