Investors wonder if coronavirus will shatter extreme calm

Fears increase that deadly virus could hit global growth and prompt a surge in volatility

Peter Wells in New York

A medical staff member (C) wearing protective clothing to help stop the spread of a deadly virus which began in the city, walks at the Wuhan Red Cross Hospital in Wuhan on January 24, 2020. - Chinese authorities rapidly expanded a mammoth quarantine effort aimed at containing a deadly contagion on January 24 to 13 cities and a staggering 41 million people, as nervous residents were checked for fevers and the death toll climbed to 26. (Photo by Hector RETAMAL / AFP) (Photo by HECTOR RETAMAL/AFP via Getty Images)
A member of medical staff wears protective clothing at a hospital in Wuhan, China, as coronavirus fears grow © Hector Retamal/AFP/Getty

In February 2018, markets were struck by an outbreak of volatility that tore Wall Street down from record highs, prompting some to dub it a “virus.” Nearly two years later, and with US stocks again near a peak, investors are wondering whether an actual virus might bring back some more drama to markets.

Optimists may point to the relative resilience of the market’s “fear gauge”, the CBOE Volatility index — or the Vix — which reflects the cost of buying short-term options on the S&P 500. This year the index brushed off heightened tensions between the US and Iran. But the adverse effects of a global pandemic could have a bigger impact on one of the things that still manages to unsettle volatility indices — expectations of economic growth.

The swift de-escalation between Washington and Tehran allayed concerns about impacts on the global economy, through higher oil prices. That helped the Vix revert to a near-two-month low of 12 — well below its 10-year average of 17 — and set the stage for a series of record highs for US stocks in subsequent sessions.

That flare-up in the Middle East also failed to disturb a three-month run in which the closing price of the S&P 500 has moved less than 1 per cent in either direction. That is one of the longest such streaks of the past half-century.

Nor has the tranquillity been confined to equities. On Monday, the JPMorgan Global FX Volatility index hit a record low, while Bank of America’s index of Treasury volatility last week reached its lowest point in eight months. Investment-grade credit default swap spreads, meanwhile, which reflect perceived risks of higher-quality companies failing to pay their interest bills, narrowed to their tightest in years.

“If growth were to contract more substantially for some reason, whether because it’s fiscal policy not working or global tensions aren’t a chess game back and forth, I think you’ll have bigger moves,” said Kathryn Kaminski, chief research strategist at AlphaSimplex Group. “That’s what is driving everything.”

The coronavirus outbreak in China might just cause that contraction. The virus has spread to a number of Asian countries and resulted in one confirmed case on US soil. Analysts are already reflecting on the impact that the 2003 Sars epidemic had on economies in Asia, particularly in consumer spending.

Economists at Goldman Sachs say that negative impacts on growth and asset prices from viral outbreaks typically fade within a few months. But any hit to the economy is unlikely to be well received by investors at a time when they are positioned for growth to accelerate.

Equity fund flows, which tend to be closely tied to global growth, have ratcheted up strongly since the end of October. Investors have poured a combined $66bn into equity ETFs and mutual funds over the period, reversing outflows over the previous 10 months, according to Deutsche Bank.

Investors spent a good portion of 2019 worrying about the growth outlook, and particularly over the summer, when volatility touched some of its highest points for the year.

The market has since stepped back from the precipice. But analysts say there is a clash between the new-found optimism and the economic data, which are not exactly strong. “People are exposed to equities much more than is the historical norm and at a point when growth hasn’t really picked up yet,” said Parag Thatte, strategist at Deutsche Bank.

Another factor in the market’s muted reaction to recent geopolitical risks is the actions of central bankers. Their continued support through low interest rates and asset-purchasing programmes is seen as a primary reason why volatility has been crushed.

That is why hedge funds continue to bet the stock market will remain calm, according to net short positions on the Vix tracked by the Commodity Futures Trading Commission.

In late 2017, such net short positions reached a record, and a couple of months later a bout of turmoil linked to the implosion of several Vix-linked funds triggered a rapid correction. Two months ago, net shorts on the Vix again hit a fresh record as hedge funds bet big against volatility returning — though positions have been trimmed since mid-November.

The problem with such complacent positioning is that when something does upset the market, the chance of a heavy sell-off is heightened. At a time when investors have not seen any significant daily swings since mid-October, when the US agreed a limited trade deal with China, anything really piercing the calm could prove a rude shock.

Central Banks Face a Year of Mounting Challenges

After committing to monetary-policy normalization in 2018, the US Federal Reserve and the European Central Bank spent the past year reversing course with further interest-rate cuts and liquidity injections. Yet, given mounting medium-term uncertainties, central bankers cannot assume calm conditions in 2020.

Mohamed A. El-Erian


SEATTLE – After a year that involved one of the biggest U-turns in recent monetary-policy history, central banks are now hoping for peace and quiet in 2020. This is particularly true for the European Central Bank and the US Federal Reserve, the world’s two most powerful monetary institutions.

But the realization of peace and quiet is increasingly out of their direct control; and their hopes would easily be dashed if markets were to succumb to any number of medium-term uncertainties, many of which extend well beyond economics and finance to the realms of geopolitics, institutions, and domestic social and political conditions.

Just over a year ago, the ECB and the Fed were on the path of gradually reducing their massively expanded balance sheets, and the Fed was increasing interest rates from levels first adopted in the midst of the global financial crisis. Both institutions were attempting to normalize their monetary policies after years of relying on ultra-low or negative interest rates and large-scale asset purchases.

The Fed had raised interest rates four times in 2018, signaled further hikes for 2019, and set the unwinding of its balance sheet on “autopilot.” And the ECB had ended its balance-sheet expansion and begun to steer away from further stimulus.

A year later, all of these measures have been reversed. Rather than hiking rates further, the Fed cut them three times in 2019. Instead of reducing its balance sheet, the Fed expanded it by a greater magnitude during the last four months of the year than at any comparable period since the crisis.

And far from signaling an eventual normalization of its rate structure, the Fed moved forcefully into a “lower-for-longer” paradigm. The ECB, too, pushed its interest-rate structure further into negative territory and restarted its asset-purchase program.

As a result, the Fed and the ECB cleared a path for many interest-rate cuts around the world, producing some of the most accommodative global monetary conditions on record.

This dramatic policy turnaround was particularly curious in two ways. First, it materialized despite growing discomfort – both within and outside central banks – about the collateral damage and unintended consequences of prolonged reliance on ultra-loose monetary policy.

If anything, this discomfort had grown throughout the year, owing to the negative impact of ultra-low and negative rates on economic dynamism and financial stability.

Second, the dramatic reversal was not a response to a collapse in global growth, let alone a recession. By most estimates, growth in 2019 was around 3% – compared to 3.6% the previous year – and many observers are expecting a quick rebound in 2020.

Rather than acting on clear economic signals, the major central banks once again succumbed to pressure from financial markets. Examples include the fourth quarter of 2018, when the Fed reacted to a sharp stock-market selloff that seemed to threaten the functioning of some markets around the world. Another occurred in September 2019, when the Fed responded to a sudden, unanticipated disruption in the wholesale funding (repo) market – a sophisticated and highly specialized market segment that involves close interaction between the Fed and the banking system.

This is not to suggest that central banks’ objectives weren’t at risk on each occasion. In both cases, generalized financial-market dislocations could have undermined economic growth and stable inflation, creating the conditions for an even more acute monetary-policy intervention down the road. That is why the Fed, in particular, couched its policy U-turn in terms of “insurance.”

But the challenges facing central bankers do not stop there. By allowing financial markets again to dictate monetary-policy changes, both the ECB and the Fed poured more fuel on a fire that has been raging for years. Financial markets have been driven from one record high to another, regardless of the underlying economic fundamentals, because traders and investors have been conditioned to believe that central banks are their BFFs (“best friends forever”).

Time and again, central banks have proved willing and able to step in to suppress volatility and keep prices of both stocks and bonds elevated. As a result, the right approach for investors has been to buy whenever the market dips, and to do so more and more rapidly.

Yet, given mounting medium-term uncertainties, central bankers cannot assume tranquil conditions in 2020. While ample and predictable liquidity can help calm markets, it does not remove existing barriers to sustained and inclusive growth.

