Sultans of bling

IT'S ALL about the economy, stupid. Every time the price of a barrel of oil rises by $1, Abu Dhabi is reputed to become almost $500m a day richer. So, with oil prices rising from $50 a barrel in January 2007 to a high of more than $147 in July, all it takes is access to the back of a fag packet to know that's a pretty substantial windfall for a nation of just 850,000 people lucky enough to be sitting on 9% of the world's hydrocarbon reserves.

Oil has produced dizzying levels of wealth in Abu Dhabi. Its citizens have a per capita income of 28,000, a net worth of 9.6m, and an average GDP per person of 35,500 a year – a figure exceeded only by Norway and Luxembourg. At the top of the tree, its royal family, the Al Nahyan dynasty, sit on a fortune worth hundreds of billions of pounds. There's so much money that they would be hard pressed to give it away – not that such a course of action is on the radar.

The popular perception of the oil-rich Arab sheikh as a feckless investor easily parted from his cash was undoubtedly strengthened by last week's 210m acquisition of Manchester City and the subsequent British record fee of 32.5m for Brazilian striker Robinho. Yet nothing could be further from the truth.

Sheikh Khalifa bin Zayed Al Nahyan, the ruler of Abu Dhabi, and his right-hand man, half-brother Sheikh Mansour bin Zayed Al Nahyan, are preparing for a life after oil by investing their petrodollars with ruthless vigour. Using the world's biggest sovereign fund, the Abu Dhabi Investment Authority, whose three divisions sit on a war chest of almost 565bn, they have invested 50bn in US banks, retail and property, recently buying New York's iconic Chrysler Building.

Now they are turning their attentions to Europe. A 5% stake in Ferrari was a recent acquisition. So, too, Manchester City. And they say there are more big deals in the pipeline, almost all of them for established iconic global brands. Personally, the Al Nahyans are publicity shy and level-headed (Sheikh Mansour was described this week as "cool-tempered, sensible and thoughtful"), but an investment strategy designed to build profile through acquisition rather than organically has seen them Hoover up an increasing number of the world's most bling brands.

Recent acquisitions need to be seen in a wider context. It is a context in which Abu Dhabi's economic and cultural rivalry with Dubai, the second-largest of the seven tiny city-states which joined together in EU-style to form the United Arab Emirates, drives all their actions.

In many ways it is a clash of opposites: oil-rich but cautious Abu Dhabi against brash, gaudy Dubai which has just 1% of Abu Dhabi's oil reserves but an entrepreneurial instinct for trading that has seen it keep pace commercially with its big brother. But both countries have the same goal: to establish themselves as the world's commercial hub, a nexus between East and West – even though there can only be one winner, the one which establishes its "brand" most successfully. Hence the recent establishment of the lavishly-funded Office of the Brand of Abu Dhabi.

Sheikh Mansour is leading the game of catch-up as well as taking the fight to the flamboyant capitalists transforming Dubai. Not only is he the influential minister for presidential affairs, chairman of the First Gulf Bank and the head of the nation's International Petroleum Investment Company, but he is a cultural and sporting obsessive who is ensuring Abu Dhabi matches the investments of Dubai's ruling Al-Maktoum family dollar for dollar.

All of the Abu Dhabi Investment Authority's spending fits into a long-term plan partly determined by that rivalry. On the sporting front, for instance, Dubai dominates the world of horse racing and stages significant events in tennis, rugby and golf, but it no longer has a free run. When a scion of the Maktoums set up the A1 grand prix racing circus as a potential competitor to Formula One, Sheikh Mansour courted Bernie Ecclestone: 2009 will see the first Abu Dhabi grand prix. And when Sheikh Maktoum launched a bid for Liverpool, Sheikh Mansour stepped up his efforts to invest in the Premier League, culminating in last week's move on Manchester City.

It isn't just a regional or personal rivalry (Sheikh Mansour is married to his cousin, Sheikh Maktoum's daughter) that is driving the Abu Dhabi interest in sport, however. Sheikh Mansour sees sport as a shortcut to commercial acceptance. The chairman of the Emirates Horse Racing Authority and the chairman of Al Jazira Football Club, he is behind a campaign to ensure that the UAE team qualifies for the 2010 World Cup in South Africa and lobbied hard to win the right to host the Fifa World Club Championship in 2009 at the 55,000-seater Zayed Sports City Stadium.

