Seveal lessons for Dubai are to be drawn from the crisis unfolding in Cyprus. The first is: be careful what you wish for, you might just get it.
Financial turmoil in Cyprus an object lesson for Dubai
There are several lessons for Dubai to be drawn from the crisis unfolding in Cyprus. The first is: be careful what you wish for, you might just get it.
Twenty years ago the Cypriot economy was dependent on agriculture, tourism and revenue from British military bases on the island. Its subsequent development as a financial centre mirrors Dubai's ambitions along the same lines, and it was hugely successful.
Cyprus used all the lures available to a would-be financial centre: relatively high deposit rates, comparative anonymity and light-touch regulation. Coupled with the appeal of the location, and its proximity to the freed-up economies of the former Soviet states, the policy was a hit with international investors. Cash poured into the Cypriot safe haven to the extent that the banking sector swelled to seven times the size of the rest of the economy.
All went well until 2008, when two events occurred, the consequences of which we are seeing now in the Cypriot crisis. Financial turmoil rocked the island, along with the rest of the world; but more importantly, in that year Cyprus joined the euro zone.
No doubt Cypriot policymakers thought it was a good idea to be part of a broader and stronger financial union at such a time of global turbulence, but a glance at the situation today shows just how wrong they were.
While Dubai, for example, was able to renegotiate and restructure its financial liabilities more or less bilaterally with creditors, Cyprus found itself in the straitjacket imposed by euro membership and German-led formulae for dealing with the crisis.
The result is the chaos we see today in Cyprus: banks are afraid to open, policymakers are afraid to vote, and international investors are afraid their deposits there will never be safe again.
That is the second lesson for Dubai from the Cypriot debacle: be wary of membership of big international groupings. They might offer shelter in extremis, but they can just as easily constrain flexibility of policymaking in the national interest.
Dubai policymakers were able to meet the challenges of the financial crisis in 2009-10 partly because of the enduring relationship with Abu Dhabi and the durability of the UAE federal structure.
If Dubai had also been dealing with, for example, a central bank in Riyadh, over loans in a GCC common currency and with centrally fixed interest rates, the problems would have been much more serious, perhaps insurmountable.
Cyprus now finds itself a plaything of the big European powers, especially Germany, which is leading the bloc of countries trying to grab Cypriot bank depositors' cash in an unprecedented act of expropriation.
In a German election year, that country's politicians are willing to sacrifice Cyprus for the demands of the ballot box. Opposition to the demands of the peripheral euro-zone members are growing, and a tough stance on Cyprus bolsters chancellor Angela Merkel's credentials.
It can be no coincidence that depositors from three countries in particular - Russia, Britain and Greece - stand to lose most from the smash-and-grab on Cypriot deposits. All three countries are regarded in Germany with a mixture of fear and disdain as anti-European forces.
The Russians, in particular, have found themselves the real target of the cash-grab. A whole country has effectively been labelled "money launderers" by the euro establishment; so, according to euro thinking, it is acceptable to take some US$3 billion (Dh11.01bn) from them.
If the euro-zone plan for Cyprus goes ahead, the estimated $30bn of Russian deposits in Cyprus would be at risk. What the economists call "deposit flight" would be the order of the day, not just for Russians but for all foreign investors in the country.
The third lesson for Dubai comes in here. The emirate should make it known, as publicly as possible, that investors seeking to escape the heavy hand of the euro zone, in Cyprus or any other euro-zone state, would be welcome in the UAE, where they will enjoy the protection of a well-regulated financial regime free from the political interference of foreign countries.
Dubai has the potential to become a safe haven for embattled euro zone investors, just as it has for victims of the Arab Spring.