City of Gold: Dubai and the Dream of Capitalism (28 page)

DIAMONDS, DUBAI, AND ISRAEL

THE ISRAELI TAKES
the stage and the Dubai diamond conference springs to life. He’s a blocky man in a pinstripe suit with tufty gray hair on a very large head. His name is Chaim Even-Zohar. He kicks off with a recession joke in his thick Hebrew accent. For a moment I’m in the Borscht Belt.

“Yesterday one of the dealers said to me, ‘You know, Chaim, we always believed that diamonds were rare. But today there is one other product that is rarer than rare.’”

“‘What’s that?’ I said.”

Even-Zohar wags his eyes back and forth in a campy gesture suggesting a great truth about to be revealed.

“Money!”

He pumps his fist and yells it again in case anyone didn’t hear: “Money!”

The Saudis, Emiratis, and Chinese in the audience sit unmoved. They’re wearing headphones, listening to simultaneous translations into Arabic, Cantonese, and Mandarin. A few seconds later, when the interpreters finish, they erupt in guffaws.

Even-Zohar is one of the world’s foremost experts on the diamond trade and he’s a jolt of caffeine to an otherwise staid show. He squats
and leaps to emphasize his points. He throws his arms wide and shouts, “Look at this!” and flicks his green laser pointer at a graph on his PowerPoint slide.

“We saw
history
being made this week,” he booms. “Forty percent of De Beers product offer was left on the table! That’s never happened before. A hundred years of the cartel structure is over!”

In the front row is young Ahmed bin Sulayem, the top diamond official in Dubai. Bin Sulayem, in his
kandoura
and
gutra
, is a big fan. He once gave me a copy of Even-Zohar’s book.

The Jewish presence in Dubai got a lift with the opening of Sol Kerzner’s mammoth hotel, Atlantis, The Palm, the diamond conference’s venue. It’s managed by a guy named Alan Liebman, and it’s where Israeli tycoon Lev Leviev operates one of Dubai’s four high-end Levant jewelry outlets. There’s a smattering of guttural Hebrew amid the Arabic, English, Turkish, and Chinese conversation. But there was to have been much more. Some 250 Israelis had registered for the conference, which focused on hot new diamond markets in the Middle East and China. But most couldn’t get visas.

It’s one of those things. When the planets line up, Israelis get UAE visas, even though the UAE and Israel have no relations. But often the stars don’t align. Israelis who thought they could spend a few days in Dubai are locked out. Israeli tennis player Shahar Peer, refused entry in 2009, is the most prominent among them.

“If they want you in, they get you in. It’s that simple,” Even-Zohar explains over lunch at the Atlantis’s Asian-themed buffet.

From virtually nothing in 2002, Dubai has clambered up the ranks of global diamond capitals. In 2007, Dubai was the world’s fifth largest overall diamond center and the number four handler of rough diamonds, with $5 billion in trade. Dubai’s share of rough diamonds is catching up with the big centers: Mumbai (number two) and Tel Aviv (number three) handle around $9 billion each. Antwerp, number one in the world, traded $19 billion that year.
¹

Dubai’s splashy entry into diamonds has created some fascinating geopolitical juxtapositions. The ancient diamond trade has been the purview of Jewish craftsmen and traders for hundreds of years. Tel Aviv—the Middle East’s chief diamond center—controls a large portion of it. Dubai cannot get into the sector without dealing with Jews in general and Israel in particular. Tel Aviv is a vital supplier of rough and polished
stones, a cutting and polishing center, and a hub of global companies that handle the trade. When it comes to diamonds, Israel is a fact of life.

But Israel has a problem. It has no formal relations with the Arab countries that now form the world’s fastest growing jewelry market. The oil-rich Middle East commands 14 percent of global jewelry sales.
²
Diamond sales jumped by 20 percent in Saudi Arabia alone in 2007.
³
For Tel Aviv’s diamond merchants, Dubai’s Diamond Exchange is a godsend. It’s their only plausible gateway to a market that lusts after jewelry. It’s also one of the few platforms for Arab-Jewish cooperation.

If it were any other country, the business relationship wouldn’t be worth noting. But the UAE and Israel have no diplomatic ties. Dubai, massive air hub that it is, offers no direct flights to Israel. You cannot phone one country from the other. Israeli freighters call at Jebel Ali port, but Dubai has no direct air cargo connection to Tel Aviv that diamond merchants can trust. The UAE honors the Arab League boycott and says it won’t normalize relations with Israel until the Palestinians do.

Despite these hurdles, the trade flourishes. The world’s largest diamond companies maintain offices in Dubai and Tel Aviv, as well as in Antwerp and Bombay and other jewelry capitals. Dubai and Tel Aviv’s bourses are members of the same associations. When a dealer in Tel Aviv sends stones to Dubai, he ships them through Switzerland. Many Israeli traders have dual citizenship and use second-country passports to get into the UAE. Those who only carry Israel’s blue passport are subject to the UAE’s good graces.

“Israeli traders fought their way into the market,” says Youri Steverlynck, CEO of the Dubai Diamond Exchange. Steverlynck, a former Antwerp diamond official, says business relations between the two countries are a lot smoother than political ones. Maybe it’s the way forward. “The best way to solve problems is through business,” he says.

Problem is, trade with Israel goes against UAE foreign policy. Dubai plays up its Arab credentials to avoid a political backlash—even a terrorist attack—and keeps quiet about facts that go against the grain, like U.S. bases and ties with Israel. “There is more Israeli business here than you think and the less that is said about it the better,” Even-Zohar says. “It’s in the interest of Dubai not to talk about it. Dubai is worried about the reaction from the rest of the Arab world.”

