SCENESETTER FOR THE VISIT OF DEPUTY TREASURY

S E C R E T SECTION 01 OF 04 RIYADH 005548 SIPDIS SIPDIS TREASURY FOR DEPUTY SECRETARY KIMMITT, STATE FOR EB AND NEA/ARPI, NSC FOR BOUZIS, JOINT STAFF FOR BRIGADIER GENERAL JONES E.O. 12958: DECL: 07/12/2016 TAGS: OVIP EAID ECON EFIN PREL IZ SA SUBJECT: SCENESETTER FOR THE VISIT OF DEPUTY TREASURY SECRETARY KIMMITT TO SAUDI ARABIA SIPDIS REF: A) STATE 114028 B) RIYADH 5547 C) JEDDAH 449 D) JEDDAH 450 E) 05 JEDDAH 140 Classified By: Ambassador James C. Oberwetter for reasons 1.4(b) and (d). ¶1. (C) The U.S. Mission to Saudi Arabia warmly welcomes your visit to Jeddah July 23. Ambassador Oberwetter and Consul General Tatiana Gfoeller look forward to meeting you and will accompany you on a number of your calls on Saudi leaders. Per your request, appointments are being requested in Jeddah with King Abdullah, Foreign Minister Saud al-Faisal, National Security Advisor Prince Bandar bin Sultan, Finance Minister Dr. Ibrahim bin Abdul-Aziz al-Assaf, and Islamic Development Bank President Dr. Ahmed Mohamed Ali al-Madani. ¶2. (S) Your visit to the Kingdom takes place at a time of relative internal stability but continuing concern over regional developments. Saudi leaders always look to USG visitors for assessments on regional security issues, especially with regard to Iran, Iraq, and Afghanistan. The SAG shares most U.S. concerns about a range of regional issues, including Iran and Iraq, and is quietly pursuing initiatives to help promote political stability in Iraq and urge Iran to cooperate with the international community regarding its nuclear program. The February 24 terrorist attack on the Abqaiq oil facility came much closer to success than the SAG has been willing to acknowledge publicly, causing Saudi leaders to intensify internal security and counterterrorism efforts -- and to look to the U.S. for assistance. ¶3. (S) Your visit also comes during a time of some tension in U.S.-SAG relations. On the one hand, Saudi leaders have warmly welcomed a large number of senior USG visitors and confirmed the strength of the bilateral relationship. Counterterrorism cooperation remains strong and effective, and the importance of the U.S.-Saudi military relationship has been repeatedly reaffirmed by Saudi officials to visiting senior U.S. commanders. Strategic Dialogue meetings in May in Washington went well, and the thousands of Saudis, especially students, now seeking U.S. visas offer clear evidence that we have progressed beyond the decline that followed 9/11. Nevertheless, obvious tensions exist. Saudi public opinion is on edge after the recent two suicides at Guantanamo, and the SAG is working with us to keep this matter low profile. Further, recent independent polling shows an 11% approval rating for the U.S. among Saudis. While Saudi leaders do share U.S concerns about Iran, Iraq, and other regional issues, there is a clear reluctance by the SAG to cooperate directly and openly with the U.S. to address them. Saudi leaders are very worried about nuclear proliferation, but they perceive a double standard in U.S.-driven pressure against Iranian nuclear weapons development and have argued instead for a nuclear-free Middle East that would include Israel. King Abdullah, who has in the past accused the U.S. of handing Iraq to Iran "on a golden platter," told General Abizaid May 13 that the U.S. regional and possibly world reputation was "broken." -------------- Iraq Stability -------------- ¶4. (S) During the course of the past few weeks, senior U.S. officials have held meetings with senior SAG leaders regarding Iraq. The SAG leadership continued to express concern about engaging former Baathists in Iraq, and stated that "it would be very wise to co-opt the former Baathist elements into the new Iraqi government." The King and Crown Prince both expressed concern over what they perceived to be a growing Iranian threat, including their growing influence in Iraq, and questioned the wisdom of consulting with Iran about Iraq. Additionally, the transfer of Saudi detainees from Iraq to SAG authority as well as the recruitment of RIYADH 00005548 002 OF 004 terrorists from Saudi Arabia to fight in Iraq were key concerns. It was noted that both the U.S. and the SAG want to see the transfer of detainees, but that the SAG must engage the GOI to do so. SAG officials were pleased to hear that the USG and GOI decided to allow Saudi detainees in Iraq to return to the Kingdom. ¶5. (S) On June 27, Ambassador Khalilzad had several meetings with senior SAG leadership, including King Abdullah, Crown Prince Sultan, and Foreign Minister Saud al-Faisal. During the meetings they discussed the new Iraqi government, the recently announced Iraqi national reconciliation plan, Saudi detainees, and the continuing destabilizing influence of Iran in Iraq. Ambassador Khalilzad reiterated earlier requests for the Kingdom,s political and economic assistance to help reconstruct and stabilize Iraq, and contain Iran,s increasing influence among Iraqi Shi'a. The SAG received Iraqi Prime Minister