Dubai wants to bypass Strait of Hormuz

0:02Good morning from the Financial Times. Today is Tuesday, July 14th, and this is your FT News Briefing. Ukraine could get drone parts from an unexpected place soon, and Dubai wants a way around the chaos in the Strait of Hormuz. Plus, the Trump administration is going after Brazil's popular payment system. I'm Mark Filippino, and here's the news you need to start your day.

0:37Ukraine is going to be allowed to spend money from an EU defense loan on Chinese drone components. That's according to people familiar with the matter. Brussels granted Kyiv the carve-out. It'll be the first allocation from a wider Ukraine support loan. Europe has been struggling to build up its own defense industry, and this decision exposes its reliance on China. even though the bloc has criticized Beijing for supplying Russia with military equipment and accused China of being, quote, the key enabler of Russia's war. The European Commission and the Ukrainian Defense Ministry did not respond to requests for comment.

1:18The price of oil jumped yesterday. At the time of this recording, Brent crude was up more than 9.5%, almost hitting$84 a barrel. This was after President Donald Trump said the U.S. will reinstate its naval blockade of Iran. He also said America would charge a 20 percent fee on cargo passing through the Strait of Hormuz. All the uncertainty surrounding the Strait has put the United Arab Emirates in a bit of a pickle. Currently, you have to go through the Strait to reach Dubai's Jebel Ali port. And now Dubai wants to bypass the Strait entirely. The FT's Gulf business correspondent, Nico Perazzi, has been reporting on this.

1:54Hi, Nico. Hello. Hi. So before we get into Dubai's solution, let's start with the problem. How much has the U.S.-Iran war affected Dubai's maritime shipping? Well, the short answer is a lot. I think of all the countries involved in the conflict, the UE has borne the brunt of Iran's retaliatory strikes. In the weeks after the war began, activity at Jebel Ali, the flagship hub of the United Emirates and Dubai in particular, has fallen by 90 to 95 percent. And the obvious reason is that the strait was closed, to which most of the traffic to Jebel Ali runs. Now, like I mentioned, you've been reporting on how the UAE might get around these shipping disruptions.

2:37There's a company that wants to build a new port on the other side of the country. Tell me more about that. So the company behind this new port is DP World. DP World is probably one of the most prolific Dubai-based entities. Over the past two decades, they've truly built and set up and established a ports and logistics empire across the globe from Africa to Asia. So basically, they're looking at Fujairah, which is one of the seven emirates of the United Arab Emirates located on the East Coast. And what they're trying to do is build a new port and also add a container terminal to the existing Fujairah port that you already have there.

3:16Why build on the East Coast, though, Nico? Well, so the Jebel Ali port is based on the west coast of the UAE. And so it has to rely on the Strait of Hormuz for shipping to come in. So what they're doing now is very much bypassing the Strait and moving eastwards, which is on the Gulf of Oman. Now, there are already ports there and they use these at the very beginning of the conflict. So a lot of the container and trade shipments were rerouted through these ports. but they don't have the same capacity as Jebel Ali. So what DP World is now trying to do is to build a plan B, so to say, if the war continues or if hostilities in the future would return.

3:58Just out of curiosity, how big of a deal is this that they're shifting eastward? It is a big deal because the whole story around Dubai and how it became a very prominent regional, even global logistics hub, is very much tied to Jebel Ali. Jebel Ali is the crown jewel in Dubai's economic story. It's also incredibly big. It contains more than just the port. There's a free zone. There's warehousing. So it is very difficult to replicate. But the fact that they're considering to moving some of that capacity elsewhere, and that's outside Dubai because they're, to be clear, moving it into a different emirate, is very big.

4:37It's very important for Dubai. And it's a fairly recent history of the last one or two decades. Now, we should mention that DP World declined to confirm details of any East Coast projects, but said that, quote, there are plans in the works around diversification to get through this disruption. Nico, are there other countries who are trying to find ways to avoid the Strait of Hormuz? What we're already seeing is that there are, for example, pipelines being built from East to West that would bypass the Strait of Hormuz altogether. So what DP World is doing in itself is not unique. The other Gulf countries are either looking at it or already have done so in the case of Saudi Arabia.

5:18But clearly, Dubai, which as always kind of has this ability to switch very quickly and to adapt, is taking the lead here. Nico Perazzi is the FT's Gulf business correspondent. Thanks so much, Nico. Thank you.

