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Identifier
Created
Classification
Origin
03KUWAIT1213
2003-04-02 13:50:00
CONFIDENTIAL
Embassy Kuwait
Cable title:  

PROMOTING U.S. (AND OTHER FOREIGN) TRADE WITH, AND

Tags:   EINV  ETRD  EAID  BEXP  PREL  IZ  KU 
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						C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001213 

SIPDIS

STATE FOR NEA/FO (DAS CHENEY AND DAS CROCKER)
STATE FOR E (U/S LARSON)
STATE FOR EB (A/S WAYNE), EB/CBA, AND EB/IFD
USDOC FOR 3131/USFCS/OIO/ANESA
USDOC FOR 4520/MAC/AME
TREASURY FOR U/S TAYLOR AND OTA
STATE PASS OPIC, USTDA AND EXIM
STATE ALSO PASS USAID
DOD FOR U/S FEITH

E.O. 12958: DECL: 03/30/2013
TAGS: EINV ETRD EAID BEXP PREL IZ KU
SUBJECT: PROMOTING U.S. (AND OTHER FOREIGN) TRADE WITH, AND
INVESTMENT IN A NEW IRAQ

Classified By: Ambassador Richard H. Jones for reason 1.5 (D).

INTRODUCTION
------------
C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001213

SIPDIS

STATE FOR NEA/FO (DAS CHENEY AND DAS CROCKER)
STATE FOR E (U/S LARSON)
STATE FOR EB (A/S WAYNE), EB/CBA, AND EB/IFD
USDOC FOR 3131/USFCS/OIO/ANESA
USDOC FOR 4520/MAC/AME
TREASURY FOR U/S TAYLOR AND OTA
STATE PASS OPIC, USTDA AND EXIM
STATE ALSO PASS USAID
DOD FOR U/S FEITH

E.O. 12958: DECL: 03/30/2013
TAGS: EINV ETRD EAID BEXP PREL IZ KU
SUBJECT: PROMOTING U.S. (AND OTHER FOREIGN) TRADE WITH, AND
INVESTMENT IN A NEW IRAQ

Classified By: Ambassador Richard H. Jones for reason 1.5 (D).

INTRODUCTION
--------------

1.(C) While the world focuses on the short-term humanitarian
needs of the Iraqi people, it is obvious that the
resurrection of the Iraqi economy, demolished by decades of
mismanagement, will require literally trillions of dollars.
This burden cannot be borne by the international community;
the vast bulk of this capital must come from the private
sector. Unique USG programs such as the Overseas Private
Investment Corporation (OPIC), the U.S. Trade and Development
Agency (USTDA) and the Export-Import Bank of the United
States (EX-IM) can and should play a major role in
facilitating the flow of U.S. trade and investment into the
new Iraq. Similar programs within the World Bank Group such
as the Multilateral Investment Guarantee Agency (MIGA) and
the International Finance Corporation (IFC) should also be
encouraged to play significant roles at the multilateral
level. Finally, technical assistance programs, perhaps
orchestrated by USAID and the Treasury Department's Office of
Technical Assistance, could help capital-rich Persian Gulf
states develop their own institutions to provide trade and
investment finance programs similar to these, thereby
mobilizing their wealth more effectively for investment
projects in Iraq, Afghanistan, and elsewhere.

PROPOSAL
--------------

2.(C) With the above in mind, Embassy Kuwait proposes:

a) to shortly open a joint FCS/OPIC/TDA/EX-IM office in
Kuwait to provide front line support to U.S. exporters
seeking to do business in the new Iraq, possibly using MEPI

funds to support the establishment of the operation

b) that USDOC and Treasury work closely with IMIs such as the
World Bank to encourage MIGA, IFC and other similar programs
to consider rapidly establishing programs to promote the
rebuilding of the Iraqi economy

c) that USAID and Treasury's Office of Technical Assistance,
possibly working with the World Bank and others, develop
proposals for programs to help Kuwait and other Persian Gulf
states develop trade and investment guarantee programs
similar to OPIC and EX-IM.

PROPOSAL A: US TRADE PROMOTION OFFICE
--------------

3.(C) To date, post has received hundreds of inquiries from
Kuwaiti firms seeking information on how they can do business
in the new Iraq, and many of these either already have U.S.
partners or are actively looking for U.S. partners.
Separately, many U.S. firms have expressed their intent to
fully exploit the business opportunities opened by the fall
of the Hussein regime. However, it seems clear that Iraq
will be a difficult place to do business for some time, and
legal and regulatory structures and financial systems will
require massive restructuring. The perceptions of political
risks are also likely to remain high, at least in the medium
term.

4.(C) U.S. exporters of goods and services are more than able
to assess commercial risks, but will look elsewhere for
protection from political risks. These, of course, are
exactly the risks agencies such as EX-IM and OPIC are
designed to help firms mitigate. For example, until a modern
international payment system is in place, and until economic
activity in Iraq expands to the point where consumers have
disposable income, U.S. exporters are unlikely to sign
significant supply contracts with revived Iraqi firms, nor
are they likely to find banks willing to extend significant
credit for such trade. EX-IM guarantee and lending programs
may provide sufficient comfort to exporters and lenders to
encourage the onset of such trading activity. And OPIC
investment guarantee programs would similarly allow U.S.
firms to more fully participate in the reconstruction of Iraq
by shielding firms from political risks so they can focus on
commercial investments that will create badly needed jobs and
revive a decimated Iraqi economy. Finally, TDA programs such
as funding feasibility studies can introduce key officials in
the new Iraqi government and in the private sector to U.S.
firms and technologies that will help quickly reintroduce
Iraq to the modern world economy.

