Microsoft's new $1.5 billion partnership with G42, a government-backed tech-investing giant in the UAE, marks a stunning move in AI's increasingly frantic global chess game.

Why it matters: The deal enlarges America's AI tent and sidelines China from the UAE market while placing Microsoft's AI business at the heart of American geopolitical interests and policy.

Driving the news: The deal was partly brokered by Commerce Secretary Gina Raimondo, and hands Microsoft president Brad Smith a seat on the G42 board.

• G42 gets to put the UAE's homegrown AI models on Microsoft's Azure platform.
• Microsoft will get much of its investment back as G42 pays for its Azure cloud services. This sort of deal has already attracted antitrust scrutiny in the U.S., EU and U.K.
• G42 will strip equipment made by China-based Huawei from its systems. G42 separately divested from Chinese companies, including TikTok owner ByteDance, in February under U.S. pressure.

What they're saying: "When it comes to emerging technology, you cannot be both in China's camp and our camp," Raimondo told New York Times.

The big picture: The deal showcases the benefits companies and governments can reap if they side with Washington over Beijing on AI development and governance.

• It also demonstrates the importance the U.S. government and big tech companies place on Gulf markets, for both geopolitical and financial reasons.

Between the lines: The deal is a dividend on a 20-year investment by Microsoft, led by Smith, in better government relations at home and abroad.

• Microsoft has worked furiously to avoid regulatory tangles after the U.S. government's epic effort to break up the company, beginning in 1997, failed. It also faced billions in EU antitrust fines levied between 2004 and 2013.
• The company's outreach has ranged from a tech demonstration center on the doorstep of EU headquarters in Brussels to a de facto embassy to the United Nations in New York, and it has placed armies of lobbyists on every continent.

Microsoft has again been in the antitrust crosshairs recently for its AI partnerships and acquisition of gaming giant Activision.

• The FTC is examining AI giants' acquisitions for signs of anticompetitive behavior.
• It could get awkward for one arm of the Biden administration to take aim at Microsoft's growing AI clout while another arm is joining forces with the company.

The intrigue: Microsoft has its own complicated relationships in China.

• Smith was questioned by senators last year about Microsoft's multi-billion investment in an AI lab in Beijing, dating back to the 1980s and staffed by 200 or so local researchers.
• Peter Lee, a corporate vice president who leads Microsoft Research, told Axios in January that media coverage of the lab had been "deeply unfair."

Catch up quick: G42 is chaired by UAE's most senior security official, Sheikh Tahnoon bin Zayed, and backed by the country's sovereign wealth fund, Mubadala. It has a track record of spreading its geopolitical bets.

• The company says it was the first UAE firm to set up in Israel after the Abraham Accords.
• It also partnered with BGI, a Chinese firm that developed COVID-19 rapid tests and offered them free to the state of Nevada, drawing private warnings from federal officials.
• Peng Xiao, G42's CEO, was born in China — but after gaining U.S. citizenship, he renounced it in favor of Emirati citizenship, per the New York Times.

Fun fact: In the name G42, the G stands for group, while 42 is a reference to "The Hitchhiker's Guide to the Galaxy," in which a supercomputer called Deep Thought says 42 is the answer to "the ultimate question of life, the universe and everything."

Our thought bubble: The deal highlights an emerging battle to determine which countries' systems — and by extension, which countries' values — will dominate the AI world.

• AI makers face pressure from governments to adapt their systems to reflect different sensibilities — for example, around issues such as women's and LGBTQ rights — or to limit criticism of the government.

Behind the scenes: A source notes the deal could help Microsoft access areas of Southeast Asia and Africa where U.S. companies have not had much of a presence.

• Another source notes the changes could help make G42's services more palatable to the large Indian market than when they were seen as more aligned with China.

What we're watching: After Microsoft's win, other tech giants with big government contracts — such as Google and Amazon — are also likely to try to cash in on the market for AI diplomacy.