ITALIAN TRADE AND INVESTMENT IN LIBYA

UNCLAS SECTION 01 OF 02 ROME 002217

SIPDIS

SENSITIVE
SIPDIS

EUR FOR DAS BRYZA

E.O. 12958: N/A
TAGS: ECON EINV ENRG ETRD LY IT
SUBJECT: ITALIAN TRADE AND INVESTMENT IN LIBYA

Summary
--------------


1. (U) The importance of Libyan oil and gas to the Italian
electricity industry has ensured a steady stream of trade and
investment between the two countries, notwithstanding Libya's
sometimes difficult business environment. Italian trade and
investment outside the energy sector is virtually
non-existent, a situation which could change if Libyan
business and bureaucratic practices were to become more
transparent. End Summary.

Italy-Libya Trade
--------------


2. (U) Italy has consistently run a substantial trade
deficit with Libya over the recent past. Principal imports
from Libya are petroleum and natural gas, resources upon
which Italy relies heavily to support its energy needs. From
Libya's vantage, Italy is its largest trading partner: in
2005, trade with Italy made up 36.9 percent of Libya's total
trade. While most of this position is skewed towards
imports, Italy is an important supplier to Libya: some 25.2
percent of Libya's total imports come from Italy.


3. (U) Italian exports to Libya include agricultural
machinery, agricultural products, refrigeration plants,
packaging plants, marble, metal, plastic and woodworking
machines, road- and rail-network materials, tourist services,
telecommunications, furniture, clothing, and food products.

Italy's Foreign Trade with Libya (billions of Euros)

Exports Imports Balance
1999 .867 3.099 -2.232
2000 1.028 6.384 -5.356
2001 1.294 5.466 -4.173
2002 1.316 4.908 -3.592
2003 1.367 5.226 -3.859
2004 1.516 6.310 -4.793
2005 1.360 9.732 -8.372

Italian Foreign Direct Investment in Libya
--------------


4. (SBU) SACE, Italy's export credit insurance company, does
little business in Libya. Outstanding disputes between the
Libyan government and Italian businesses, dating from Libyan
independence from Italian colonial rule, are an additional
deterrent to SACE entering the Libyan market. SACE officials
told Econoff July 26 that export credit agencies (ECAs) doing
business in Libya have found bureaucratic processes
incoherent, and most export credit agencies have yet to be
paid for their services. With no solution visible in the
short term, insurance premiums will likely continue to be
prohibitive for Italian investment in Libya. SACE officials
noted that in Libya's centralized bureaucracy, the pace of
change depends on Colonel Gaddafi. SACE further noted Libya
needs money to modernize and develop, and expressed hope that
this need may encourage the government to promote more
transparent business and bureaucratic practices. Our
contacts concluded that the atmosphere will not change
easily, as many Libyans feel "they should be indemnified" for
the past sanctions imposed against them and for Italy's
colonial legacy, rather than charged with past debts.


5. (U) Regardless of the troubled business climate, the role
of Libya as an important source of energy for Italy has made
Libya one of the leading destinations for Italian foreign
direct investment. In 2005, Italian companies invested 844.7
million euro in Libya, almost exclusively in the energy
sector. Eni, the 30 percent GOI-owned oil and gas parastatal
is the largest Italian investor in the country, and has been
present there since 1959. Eni is a partner in the
Libya-Sicily natural gas pipeline, a 3.5 billion dollar
project which delivers eight billion cubic meters of gas to
Italy annually. Another large investor in Libya is the Fiat
group, which has built an automobile plant in Tajoura,
producing two to three thousand cars a year. SACE officials
speculated that the Libyan government's role in the economy
keeps out much foreign industry, but the private sector is
growing, favoring small and medium-sized Italian businesses
in the future.

Economic Reform: Hope for the Future
--------------

ROME 00002217 002 OF 002




6. (U) According to SACE, Libya's centralized bureaucracy
and Colonel Gaddafi's erratic economic policies limit Libya's
short-term economic prospects. According to our contacts,
these factors have been promoting an unpredictable policy
climate; the Libyan leader is notoriously capricious and
prone to sudden reversals, which, together with bureaucratic
bottlenecks, hinder policy implementation. SACE sees some
signs that Libya intends to move towards economic reform and
a reduction in the state's direct role in the economy, though
there has been little progress so far. For example, our
contacts say, in 2005, Libya simplified the duties system and
reduced some tariffs. This reform is widely considered the
only meaningful economic reform of 2005. However, many
imported products are still subject to a consumption tax that
can reach 50% of the value.

Comment
--------------


7. (U) Although GOI public statements might shine a positive
light on the relationship between Libya and Italy, private
conversations with SACE officials focused on the inhospitable
business climate and the high risk associated with
investments made in Libya. However, Italy's dependence on
Libyan oil and gas ensures that business with Libya will
continue, regardless of bureaucratic problems or other
impediments. End Comment.


8. (U) Minimize considered.
SPOGLI