WHY KUWAIT?
--------------

5.(C) Our proposal is to open a joint FCS/OPIC/TDA/EX-IM
office here in Kuwait that will serve as a service center for
U.S. firms coming to the region for business in Iraq. The
office should be led by US&FCS, with its extensive network of
commercial offices throughout the U.S. and its expertise in
business counseling. We see the office located in Kuwait for
several reasons. First and foremost, Kuwait is the only Arab
country that has publicly and repeatedly stated its support
for coalition actions against Iraq. In addition to this
verbal support, Kuwait is providing literally hundreds of
millions, if not billions, of dollars worth of support for
the military effort.

6.(C) Beyond these political factors, Kuwaitis control
hundreds of billions of dollars of private capital, capital
that will be badly needed to rebuild Iraqi farms, businesses,
and factories. Kuwait has a long history of commercial and
family ties in Iraq, especially in the South, and Kuwaitis
tell us that they already have their eyes set on
reestablishing and building on those relationships. Helping
to build those relationships between Iraq, Kuwait, and the
other states of the Gulf Cooperation Council will be
important to reestablishing stability in the region.
Finally, many Kuwaiti companies already have strong ties, as
agents, distributors, or partners with U.S. firms, and those
Kuwaiti firms could be an invaluable source of knowledge
about Iraqi market conditions for U.S. firms seeking to enter
the new Iraq.

7.(C) Establishing the office quickly in the region will be a
clear signal of U.S. intent to participate fully in the
reconstruction effort in partnership with Kuwait and other
GCC states. It also will encourage U.S. firms to seriously
consider partnerships with local firms as they pursue
business opportunities. Eventually, the office could be
relocated to Baghdad, but Kuwait offers a safe and secure
location, with excellent infrastructure, to initiate
operations. While individual agencies would likely absorb
their own personnel costs, we suggest that MEPI funds could
be a source for the start-up costs.

PROPOSAL B: MIGA AND IFC
--------------

8.(C) Of course, U.S. firms are not the only companies that
will look to do business in the new Iraq, nor could they
provide all the capital needed. Some projects may be so
large that they will require the creation of multi-national
consortia to undertake. For these multinational efforts, one
must turn to multinational agencies for support. Hence the
involvement of MIGA and the IFC will be vital. We understand
that neither has underwritten projects in Iraq for years, and
that important issues such as IMF arrears will need to be
addressed before they can resume such work. However, we
encourage Washington agencies to begin (or, more likely,
accelerate) discussions with the IMIs to rapidly deal with
any significant impediments and to quickly resume operations
with a new Iraqi government. MIGA investment guarantee
programs are particularly influential on financial
institutions making major lending decisions. The ability of
the IFC to take direct equity stakes in important projects in
Iraq would be an important political signal to the Iraqi
people of the international community's commitment to their
economic well-being and its faith in their economy.

PROPOSAL C: TA FOR OPIC/EX-IM LIKE PROGRAMS IN THE GULF
-------------- --------------

9.(C) As noted above, Kuwait (and other Gulf states) controls
hundreds of billions of dollars in private capital, mostly
held in Western equities. This capital, properly mobilized,
could be an invaluable source of funds for job and wealth
creation for the Iraqis. However, Gulf financial
institutions tend to be relatively unsophisticated and
notoriously risk-averse. Arab-wide programs such as the
Inter-Arab Investment Guarantee Corporation (IAIGC) are
relatively small (IAIGC wrote only 3 investment guarantees in
2001 according to its annual report), and, according to our
Kuwaiti interlocutors, are prone to paralysis caused by
political interference. We believe that with the appropriate
technical assistance, Gulf states could easily develop their
own trade and investment guarantee organizations. We have
tested the idea of a "Kuwait Iraqi Private Investment
Company" on a few select Kuwaiti contacts, and they expressed
enthusiasm for the idea. With a few tens of millions of
Kuwaiti Dinars as capital, such an institution could mobilize
hundreds of millions of private investment, with profits
plowed back into the organization.

10.(C) We are reluctant to shop the idea around too much,
however, if we cannot provide the necessary support. We see
that Treasury's Office of Technical Assistance, perhaps
working with USAID, would likely be the best source of the
training and advice for Gulf states to establish their own
domestic programs. If Washington will signal is willingness
and ability to provide such assistance (again, possibly
funded by MEPI if not by the governments themselves), we can
then engage more fully with our interlocutors to help them
develop a formal proposal.

CONCLUSION
--------------

11.(C) Fully engaging the U.S. and GCC private sector in
Iraq's reconstruction effort will be vital to its success.
The most important issues to achieve this will be the most
basic -- transparent and predictable legal and regulatory
structures, business friendly tax regimes, and the other key
elements of the investment climate. We look to the Office of
Reconstruction and Humanitarian Assistance to work with the
new Iraqi government to do everything possible to get these
elements right. These are the necessary conditions to
attract trade and investment, but they are not sufficient.
In addition, governments will need to take steps to encourage
their firms to seriously consider entering the Iraqi market,
and to provide comfort to those who do. We believe steps
such as those outlined above will go far to help attract
foreign investment into Iraq, and more importantly, to ensure
the Iraqi people benefit fully from their hard-won freedom.
JONES