It wasn't that long ago when Dubai's ambitions — as well as its fortunes — seemed limitless, particularly to those at the center of it.
The wealthy Persian Gulf city-state, fueled by the region's oil wealth, was working to transform itself into the business, financial and even tourist capital of a region known mostly for turmoil and conservative, authoritarian rule.
But Dubai's dream ran smack into painful financial reality at the end of November. Officials announced that high-flying Dubai World, the government-owned colossus that is behind some of the most ambitious — some say outlandish — development projects, wants time to delay and restructure payments on some $26 billion in debt.
The news sent a shockwave through a place built on brash salesmanship and bravado. Many businessmen in the region are waiting for additional shoes to drop from several other government-owned development firms that could have massive debt woes of their own.
In the spring of 2008, visitors to Dubai would have seen nothing but confidence for Dubai's future. With oil prices at record highs, money was pouring into the region, and Dubai hungrily gobbled it up.
"If there's one thing you can trust, it's Dubai," Khalid al-Malik, the CEO of Tatweer, a separate government-owned developer behind some of Dubai's most ambitious projects, said during an interview in April 2008. "Just like what the Americans did with their reputation, we are people who can deliver."
We're building a new city. It will have a sparkle to it. It will be a model, cosmopolitan city that people will continue to envy.
Tatweer's projects include Dubailand, which was planned to hold about a dozen full-scale amusement parks, including ones from Dreamworks, Legoland, Six Flags, Universal Studios and Marvel Entertainment.
"If you don't take risks," he told U.S. News & World Report at the time, "you're not serious."
Even later, as the global financial crisis gutted the world economy, Dubai continued to act as if it were immune, even though it has almost no oil of its own. But Dubai did enjoy the implicit backing of oil-rich and fabulously wealthy Abu Dhabi, one of the six other emirates that make up the United Arab Emirates.
"International investors were just so taken with this idea of a liberal emirate next to an oil-rich brother that they thought it was a sure bet," says Christopher Davidson, a senior lecturer at Britain's Durham University and author of Dubai: The Vulnerability of Success, a book that foreshadowed Dubai's troubles. "Nobody bothered to clarify just what the rules were or how these companies were backed. No due diligence was done."
Dubai's story is a compelling one. Once a sleepy backwater, Dubai's royal family built a massive port in the 1970s and began to transform the place into a center for commerce.
Throwing its doors open to all nationalities and religions, Dubai's ruler, Sheik Mohammed bin Rashid al-Maktoum, and his father helped orchestrate an intoxicating buzz about the emirate, building indoor ski slopes and elaborate man-made islands shaped like palm trees.
The competition for glitz and hype was fierce. No sooner did one government-backed developer break ground on the "world's tallest building," then a competing government-owned developer would announce an even taller one.
"Each deal had to be bigger than the last one or it doesn't make it onto the CEO's desk," says T.B. (Mac) McClelland, the chairman of Center House Ltd., a Dubai-based consulting firm. "They hyped these things bigger and bigger and bigger, so it falls down harder."
One such developer was Nakheel, the property arm of Dubai World and ground zero for the company's debt crisis. Nakheel is behind the famous palm-shaped islands, as well as a separate island development, called "The World," built to resemble a map of the world, and another planned one called "The Universe."
Back in April 2008, Nakheel's CEO, Chris O'Donnell, was mostly worried about the limited capacity of Dubai's construction sector to complete all of his projects. At that point, he said Nakheel was responsible for about half of everything being built in Dubai over the next decade.
"We're building a new city," he said at the time. "It will have a sparkle to it. It will be a model, cosmopolitan city that people will continue to envy."
But the company — along with other developers — was taking on lots of debt to fund the boom. The effect was the same kind of real estate bubble that hit Florida and Las Vegas, fueled by speculators, where the financial success of projects depended on prices continuing to go up.
Indeed, to outsiders, the place often seemed to resemble something of a pyramid scheme, where outlandish developments like underwater hotels were announced with elaborate fanfare, often to be quietly abandoned later.
Each deal had to be bigger than the last one or it doesn't make it onto the CEO's desk. They hyped these things bigger and bigger and bigger, so it falls down harder.
Because the developers were tied to the government and the royal family, few questions were asked about their financial viability. Still, the exact relationship between Dubai World and the government, royal family and other emirates remained deliberately hazy.
"They are always bragging about these companies that are majority-owned by the government of Dubai, which suggests there are sovereign guarantees for these things," says a U.S. businessman with interests in the UAE, who asked for anonymity to avoid retribution from Dubai's government. "Then they pulled out the rug from under everybody."
Over the past year, real estate prices in Dubai have plummeted by half, and construction projects have been halted or abandoned.
Yet it was still a real surprise when Abdulrahman al-Saleh, the director general of Dubai's Department of Finance, went on Dubai TV on Nov. 30 to distance the government from Dubai World.
"It is correct that the government owns Dubai World, but the decision when it was set up was that it should receive financing based on the viability of its projects, not on government guarantees," he said. "It's not correct to assume that Dubai World is part of the government of Dubai. The lenders should bear part of the responsibility."
In an interview aired by al-Jazeera on Monday, al-Saleh said Dubai World may sell off domestic and overseas assets as it struggles to raise cash.
It remains unclear how Abu Dhabi will respond. While Abu Dhabi sits at the head of the UAE's federal government structure, officials there have often viewed Dubai as brash and reckless.
"The signals have come out of Abu Dhabi that they're not going to bail out everything," says Davidson. "They are playing hard to get in that sense. They're not just writing a big check."
For its part, Dubai is putting out a mixture of defiance and optimism.
Sheik Mohammed used his Twitter feed to celebrate the UAE's national day on Dec. 2 by writing, "Ambitions remain ally of our plans, big goals remain our objectives, nobility of our nation remains the compass that guides us." But last month, he told reporters to "shut up" when they asked about the rivalry between Dubai and Abu Dhabi.
Dubai has always had a quiet authoritarian streak, where detractors and troublemakers in the past have found themselves summarily deported. Many foreign businessmen were reluctant to speak on the record for fear of angering government officials or the royal family.
"The press has been threatened," says one frequent visitor. "Everyone is being really careful about what they say."
Of course, nobody is counting Dubai out yet either.
It is still a huge transportation and logistics hub, with world-class port and airport facilities. And it remains a safe and comfortable haven in an unstable region.
"If Dubai handles this properly, everybody will give them the benefit of the doubt," says McClelland, the consulting firm chairman. "If they keep up this obfuscation and not tell people what they're doing, it will drag on for years."
Next month, Dubai will ramp up its hype machine again to mark the opening of the world's tallest building, the Burj Dubai.
The question now is whether the rest of the world will see the new skyscraper as another sign of Dubai's towering ambition, or merely an affirmation of its hubris.
Kevin Whitelaw, a correspondent for NPR, reported from Dubai and Abu Dhabi in April 2008 for a cover story in U.S. News & World Report.
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