Israel is cautious, too. In 2008, I sought an interview with Ran Gidor, an Israeli diplomat at the country’s embassy in London. Gidor agreed to
discuss Israel-Dubai ties until he informed his higher-ups in Jerusalem, who batted it down. His e-mail was apologetic. “I’ve been instructed in the most unambiguous terms to avoid making any reference to Dubai,” he wrote, adding that he hadn’t “the faintest idea why it is deemed so sensitive.”

Dubai-Israel ties are sensitive because they are substantive. Stanley Fischer, Israel’s central bank governor and former Citibank vice-chairman, mentioned the relationship at a 2008 press briefing in London. An audience member asked Fischer whether Dubai’s success was coming at Israel’s expense, as some U.S.-based Israel backers were saying.
⁴
Fischer said the reverse was true: Dubai was more interested in trade than deepening the boycott. “Various business contacts are taking place between Israel and the Gulf, without wishing to identify the parties since both sides want to keep it quiet,” Fischer said. “Both sides know what they’re doing.”
⁵

Dubai and Israel share a “very good informal relationship,” says Even-Zohar. “Dubai doesn’t hurt Israel at all,” he says between spoonfuls of vanilla ice cream. “My first contact with Dubai came because our Israeli foreign ministry suggested that I call somebody here.”

The lack of formality greases the skids. Qatar was, until recently, the only Gulf state with diplomatic ties. It hosted an Israeli trade mission until January 2009, when it closed it in protest of Israel’s assault on Gaza. But Qatar dealt far less with Israel than the UAE does.
⁶

Some Israeli concern is warranted. Dubai’s entry into the diamond business is a long-term challenge to Tel Aviv’s status as the Middle East’s diamond capital. But in the short term Dubai’s tax-free and lightly regulated sector is a bigger challenge to Antwerp and a boon for Israeli dealers who can serve the Gulf’s fast expanding markets.

“We are indeed challenging existing positions,” says Peter Meeus, CEO of Dubai-based International Diamond Laboratories. “Publicly we always say we are complementary. This is also true. With the business growing so fast in the Mideast, people who want polished stones come here instead of going somewhere else.”

Dubai has capitalized on important shifts in the sector. The diamond business is drifting away from Europe and the mighty De Beers cartel. New trade centers are rising in Africa and India. Markets are growing in the Middle East and Asia. Europe and America are still the most important, but they are slowing.

Dubai is better placed than Tel Aviv and Antwerp to serve the Arab
market, and the emirate is fast deepening ties with China and Africa. Dubai’s long relationship with India allows it to capitalize on the explosion of the diamond business there. In short, Dubai sits at the center of the revamped trade matrix. This realization caused Meeus, a native Belgian, to dump Antwerp and move to Dubai.

Meeus, a buzz-cut man with a fireplug physique, said he’d been stifled in clannish Antwerp. In 2005, the board governing the Belgian diamond sector told Meeus to halt his plans to expand the city’s operations into Bombay and New York. At the time he directed Antwerp’s Diamond High Council. Meeus reckoned that Flemish fortunes were fading. He accepted an offer from Ahmed bin Sulayem to open the Arab world’s first diamond exchange.

When Meeus defected, Belgian newspapers plastered it on page one. The Antwerp chapter of the World Diamond Council stripped him of his leadership post. But not everyone was scandalized. Meeus was able to poach another fifteen Antwerp experts. One by one they followed him to his headquarters near the Jebel Ali port, an area the gem industry press now calls Little Antwerp. Meeus is a man rejuvenated. He’s jettisoned Belgium’s stolid traditions and regulatory morass for a new place that seethes with dynamism.

“What pushed me away was the lack of vision and ambition,” he says. “I’m a very ambitious guy. I want to build. And Dubai gives me that environment. We take risks. Okay, sometimes it doesn’t work, but at least we do things. That mentality is missing in Europe.”

Meeus’s stewardship partly explains Dubai’s astonishing rise. Sheikh Mohammed invited him to an
iftar
dinner at Zabeel Palace during Ramadan. The Dubai leader asked him two questions: “How will you internationalize your business? Where are you going to expand?” Meeus told him Dubai needed to move into markets in Russia, Europe, and India. Sheikh Mohammed didn’t say much in response. Meeus got the feeling he was unimpressed.

For Meeus, however, the sheikh’s attitude was sweet music. His global ambitions had been shot down by the gray men of Antwerp. In Dubai, his ambitions needed beefing up.

Dubai’s nearly instant success in diamonds isn’t completely on the up-and-up. The zone’s tax-free status makes it a convenient transfer center
for dealers looking to launder profits and avoid taxes in their home markets.

Even-Zohar explains how it works in his book
From Mine to Mistress
. Exporters send diamonds to Dubai with paperwork listing them at a fraction of their value. The stones are then transshipped elsewhere, often unopened, at marked-up values. African exporters send stones through Dubai to avoid paying heavy export taxes. Europeans and Israelis use Dubai to manipulate profit figures and reduce income taxes or, like the Africans, to avoid export tax. The scheme costs those governments revenue, and it fills the wallets of their corrupt bureaucrats and merchants. In short, Dubai makes money on crimes committed elsewhere. It’s another reason Dubai’s diamond exchange has grown so fast.
⁷

“They’re thriving on the greed of others,” Even-Zohar says. “It’s cheating other countries’ tax systems. It’s not sustainable.”

A U.S. State Department money laundering report cited the practice and Belgian authorities have begun cracking down.
⁸
But so-called transfer pricing has slowed in recent years as Dubai’s more legitimate business has grown. Local regulators have worked with global money laundering authorities to stem the manipulations, even though no criminal activity takes place on UAE soil. Steverlynck, the Dubai exchange boss, says he has no desire for Dubai to be labeled a repricing center.