al-Maliki four days later in its first public showing of support for the new Iraqi government. He was warmly received by the King, the Crown Prince, the Foreign Minister, the Defense and Aviation Minister, the Secretary General of the National Security Council, the SIPDIS Inspector General and the Transportation Minister among others (Ref C, Ref D). The SAG considers the Maliki government a marked improvement and believe that PM Maliki is more likely to achieve stability and development in Iraq. ¶6. (S/NF) Throughout discussions in recent months, senior SAG leaders have told us that the SAG is taking steps to promote Iraqi stability and unity, including encouraging the involvement of other regional governments and consideration of targeted media campaigns and humanitarian aid. The SAG believes that its support was critical to the increased participation of Sunni elements in the most recent elections but, in the face of continuing sectarian violence, Saudi leaders also likely believe there is little they can directly do to foster peace. They remain particularly sensitive about being perceived as supporting only the Sunni side, as this would damage their credibility with Shi'a Iraqis and put them in direct conflict with Iran. -------------- SAG Position on Iraq Debt Relief -------------- ¶7. (S) The Saudis have still not implemented their pledges on Iraqi debt relief and the provision of economic aid. Despite repeated Saudi promises to offer Baghdad debt relief on terms more favorable than that announced by the Paris Club in 2004, no debt deal has been achieved. Initial technical level discussions on the size and character of Iraq,s debt (the Saudis claim a bulk of the debt is commercial, rather than government to government) were held in early 2005, but there have been no further talks since then. The Saudis blame Baghdad for the lack of follow up. The Ministry of Finance,s position is that no political-level decision can be taken on the final terms of Saudi debt relief until the two sides have agreed on the exact amount and nature of the debt. Our arguments that the SAG should move forward to make the political decision to forgive one hundred percent of the debt, and thus make working-level negotiations unnecessary, have failed to produce progress. If we can tell the Saudis that the Iraqis are ready to send a delegation to the Kingdom to discuss the debt issue, it would put the ball back in the Saudi court. -------------- SAG Aid to Iraq -------------- ¶8. (S) The SAG has made no progress in disbursing the roughly one billion USD in aid, trade credits and concessional loans it pledged at the Madrid Donors Conference. The SAG,s rationale for this failure has evolved over the last twelve months from their original concern about the lack of security RIYADH 00005548 003 OF 004 on the ground to a current argument that the Saudi Development Fund and other agencies cannot release project development funds and other aid until the Iraqi Government has in place national development priorities, recognized by all Iraqi political elements (Ref E). It would help break this logjam ) or at least call the Saudis, bluff -- if we can assure the SAG that the Iraqis have such a plan and a working ministerial-level committee to coordinate assistance priorities. ¶9. (S) The SAG is interested in increasing Saudi-Iraqi cross-border trade over the long-term, but any discussion of a trade zone along the border now would have to address the Saudi concern about cross-border terrorist activity and the safety of Saudi nationals in Iraq. We have not had discussion with the SAG about this proposal. Saudi import and customs duties are already quite minimal, so the attraction to the Iraqis of such a proposal would have to be easier customs and immigration rules, always a sensitive issue for the SAG. ¶10. (S) Primarily for security reasons, the Saudis remain hesitant to expand diplomatic representation. Saudi leaders have missed few opportunities since the December 15 Iraqi elections to convey to us their view that Iraq is now more susceptible to political instability and Iranian influence. Despite their willingness to quietly encourage Iraqi unity and stability, Saudi leaders, especially King Abdullah, have been very worried about the chances for success. Saudi leaders continue to worry that Sunni Takfiri insurgents in Iraq will eventually redeploy to Saudi Arabia just as they did after the Soviet-Afghanistan War and target the regime. -------------- Domestic Issues -------------- Terrorism and Counterterrorism ¶11. (S) Dealing with the Symptoms: Saudi Arabia continues to enjoy significant successes in its offensive against terrorists in the Kingdom. Saudi Arabia's campaign against the terrorists has significantly degraded al-Qaeda operations in the Kingdom and largely isolated terrorists from the rest of Saudi society. Nonetheless, SAG leaders have acknowledged publicly and privately that their war on terrorism will not be won for many years, a view reinforced by the February 24 terrorist attack against the Abqaiq oil