The eurozone economy in particular is currently saddled with structural impediments that are eroding productivity growth. And there are deep long-term structural uncertainties stemming from climate change, technological disruptions, and demographic trends.

Moreover, around the world, there has been a generalized loss of trust in institutions and expert opinion, as well as a deep sense of marginalization and alienation among significant segments of society. Political polarization is more intense, and many democracies are undergoing uncertain transitions.

Also, although the trade tensions between the United States and China have been temporarily alleviated by a “phase one” deal, the underlying sources of conflict have hardly been resolved.

And the world is suddenly on tenterhooks as tensions between the US and Iran have escalated, with Iran vowing further retaliation for America’s targeted killing of Iran’s top military leader.

For long-term economic wellbeing and financial stability, this litany of uncertainties demands a policy response that extends well beyond central banks’ traditional remit. It calls for comprehensive multiyear engagement using structural, fiscal, and cross-border tools.

Without that, financial markets will continue to expect central-bank interventions that a growing body of evidence indicates are not just increasingly ineffective for the economy but also potentially counterproductive.

Whether or not central banks avoid the spotlight in 2020, they are likely to face even greater challenges to the political autonomy and policy credibility that are so crucial to their effectiveness.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Oil Producers Are Setting Billions of Dollars on Fire

Massive amounts of natural gas are being burned to make way for oil production. Unless the incentives are changed, the harmful practice will become even more common in the U.S.

By Spencer Jakab

A gas flare burns bright on land near Mentone, Texas, U.S., on Saturday, Aug. 31, 2019. Bronte Wittpenn/Bloomberg News

Relatively clean and flexible, natural gas has been described as “the champagne of hydrocarbons.” Lately, though, energy companies are treating it about as sparingly as a team that just won the World Series.

Tremendous quantities are intentionally burned off to make way for oil production. The problem is likely to get worse in the U.S., the number four flarer of gas behind Iran, Iraq and world-leader Russia.

It is more than an issue of waste: Flaring may be responsible for 1% of global greenhouse gas emissions according to Raymond James.

Even as more and more gas gets supercooled and shipped around the world in expensive, liquefied form, an estimated 5.1 trillion cubic feet of gas was flared world-wide in 2018, according to The World Bank—equivalent to the combined consumption of France, Germany and Belgium.

Why waste so much valuable fuel? Because it is often an unwanted byproduct of an oil well, and it isn’t worth enough to sell.

Geography determines whether it is worth something or not. For example, the big oil fields of eastern Siberia or Algeria’s Sahara desert are so far from end markets that the investment to process, gather and transport the associated gas produced would exceed its market value. In other cases, though, poor planning and regulation are as much to blame.

Riccardo Puliti,Global Director, Energy and Extractive Industries at The World Bank, notes that there is a “huge potential market” for gas in densely-populated Iraq, which is wracked by power shortages. The bank estimates that establishing a regulatory framework for selling the gas could bring $21 billion in investment to the country.

Unlike Iraq, the U.S. has a robust legal framework and enough natural gas pipelines to reach the moon. But America also has incredibly cheap gas, which encourages waste. Building more gas pipes to the Permian Basin, the center of America’s oil patch, is less of a priority than completing oil pipelines. Meanwhile, connecting them to outlying areas like the Bakken region in North Dakota is uneconomical at any price.

This results in some strange anomalies. Last year the price of gas at the Waha Hub in Texas reached negative four dollars per million British thermal units while gas in the other parts of the country was around $2.50/MMBtu. In other words, companies with natural gas on their hands in that region had to pay people to take it.

Prices would still be negative if the local regulator, the Railroad Commission of Texas, hadn’t greatly expanded the amount of gas that could be burned off. Last year a subsidiary of pipeline company Williams claimed in a lawsuit that the commission allowed a firm that could have used its pipelines to flare gas instead.

Geography causes the problem, but geology is making it worse. Shale oil wells have much steeper decline rates than conventional ones. This means that the volume of crude they produce after the first year drops sharply, but their associated gas volumes fall more gradually. The furious pace of drilling needed to keep shale oil production stable or rising results in more and more unwanted gas.

Burning gas releases carbon dioxide, but simply releasing it into the air would be worse because flammable methane is a far more potent greenhouse gas. Flaring produces other types of pollution too, says Audrey Mascarenhas, chief executive officer of Questor Technology. Questor produces machines that safely process over 99% of methane and volatile organic compounds at oil wells. It has been used widely in Colorado, which has stringent anti-flaring rules.

Even in less environmentally aware places, a lot of gas might be harnessed. For example, microturbines could generate electricity using waste gas for energy-intensive oil field equipment. Most creative are projects that use such power to run energy-intensive computers that do tasks like mining bitcoin or other calculations and then beam the results elsewhere by satellite.

“It’s easier to move data than a remote commodity,” explains Chase Lochmiller, co-founder of Crusoe Energy Systems, which runs several such computers.

Data may be the new oil, but such initiatives remain small. Proper incentives could tip the balance. For example, even as so much gas is being flared in the Permian, German utility RWE just christened a large solar facility there to help meet booming local electricity demand. While Texas is sunny, solar farms are made possible by subsidies.

So are even more expensive technologies like carbon sequestration—physically storing CO2.

Ms. Mascarenhas laments the fact that the cheapest solutions to mitigate global warming such as finding alternatives to flaring are mostly being ignored.

“We pick the hardest things first because they sound shiny and sexy.”

Few things irritate oilmen as much as taxes and red tape but, with enough gas being wasted to supply most of Western Europe, there is money to be made in finding uses for it. Forcing them to pay up for flaring gas and helping them profit from capturing it could help them do well while doing the earth a lot of good.

Mohammed bin Zayed’s Dark Vision of the Middle East’s Future

The enigmatic leader of the U.A.E. may soon emerge as the region’s most powerful figure. What does he really want?

By Robert F. Worth

Credit...Artwork by Alan Coulson

Richard Clarke was in Abu Dhabi one morning in 2013 when his phone lit up. “You busy?” a familiar voice said. It was a rhetorical question. The caller was Mohammed bin Zayed al-Nahyan, the ruler of the United Arab Emirates and one of the most powerful men on Earth.

“I’ll send a car,” he said, and hung up. Clarke, the former White House counterterrorism czar, was working as a consultant for M.B.Z. (as he’s mostly known outside his country) and had gotten used to impromptu calls like this. M.B.Z. rarely explained what he had in mind. Once, he took Clarke for an unexpected helicopter flight deep into the desert of the Empty Quarter and then landed by an artificial pond, scattering a herd of wild gazelles. Not far away, a group of German engineers was standing around, working on an experimental solar-powered water-desalination plant.

This time, Clarke got in the back of the car with no idea where he was heading. As they drove through a remote warehouse district, the thought crossed his mind that he was being kidnapped. Then the driver pulled up outside a building where Clarke heard popping sounds.

He went inside and saw a group of young women in military uniforms, firing pistols at targets. Seated not far away was M.B.Z., in his white tunic and ear-protection muffs, alongside his wife and an empty third chair reserved for Clarke. During a lull in the shooting, M.B.Z. introduced the women, who were all his daughters and nieces. “I’m starting a draft,” M.B.Z. said. “I want everyone in the country to feel like they’re responsible. A lot of them are fat and lazy.” To stimulate the draft, he said, he would begin with all the young people in his own family.

M.B.Z.’s draft was part of a grand nation-building effort at home and abroad, one that would require more soldiers and have repercussions for the entire Middle East. Since its founding in 1971, the United Arab Emirates — a federation of oil-rich sheikhdoms on the north Arabian coast — has mostly stayed out of the Arab world’s many conflicts. It became the region’s economic marvel, a desert Xanadu of gleaming skyscrapers, endless malls and marble-floored airports. But by 2013, M.B.Z. was deeply worried about the future.

The Arab Spring uprisings had toppled several autocrats, and political Islamists were rising to fill the vacuum. The Muslim Brotherhood — the region’s foremost Islamic party, founded in 1928 — and its affiliates had won elections in Egypt and Tunisia, and jihadist militias were running rampant in Libya. In Syria, the rebellion against Bashar al-Assad was also falling into the hands of Islamist militias. ISIS was on the rise, and in less than a year would sweep across the Iraqi border and seize a territory the size of Britain.

