SCENESETTER FOR A/S TONY WAYNE'S JANUARY 7, 2006

UNCLAS SECTION 01 OF 04 KUWAIT 005231

SIPDIS

SIPDIS

FOR EB A/S WAYNE AND NEA/ARPI

E.O. 12958: N/A
TAGS: PREL ECON KU
SUBJECT: SCENESETTER FOR A/S TONY WAYNE'S JANUARY 7, 2006
VISIT TO KUWAIT


1. (SBU) We look forward to welcoming you to Kuwait. Over
the past three years the GOK has embarked on an ambitious
program of economic and political reform, with some successes
and some frustration. There are significant opportunities
for U.S. businesses in Kuwait, which will continue to
increase as economic reforms progress. A National Assembly
vote on developing Kuwait's Northern Oil fields in January
2006 could signal the beginning of new opportunities in
Kuwait's petroleum sector. TIFA discussions that began in
2004 have stalled, but technical talks are planned for early

2006. While reforms in its laws have been slow, Kuwait has
made significant progress in combating terrorist financing.
Kuwait remains a strong and reliable partner in our efforts
in Iraq, and has also contributed to Afghanistan, the
Palestinian Authority, earthquake relief efforts in Pakistan
and tsunami relief efforts in south Asia. Kuwait has also
recently pledged an extraordinarily generous aid package for
the victims of Hurricane Katrina. We continue to encourage
economic cooperation between Kuwait and the United States.

Economic and Commercial Opportunities
--------------


2. (SBU) Project Kuwait, the initiative to develop Kuwait's
Northern oil fields, represents the largest single
opportunity for U.S. firms in Kuwait. The project aims to
expand production in four specific fields from 450,000 to
900,000 bpd. Pending National Assembly approval, the Kuwait
Petroleum Corporation (KPC) will award the development
project to one of three oil company consortia; Chevron and
ExxonMobil lead two of the consortia, while Occidental
Petroleum is an investor in the third. The arrangement will
be akin to a very large technical services agreement, and
could be worth up to USD 8.5 billion.


3. (SBU) In addition to Project Kuwait, opportunities for
U.S. businesses in the petroleum sector are numerous. The
Al-Zour North electricity plant, a proposed USD 2.4 billion
2500-megawatt powerplant, is currently in the bidding stage
with American companies (Bechtel, Fluor, The Washington
Group, Shaw-Stone & Webster Group, and GE) representing 5 of
the 7 leading consortia. Kuwait's planned fourth refinery
will reportedly be the world's largest and will refine
615,000 barrels of crude oil each day. With the loosening
of Kuwait's foreign investment laws, opportunities for
petrochemical joint-ventures, and the environmental and
security contracts that accompany them, should increase over
time.

Oil & Gas
--------------


4. (SBU) In total, Kuwait claims to have 101 billion barrels
of crude reserves, about 8 percent of the world total.
Kuwait's petroleum sector is currently running at or near
capacity, pumping roughly 2.5 million bpd of crude oil (2.3
million bpd is exported) and refining about 900,000 bpd. On
January 23, 2006, the National Assembly is scheduled to vote
on Project Kuwait, through which the GOK aims to increase
production to 4 million bpd by 2020. At the final OPEC
meeting of the year on December 12, 2005 (hosted and chaired
by Kuwait),the organization decided to retain current
production quotas, and noted that it may consider production
cuts in 2006.


5. (SBU) While rich in oil, Kuwait is poor in natural gas.
A pipeline deal to import gas from Qatar has stalled over
Saudi objections to the pipeline passing through its
territorial waters, and the GOK has explored options to
import gas from Iran. Another possibility is for Kuwait to
exploit the Al-Dorra offshore field, which is jointly owned
by Kuwait and Saudi Arabia.

Terror Finance
--------------


6. (SBU) The GOK is pursuing legal reforms to strengthen its
CTF/AML regime; however, progress has been slow. In 2004 the
GOK formed a National Committee to Combat Money Laundering
and Terrorist Financing, chaired by the Central Bank (CBK)
Governor, to implement the countries AML legislation (Law No.
35) that criminalizes money laundering and conduct a legal
review. The Committee is comprised of 10 GOK ministries and
agencies involved in CTF/AML issues. Members of the
committee have formed a smaller sub-group to draft a new
comprehensive terror finance law, expected to replace the
2002 AML law. According to GOK officials, a draft of the new
law is near completion and will be ready for review by the
USG and IMF prior to Cabinet and National Assembly approval
(no earlier than Spring 2006). Central Bank officials have
informed Post that the new law will incorporate international
(USG and IMF) recommendations on strengthening Kuwait's
CTF/AML regime to include such measures as criminalizing
terror finance, strengthening Kuwait's Financial Intelligence
Unit (FIU),and improving internal GOK coordination.