facility. Though the attack failed to cause significant damage, a senior Saudi security official has told us that "we did not protect ourselves, God did" at Abqaiq. Although the SAG publicly maintains that the Abqaiq attack was a demonstration of the impenetrability of the energy infrastructure, it is clear that there were serious lapses in security, and that terrorism is still a dangerous presence in the Kingdom. ¶12. (S) Dealing with the Causes: Saudi leaders recognize that the war on terrorism is as much a campaign of ideas and education as it is a military and law enforcement offensive against violent extremists. The Saudi government has continued an ambitious media and public education campaign to dissuade Saudis, particularly the young, from accepting the extremist message. The campaign includes weekly television programs, often in which former terrorists or would-be terrorists describe their experiences, and the error of their ways, pointing to a path that Saudis should not follow. Border Control - Border Guard Modernization Program ¶13. (S) Control of Saudi borders in general remains a high priority for the SAG. Saudi leaders continue to be concerned about both the historically porous border with Yemen and, more recently, about the potential for insurgents from Iraq crossing into the Kingdom. The Ministry of Interior (MOI) is engaged in a lengthy process to identify vendors for an RIYADH 00005548 004 OF 004 extensive border guard modernization program, for which a Raytheon-led consortium, the "American Team," is a key contender. The USG has endorsed the American Team consortium to compete for the modernization program. NSC Homeland Security Advisor Townsend endorsed that candidacy during a meeting with then-Crown Prince Abdullah in June, 2005 and Secretary Rice wrote the Saudi Foreign Minister reconfirming SIPDIS our endorsement of the American Team proposal. MOI Prince Nayif spoke favorably of the candidacy during a meeting with visiting Secretary of Commerce Gutierrez. Reform ¶14. (S) King Abdullah appears committed to the incremental but steady implementation of a range of reforms. Municipal council elections were held in the Spring (half of the municipal councils' 592 members were elected). The 178 councils were completed in December when the remaining members were appointed by the King. The issue of women's rights, an area of concern, has seen some notable progress, including the recent decision to grant women a more active role in business organizations and the inclusion of women's empowerment as a central element of the SAG's 2005 five-year plan. While important changes are underway, some areas in urgent need of reform remain to be addressed. Additionally, there has been pressure put on the SAG from conservative religious circles about recent reforms, including the issuance of a May 23 open letter signed by sixty-one religious conservatives that, for the first time from the main-stream religious circles, threatened advocates of reform with possible violence. The Economy ¶15. (C) Saudi Arabia's current oil-driven economic boom gives the SAG resources and the ability to damp down discontent, and buy off potential terrorist sympathizers, with increased social spending and job-creation public works projects. The vast public expenditures on gold-plated infrastructure projects which characterized past oil booms are not being repeated under King Abdullah. This year's government surplus is being used to significantly reduce government debt, raise public sector salaries by 15% (70 % of Saudis work for the government),and increase spending on targeted social infrastructure projects, such as health, education and vocational training programs that will reduce the number of under-educated, under-employed Saudi youths who otherwise would be open to extremist influence. Moreover, the King and his economic advisors stress that, in contrast to the 1970s and 1980s, the government's current oil bonanza -- estimated in excess of 700 billion USD over ten years -- will be reinvested in the Kingdom to generate future wealth-creating industries and infrastructure, rather than used for overseas investments and acquisitions. ¶16. (C) King Abdullah is also creating the mechanisms - a well-regulated stock market, a mortgage housing industry - to distribute this new wealth to the Saudi population and create an "ownership society" which should, given time, reduce support for extremists by giving the average Saudi a stake in the continued stability of the Kingdom. Although the Saudi stock market has lost almost a third of its value since beginning a steep dive in late February - a decline mirrored in other Gulf stock markets, the decline is likely a necessary, though painful, correction to what was a grossly overheated market. The market has stabilized in the last several weeks, without government intervention, and the decline did not reflect the fundamentals of the Saudi economy, which remain exceptionally positive with all observers predicting continued double-digit GDP growth and low inflation. OBERWETTER