At the same time, M.B.Z. watched in dismay as armies mobilized on the other side of the region’s great sectarian divide. Shiite militias loyal to the Iranian spymaster Qassim Suleimani — who was killed earlier this month in an American drone strike — exploited the post-2011 vacuum to spread their theocratic influence over Syria, Iraq and Yemen. It was a recipe for apocalyptic violence, and the regional powers were doing little to stop it. Turkey was vehemently cheering its own favored Islamists on and backing some of them with weapons. So was Qatar, the U.A.E.’s oil-rich neighbor in the Persian Gulf.

The Saudis were ambivalent, hampered by an elderly and ailing monarch. Even the United States — which M.B.Z. had always regarded as his chief ally — seemed to regard the Muslim Brotherhood as an unsavory but inevitable byproduct of democracy in action. M.B.Z. repeatedly warned Barack Obama in phone conversations about the dangers he saw. The American president was sympathetic, former White House officials told me, but seemed intent on getting out of the Middle East, not wading back in.

By the time he invited Clarke to his family’s firing range, M.B.Z. had already hatched an immensely ambitious plan to reshape the region’s future. He would soon enlist as an ally Mohammed bin Salman, the young Saudi crown prince known as M.B.S., who in many ways is M.B.Z.’s protégé. Together, they helped the Egyptian military depose that country’s elected Islamist president in 2013. In Libya in 2015, M.B.Z. stepped into the civil war, defying a United Nations embargo and American diplomats.

He fought the Shabab militia in Somalia, leveraging his country’s commercial ports to become a power broker in the Horn of Africa. He joined the Saudi war in Yemen to battle the Iran-backed Houthi militia. In 2017, he broke an old tradition by orchestrating an aggressive embargo against his Persian Gulf neighbor Qatar. All of this was aimed at thwarting what he saw as a looming Islamist menace.

M.B.Z. makes little distinction among Islamist groups, insisting that they all share the same goal: some version of a caliphate with the Quran in place of a constitution. He seems to believe that the Middle East’s only choices are a more repressive order or a total catastrophe. It is a Hobbesian forecast, and doubtless a self-serving one. But the experience of the past few years has led some veteran observers to respect M.B.Z.’s intuitions about the dangers of political Islam writ large. “I was skeptical at first,” says Brett McGurk, a former United States official who spent years working in the Middle East for three administrations and knows M.B.Z. well. “It seemed extreme. But I’ve come to the conclusion that he was often more right than wrong.”

M.B.Z. has put many of his resources into what could be called a counterjihad, and they are formidable. Despite his country’s small size (there are fewer than a million Emirati citizens), he oversees more than $1.3 trillion in sovereign wealth funds, and commands a military that is better equipped and trained than any in the region apart from Israel. On the domestic front, he has cracked down hard on the Brotherhood and built a hypermodern surveillance state where everyone is monitored for the slightest whiff of Islamist leanings.

M.B.Z.’s leading role in this ongoing counterrevolution, as a sort of latter-day Metternich, has changed his country’s reputation. The Pentagon still regards him as a loyal and capable ally; during one visit to Abu Dhabi last May, I sat in the audience as Jim Mattis, the former secretary of defense, addressed a crowd of Emirati and foreign dignitaries and compared the Emirates to both Athens and Sparta.

But some Obama officials came to see him as a dangerous rogue actor. By the time Donald Trump was elected — offering him a more pliant partner — M.B.Z. was drawing criticism from human rights groups and diplomats for his military’s role in Yemen and Libya. Even some of M.B.Z.’s admirers in diplomatic circles say that he can be too absolutist and that he has waded too deep into conflicts whose outcomes he cannot control.

Yet M.B.Z. remains a rare figure in the Middle East: a shrewd, secular-leaning leader with a blueprint of sorts for the region’s future and the resources to implement it. For all his flaws, the alternatives look increasingly grim. The American drone strike that killed Suleimani and his top Iraqi ally, coming on the heels of a tense standoff at the United States Embassy in Baghdad, has pushed the region closer to war, with Iran's supreme leader issuing dire-sounding threats of retaliation.

It is too soon to know how Tehran will react, but M.B.Z. is likely to be a key player in whatever unfolds next. Despite his reputation as an Iran hawk, he has made several quiet diplomatic gestures in recent months and reportedly has a back channel to communicate with Iran’s leadership.

These departures from Trump’s “maximum pressure” campaign have underscored his new willingness to steer an independent course. The same man who privately criticized Obama for appeasing Iran now appears to be worried that Trump will stumble into war. M.B.Z. may be uniquely well placed to avert a conflict in which his country — which sits just across the Persian Gulf from Iran — could be one of the first targets.

M.B.Z., 58, has been the U.A.E.’s leading figure for over a decade (his older brother Khalifa, who suffered a stroke in 2014, remains the titular president) and has been shaping its policies — in education, finance and culture as well as foreign policy — for even longer. Yet he has made few state visits and has never attended a United Nations assembly. He doesn’t do Davos. He rarely gives speeches and doesn’t talk to journalists. He has a lower profile than the ruler of Dubai, Mohammed bin Rashid al-Maktoum, his subordinate in the Emirati federation. “He doesn’t want to be in the photo,” one of his oldest friends told me.

It took me nearly a year to arrange an interview. During that time, I went through a series of meetings with his surrogates in New York, Washington, London and Abu Dhabi — a sort of vetting process, which I seem to have survived mostly because I had spent years reporting on the gulf region. He had never given an on-record interview to a Western journalist, but the timing was lucky: My efforts coincided with a push by his inner circle to be more open and transparent. Still, even after our conversation, his advisers were extremely cagey about what could be quoted, fearing his words would be twisted and misused by his enemies.

The first time I saw M.B.Z., last May, he was at his evening majlis, a central ritual of Emirati social and political life. It was in a vast reception hall in Abu Dhabi, and I was surrounded by hundreds of fasting Muslims. It was over 100 degrees outside, but this palatial room, with its 50-foot ceilings and rows of immense chandeliers, was air-conditioned to a clammy-palms chill, like almost every other building in the U.A.E. It was strange to be surrounded by so many Emiratis, who form a small minority of the country’s population.

I’ve been visiting the U.A.E. for many years, and have come to think of rootlessness as one of the country’s defining features. Even when the streets are packed, almost everyone you see in Dubai or Abu Dhabi — a Benetton crowd of faces from everywhere on Earth — comes from somewhere else. When you ask them about their lives, they almost invariably mention how grateful they are to be in the U.A.E., sending cash home to their families in Kerala or Nairobi or Kuala Lumpur.

Mohammed bin Zayed al-Nahyan, ruler of the United Arab Emirates, with President Vladimir Putin of Russia in 2019.Credit...Mikhail Metzel/TASS, via Getty Images

The majlis I attended was the prelude to an iftar, the ritual evening breaking of the fast during the holy month of Ramadan. M.B.Z. was deep in conversation with a visiting African dignitary seated to his left. On his right was Mohammed bin Rashid. Later, I watched M.B.Z. get up and work the room like a Chicago pol — greeting new arrivals, making introductions, laughing, hugging old friends.

He hosts a separate weekly majlis at which any Emirati citizen may apply to appear, often to voice grievances or ask for help. These regular gatherings serve an important purpose, allowing M.B.Z. and his peers to get feedback from businessmen, tribal leaders and other constituencies. Emiratis often tell you, with perfect sincerity, that this is their own indigenous answer to democracy.

As we filed into a huge, high-ceilinged hall piled with food and drink, I stationed myself back near the corner. Then I felt a tap on my shoulder and heard a voice behind me: “Come on, guys, let’s eat.”

M.B.Z.’s advisers had been telling me for months about his love for going off-script. He drives around Abu Dhabi at the wheel of his white Nissan Patrol and shows up unannounced in local restaurants. A fitness enthusiast, he often conducts meetings during long walks, occasionally jotting notes on his hand. He is scrupulously punctual and always well briefed, but he loves to surprise Western diplomats by flouting princely decorum. One former diplomat told me he was waiting for his car in Abu Dhabi on a foggy evening when a helicopter emerged out of the mist and landed nearby.

