A/S BOHIGIAN HEARS ABOUT FTA, EXPORT CONTROLS AND INVESTMENT

C O N F I D E N T I A L ABU DHABI 004414

SIPDIS

SIPDIS

STATE FOR EB/TPP/BTA AND EB/IFD/OIA
STATE FOR NEA/ARP
STATE PASS USTR FOR DOUG BELL, SHAUN DONNELLY
COMMERCE FOR A/S BOHIGIAN
TREASURY FOR DAS SAEED

E.O. 12958: DECL 12/5/16
TAGS: ETRD ECON KBCT EINV AE

SUBJECT: A/S BOHIGIAN HEARS ABOUT FTA, EXPORT CONTROLS AND INVESTMENT

CLASSIFIED BY AMBASSADOR MICHELE J. SISON FOR REASONS 1.4 (B & D).


1. (C) Summary: On November 13, A/S Bohigian urged Minister of
Economy Sheikha Lubna Al-Qasimi and ADIA officials to re-energize FTA
negotiations. Sheikha Lubna said that she and MinState Finance Dr.
Khirbash would be contacting AUSTR Donnelly about having him come to
the UAE to try and move discussions along. Bohigian assured his
interlocutors that -- despite DP World -- the U.S. welcomed foreign
investment and wanted the UAE to know that its investment was
welcome. In response, the UAE noted that concern about security of
assets and tax issues were two disincentives. ADIA noted that it
looked at the U.S. as an important part of it strategic asset
allocation. Bohigian pressed MinEcon Sheikha Lubna to pass an export
control law. In response, Lubna suggested that we engage in outreach
to the various emirate-level chambers of commerce to explain U.S.
export control regulations, which we will do. Bohigian also
highlighted our concerns about continued implementation of secondary
and tertiary aspects of the Arab League Boycott. Post has already
requested back up data from Commerce/BIS and will follow-up with the
Ministry of Economy when it arrives. End Summary.


2. (SBU) On November 13, Assistant Secretary of Commerce for Market
Access and Compliance David Bohigian met with UAE government
officials, the Abu Dhabi Chamber of Commerce, and with U.S. business
officials. At the Ministry of Economy, he met with UAE Minister of
Economy Sheikha Lubna Al-Qasimi, MinEcon U/S Abdullah Al-Saleh, and
UAE Commercial Attach in Washington Reem Al-Hashemi. At ADIA, he
met with ADIA Executive Director Salem Al-Mazroui, Senior Legal
Advisor Wiliam Brown, and Senior Tax Advisor Robert Peake.

Need to Reenergize FTA Negotiations
--------------


3. (SBU) A/S Bohigian urged the UAE to reenergize negotiations. He
noted that recent Congressional elections and the June expiration of
the Administration's Trade Promotion Authority (TPA) made the climate
for concluding trade agreements more uncertain. He stressed that
the expiration of TPA imposed a hard deadline. Ambassador asked
Sheikha Lubna whether the UAE had evolved its position on the
investment chapter since the September meetings between Assistant
U.S. Trade Representative Donnelly and Sheikha Lubna and UAE Foreign
Minister Sheikh Abdullah bin Zayed in New York. Sheikha Lubna
explained that, due to Ramadan and travel schedules, she had only
managed to discuss the issue with AbZ the day before her meeting with
A/S Bohigian. She said that she would be discussing the matter with
MinState Finance Dr. Mohammed Khalfan bin Kharbash in order to
contact AUSTR Donnelly in the near future to invite him to visit the
UAE (hopefully before the end of the year) in order to try to resolve
the high level issues. She said that she wanted to make sure that
the UAE had its "talking points" to be sure that the meetings were
useful. She was hopeful that these meetings could help reenergize
the talks.

The UAE's Concerns
--------------


4. (SBU) Both Sheikha Lubna and ADIA representatives elaborated on
some of the UAE's concerns with regard to the FTA negotiations.
Lubna stressed the federal nature of the UAE, whereby the UAEG could
not commit to some issues (such as natural resources) without the
express consent of the individual emirates. Sheikha Lubna also
complained that the U.S. visa, border entry, and airport process
discouraged UAE businesspeople and investors from visiting the U.S.
Movement of people, she argued, was key to improving trade relations.
As an aside, she noted that when she had visited the U.S. as part of
an official delegation, she had been the only one pulled aside for
additional questioning. ADIA's Brown made a similar point in a
subsequent meeting noting that ADIA once had a large scholarship
program in the U.S. but that this had dropped off sharply, due to
concerns about treatment in the U.S. or difficulties with visas.