7. (SBU) Kuwait's FIU, housed in the CBK, is not a member of
the Egmont Group and therefore remains cut-off from important
information sharing mechanisms. The FIU lacks independent
authority and is structurally weak, comprised of seven
part-time CBK officials and headed by the governor. Unlike
the U.S., banks in Kuwait cannot file STRs directly with the
FIU and are required to file them with the Office of the
Public Prosecutor (OPP). According to the CBK, the new law
is expected to remedy these shortfalls by enhancing the FIU's
role and making it the central authority on receiving,
analyzing and investigating financial crimes. The Ministry
of Social Affairs and Labor (MOSAL),through its charity
oversight office, is responsible for regulating Kuwaiti
charities. Over the last year two years, MOSAL has taken
preventive CTF/AML measures, including the closure of
donation kiosks and prohibition of alms collection at
mosques. Banks are only authorized to transfer funds abroad
for charities approved by the MOSAL. Kuwait does not have a
cash-exit declaration policy and there is isolated
enforcement (only at the Abdaly Port bordering Iraq) of the
country's cash-entry policy (report currency of $10,000 or
more).


8. (SBU) The GOK welcomes USG and international technical
assistance to strengthen its CTF/AML regime. DHS/ICE
recently conducted a four-day cash smuggling conference in
conjunction with Kuwait Customs. The CBK is hosting a
four-day seminar (Dec 17-21) for MENA/FATF member states to
train assessors based on IMF/WB methodology. DHS/ICE is also
considering technical and legal training to the OPP's AML
unit.

Economic Development and Reform
--------------


9. (U) While economic reform remains limited, the country's
economy is experiencing an unprecedented boom resulting from
the rise in oil prices and heightened sense of political and
economic security in the country following the demise of the
Iraqi regime. It is estimated that the country's budget
surplus will be approximately $21 billion this year alone.
The Kuwaiti stock market continues to surge ahead, breaking
the 10,000 point in August 2005 for the first time in its
history and remaining the second most active market in the
region following Saudi Arabia. The appeal of Islamic banking
continues to gain popularity and foreign banks, such as BNP
Paribas and HSBC are making their entry into the market
following a relaxation of Central Bank regulations against
foreign competitors. Citibank is expected to begin
operations in early 2006. The GOK has also begun a review of
its 2002 money laundering law to enhance its overall
anti-terrorist financing policies and procedures.


10. (SBU) As part of the effort to facilitate economic
reform, the U.S. and Kuwait have signed a Trade and
Investment Framework Agreement (TIFA),with the eventual goal
of negotiating a free-trade agreement. The Embassy uses the
TIFA framework to address needed reforms in the commercial
law, taxation, labor, and import inspection sectors. While
Kuwait has made some progress, significant hurdles to an FTA
remain, including inadequate intellectual property rights
(IPR) protections, labor laws and practices which have helped
place Kuwait in Tier 3 of the annual Trafficking in Persons
Report, and an import pre-inspection regime that the U.S.
considers a technical barrier to trade. Other issues that
negatively effect the investment climate in Kuwait include
opaque and discriminatory taxation policies, and
environmental laws that fall short of U.S. standards. TIFA
talks have been stalled for the past year, but Kuwaiti
technical experts plan to meet with the U.S. Trade
Representative, possibly in February 2006, in an effort to
re-start the process.

Assistance for Hurricane Katrina
--------------


11. (U) Shortly after the Hurricane Katrina event, Kuwait
pledged $500 million in assistance. The Prime Minister has
already presented $25 million to the Bush-Clinton Katrina
Fund; another $75 million will be donated for humanitarian
projects. We are working with the GOK to discuss the best
means to disburse the remaining $400 million. The Kuwaiti
people also generously donated over $2.7 million from their
own pockets to a special fund set up by the Kuwait Red
Crescent Society, which was recently presented to the
American Red Cross. Although the President, Secretary Rice,
and the Ambassador have all thanked the GOK and the Kuwaiti
people for their extraordinary generosity, the visit presents
another opportunity to express appreciation for Kuwait's
assistance in our time of need.

Assistance for Iraq
--------------


12. (SBU) Kuwait announced $1.5 billion in bilateral aid to
Iraq at the Madrid Conference, and counted $1 billion through
in-kind assistance in support of Operation Iraqi Freedom
(OIF). Of the remaining $500 million, the GOK committed to
$440 million in concessionary loans for power sector
projects, and $60 million in grants for educational and
health projects. Beyond its Madrid pledges, in June 2005,
Kuwait committed an additional $60 million for health and
education through the Humanitarian Operations Center (HOC).
In addition, the GOK has provided $10 million to the
International Reconstruction Fund Facility for Iraq (IRFFI),
and $5 million in medical aid to the HOC.