Out of the pilot’s seat stepped M.B.Z., who trained as a flyer in the 1970s. The official complained that it was much too foggy for a safe flight. “Shut up and get in,” M.B.Z. said with a grin. They then flew to Dubai, staying just above the power lines. Another time, M.B.Z. was driving a former United States ambassador through town when the ambassador noted the absence of any security guards. “Don’t worry,” M.B.Z. said. “Look at the floor beneath your seat.” The ambassador was startled to discover an automatic weapon folded up under the carpet.

M.B.Z. led me to his table and seated me directly to his left, across from several of his brothers and a visiting Asian head of state. At M.B.Z.’s insistence, I dug into the hummus and lamb, and soon he was interviewing me about my old life as a journalist in Lebanon. In person, M.B.Z. speaks deliberately and quietly, lapsing now and then into a crooked grin that conveys a surprising impression of shyness. He has a prominent nose and slightly hooded eyes, partly concealed when I met him by a pair of clunky black-plastic glasses. He speaks fluent English with a faint British accent and an American vocabulary.

He doesn’t bother with small talk; when I met him in June for a formal interview, he had barely said hello when he began telling me about his government’s latest moves in Yemen. We were sitting in the atrium of the Emirates Palace hotel, a marble-floored monument to Persian Gulf excess. True to form, he showed up with only a couple of security men and an adviser. He went on to talk for an hour about his views on Islamism, his upbringing, his political priorities and his father’s legacy. He seemed to enjoy telling stories, but all of them were calculated to make a point. It is no accident that people often said the same things about his father, Zayed bin Sultan al-Nahyan, who founded the U.A.E. 49 years ago.

Here is a story M.B.Z. told me:

Sometime in the 1980s, when he was a young military officer, he went on a holiday trip to the grasslands of Tanzania, and on his return to Abu Dhabi, he went to see his father. The two men sat cross-legged on the floor in the traditional style, with M.B.Z. serving his father coffee. Zayed asked his son for details about everything he’d seen: the wildlife, the Masai people and their customs, the extent of poverty in the country. After hearing it all, he asked M.B.Z. what he had done to help the people he’d encountered. In response, M.B.Z. shrugged and said the people he met were not Muslims. His father’s reaction was sudden and indelible.

“He clutched my arm, and looked into my eyes very harshly,” M.B.Z. told me. “He said, ‘We are all God’s children.’ ”

M.B.Z. says his father’s pluralist instincts are at the root of his own anti-Islamist campaign. Zayed, who died in 2004 at age 86, mixed traditional Bedouin attitudes with a rare liberal-mindedness. Emiratis are deeply religious, but the country’s position on an ancient shipping lane has bred a style of Islam that is relatively cosmopolitan and tolerant. In fact, Zayed’s unusual openness is what elevated him to power and helped set the U.A.E. on a different course from its neighbors.

The British installed him as ruler in 1966 — at the request of leading Abu Dhabi families — because they were fed up with his brother Shakhbut, who had been xenophobic and averse to development. The Emirates were desperately poor then, and even the richest families lived in mud-brick huts.

There was almost no Western medicine available in the 1960s, and most of the population was illiterate; as many as half of all babies and a third of mothers died in childbirth. Even today, middle-aged people tell stories of how their parents would cut a gash in a camel’s neck and force them to drink the blood to avoid dying of thirst.

Zayed insisted on universal education for women at a time when female illiteracy was almost 100 percent. He allowed Christians to build churches in Abu Dhabi, flouting the common Muslim belief that no other religion should establish a presence on the Arabian Peninsula. In the late 1950s, a family of American missionaries built a hospital in the city of Al Ain, and it was there that an American woman doctor delivered Zayed’s third son, Mohammed.

As M.B.Z. grew up, his country was being catapulted from poverty into unimaginable wealth by the discovery of oil. At the same time, political Islam was becoming his generation’s great rallying cry. When M.B.Z. was about 14, his father sent him to school in Morocco. Zayed seems to have intended this to be a toughening experience; he gave his son a passport showing a different last name, so that he wouldn’t be treated like royalty. M.B.Z. lived simply in Morocco, and spent several months working as a waiter in a local restaurant. He made his own meals and did his own laundry, and was often lonely.

“There’d be a bowl of tabbouleh in the fridge, and I’d keep eating from it day after day until a kind of fungus formed on the top,” M.B.Z. told me. He later spent a summer at Gordonstoun, the Scottish boarding school where generations of British royals and other titled elites have sent their children to endure cold showers and hazing rituals. Prince Charles famously hated the place, but M.B.Z. told me he enjoyed his time there. He went on to spend a year at Sandhurst, the British military academy.

Unbeknown to his father, M.B.Z. was under the sway of Islamist thinking throughout these years. Zayed seems to have inadvertently facilitated his son’s indoctrination by putting an Egyptian Islamist named Izzedine Ibrahim in charge of his education. Zayed knew about Ibrahim’s Brotherhood affiliation, but didn’t yet consider the organization a threat.

M.B.Z. turned 18 in 1979, the year the Soviet Union invaded Afghanistan. As the Afghan mujahedeen began a heroic resistance, young Muslims from around the world streamed to Peshawar to join them. At the same time, popular demonstrations toppled the shah of Iran, and Ayatollah Khomeini returned to his homeland to lead the revolution. For many people, a thrilling idea bound these events: The region’s Western-backed puppets had failed, and now Islam would provide the guidebook for a better, more authentic society.

But M.B.Z. was born with another, opposing legacy: clan loyalty. His famous father was the embodiment of the traditional “feudal” dynasties that Brotherhood ideologues used to rail against. His mother, Fatima, was Zayed’s third and favorite wife, and her shrewdness and determination helped elevate her six sons over Zayed’s other male children. They are intensely loyal to one another and to her.

In the late 1960s, when they were children, Fatima told her boys about the al-Nahyan family’s long history of internecine violence, which rose to a crescendo in the 1920s with a series of brother-on-brother murders that saw power change hands three times within seven years. She made them all swear a vow never to overthrow or act against one another, a former British intelligence officer told me. M.B.Z. still talks to his mother almost every day.

Only after M.B.Z. returned to Abu Dhabi in the early 1980s did he recognize that the ideas promoted by the Brotherhood were incompatible with his own emerging role as an heir to power. M.B.Z. did not say whether he thought about the corollary of his choice: that for ordinary Emiratis, the Brotherhood’s appeal must have been even stronger.

In 1991, as George H.W. Bush assembled a coalition to push Saddam Hussein out of Kuwait, the Pentagon was impressed by Zayed’s eagerness to take part. Afterward, American military leaders began cultivating M.B.Z., who became a military officer and had begun to emerge as the most ambitious and competent of Zayed’s children. “He was a natural, up-and-coming,” I was told by Bruce Riedel, a former C.I.A. officer who is now an analyst at the Brookings Institution. “He was going to run the country. The U.S. set on a path of wooing and grooming him.”

In 1995, Riedel told me, Secretary of Defense William Perry invited M.B.Z. to the Pentagon. To make the experience more memorable, he also flew him down to Camp Lejeune and arranged for him to attend a military exercise in which Marines landed on the North Carolina shore — a simulation of an amphibious attack in Iran or Iraq. “We used to say in the Pentagon, the objective was to get M.B.Z. addicted to aerospace magazines so he’d buy everything we produced,” Riedel said.

The seduction appears to have worked. The U.A.E. has spent billions on American jets and weapons systems, and visitors to M.B.Z.’s office say they still see stacks of military magazines there. In the early 1990s, M.B.Z. told Richard Clarke, then an assistant secretary of state, that he wanted to buy the F-16 fighter jet. Clarke replied that he must mean the F-16A, the model the Pentagon sold to American allies.

M.B.Z. said no, he wanted a newer model he’d read about in Aviation Week, with an advanced radar-and-weapons system. Clarke told him that that model didn’t exist yet; the military hadn’t done the necessary research and development. M.B.Z. said he would pay for the R. & D. himself.

