INTELBRIEF

January 8, 2014

TSG IntelBrief: Afghanistan’s Capital Flight and Post-2014 Future

• The increase of Afghanistan’s capital flight to the United Arab Emirates, particularly Dubai, is one indication of uncertainty about the post 2014 transition future

• Afghanistan’s elite are attracted to Dubai’s relatively welcoming business and real estate investment environment, which enables transfer of funds to a more stable and safer economy

• Consistent reporting indicates a significant amount of capital comes from illicit economic activities originating in Afghanistan, further complicated by a lack of transparency in oversight, accounting, and enforcement.

As of early January 2014, the continued transfer of capital by Afghanistan’s elites to the UAE points to persistent uncertainty among them about their country’s future as US and allies prepare for draw down post-2014. Over the past several years, Afghanistan’s wealthy appear to be hedging their bets that the successor government to President Hamid Karzai, following the April 2014 presidential elections, will be unable to govern effectively and stabilize the country once most of the US-led NATO forces and development assistance teams leave the country. These elites appear unconvinced that the national military and police forces will be capable of countering the likely escalation in the Taliban’s insurgent warfare, leading to continued—and possibly worsening—political and economic instability throughout the country.
Estimates of Afghan expatriates reported to reside in the UAE vary from 200,000 to 300,000, though the large majority are guest laborers. Most reside in Dubai and Abu Dhabi. This expatriate community is the second largest diaspora of Afghans after the US.

The motivations of Afghans having the means to establish residency in the UAE include relatively relaxed laws for banking and business and real estate investment, which enables them to place considerable sums in a relatively much more stable and safe economy. With its location at the junction of Asia, Europe and Africa, and its banking secrecy laws, Dubai has also become ideal for moving liquid assets to a variety of businesses (current laws require a local partner), property sales, and development projects. In recent years, though, the Emirates have tightened money laundering and banking laws.

Well before the announcement of the 2014 date for departure of Western forces, Afghan businessmen have been concerned with the lack of safe investment opportunities in Afghanistan, where corruption and infrastructural inefficiencies are widespread. With only an estimated seven percent of the Afghanistan population holding a bank account, it is difficult to track of the flow and exfiltration of capital, with significant volumes of cash transferred through hawala (traditional money transfer system) as well as physically through Kabul Airport (although tighter restrictions have reportedly been instituted at the airport in recent years to prevent transporting large amounts of cash).

The Afghan elite’s capital flight has been accompanied by a slowdown in new building construction in Kabul and an increase in the number of high-end houses up for sale, with their owners reportedly seeking to shift assets abroad. As a result, the prices of such properties have declined by as much as 35 percent since 2011, according to a September 2013 NBC News report.

Increase in capital flight from Afghanistan has been ongoing for the past several years. One of its peaks was reached in September 2010, when relatives and associates of President Karzai had assembled a “property empire” in Dubai, estimated to be worth $140 million that was, at least, in-part owned or occupied by them, according to The Telegraph. This was followed in the first six months of 2012, when Afghan buyers reportedly invested more than $60 million on property in Dubai, a 27 percent increase compared with the same period in 2011 (although these figures are likely to be considerably higher than officially reported), according to Dubai government data.

Strategic Assessment

The increasing migration of Afghans and their capital to the UAE speaks to atmospherics among the able and wealthy, prior to Afghanistan’s critical transition period over the next year. It may also point toward the betting on prospects for sustained economic growth and establishing viable—and enduring—political and economic institutions that enable growth and the trust of Afghans. As segments of the population sense as fleeting the country’s stability, security, and future, the political and economic elites typically—and often astutely—view their future in foreign countries. Even under the best circumstances, the next Kabul government will be significantly challenged to build an economy capable of financing and attracting long-term development that can help unite a nation fractured by the Taliban insurgency and decades-old ethnic and political rivalries.

With Afghanistan heavily relying on international aid to fund a considerable portion of government expenditures, salaries and national development, the uncertain political and economic future will make exceptionally challenging the retention and attraction of donors and investors.

• For the UAE, particularly Dubai, the influx of Afghanistan’s wealthy elites will continue to contribute to its economic and real estate boom

• However, there remain persistent allegations of transfer of illicit capital, derived from activities originating in Afghanistan such as graft proceeds and drug trafficking money; moreover, the situation is exacerbated by lack of transparency on monetary governance, accounting, and enforcement

• With neighboring Pakistan and Iran experiencing political tension and economic difficulties, other regional states will likely face an influx of Afghans seeking greater personal and financial security

• The UAE, about a two hour flight from Kabul, is likely to see an increasing number of Afghanis seeking to work and reside in, and for those requisitely moneyed, to invest in real estate and UAE equities

• These trends will present challenges to Afghanistan’s Western allies, and any semblance of steady transition to full Afghanistan government control and domestic responsibility—in particular, capacity, capability and will to contain an expected Taliban insurgency.

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