Identifier
Created
Classification
Origin
06OSLO400
2006-03-31 12:41:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Oslo
Cable title:  

AMBASSADOR'S VISIT TO NORWEGIAN CENTRAL BANK:

Tags:  ECON EPET EFIN NO 
pdf how-to read a cable
VZCZCXYZ0000
RR RUEHWEB

DE RUEHNY #0400/01 0901241
ZNR UUUUU ZZH
R 311241Z MAR 06
FM AMEMBASSY OSLO
TO RUEHC/SECSTATE WASHDC 3713
INFO RUEHCP/AMEMBASSY COPENHAGEN 2042
RUEHHE/AMEMBASSY HELSINKI 7777
RUEHFR/AMEMBASSY PARIS 0895
RUEHRK/AMEMBASSY REYKJAVIK 0668
RUEHSM/AMEMBASSY STOCKHOLM 2809
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBS/USEU BRUSSELS
UNCLAS OSLO 000400 

SIPDIS

SENSITIVE
SIPDIS

PARIS FOR OECD
COMMERCE FOR 4212 MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: ECON EPET EFIN NO
SUBJECT: AMBASSADOR'S VISIT TO NORWEGIAN CENTRAL BANK:
STRONG ECONOMY, RICH PENSION FUND, TROUBLING BLACKLIST


SUMMARY
- - - - -

UNCLAS OSLO 000400

SIPDIS

SENSITIVE
SIPDIS

PARIS FOR OECD
COMMERCE FOR 4212 MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: ECON EPET EFIN NO
SUBJECT: AMBASSADOR'S VISIT TO NORWEGIAN CENTRAL BANK:
STRONG ECONOMY, RICH PENSION FUND, TROUBLING BLACKLIST


SUMMARY
- - - - -


1. (SBU) On March 28, Ambassador Whitney and Pol/Econ
Officers visited the Norwegian Central Bank (Norges Bank),
meeting with Central Bank Governor Svein Gjedrem, Deputy
Governor Jarle Bergo and Knut Kjaer, Executive Director of
the Pension Fund (formerly the Petroleum Fund). Discussions
centered on the Central Bank's role in the economy, the
Norwegian economy's recent strong performance, and an
overview of the Pension Fund, with the Ambassador expressing
strong concern over the Fund's disproportionate
"blacklisting" of U.S. companies. According to the Bank
officials, Norway's expansionist economy continues to roll
ahead, fueled by high oil prices that have put the Pension
Fund over the $200 billion mark. Through the Pension Fund,
which accumulates tax revenues from the petroleum sector,
Norway hopes to leave a legacy to future generations after
the resources are depleted. As the Ambassador stressed,
however, the Fund's divestment of investments in sixteen
firms, ten of which are American, on ethical grounds is
troubling. Fund Executive Director Kjaer himself has mixed
feelings about the divestments, on the one hand striving to
maintain the broadest possible investment options but, on the
other, defending the Norwegian "consensus" that certain
corporate behavior, e.g. cluster bomb production, is
unethical. The Ambassador also encouraged the Bank's already
active involvement in transparency and other initiatives to
assist resource-rich developing nations in managing their
wealth responsibly. End summary.

PETROLEUM-RICH NORWAY IN ENVIABLE ECONOMIC POSITION
- - - - - - - - - - - - - - - - - - - - - - - - - -


2. (SBU) Governor Gjedrem told the Ambassador that the
Central Bank had three core responsibilities: establishing
monetary policy and setting interest rates, managing the
Pension Fund, and overseeing the financial sector's payments
system, including acting as lender of last resort and
ensuring liquidity to the financial markets. The bank had
reduced its work force in the last several years, partly due
to closure of regional offices and outsourcing of currency

printing. The Bank was led by a Board of Governors
consisting of the Governor, Deputy Governor and five external
members (currently two economics professors and three
business community members).


3. (SBU) Gjedrem emphasized that Norway's economy remained
robust, stimulated by low interest rates (directed by an
inflation target of 2.5 percent) and strong domestic growth
(including sectors outside of the prosperous oil industry).
The petroleum sector generated 25 percent of Norway's GDP,
though it employed only a very small percentage of the labor
force. Gjedrem also noted that Norwegian per capita income
was extremely highly (roughly $55,000-$60,000 per person).