The subsequent negotiations went on for years, and though M.B.Z.’s hardball tactics angered some Pentagon brass, “he ended up with a better F-16 than the U.S. Air Force had,” Clarke says. In the decades to come, M.B.Z. would make clear that if the United States military refused to accommodate him, he would be perfectly happy to shop elsewhere — even in China, which has sold inexpensive drones to the Emirati military in recent years. Still, the United States remained his most important relationship by far.

On Sept. 11, 2001, M.B.Z. was in northern Scotland, enjoying the last morning of a weeklong rabbit-hunting excursion with his friend King Abdullah II of Jordan. He said his goodbyes and boarded a private plane to London, arriving just after lunch. He hadn’t even left the plane when an Egyptian member of his entourage came running out from the terminal and climbed onboard, according to an official who was present. “New York is burning!” the man shouted.

M.B.Z. had heard nothing of the day’s events, and when he did he was furious. “What are you saying?” he asked the man. “New York is the center of the world — look how vulnerable we are.” M.B.Z. tried to reach his father, but was unable to get through. He did manage to get Clarke, who was then working on counterterrorism in the White House. It was the only call Clarke took that morning from outside the government. “Carte blanche — just tell me what to do,” he recalled M.B.Z. telling him.

By the time M.B.Z. arrived back in Abu Dhabi, later that day, he knew that two Emiratis were among the 19 hijackers.

The Sept. 11 attacks were a life-changing moment for M.B.Z., unmasking both the depth of the Islamist menace and the Arab world’s state of denial about it. That October, M.B.Z. told me, he listened in amazement as an Arab head of state, meeting with his father on a visit to Abu Dhabi, dismissed the attacks as an inside job involving the C.I.A. or the Mossad.

After the head of state left, Zayed turned to M.B.Z., who had been there for the meeting, and asked what he thought. “Dad,” M.B.Z. recalled telling his father, “we have evidence.” That fall, the Emirati security services arrested about 200 Emiratis and about 1,600 foreigners who were planning to go to Afghanistan and join Al Qaeda, including three or four who were committed to becoming suicide bombers.

That same autumn, M.B.Z. had another conversation with his father that would affect the way he thought about political Islam. The encounter began, M.B.Z. told me, when he entered his father’s office with a momentous piece of news: The Americans were sending troops to Afghanistan. Zayed said he wanted Emirati troops to join them. M.B.Z., who was commanding the armed forces by this time, was not prepared for this. Taking an active role in the American campaign would raise sensitive issues, given that some were calling it a war against Islam.

Sensing his son’s unease at the prospect of committing troops, Zayed said: “Tell me, do you think I’m doing this for Bush?” M.B.Z. said yes. “That’s 5 percent of it,” Zayed said. “Do you think I’m doing this to keep bin Laden away?” M.B.Z. nodded. “That’s another 5 percent.”

M.B.Z., a little baffled, asked his father to explain. “You’ve read the Quran and the Hadith, the sayings of the Prophet,” Zayed said. “And you like them?” Of course, his son replied. Zayed then said: “Mohammed, do you think this guy bin Laden running around Afghanistan is doing what the Prophet wanted us to do?” Not at all, M.B.Z. said. His father then told him emphatically: “You’re right. Our religion is being hijacked.” M.B.Z. didn't have to add that there was another reason to fight Al Qaeda — it was a threat to their own family’s authority.

Soon after the Sept. 11 attacks, M.B.Z. undertook a bottom-up review of all his country’s vulnerabilities to terrorist attacks. “I believe 9/11 made him look internally to re-evaluate key sectors from education to finance,” says Marcelle Wahba, who arrived as the new United States ambassador in October of that year.

“They went through it all very systematically.” He formed a team, including his brothers and top advisers, and they worked relentlessly to patch the holes, according to Wahba. They set out to register all the hawala shops, the informal money-transfer system that has often been used by terrorists. They put transponders on dhows that plied the gulf.

They began looking for ways to better monitor the U.A.E.’s sprawling trade and finance networks. Much of this was aimed at deterring terrorists transiting the Emirates, but the risk of attacks inside the country was also real. In the following years, U.A.E. authorities foiled a string of terrorist plots by jihadi groups, including a 2005 plan for a triple car-bombing attack against a five-star hotel.

At the same time, M.B.Z. mounted a broader assault on Islamist ideology. Many of the U.A.E.’s Islamists belonged to Islah, a group founded in the 1970s that was the local equivalent of the Muslim Brotherhood. They included thousands of foreigners, mostly from Egypt, who had been welcomed decades earlier to fill the U.A.E.’s need for educated professionals and bureaucrats. The country’s ruling families had initially given their blessing to Islah, which they saw as a benignly pious group. By the 1990s, Islamists had made the education and judicial ministries into a “state within a state,” according to the Emirati journalist Sultan al Qassemi, deciding how scholarships were handed out and pushing the courts in a more religious direction.

M.B.Z. authorized the firing of Islamist teachers and a sweeping rewrite of the country’s textbooks. Most of the Emiratis I know can tell shocking stories about elementary schoolteachers who casually told them about the glories of violent jihad and the depravity of kuffar, or infidels. The textbooks, written by Brotherhood members, sprinkled zealotry even into subjects like history and math: “If you kill three Jewish settlers and spare two, what is the sum?”

Emirati high schools now offer ethics courses that are independent of religious study — something that would have been unthinkable not long ago. M.B.Z. has made other quiet efforts to push religion into the private realm. He has given a platform to respected religious scholars who took a quietist approach, including a number of prominent Sufis like Ali al-Jifri, Aref Ali Nayed, Hamza Yusuf and Abdallah bin Bayyah, the renowned Mauritanian Sufi scholar who now chairs an Emirati council that oversees religious rulings. The U.A.E. also began exporting its own brand of Islam via training programs for imams abroad, including thousands of Afghans.

Most Islah members were concentrated in the northern emirates, especially Ras al Khaimah, just over an hour’s drive north from Dubai. It is less dense than the wealthier cities to the south, with fewer skyscrapers and malls, and it is a little shabbier. In a sense, Islah was expressing its disapproval of the hypercapitalist culture being spawned in the U.A.E.’s biggest cities. Many of its public statements were protests against the bars and prostitution that served the U.A.E.’s growing foreign population. Its spokesmen eventually began promoting democracy and human rights, though those may have been at least partly a convenient way to draw Western sympathy to their cause.

Arabists and diplomats in the West have mostly taken the view that Islamists of this kind should be tolerated, and that their views are likely to be softened over time by their integration into electoral politics. The Tunisian Ennahda movement is often held up as an example of what may happen when Islamists are given a chance to evolve in a more progressive direction. Ennahda, which emerged from the Muslim Brotherhood, has shared power with a secular party, and its leader has suggested that it is less an Islamist party than an Arab variant on European parties like the Christian Democrats.

M.B.Z. did engage in a dialogue of sorts with the U.A.E.’s Islamists, and he claims the experience proved they could not be trusted. After the Sept. 11 attacks, he began meeting with members of Islah and urging them to return to the fold. Initially, he offered them a deal: Stay away from politics and they could maintain their charitable work. They responded with lists of demands.

The attempts at outreach came to an end after a tense meeting in 2003, and M.B.Z.’s attitude appears to have hardened. He told a visiting United States delegation in 2004 that “we are having a culture war with the Muslim Brotherhood in this country,” according to a cable made public by WikiLeaks. One of M.B.Z.’s own sons started to fall under the spell of Islamist thinking, he told a group of visiting diplomats in 2009. He responded by employing a tactic his own father had used: sending his son to Ethiopia with the Red Cross to appreciate the moral worthiness of non-Muslims.

Even as he cracked down on the Brotherhood, M.B.Z. was working on a far more ambitious project: building a state that would show up the entire Islamist movement by succeeding where it had failed. Instead of an illiberal democracy — like Turkey’s — he would build its opposite, a socially liberal autocracy, much as Lee Kuan Yew did in Singapore in the 1960s and ’70s. He began with Abu Dhabi’s Civil Service, which was afflicted with many of the same ills as those of other Arab countries: bloat and inefficiency, with connections and family reputation playing a bigger role in hiring than merit. These features were partly a legacy of the Egyptian strongman Gamal Abdel Nasser, who built a dysfunctional prototype in the 1950s that was copied everywhere.

