When Borse Dubai made a hostile bid for Sweden's stock exchange last month, it conjured up visions of Rodney Dangerfield trying to join the exclusive Bushwood Country Club in the movie Caddyshack.

Swedish regulators expressed concern that Borse Dubai, which is owned by the Dubai government, might not be a proper fit for a "strategic industry" like the OMX exchange. Government officials said the offer price couldn't be their sole concern. And major shareholders questioned Borse Dubai's commitment to transparent markets and securities regulation.

It didn't help matters that Borse Dubai's managers, led by former OMX chief Per Larsson, apparently broke Swedish law by building their large stake in the OMX without publicly stating that they intended to make a takeover bid. That slip has increased the regulatory hurdles and spawned several investigations into the takeover.

But whatever the missteps, Dubai's $4 billion move to buy the Swedish exchange clearly highlights the ambitions of the country's leadership to remake the tiny Gulf island into a financial powerhouse, and the large petrodollar-filled war chest it has to ensure success.

"Dubai, in particular, wants to establish itself as a regional financial center and it feels a recognized, respected exchange is integral to achieving that status," notes Tahir Jawed, a Dubai-based expert in Islamic finance with the law firm of Maples and Calder. He adds that Dubai's ambitions would be furthered by "any links with a European exchange and the mutual recognition that would inevitably follow."

Dubai isn't the only country in the region with such lofty ambitions. Qatar, Bahrain, and Kuwait also have growing financial districts, and Saudi Arabia, whose $327 billion market remains virtually closed to outside investors, plans to finish its own sprawling financial quarter in Riyadh next year. It will include 40,000 parking spaces, a sports arena, and giant climate-controlled skyways.  The governor of Saudi Arabia's Public Pension Authority calls it "the first major financial center of the 21st century."

 

But experts say none of these countries are as far along in laying the groundwork or as cunning in their approach as Dubai, whose leaders, including Sheikh Mohammed Bin Rashid al Maktoum, have slowly remade the 1500 square mile kingdom into a slick transit center for the world's commerce.

With dwindling oil reserves now accounting for less than 3 percent of the country's $46 billion gross domestic product, Dubai has been turned into a regional transportation and entertainment hub, boasting one of the world's busiest international airports and its largest man-made port.

Dubai and the rest of United Arab Emirates control up to $875 million in sovereign wealth, so the development plans have continued at breakneck speed. It is already deep into a $1.2 billion expansion of its port system, and recently announced that, by 2015, it would be the home of the world's largest airport, part of an $82 billion investment in airport and aerospace infrastructure. Country investment funds have also continued to purchase strategic assets around the world, most recently laying out $5 billion in capital for a stake in the hotel and casino operator MGM Mirage.

Don De Marino, chairman of the U.S.-Arab Chamber of Commerce, says it is easy to believe Dubai will become the region's financial leader, saying "they have made very focused acquisitions and executed brilliantly in other sectors."

While it has always been a trading center and gained a somewhat dubious distinction as a crossroads for smugglers, money launderers and terrorists' financiers prior to the 2001 terror attacks on the U.S., Dubai has strengthened its oversight of the money trail and has moved quickly to plug holes in its attempt to increase the quality of its financial system and woo more risk-averse investors.

Dubai's free-trade zones and beneficial tax treatment have long brought major companies, such as Haliburton, to Dubai. But, financial firms are increasingly seeing the attraction as well, particularly since Dubai has continued to promulgate Western-based securities laws.

Dubai has become a center for private equity deals. And, although the Dubai International Financial Exchange, a nearly two-year-old international exchange that is part of Borse Dubai, trades only a handful of stocks and bonds, it already has attracted the world's largest broker dealers as members, including Citigroup Global Markets Ltd. and Merrill Lynch International.

 

Increasing its ties to these firms, the country has also bought into several of them, including building a 2.2 percent stake recently in Deutsche Bank. The country estimates that revenues from financial services firms will contribute $15 billion to G.D.P. by 2015, up from about $3.4 billion currently. 

Borse Dubai's drive to take over the OMX is another sign that these financial heavyweights haven't set up shop in the wrong locale. Such a takeover would immediately turn Dubai into a strong regional contender because about 60 world exchanges run on OMX technology, while it owns outright several other Nordic and Baltic exchanges. As Larsson noted in explaining the deal, the combination would turn the relatively sleepy Borse Dubai into the fifth largest and fastest growing exchange group in the world.

Eric Meyer, president and C.E.O. of U.S.-based Shariah Capital adds that Sheikh Mohammed has made clear that the move against OMX is only the start. "Owning exchanges, and integrating them into yours, ties trade and commerce to  your economy as well," he says. "It is the ultimate feeder system of capitalism and commerce."

At first, Borse Dubai has to capture the prize. Whether it will is up for debate. Borse Dubai's offer, which must be filed formally by September 14, has brought it a host of headaches so far and the regulatory scrubbing could continue for another month. Whatever the outcome, Borse Dubai will likely still have to fight off the Nasdaq, its chief rival for control of the OMX. The Nasdaq, which earlier made a $3.7 billion bid for the exchange company, may raise its bid to be more competitive if regulators don't knock Borse Dubai out of the running first.

It is unclear what the Nasdaq could raise, although it is currently negotiating with several buyers for its $1.6 billion stake in the London Stock Exchange. Borse Dubai is believed to have lined up enough funding to increase its bid by about $1 billion, and maybe more.

Even if it manages to take over the OMX, other larger problems could still derail Dubai's ambition to become a top-tier financial center. Experts point out that it will face increasing competition from other oil-rich Gulf nations, that the Gulf markets have been among the most volatile in the world, and that it has had trouble with consistently implementing its securities regulations.

In one black eye, the government famously fired the well-regarded regulator Ian Hay Davidson in 2004 after hiring him to help draft securities laws based on those in London and New York. Davidson has stated publicly that the firing came after he complained of nepotism and backroom dealings.

Then there is three hundred pound gorilla in the room. The idea that Dubai could become a world financial center "is not far-fetched," says Paul Sullivan, professor of economics at the National Defense University and an expert in the Middle East, noting that to see where Dubai could go, one only needs to look at the booming stock exchanges in China or India.

 

"But the biggest stumbling block is the geo-strategic insecurity in the region," he says, ticking off Dubai's neighbors, which include Iran and Iraq. "London, Paris, and Tokyo don't have that problem. They are not sitting on a potential military and political earthquake."