NEW INVESTMENT COUNCIL TO TAKE ADIA'S UAE

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 002542 SIPDIS NOFORN SIPDIS STATE FOR NEA/ARP, EB/IFD/OMA STATE PASS USTR FOR BELL AND CLAYMAN TREASURY FOR MATHIASEN E.O. 12958: DECL: 06/20/2016 TAGS: EFIN EINV ETRD ECON AE SUBJECT: NEW INVESTMENT COUNCIL TO TAKE ADIA'S UAE INVESTMENTS REF: A. ABU DHABI 1472 ¶B. 02 ABU DHABI 6317 Classified By: Ambassador Michele J. Sison for reasons 1.4 (b and d). ¶1. (C/NF) Summary. On June 13, UAE President Khalifa bin Zayed established the Abu Dhabi Investment Council to take over the Abu Dhabi Investment Authority's (ADIA) stake in UAE-based investments, such as the National Bank of Abu Dhabi. ADIA will concentrate on its considerable overseas investments. Contrary to what the English language press suggested, the council is not replacing ADIA. Although, there has been talk of carving off the domestic investments for years, the timing of the announcement caught seasoned ADIA officials and observers following the issue by surprise. End Summary. ¶2. (C/NF) On June 13, UAE President Sheikh Khalifa bin Zayed al-Nahyan (acting in his capacity of ruler of the Emirate of Abu Dhabi) issued Law Number 16 of 2006 establishing the Abu Dhabi Investment Council. Although the English language press suggested that this investment council would replace the Abu Dhabi Investment Authority (ADIA),this is not the case. The new investment council is taking over ADIA's domestic (UAE based) investments, which it holds on behalf of the government of the Emirate of Abu Dhabi. ADIA is the majority shareholder in the National Bank of Abu Dhabi and the Abu Dhabi Commercial Bank and a shareholder in other institutions such the Abu Dhabi Islamic Bank and the Abu Dhabi National Insurance Company. Article 6 of the new law states: "The Council shall assume all the investment activities in the emirate that used to be under the Abu Dhabi Investment Authority." ¶3. (C/NF) Our interlocutors point out that ADIA's Abu Dhabi investments were never a very good fit. Senior Investment Advisor Jean Paul Villain (protect) told Econchief that he had proposed selling some shares of Abu Dhabi Islamic Bank during the recent market correction to the Managing Director, but never got an answer. Hamad al-Hurr al-Suwaidi, Department of Finance Under Secretary and ADIA Board Member (protect) told Econchief and Treasury Regional Debt Advisor that the new Council was taking the more difficult (i.e., politicized) part of ADIA's portfolio. He noted that ADIA couldn't act like a fund manager and buy or sell shares in the local market. The market is too small, he noted, and ADIA's share too big. He explained that investors were already demanding that the government step in to prop up the Abu Dhabi Stock Market, and that the outcry if the government "caused the fall" by selling its shares, would be much worse. ¶4. (C/NF) Article 4 of the law empowers the Council to invest Abu Dhabi's funds "inside and outside" the Emirate of Abu Dhabi. According to ADIA Tax Advisor, Robert Peake (protect),Article 4 deals largely with some existing Abu Dhabi joint ventures with other countries (including Oman and Egypt). In some cases, the activity involves Emirate of Abu Dhabi financial support for other states (i.e., aid disguised as investment). ¶5. (C/NF) Although the idea of spinning off ADIA's Abu Dhabi investments has been discussed intermittently for some time, the timing of the announcement caught many inside and outside the organization by surprise. Peake noted that up to 2005, there had been discussion of carving off the "Projects Department" which managed these investments for ADIA. He added, however, that "senior people were blindsided," which implied to him that the change was less significant than it first appeared. ¶6. (C/NF) ADIA's public affairs strategy was also poor. Although the Arabic language papers covered the story relatively accurately, the English language "Gulf News" caused consternation among ADIA employees and some international fund managers and advisors. The &Gulf News8 stated that the "Council will replace the Abu Dhabi Investment Authority and all its investments will be tax-exempted." Villain told Econchief that he had been worried enough to wake up his wife to translate the Arabic reports after reading "Gulf News." Peake stated that he had fielded phone calls asking for an explanation of what was happening and that he suspected others were doing the same. ¶7. (C/NF) Comment: ADIA has held the Emirate of Abu Dhabi's shares in a number of local investments, but it has never ABU DHABI 00002542 002 OF 002 been a comfortable fit. ADIA invests Abu Dhabi's oil revenue surplus "for the general benefit of the Emirate" and to "maintain its (Abu Dhabi's) welfare in the future." It is also essentially the Emirate government's (and by extension the UAE,s) checkbook. When emirate revenues exceed expenditures, ADIA gets the surplus. If expenditures are higher, ADIA pays the difference. For both political and economic reasons, ADIA has never been able to manage the Abu Dhabi portion of its portfolio the way it would prefer. It appears that this reorganization will allow ADIA to focus on its significant overseas portfolio assets. Given ADIA's culture of secrecy, it is not surprising that the move caught many ADIA officials and outside observers off guard. End comment. SISON