M.B.Z. deployed a group of young, talented people and authorized them to smash up the bureaucracy. Over the next few years, they fired tens of thousands of employees and reassigned many others, streamlining the state. Between 2005 and 2008, the Abu Dhabi government went from 64,000 people to just 7,000. At the same time, he began harnessing Abu Dhabi’s vast capital reserves to build up a non-oil economy. Using a new sovereign wealth fund called Mubadala, he attracted new industries, creating job opportunities that would help train the local population. He honed his progressive image by including women in his cabinet. Mubadala created an aerospace-and-aviation hub in Al Ain where 86 percent of the workers are women.

At times, he seems to want to change Emiratis themselves, to make his people more disciplined, more rational, more self-reliant. “Ever shake hands with an Emirati?” one former diplomat heard him say. “It’s a weak hand — they look away. I’m trying to teach people to look you in the eye and give you a firm hand.”

He made jujitsu compulsory in schools. In 2014 he established the military draft, forcing young Emiratis — who are granted free housing, education and health care — to endure a year of boot camp and hard work. M.B.Z. made sure they took it seriously. Soon after the draft started, a few hundred eligible young men failed to register. M.B.Z. had them brought to him and “spent an hour excoriating them about what his father did, building the country and so on,” I was told by one former diplomat. “They all went to jail for 30 days.” (An Emirati spokesman disputed this account.)

When I first started visiting the U.A.E., in 2007, I heard a lot of fretting about the social consequences of the country’s sudden vault from poverty to vast wealth: listlessness, depression, isolation and dislocation. On my most recent visit, I heard at least a dozen stories about young couch potatoes who returned from boot camp sober and lean, suddenly willing to do their own laundry and dishes.

The draft has also brought together people from different emirates and social classes in a way that rarely happened in the past. The Yemen war has wreaked horrors on that country, but it appears to have had an annealing effect on Emirati society. More than 100 Emiratis have been killed in the fighting, and while that is tiny compared with the appalling toll of Yemeni dead, it is in human terms by far the costliest war the U.A.E. has ever fought.

It probably helps that M.B.Z. and most of the rulers of the other six emirates had sons or nephews on the front lines, some of whom were seriously injured. I briefly met Zayed bin Hamdan, M.B.Z.’s nephew and son-in-law, who uses a wheelchair after his spine was damaged in a helicopter crash in Yemen in 2017.

In 2009, M.B.Z. made a decision that would vastly augment his ability to project power beyond his borders. He invited Maj. Gen. Michael Hindmarsh, the retired former head of Australia’s Special Operations Command, to help reorganize the Emirati military. Early on, M.B.Z. asked Hindmarsh to help him find an Emirati officer to lead the reboot of the country’s elite units. But M.B.Z. seems to have taken a liking to Hindmarsh, a lanky man with a deeply lined face and a relaxed, frank manner, and ended up choosing him for the job.

Putting a non-Arab in charge of the military’s crown jewel would be unimaginable in any other Middle Eastern country. But by 2009, M.B.Z. had a firm grip on the state. The global financial crisis had hurt the other six emirates — especially Dubai — and they had lost some of their autonomy to Abu Dhabi, by far the largest and richest member of the federation.

M.B.Z. gave Hindmarsh (who calls him “the Boss”) his full backing and all the money he needed. Hindmarsh, who had gotten used to bureaucratic obstacles during his decades in the Australian Army, was delighted. The U.A.E. has kept Hindmarsh’s role quiet, in deference to Arab sensitivities, but he remains in the job, and his work has been essential in making the Emirati special forces among the best in the world.

M.B.Z. was deeply unnerved by the Bush administration’s talk of democracy-promotion and by its consequences, including the creation of sectarian political parties in Iraq and the electoral triumph of Hamas in Gaza. In 2009, M.B.Z. detected a freedom agenda in Obama’s landmark Cairo speech, with its call for a “new beginning between the United States and Muslims around the world.” He told a United States diplomat afterward that he feared the speech “raises the bar of expectations in the Arab world.”

Then came the Arab Spring. The United States had supported the Egyptian president, Hosni Mubarak, and autocrats like him for decades, and had treated the Brotherhood as dangerous fanatics. Yet when the Brotherhood’s Mohammed Morsi was elected president of Egypt in 2012, the Obama administration accepted the result. M.B.Z. did not. By early 2013, the U.A.E. was backing Tamarod, the swelling popular movement against Morsi. Vast demonstrations against Morsi took place on June 30, followed by his ouster by the military on July 3, which brought Abdel Fattah el-Sisi, the military chief, to power.

The U.A.E. and its gulf allies instantly pledged billions of dollars in support to the new government. Emirati officials have maintained a discreet silence about their role, but all the diplomats I spoke with believe the U.A.E. approached Sisi and outlined the terms of their financial support before Morsi’s overthrow. “I think there’s every reason to believe he staged a coup,” I was told by one former diplomat. “For a tiny country in the Persian Gulf to overthrow the ruler of Egypt and put their guy in, that’s a big achievement.”

M.B.Z. may have prevented Egypt from becoming an Islamic theocracy — that, at any rate, is how he sees it. But Sisi’s own ruthlessness became apparent almost instantly. (It is safe to assume that this doesn’t bother M.B.Z. much, if at all.) In mid-August of 2013, the Egyptian military gunned down about a thousand people in two pro-Brotherhood protest encampments in Cairo, according to Human Rights Watch.

Around the same time, the government began cracking down on secular dissidents too, and in many ways Sisi has been more autocratic than Mubarak was. The takeover in Egypt raised tensions between the U.A.E. and the United States, which danced clumsily between censuring Sisi as an undemocratic strongman and quietly continuing some cooperation. (Trump would later offer a much more unqualified embrace, joking that Sisi was “my favorite dictator.”)

Soon after Sisi took power, in October 2013, M.B.Z. was watching CNN when he learned for the first time that the United States had been secretly negotiating a nuclear deal with Iran. His American friends had told him nothing. “It was a big blow,” one of M.B.Z.’s senior advisers told me. It wasn’t so much that he opposed the idea of negotiating with Iran (the U.A.E. eventually endorsed the preliminary nuclear deal, which was formalized that November).

Instead, M.B.Z. was staggered that Obama had not bothered to consult or even inform a longtime ally about such an important deal — and one that was being negotiated right next door, in Oman. The U.A.E. had a lot at stake, having forced Dubai traders to give up their lucrative business with Iran to comply with the sanctions. “His Highness felt that the U.A.E. had made sacrifices and then been excluded,” the senior adviser said.

Together, the Egyptian tumult and the Iran talks formed a kind of watershed in M.B.Z.’s relations with the United States. The shift was not immediately apparent; he continued talking to Obama regularly and offered him advice. He warned him that the proposed remedy in Syria — Islamist rebels — could be worse than the disease (Assad’s tyranny). He also urged Obama to talk to the Russians about working together on Syria, a coldly realistic suggestion that might have ended the war faster, albeit by foreclosing the opposition’s hope of victory.

But beneath the veneer of routine consultations, M.B.Z.’s feelings about Obama had changed. The relationship eventually turned toxic, with M.B.Z. trash-talking the administration to visitors, former administration officials told me. Obama also made dismissive comments in a 2016 interview in The Atlantic, describing the gulf’s rulers as “free riders” who “do not have the ability to put out the flames on their own” and expect the United States to rescue them.

The final straw came a month after the election of Donald Trump, when M.B.Z. flew to New York to meet the president-elect’s team, canceling a parting lunch with Obama. Soon afterward, M.B.Z. hosted a Russian middleman at an Emirati-owned resort in the Seychelles with Erik Prince, the Blackwater founder — an encounter that put them in the sights of Robert Mueller’s investigation of the Trump administration’s ties to Russia. The meetings, mentioned briefly in the Mueller report, do not seem to have involved any Trump-related collusion. But even if he wasn’t colluding with Russians, M.B.Z.’s attitude toward his American patrons seems to have changed. He had plans of his own, and would no longer wait for their approval.