5:37U.S. small cap stocks are enjoying their best returns in more than 20 years. It's great news for the group of companies that's been underperforming for quite a while now. The Russell 2000 Index is the benchmark for small caps in the U.S., and it's up 20 % this year so far. This is significantly higher than the S &P 500's around 10 % rise. The reason small caps are soaring right now? Well, investors are getting more and more worried about whether the larger tech companies can turn their big spending on AI into profits. So they're looking beyond big tech at lower-valued stocks that are benefiting from the AI boom.

6:19A popular online payment system is driving a wedge between Brazil and the U.S. PIX allows direct digital transfers between parties and lets you make payments without a debit or a credit card. But the success of PIX is one of the reasons the U.S. is looking to put tariffs on Brazilian imports again. And the controversy will likely become a talking point in the country's upcoming presidential election. Michael Pooler is the FT's Brazil Bureau Chief. He joins me now to talk about this. Hi, Michael. Hi, Mark. So I gave a little bit of a background here, but tell me more about PIX. So PIX, as you mentioned, it's this instant real-time payments tool.

6:56And it's not a standalone app itself, but it's integrated into banking or fintech apps. And it allows users to transfer money instantaneously without any fee for consumers. And for businesses, there's a small charge. The government launched PIX in late 2020 as a way of improving financial inclusion. And on its own criteria, it worked. Around 80 % of the population, which is 170 million people, use it regularly. And the central bank says that it brought 70 million people into the formal financial system. Yeah, it sounds convenient. So why is the U.S. upset about it? So the U.S. has a list of complaints about PIX.

7:32One of them was that PIX is mandatory for banks and fintechs. So any bank or financial institution that has more than half a million customers must offer PIX on its app. PIX also caps the fees that these financial institutions can charge businesses for a payment through PIX. Another issue that the US had was around the governance of PIX because it was created by the central bank, which operates it. But the central bank is also the regulator of the payment system. And they say that dual role poses problems. Why would this be a problem for the Trump administration? Supporters of Lula suggest that this issue is being driven by US electronic payments companies, such as Visa and MasterCard.

8:16They say that if more people are using PIX, which is free or very low cost, then that means fewer transactions going through credit and debit cards, which is bad for them. However, when you speak with people in the financial sector, they say that in one of the most unequal societies in the world, PIX has actually brought millions of people into the financial system. And as a result, it's increased the overall level of payments that are happening, which is good for those companies. Michael, probably good to mention that you reached out to Brazil's central bank and it said it's, quote, regulation focused on openness and fairness across all payment segments.

8:49And this is all at play in the decision the U.S. is set to announce this week on whether it will impose new tariffs on Brazil. But it's also become an issue on Brazil's campaign ahead of an election coming up in October, right? So this has become a really big issue for the upcoming elections in Brazil. There'll be a ballot in October to decide the next president. And it's going to be left-wing President Luiz Nato Lula da Silva, commonly known as Lula, versus Senator Flavio Bolsonaro, who is the son of former president who is now jailed, Jair Bolsonaro. Lula and his supporters say that this is an attack on Brazilian sovereignty because PICS really is beloved by Brazilians and they say it's a national asset.

9:29And Flavio Bolsonaro actually went to Washington and met Donald Trump and other members of the administration days before this USTR report recommending the tariffs and criticizing PICS came out. So Lula's supporters have tried to suggest that Flavio Bolsonaro, the opposition right-wing candidate, is in cahoots with the US and that he invited this. Flavio Bolsonaro, for his part, says that's completely untrue. He's come out and defended PIX and said, in fact, PIX is a legacy of my father because it was launched during the government of Jair Bolsonaro. We should say that MasterCard declined interview requests while Visa did not respond to inquiries.

10:07Michael Pooler is the FT's Brazil Bureau Chief. Thanks so much, Michael. Thanks, Mark.

10:16You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

10:49Michael Pooler: solution, and they're ready to act on it. When AI gives an answer, is your brand a part of it or not? Most companies have no idea which. GIST changes that. We show you where you're visible, where you're not, and give you the tools to do something about it. It's time to make AI work for your brand with GIST. Learn more at gist.ai. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio.

11:28Listen at schwab.com slash Washington Wise.