First came the tacky influencers, broadcasting raucous yacht parties to their followers caught in pandemic lockdowns. Then came Russian wealth, from cash to crypto, looking for a home unbothered by pesky sanctions after the invasion of Ukraine.

Now Dubai’s latest well-heeled digital-nomad demographic is the wealthy Western hedge-funder, judging by a recent flow of talent from the likes of Millennium Management and ExodusPoint Capital Management, as the emirate and its neighbor Abu Dhabi court the rich and powerful with tax-free status, lighter regulation and an Asia-friendly time zone.

This may feel like “deja vu” for some — and perhaps out of whack with the hedge fund industry’s stagnant growth, poor performance and worsening environment for raising money last year — but there’s a good chance the Gulf is going to become a test case in the race for rich talent in a world dominated by geopolitics and war. It will also likely raise the hackles of tax authorities across the West at a time of stretched budgets.

Follow the Millionaires

Estimated net flow of high net worth individuals in 2022 shows UAE benefiting

Times have changed since Dubai’s last big push at being a global financial center, which turned out to basically be a speculative debt-fueled real-estate bubble built on sand. When I visited the emirate during the financial crisis days of 2009, I was struck by how many foreign investors had lost a small fortune flipping property. When the bubble burst, its less freewheeling neighbor, Abu Dhabi, tightened its grip with a bailout.

Today, the UAE has the Louvre in Abu Dhabi, the tallest building in the world in Dubai, and a financial center seen by hedge funds as the new Zug or Geneva — just as the old ones can no longer offer bank secrecy or a Credit Suisse account. Roughly 50 hedge funds jointly managing more than $1 trillion worth of assets are said to be looking to obtain a license in Dubai, which eagerly promotes its “zero personal income tax regime” — compared with a top rate of tax in European countries of 45% to 55% — and its role as a “neutral ally” to both West and East in wartime.

Brexit job moves used to mean a win for the EU, but now they also mean a win for the UAE: In an interview with Financial News, Florin Court Capital partner David Denison cited sunshine (though maybe not in July), housing and a responsive regulator as Abu Dhabi’s advantages over the City.

The frustration of Western capitals will likely rise given how much effort has been spent on ending the global race to the bottom on corporate tax; if competition spreads to wealthy digital nomads, that could erode tax bases further. There’s also the darker side of sanctions and money laundering risks: UAE trade with Russia has soared as oil and precious metals flow into the emirates while microchips and civilian drone go the other way, according to the Carnegie Endowment for International Peace. The UAE was last year added to a global watchdog’s “gray list” of countries seen as falling short in the fight against illicit finance.

Hot Property

Tourism, no income tax and a lack of Russia sanctions have seen Dubai pop

But there’s no magic bullet here. The UAE is no old-school tax haven. The country has made an effort to keep the playing field level by adopting corporation tax for the first time in its bid to diversify from oil revenue, and it has also responded to Western sanctions pressure by effectively forcing local Russian bank closures. The country is profiting from its position as a “geopolitical swing state,” in the parlance of Goldman Sachs Group Inc.’s Jared Cohen.

High energy prices have given it a disproportionate amount of capital and willingness to deploy it in pursuit of strategic objectives, including finance, and the war in Ukraine has given it leverage. Germany was forced to turn to Abu Dhabi to help secure gas supplies to get through the winter, while Washington DC is keen to use it to expand its influence, meaning a blind eye might be turned to those money-laundering risks, Politico reports.

So if Dubai’s influence makes it unlikely that a global alliance on personal taxation emerges, and with the US the only country that looks powerful enough to tax its citizens globally, perhaps the next most probable outcome is a bid to make the cost of moving more dissuasive. That may mean exit taxes — such as a tax on unrealized capital gains — look more attractive; the list of countries imposing them is already growing longer.

It’s a blunt tool, but, as the OECD’s former tax chief Pascal Saint-Amans writes in his recent book on tax havens, competition between countries for rich talent has been a “blind spot” — and fairer taxation of capital while limiting global competition would be a good step to fight inequality. If that message catches on, better hold off on the raucous Dubai yacht parties.