5. (SBU) On the key issue of investment in the oil and gas sector,
all of A/S Bohigian's government interlocutors stressed that U.S.
companies already enjoy a preferred position, due to their reputation
for excellence. Lubna noted that UAE restrictions on investment had
not prevented U.S. firms from establishing themselves in the market.
Brown noted that USTR's insistence on codifying Most Favored Nation
status would actually do away with this preferred status as future
FTA partners took advantage of the MFN clause.


6. (C) ADIA officials emphasized the UAE's concerns about entering
into an agreement providing for third party investor-state
arbitration, explaining the UAE's essential dispute shyness. As and
example, Peake cited the UAE's decision not to fight the
Congressional opposition to DP World's acquisition of U.S. port
operations, but rather to quietly back down and divest itself of the
assets. Brown emphasized that in the UAE's view, "partners don't sue
partners." (Note: In a conversation with Parson's regional Vice
President Roy Hill, Hill made essentially the same point. He
explained that Parsons had never taken any of its partners in the UAE
to arbitration, despite the ability to do so, with the view that
taking a case to arbitration would destroy their ability to operate
in the UAE in the future. End Note).


7. (C) Brown explained that the UAE was willing to accept third party
arbitration, but wanted to impose mandatory confidential mediation
(on the Michigan model) first. He explained that there were still
differences on extending mandatory mediation to all sectors and on
the mount of time to allocate to mediation, but that progress had
been made Brown added that the U.S. would face similar concerns
about 3rd party arbitration in future negotiations with Saudi Arabia
and Kuwait


8. (SBU) Peake commented that the negotiations had made progress, but
expressed irritation at the fact that the UAE kept facing "precedents
not of its making" or being compared to "countries that are
irrelevant" to its circumstances. He added that, every time the UAE
thought it had made progress in proposing ideas that met its
essential interests, it faced "bogyman" of the "interagency" or "U.S.
business" or "Congress" without having a better idea of where the
specific concerns were. He urged greater transparency to the UAE on
the interagency process so that the UAE could see if interagency
objections arose from misunderstandings. Brown added that he
believed that "U.S. business" objections did not reflect the actual
views of senior businesspeople. He explained that ADIA dealt with
the largest oil and financial institutions in the world at the
CEO/General Counsel level. The feedback that ADIA received at that
level appeared to differ from the feedback that USTR was receiving at
the Washington representative level about the relationship.

Progress has been Made
--------------


9. (C) Despite these concerns, ADIA officials stressed that progress
had been made and that the UAE wanted to deepen its partnership with
the U.S. In their view, they noted, the FTA served as a visible
symbol of that partnership, but other tools could also be used to
deepen the partnership. They explained that progress had been made
in resolving several issues, including security of assets and tax.
Brown noted that the U.S. Treasury Department had worked closely with
ADIA and USTR on clarifying tax treatment in a way that proved how
successful an open minded approach to dealing with legitimate needs
could be. ADIA would follow-up with Treasury with our without an
FTA. Brown suggested that negotiating a Bilateral Investment Treaty
based on the FTA investment chapter might be an option to capture
some of the progress made, should both sides fail to reach agreement
on an FTA.

Open U.S. Investment Climate
--------------


10. (C) A/S Bohigian explained that he wanted the UAE to know that,
despite problems such as DP World, the U.S. welcomed foreign
investment and understood its benefits in terms of job creation. He
solicited thoughts from his interlocutors on what it would take to
increase their investments in the U.S. Sheikha Lubna noted that the
UAE had long invested in financial assets in the U.S. Recently,
however, she noted, the UAE was investing in tangible, high profile,
and sensitive real assets. DP World had been a shock to the UAE, she
noted. Most ports in the U.S. were already managed by foreign
companies. The opposition left the Emiratis feeling that foreign
ownership was ok, Arab ownership was not. She noted that she thought
the Committee on Foreign Investment in the U.S. served an important
screening role and had made the right decision in the DP World case.
Too much scrutiny, she asserted served as a barrier to investment.


11. (C) The UAE also had concerns about the security of its assets.
The UAE had trade and investment relations with a number of different
countries, some of which -- Iran for example -- the USG sanctioned.
She noted that she had been in discussions with Dubai Holding before
it purchased Doncasters (a British firm with defense industry assets
in the U.S.) and that they had been "this close" to pulling out of
the deal out of concern for the possible reaction.. For that reason,
it was seeking some assurances in the FTA. "With respect to U.S.
assurances," she noted, "we want to see it in black and white."
Sheikha Lubna also stressed that the UAEG viewed its relationship
with the U.S. as a strategic one that would withstand these
difficulties. She noted that the UAEG had made the decision to view
DP World's difficulties as commercial rather than political and had
resisted calls to retaliate.