The overthrow of Morsi was the first great success of M.B.Z.’s counterrevolutionary campaign, and it seems to have supercharged his confidence about what could be done without American constraints. His attention soon turned to Libya, where jihadists were running rampant. He began providing military support to the renegade former general Khalifa Haftar, an autocrat who shared M.B.Z.’s feelings about Islamists. At a Camp David summit in May, 2015, Obama tacitly scolded M.B.Z. and the emir of Qatar for waging proxy war in support of their rival militias. But by the end of 2016, the U.A.E. had set up a secret air base in eastern Libya, from which drones and aircraft bombed Haftar’s rivals in Benghazi.

All of this was in violation of a U.N. weapons embargo, and it irritated Washington. Thousands have been killed in the Libyan fighting, and Haftar’s effort to capture Tripoli has not succeeded. One former United States diplomat who admires M.B.Z. told me that his handling of the Libya mess underscored the danger of overreach. “They are looking to stage-manage and cleave out the parties they don’t like,” she said of the U.A.E. “They will learn they can’t do that.” She added: “You may stir a pot that boils over because of your meddling.”

As he pulled away from the Obama administration, M.B.Z. was acquiring a powerful ally: Mohammed bin Salman, the Saudi crown prince. The alliance may seem natural to outsiders — two gulf autocrats with similar initials — but the bond papered over a historic rift. The Saudis, as the slain Saudi journalist Jamal Khashoggi liked to say, are “the mother and the father of political Islam.” M.B.Z. would agree. The Saudi state is rooted in an 18th-century pact between its rulers and a hard-line strain of Islam known as Wahhabism. It is a formula for state-sponsored extremism that makes the Muslim Brotherhood look mild.

M.B.Z. grew up in a time when most Emiratis felt threatened by their big desert neighbor; there were armed clashes on the border as recently as the 1950s. In 2005, M.B.Z. told a United States ambassador, James Jeffrey, that his biggest concern was Wahhabism, according to a cable made public by WikiLeaks. He saw the Saudi royal family as feckless, but feared that the alternative in such a deeply conservative society could be an ISIS-style Wahhabi theocracy. “Anybody who replaced the Al Saud would be a nightmare,” Jeffrey remembered him saying. “We have to help them help themselves.”

M.B.Z. soon latched onto his Saudi counterpart — who was eager for big reforms — as the key to loosening Saudi Arabia’s ties to radical Islam. He appears to have been something of a mentor to the younger man, and he encouraged the Obama administration to support him. But he doesn’t seem to have any sort of brake on M.B.S.’s worst impulses. When the Saudis led a military campaign against the Iran-allied Houthi fighters in Yemen in March 2015 — with the U.A.E. as their lead partner — many expected it to last a few months at most.

Instead, it has lasted nearly five years, becoming a catastrophe that shocked the conscience of the world. Ancient buildings have been smashed to rubble, thousands of civilians have been killed and Yemen — already the Arab world’s poorest country — has suffered terrible outbreaks of famine and disease. The war’s ostensible goal of uprooting the Iran-backed Houthi government is more distant than ever.

The U.A.E. has a share of responsibility for this immense tragedy, though it did not carry out the bombings that wreaked so much destruction on northern Yemen. M.B.Z. confined his country’s role to the south, where he tried unsuccessfully to broker political deals to end the war, and relied on Hindmarsh’s commando units to train local forces. One former high-ranking American military official told me that 95 to 100 percent of the military success in the war was due to the Emiratis.

When M.B.Z. announced a withdrawal from Yemen in June, he made clear that his new partnership with Saudi Arabia had limits. He also began charting a more diplomatic course with Iran. After a series of attacks on shipping in the Persian Gulf and the downing of an American drone, Trump threatened fire and fury that same month and then abruptly backed down.

M.B.Z. appears to have sensed that Tehran was starting to see Trump as a paper tiger — leaving the U.A.E. dangerously exposed to further Iranian aggression. Soon afterward, the U.A.E. issued conciliatory statements and sent a delegation to Iran in late July. That pattern of outreach and dialogue may be essential in the wake of the Suleimani assassination, as Iran’s neighbors struggle to avert a war.

The diplomatic gestures in July were hailed by some of M.B.Z.’s critics as signs of an unexpected flexibility, or even of “retrenchment.” Yet at times M.B.Z. can be as rigid and ideological as his enemies. The embargo of Qatar, begun in June 2017, has grown personal, with the two sides waging nasty campaigns of media vilification, and has even led to proxy skirmishes in Somalia.

The rift undermines M.B.Z.’s ostensible goal of maintaining a united front against Iranian subversion in the region. If they do not find a way to resolve it, “someone’s going to drive a tractor-trailer right through that gap,” I was told by a former high-ranking United States military official. At its worst, the feud with Qatar has cast M.B.Z.’s whole campaign against political Islam in a vengeful light, as if he were more keen on humiliating his rivals than anything else.

A large bronze sculpture stands outside M.B.Z.’s main office in Abu Dhabi, spelling out the word “tolerance” in English letters. The U.A.E. goes to enormous lengths to advertise its commitment to pluralism. In 2016, the government created a Ministry of Tolerance, and 2019 was branded the Year of Tolerance, kicked off in February by a much-heralded visit from Pope Francis, the first time a pontiff has set foot on the Arabian Peninsula. But the tolerance does not extend to Islamists or anyone who expresses sympathy for them. The U.A.E. has cracked down much harder on Islamists since 2011, arresting and incarcerating them en masse, on thin pretexts.

There is an unmistakable chill in the air, an intolerance for fellow travelers reminiscent of the Cold War. In 2012, the Emirati authorities shuttered the Dubai offices of the United States-based National Democratic Institute and other foreign foundations that supported democratic institutions. In 2014, the government officially designated the Brotherhood a terrorist group. It has prosecuted at least one lawyer who defended Islamists and even, in some cases, secular critics of the government.

Most Emiratis who discussed M.B.Z.’s crackdown on the Brotherhood with me did so only on condition of anonymity and using encrypted apps. Unlike in the West, private cameras in the U.A.E. can be co-opted by the government, giving the authorities extraordinary surveillance over what goes on everywhere in the country.

A widely adopted message app introduced in the U.A.E. last year, ToTok, was recently unmasked as a spying tool for Emirati intelligence. Officials in the U.A.E. are quick to defend these tactics; a single terrorist bomb or Iranian missile could send the expats fleeing and do immense harm to the country’s role as a safe trade and transport hub. A militant apparently inspired by ISIS stabbed a teacher to death in Abu Dhabi in 2014, underscoring the danger.

But the U.A.E. is not just looking for terrorists. It has developed an increasingly aggressive cyberintelligence program called Project Raven, built in part by former American intelligence operatives, that appears to be aimed in part at political rivals. Project Raven’s targets have included at least four Western journalists, including three Americans, according to a Reuters investigation published last year.

Messages on social media warn that expressing support for Qatar is a criminal offense punishable with fines or even jail time. “It’s a fact of life that today it’s very difficult to air criticisms, to talk frankly,” I was told by Abdulkhaleq Abdulla, a prominent Emirati political scientist who has been detained for voicing criticism of the government. He added that this was true across the Arab world.

In the Emirates, much of the censorship is self-imposed, with younger people absorbing a sense that they must be more vigilant against the country’s external enemies. One man in his 20s told me he wondered whether the Muslim Brotherhood threat had been exaggerated to help strengthen the state — a suspicion he would never dare to voice in public.

This may be the central enigma of M.B.Z.’s tenure: He is a socially liberal autocrat, and his country looks different depending on where you stand. Weighed against the standards of Western human rights groups, the U.A.E. can easily look like a hyper-capitalist slave colony whose leader wants to crush all dissent. When you compare it with Syria or Egypt, the U.A.E. is almost a model of enlightened liberalism.

Arab young people mostly seem to take the latter view. Surveys have shown that most young Arabs would rather live there than anywhere else — including the United States or Canada. In part, this is because mournful nostalgia is almost a way of life in Egypt and Iraq, while people in the U.A.E. talk far more about the future. That this is a talking point for the U.A.E.’s publicists does not make it any less true.

Foreign diplomats have occasionally confronted M.B.Z. about his country’s lack of democracy, and he has responded by saying something along the lines of “This isn’t California”: Lack of education and the prevalence of backward religious attitudes make autocracy necessary, he insists. But if he succeeds in his mission to educate the populace and eradicate political Islam, the al-Nahyan family may eventually have more trouble justifying its role as a virtual monarchy.