Despite Sheikh Mansour's promise to spend "as much as it takes" to make Manchester City "the biggest club in the Premier League", the hyperbole about the purchase redefining the landscape of football was overblown. It's an obvious fit: the UAE has money to burn and an expertise deficit, the Eastlands club has expertise and an insatiable appetite for funds. The club will play regularly in Abu Dhabi and will take an active role in helping develop football in the UAE, where home-grown players like Ismail Matar dwarf the popularity of international icons like Beckham and Ronaldinho. "We need time to become like the Premier League," said Al Jazira's Khalid Al Omari. "People are pleased with the deal because we will learn about how to operate in a high level professional league."

It was, said Sulaiman al-Fahim who will run Manchester City for Al Nahyans, the latest part of the plan to make Abu Dhabi "a global sports capital". More buyouts of top European sides are inevitable, he added. The same is happening in the cultural world. When Dubai's sovereign fund launched a national film festival and nibbled around the edges of Hollywood, the government-owned Abu Dhabi Media Company piled in last week, taking a huge chunk of Warner Brothers, the studio that George Clooney and Will Smith call home. They pledged to "spend in excess of one billion dollars over the next five years", making eight full-length feature films.

Abu Dhabi has also used the acquisition of huge brands to establish itself as a top-end Dubai-style tourist destination. A Warner Brothers theme park is already under construction, as is a Ferrari theme park. High-culture is represented, too. Lured by huge stipends, both the Sorbonne and New York University have established their first overseas campuses. Abu Dhabi has also embarked on the most ambitious museum-building programme ever seen, with three major projects due to open in 2012 on Saadiyat island, a barren square of land off downtown Abu Dhabi which has been transformed into a 21st-century version of the pyramids of Egypt in a 20bn project.

Architect Frank Gehry has designed a branch of the Guggenheim that dwarfs the original in size and scale, Norman Foster has designed the national museum, and the Emirate has paid the Louvre 300m to open its first branch outside Paris. As if that's not enough, Zaha Hadid, the London-based Pritzker prize-winning architect who designed the 2012 Olympic aquatic centre, is designing a performing arts centre.

As well as bringing in tourist dollars, a key rationale of the cultural onslaught is the desire to change western perceptions of Muslims in general, and the Emirate Arabs in particular. Sheikh Mansour has spoken of his hopes for a renaissance mirroring the early Islamic flowering of knowledge that occurred while Western Europe was in the midst of the dark ages.

It's an ambitious programme of expansion and acquisition that sometimes seems to verge on the megalomaniacal. Yet whether it's with Manchester City or Ferrari, Abu Dhabi's rulers are determined to spend big, to speculate to accumulate. As Sheikh Mansour says, one day the oil will run out and the survival of the tiny emirate will depend on the decisions being taken today.

World's fastest growing economy

The oil-rich United Arab Emirates is a collection of seven small city states on a promontory the size of Austria which sits at the entrance to the strategically important Straits of Hormuz separating the Persian Gulf from the Gulf of Oman.

• Almost 40% of the world's oil is transported through the Straits. Bordered by Saudi Arabia to the south and Oman to the east, the UAE looks across the Red Sea at Iran.

• Based on ancient sheikhdoms, the seven kingdoms of Abu Dhabi, Dubai, Fujairah, Ras al-Khaimah, Sharjah, Umm al-Quwain and the tiny Ajman comprise the area that was once known as the Pirate Coast, thanks to attacks on ships en route to or from India before a truce with Britain in 1853 saw them renamed the Trucial States. When that treaty expired at Britain's insistence in 1971, Dubai and Abu Dhabi agreed to form a union of independent states and invited the other emirates to join them.

• Oil has formed the bedrock of an economy whose GDP grew by 35% between 2005-6 to stand at 100bn – the fastest growing economy in the world, although it is heavily dependent upon the price of oil. Only Dubai, which has smaller reserves, has developed an economy based on trade, tourism and leisure.

• In theory, the UAE is ruled by a council of all seven monarchs, but, in practice, it is run by the two largest emirates, Dubai and Abu Dhabi. The president has always been the leading sheikh of the Al Nahyan clan from Abu Dhabi, while the prime minister has always been the leading sheikh of the Al Maktoum clan from Dubai, currently Mohammed bin Rashid Al Maktoum.

• Over two thirds of its population of 5.5 million are men. 85% are non-indigenous workers brought into help build up the infrastructure and there is currently 200bn worth of active construction projects underway in the UAE.