12. (C) ADIA officials explained that ADIA looked at the U.S. as an
important part of the global financial system. Given the size and
liquidity of the U.S. market, it made up an important part of ADIA's
asset allocation strategy. (Note: ADIA is a portfolio investor and
does not engage in Foreign Direct Investment. End Note) According
to Salem Al-Mazroui, ADIA invested across the various asset classes
and allocated its investments based on its evaluation of risk and
return. It had increased its investments in the U.S. over the
previous 2-3 years and found U.S. real estate funds, private equity
and fixed income attractive (in addition to its traditional equity
investments). He added that a few small incentives could increase
ADIA's appetite for U.S. investments. (Note: These incentives
likely deal with the clarification of ADIA's tax status that it has
requested as part of the FTA negotiations. End Note.) Brown noted,
by way of example that ADIA did not have an office in the U.S., the
lack of which limited its willingness to participate in certain
private equity or real estate transactions. The problem was not in
getting access to the institutions. The concern was with getting
current intelligence from nine time zones away. Peake noted that
concerns about litigation were the biggest single potential
bottleneck to ADIA expanding its U.S. portfolio dramatically. An
alternative dispute mechanism that met the needs of both parties
would be "an incredible breakthrough."


13. (SBU) Al-Mazroui noted that after September 11, 2001, there had
been some capital flight from the U.S. with regard to both government
and private sector investors in the region. In the last two years,
however, he noted that the U.S. had been more willing to come to the
region in order to discuss issues. In terms of private sector
investors, he added that UAE private sector reserves would probably
add $300-$500 billion in the UAE alone with around one trillion in
the GC as a whole. The time would come, he predicted when China would
not be as major an investor in the U.S. financial markets and then
the U.S. would need to look back to petrodollars.

Export Controls - Where is the Law?
--------------


14. (C) A/S Bohigian and Ambassador stressed the need for the UAE to
enact an export control and transshipment law by the end of 2006,
since the continued lack of such a law could have a negative impact
on U.S. - UAE trade. Sheikha Lubna agreed that the UAE needed to
tighten any loopholes "if they exist," and urged the U.S. to engage
in outreach to the various UAE Chambers of Commerce to explain U.S.
export control laws. She noted that many UAE companies had
difficulties understanding the USG sanctions on Iran. She also
suggested that the UAE and the U.S. develop a bilateral commission to
deal with the questions of exports, to which Ambassador replied that
there was already a bilateral Counterproliferation Task Force. (Note:
It was apparent that Sheikha Lubna was not completely aware of USG
efforts to urge the UAE to adopt and enforce an export control law.
End Note.)

Arab League Boycott - Commitment to Working with us
-------------- --------------


15. (C) A/S Bohigian raised the continuing problems with UAE
implementation of the secondary and tertiary aspect of the Arab
League Boycott of Israel. Sheikha Lubna initially noted that this
would be an easier topic of discussion if the Israeli Government
ceased its "aggression and genocide" in the Palestinian territories,
noting that people in the UAE react "emotionally" on this issue at
times. She explained that the UAEG had instructed a number of
government agencies and parastatals to revise the language, and
promised to work with the Embassy on resolving the problem. (Note:
Commerce/BIS will be providing copies of the documents to the
Embassy. We will be following up with the Ministry of Economy as
soon as these arrive.

UAE Opening up Economy
--------------


16. (SBU) A/S Bohigian asked Sheikha Lubna if she could provide an
update on the UAE's plans to amend the Commercial Companies Law to
permit greater foreign investment. She said that the legislation had
gone through the government's technical committee and was moving on.
The current plan she noted was to liberalize in the service sectors.
U/S Al-Saleh explained that the plan was to focus the opening on
sectors where the UAE wanted to attract foreign investment such as:
professional services, information technology, health, and education.
The intention was to open some sectors to 100% foreign ownership.
The UAE was pursuing a step wise approach to liberalizing its
economy. In addition, he noted the UAE had around 32 free zones
which authorized 100% foreign ownership. Service companies also had
the opportunity to establish branches in the UAE with 100% foreign
ownership. Sheikha Lubna noted that her efforts to liberalize the
economy also had to deal with concerns form UAE business. She
explained that amending the Agency law had been "tough." Even though
the UAE business constituency didn't vote, she noted it had direct
connection to the rulers through the Majlis process.


17. (U) A/S Bohigian's party cleared this cable.

SISON