“You cannot import a ready-made process from abroad,” I was told by Zaki Nusseibeh, who served as a translator and adviser to M.B.Z.’s father for decades. “But yes, we need to start involving young people more in decision-making.” On the two-hour drive from Abu Dhabi to Nusseibeh’s home in Al Ain, in the country’s conservative heartland, I passed immense, upscale housing blocks built by the state for Emiratis, who tend to seclude themselves from the gleaming towers of the city. It was a vivid reminder of the al-Nahyans’ tacit deal with their people: safety and prosperity in exchange for quiescence.

Nusseibeh, a slim, bald man of 73 with alert eyes and a professorial air, is a kind of cultural ambassador for the U.A.E., where he has lived since he arrived five decades ago from the West Bank. His house is a museum of sorts, with books in Arabic, English and French stacked ceiling-high and a whole tower of CDs devoted to the work of Richard Wagner (a framed photograph at the bottom shows Nusseibeh with the composer’s descendant, Cosima Wagner). Paintings and sculptures fill almost every available space, most of them by Arab or Iranian artists.

The important work, Nusseibeh said, is still about building institutions and protecting against external threats, and that requires stable leadership. We were back to the Islamist menace.

“The last 50 years were foundational,” he said. “The next 50 — how do we move this to a new, global level? The challenge becomes more existential. We have to inoculate people against what is happening.”

One morning in June, I got a taxi from my hotel to the Louvre Abu Dhabi, M.B.Z.’s madly ambitious, billion-dollar monument to “art and civilization.” It was unbearably hot and humid out, and as we drove past the corniche — a beautifully landscaped mile-long stretch of waterfront — I didn’t see a single human being. As we crossed the bridge onto Saadiyat Island, I could see the museum looming in the distance like a vast metallic tortoise. Its steel dome, which is as heavy as the Eiffel Tower, is a weave of strands designed to act like a palm grove, allowing tiny shards of sunlight onto the grounds below.

When we arrived, I got out and suffered my unavoidable minute-long exposure to nature, and then returned indoors to the controlled world of M.B.Z.’s visions. It was easy to imagine him striding confidently around the building site a decade earlier, pointing his index finger like a magician: I want walkways here. Let’s keep the natural coastline there. Let’s put hotels there, with a view of the museum. That, in fact, is more or less what happened, as I learned from the man who ran the project for him.

Inside, I goggled alongside the tourists at classic works of Western art sitting alongside Chinese and Indian and Arab masterpieces. The museum’s guiding concept reflects the U.A.E.’s own multicultural ethos, a mash-up of global high culture. It has been derided by some critics, including many in France, as a lavish purchase of a European brand for the benefit of a global leisure class. But M.B.Z.’s main goal for the museum, one of his advisers told me, was to educate the local population, not attract tourists.

As I strolled past a Roman sculpture, a group of Emirati schoolchildren in green shirts trickled in and sat on the floor around me. After a few minutes of sketching, their teachers led them toward the Universal Religions gallery, the museum’s centerpiece. I followed behind and listened as one of the teachers led a Q. and A.

“You all know about the Quran,” he said. “But who can tell me what the Christian holy book is?” Several children shouted the answer. “Very good! What about the Jewish holy book? And for Hindus?” More high-pitched answers. At last came the clincher. “Sheikh Zayed wanted this to be a universal museum, and he had the idea to put all the holy books in one place, so people could see what their religions had in common, and perhaps that way they’d be a bit nicer to each other.”

As the children got up and filed into the next room, it struck me that the teacher’s lecture contained a revealing false note. Sheikh Zayed wasn’t the one who conjured up this museum, with its grand ambition to smash Islamic certainties and turn Bedouins into citizens of the world. M.B.Z. was hiding in his father’s shadow, absent and omnipotent at the same time.

Toyota’s success sends Japan a mixed message

The company is an emblem of resistance to corporate governance reform

Leo Lewis

web_Toyota governance
© Ingram Pinn/Financial Times

A video on the Toyota Times website shows the automaker’s president at the controls of the GR Supra sports car.

Akio Toyoda emits a boy-racer cackle before skidding the vehicle into an arc of smoking rubber. “I love cars that make a racket and reek of petrol,” he yells.

Jarring for a company whose flagship is the Prius hybrid, whose environmental ambitions outpace most of the global industry’s and whose looming challenge is to usher Japan’s most important company out of the human-controlled, combustion-engine era and into whatever artificially intelligent cleanliness replaces that.

But of course, Toyota gets away with the paradox. Mr Toyoda has an awful lot of conventional motors to shift before the future arrives. His hands-on-the-wheel zeal is a calculated salesmanship Toyota has mastered along with operational excellence, Scrooge-like cost-cutting and defiance of prevailing market headwinds.

It is, after all, a company that has grown sales in a slowing China, expanded profits in a shrinking US market and is on course to sell nearly 11m vehicles worldwide in its current financial year as many of its rivals sputter. But might all this excellence come at a heavy cost?

For years, these qualities have given Toyota a convincing claim to the title of Japan’s greatest company. Jesper Koll of asset manager Wisdom Tree calculates that Toyota, plus its supply chain, sales presence and web of other businesses accounts for up to 8 per cent of Japan’s gross domestic product. It has thrived handsomely on the credo — to echo former US defence secretary Charles Wilson’s 1953 observation on General Motors — that what is good for Toyota is good for Japan.

Investors, led by those who view governance as the defining metric of the age, increasingly question whether this holds true. Some, who see Japan risking insularity with toughened new rules on foreign investment, believe the state’s instinct to protect Toyota may have played a role in forming that policy.

Its dominance creates two related issues.

The first, that Toyota is treated as an exemplar by the rest of corporate Japan, the second is that its huge economic and societal footprint obscures just how much of an exception it is.

Japan would love to believe its corporate sector comprises thousands of mini-Toyotas, but it does not. Toyota’s success promotes the idea that a traditional Japanese governance model works perfectly and allows the intransigent and the incompetent to claim it as a recipe.

This might not matter except that, in an era in which corporate Japan has seemed more susceptible to shareholder engagement and governance improvements, and where foreigners are the swing buyer of Japanese equities, Toyota is a beacon — both of resistance to change and to the idea that Japanese companies are owed protection from the outside world.

It also misses the point of investors’ frustration: the push for better governance is not, for the most part, an attack on corporate Japan, but stems from a conviction that in a market where about half of companies are trading below book value, governance improvements would have a more explosive upwards effect on valuations here than they would almost anywhere else in the world. Toyota may not need that boost, but most others do.

The central complaint is with the company’s addiction to so-called cross-shareholdings — the networks of shares that allegiant Japanese companies hold in one another for reasons other than pure investment. To investors, these portfolios are the glue that hold bad governance in place across corporate Japan. They tie up capital to no purpose, are a form of stealth takeover defence and, in the words of Mizuho chief strategist Masatoshi Kikuchi, “a hindrance to open innovation”.

It is no coincidence that, in the government’s efforts to make the Japanese stock market more attractive to domestic investors, the revised 2018 governance code attempted to compel companies to justify their crossholdings and demanded they not “hinder the sale of cross-held shares by implying a possible reduction of business transactions”.

Toyota, which holds shares in 146 listed companies, whose stock is cross-held by around 112 companies, and which has mastered the art of vague justification, provides unspoken market leadership against this effort.

In recent years, it has inked a series of partnerships with Suzuki, Subaru, Mazda and others. In each case, it has not only bought shares in the partner, but encouraged those partners to buy shares in Toyota.

Toyota was seen to be protecting the smaller companies, but as the auto industry prepares for disruption and the certainty of consolidation, it was actually ringfencing itself. In imitation, significant numbers of Japanese companies also expanded their cross-shareholdings last year.

The risk centres on Mr Toyoda, who is widely rumoured to be on the point of swapping his GR Supra for a more highly-powered vehicle: an ascent to both the chairmanship of Toyota and of the formidable Keidanren business federation.

Japan, teetering so tantalisingly on the brink of a real governance breakthrough, may now be hauled back by the old saw that what is good for Toyota is good for the country.