GOVERNMENT PENSION FUND AMONG THE WORLD'S RICHEST
- - - - - - - - - - - - - - - - - - - - - - - - -


4. (SBU) Gjedrem told the Ambassador that the government's
tax take of petroleum sector profits was effectively 60-70
percent, all of which went directly into the Government
Pension Fund. The Fund, currently valued at about $210
billion, was invested entirely abroad, 40 percent in equities
and 60 percent in fixed-income securities. The projected
strength of the Fund is staggering -- with increases forecast
at $50 billion per year for another 4-5 years if high oil
prices hold, the fund will equal Norway's entire GDP
(currently about USD 260 billion) by 2008 and reach twice GDP
by 2015. The Fund's real return (currently about 4 percent)
was given over to the government's budget, while capital was
preserved for future generations. Gjedrem stressed that the
Fund was strictly apolitical, so it did not invest
domestically in spite of many demands to do so. He said
Norway was committed to avoiding the mistakes of countries
that earned resource-based "easy money" only to see their
national competitiveness undermined, citing such historical
examples as a massive, but destructive, New World gold influx
to 16th century Spain and wastage of billions of petrodollars
by oil-rich Middle Eastern states in the 1970s and 1980s.

Over-reliance on natural resources led to many failures,
including an inability to produce goods and services,
imprudent investments, or over-building the welfare system.
Demographics posed the key future challenge for the Pension
Fund, as an aging Norwegian population would place greater
demands on the welfare/pension system.

CONCERNS ABOUT PENSION FUND'S "BLACKLISTING" OF U.S. FIRMS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -



5. (SBU) Background on Pension Fund "Blacklist": In 2004,
the Ministry of Finance adopted ethical guidelines for
Pension Fund investments that require the Central Bank to
exclude investments in (or divest itself from) companies that
engage in certain activities (e.g. production of cluster
bombs and nuclear weapons) or that violate "fundamental
ethical norms." Over the last year, the Ministry has
instructed the Central Bank to divest shares in 16 companies
- 10 of which are American. The U.S. companies affected are:
Boeing, Honeywell, Northrup Grumman and United Technologies
(for alleged involvement in nuclear weapons production);
Lockheed Martin, General Dynamics, Raytheon, L3
Communications and Alliant Techsystems (for alleged
production of cluster bomb components); and Kerr-McGee (for
concluding an oil concession deal with Morocco covering the
disputed territory of Western Sahara). The total
disinvestment in U.S. firms amounts to $853 million. The
other six blacklisted firms are European. The Embassy has
been working with the American Chamber of Commerce and a
number of concerned companies to address the blacklisting
issue. We have gained informal assurances from the Ethics
Advisory Council that it is not considering divestment from
U.S. petroleum firms operating in Norway, though other,
smaller Norwegian investment funds have blacklisted some
(mainly for alleged bribery in Equatorial Guinea).


6. (SBU) The Ambassador raised concerns about blacklisting
American companies in a separate meeting with Pension Fund
Executive Director Kjaer. The Ambassador said labeling
companies "unethical" was problematic and put Norway on a
"slippery slope." He noted, for example, that the Norway was
pushing hard for more Joint Strike Fighter project contracts
from Lockheed Martin, a company branded as unethical by the
Pension Fund. The Kerr-McGee case was another troubling
example, as the firm seemed to be blacklisted for purely
political reasons, i.e. its agreement with Morocco to explore
for petroleum offshore the disputed territory of Western
Sahara.


7. (SBU) Kjaer demurred, asserting that the Ministry of
Finance made the ethics decisions, while the Fund's managers
were concerned only with financial operations. He clearly
had mixed feelings about the ethical guidelines, noting that
the Bank preferred having "as big an investment universe as
possible" and that he personally favored a "high threshold,"
particularly given there were difficult "borderline" issues
involved. On the other hand, Kjaer asserted there was
"widespread consensus" in Norway about the exclusions and
that it was "perfectly legal and acceptable" to deny support
to companies that, for example, manufactured cluster bombs.
He added that companies involved in manufacturing such
weapons should "look inward." They could even benefit by
shedding such product lines, given the potential financial
impact of a black spot on their reputations. The Ambassador
noted that while Norwegians may have reached some consensus
about the blacklist, the impact fell disproportionately on
American firms with few local defenders, and it was certainly
not the case that half of the unethical companies in the
world were American.

SHARING THE NORWEGIAN MODEL WITH THE DEVELOPING WORLD
- - - - - - - - - - - - - - - - - - - - - - - - - - - -


8. (SBU) Gjedrem and Kjaer both noted that the Bank and
Pension Fund were taking an active part in bilateral and
multilateral transparency and training initiatives for
resource-rich developing countries to assist them in managing
their wealth responsibly. Officials from many countries,
including Iraq, Kazakhstan and others, had visited the Bank

to consult on the benefits of Norway's "petroleum sector
model." Kjaer cited the keys to successful petroleum sector
management: transparency, clear investment benchmarks, strict
division between business and politics, and establishing a
corporate culture and business model for petroleum fund
management. The Ambassador noted the positive example Norway
set for other oil-rich nations and encouraged the Bank's
assistance efforts.
Visit Oslo's Classified website:
http://www.state.sgov.gov/p/eur/oslo/index.cf m

WHITNEY