13. (SBU) From December 2002 - December 2004, Kuwait
provided over $2 billion in free fuel for U.S. and Coalition
Force use in Operation Iraqi Freedom (OIF) and as Assistance
in Kind (AIK) for Kuwait-specific activities under the
Defense Cooperation Agreement (DCA). Kuwait continues to
provide fuel at a concessionary rate, saving the military and
U.S. taxpayers millions of dollars a year. It also provides
assistance-in-kind support, estimated at $1-2 billion
annually, for the U.S. military presence in Kuwait. Kuwait's
support facilitates the U.S. military's mission in Iraq and
Afghanistan, both of which are supported by over 22,000
troops in Kuwait.

Assistance for Afghanistan
--------------


14. (SBU) At the 2002 Tokyo Donors Conference, Kuwait
pledged $30 million in grants to the GOA (GOA claims that the
pledge was $45 million, while the Kuwait Fund contests the
GOA claim as inaccurate). At this time, there is no
bilateral assistance pending the resolution of GOA arrears of
$19 million on a 1977 loan for a sugar factory. The GOK has
offered to reschedule the loan pending GOA approval, and the
issue is expected to be resolved after settlement of Russian
debt claims with the GOA. The Council of Ministers has the
authority to commit to new GOK grants to the GOA despite the
arrears with the Kuwait Fund; the Council of Ministers
employed this route in 2002 and channeled the money through
the Asian Development Bank and World Bank.

Other Assistance
--------------


15. (U) Kuwait maintains a generous foreign assistance
program spear-headed by the Kuwait Fund for Arab Economic
Development (KFAED). Since its inception in 1961, KFAED has
provided approximately $13B in concessional loans and grants
to 101 countries in the developing world, focusing on
infrastructure and social sector development. Today, KFAED
is responsible for administering the GOK's $560M in pledge
assistance to Iraq focusing on health, education and power
sector development. KFAED has also provided grants in
support of Afghanistan's reconstruction efforts and continues
to serve as the GOK's main assistance agency for the
Palestinian territories and other Arab countries. Kuwait has
contributed $221 million to the Palestinian Authority since
1993, and nearly $80 million to Lebanon since 1992.. The GOK
is among the region's most generous donors of humanitarian
assistance, contributing $100M to the South Asia earthquake
and continuing to assist the United Nations Relief and Works
Agency (UNRWA) support of Palestinian refugees.

GOK Leadership
--------------


16. (SBU) Power in Kuwait is concentrated in the Executive
Body, which consists of the Amir, the Prime Minister, and the
Council of Ministers. The health of both the Amir and the
Crown Prince has deteriorated significantly over the past
five years, leaving Prime Minister Shaykh Sabah Al-Ahmed
Al-Jaber Al-Sabah as the de facto ruler of the emirate.
Recent speculation that the Al-Sabah family would make a
pre-emptive succession decision were silenced when Shaykh
Sabah stated firmly that neither the Amir nor the Crown
Prince would step aside. The National Assembly also plays an
assertive role in Kuwaiti politics, having the power to
initiate legislation and to question government ministers,
several of whom have been forced to resign. The role and
influence of the National Assembly will likely become more
important as political reforms are implemented.

Political Reform
--------------


17. (SBU) In May 2005, the National Assembly passed
legislation giving women full political rights; the next
National Assembly elections are scheduled for 2007. Debate
continues to rage over a number of other key reforms,
including proposals to reduce the number of electoral
districts from 25 to 10, or even 5, which supporters argue
would limit the electoral corruption believed to be
widespread; legislation granting official Government
recognition to political parties; a new press and
publications law, allowing licensing of new dailies; and a
new labor law, providing greater protections to Kuwait's
expatriate work force. These reforms are seen by supporters
as critical to continued political and economic development
in the country.

Promoting Study in the U.S.
--------------


18. (U) Since 9/11, Kuwait has seen the largest percentage
drop of all the Middle East countries in the number of
students studying in the U.S. From a pre-9/11 average of
2,800 Kuwaitis studying in the U.S., there were only 1,846
during the 2003-2004 academic year. If this trend continues,
in less than 15 years, there will be far fewer Kuwaiti elite
in academia and business, cultural, and political life who
are intimately familiar with AMERICA and sympathetic to our
values. The reasons for the sharp drop in the number of
Kuwaitis pursuing advanced degrees in the U.S. are diverse:
the misperceptions that visas are difficult to obtain and
America does not welcome Muslims or Arabs, a growing
preference to attend "American" universities in the region,
and more students choosing Australia, Canada, and the UK.
Embassy Kuwait has made increasing the number of Kuwaitis
studying in the U.S. a Mission priority and is using
Ambassadorial speeches, media interviews, the Internet, and
information fairs to promote the value and benefits of a U.S.
education.

********************************************
Visit Embassy Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************
TUELLER