ABU DHABI'S SOVEREIGN WEALTH FUNDS -- THE TRILLION

C O N F I D E N T I A L SECTION 01 OF 10 ABU DHABI 001294 SIPDIS NOFORN SIPDIS STATE FOR NEA/ARP, EEB/IFD/OMA TREASURY FOR U/S LEVEY, DAS SAEED, ROSE STATE PASS USTR FOR AUSTR DONNELLY NSC FOR NRAMCHAND E.O. 12958: DECL: 08/01/2017 TAGS: EINV EFIN ECON PINR AE SUBJECT: ABU DHABI'S SOVEREIGN WEALTH FUNDS -- THE TRILLION DOLLAR QUESTION (OR IS IT 200 BILLION?) REF: A. 06 ABU DHABI 408 ¶B. 06 ABU DHABI 3709 ¶C. 02 ABU DHABI 6317 ¶D. 06 ABU DHABI 2542 ¶E. 06 ABU DHABI 1472 ¶F. 06 ABU DHABI 4414 ¶G. ABU DHABI 193 ¶H. ABU DHABI 1127 ¶I. ABU DHABI 465 ¶J. ABU DHABI 539 ¶K. 06 ABU DHABI 4411 ABU DHABI 00001294 001.2 OF 010 Classified By: Ambassador Michele J. Sison for reasons 1.4 (b & d). ¶1. (U) This cable contains business proprietary information. ¶2. (C/NF) Summary: The Emirate of Abu Dhabi is the largest and most powerful of the seven emirates of the United Arab Emirates, with over 90% of oil and gas reserves, and about 60% of GDP. In addition, it directly funds over half of the UAE federal budget. Constitutionally, Abu Dhabi Emirate,s significant oil and gas reserves belong to it, not to the UAE as a whole. For this reason, when we talk about UAE sovereign wealth funds, we talk about the Abu Dhabi Investment Authority (ADIA) and not a UAE Investment Authority. In fact, other emirates have their own investment arms, either to manage overseas investment or to attract inward investment. ADIA is the largest of these "sovereign wealth funds" or investment funds, with assets estimated from USD 200 billion to USD 875 Billion. ¶3. (C/NF) Summary Continued: ADIA fills two roles. It serves as both the investment arm and the "check book" of the Abu Dhabi Emirate's government. It needs to invest for a post-oil future, but also finance the government budget when oil prices are falling. It has, therefore, both a long-term investment perspective and a bias toward liquidity. According to one ADIA official, in 2006 over 80% of ADIA's portfolio was in market trade securities. As ADIA's portfolio grows, it has diversified into new asset classes. ADIA officials stress that ADIA manages government money, not private money. In other words, they say, it does not manage the funds of the Abu Dhabi ruling family or of private citizens. ADIA is also generally a passive investor and rarely takes management stakes in invested companies. ADIA finds U.S. real estate funds, private equity, and fixed income attractive. End Summary. ADIA: Investor and "Check Book" -------------- ¶4. (SBU) In 1976, the Emirate of Abu Dhabi established the Abu Dhabi Investment Authority (ADIA) to monetize the emirate's oil wealth and invest it for the future. Under law, ADIA is responsible for "receiving funds allocated to investment by the government of the Emirate of Abu Dhabi, and shall invest and reinvest such funds for the general benefit of the emirate in order to secure the necessary financial resources and maintain its welfare in the future" (law number 5 of 1976 as amended by law Number 5 of 1981). ADIA manages the bulk of Abu Dhabi's foreign assets, but there are other smaller government investment agencies, including the new Abu Dhabi Investment Council (which took over ADIA's UAE and regional holdings),the International Petroleum Investment Corporation (IPIC) with a broad mandate to invest in hydrocarbons and related sectors outside Abu Dhabi, and the Mubadala Development Corporation. ¶5. (C/NF) ADIA performs two functions for Abu Dhabi. It manages the bulk of Abu Dhabi's external assets, investing for a post-oil future. It also serves to finance the government of Abu Dhabi when the price of energy is low. Essentially, it serves as the Emirate of Abu Dhabi's "check book." Since the Emirate of Abu Dhabi has taken on the responsibility for financing both the Federal budget and supporting the other emirates, ADIA can also be called upon to finance other UAE commitments, if the government of Abu Dhabi agrees. In addition, ADIA officials represent the government of Abu Dhabi, and sometimes the UAE, in international negotiations. (ADIA officials were key members of the UAE's Free Trade Agreement (FTA) negotiating team 2005-07.) ABU DHABI 00001294 002.2 OF 010 ¶6. (C/NF) ADIA's dual role as government investor and "check book" contributes to the organization,s culture of secrecy. The exact size and composition of ADIA's holdings is a well-guarded secret, and most ADIA officials are reluctant to talk to outsiders. ADIA employees are compartmentalized in their work and only know as much as they need to about the size of the portfolio they manage. This secrecy stems from UAE founder Sheikh Zayed's deliberate policy to preserve Abu Dhabi's wealth for its own citizens. Although Sheikh Zayed was more than willing to provide generous financial assistance to other Arab and Muslim countries and to pay to bind the UAE together, it was on his terms. The concern was -- and is -- that some Arab states viewed oil as part of the "Arab patrimony" and not the resource of any one country. Under that view, oil-derived investment assets would also belong to the Arab world. Interestingly, because of the loose federal nature of the UAE, this secrecy extends to the relations with the UAE federal government and the other six other emirates. ¶7. (C/NF) On more than one occasion, ADIA officials have told us that they would share information with other foreign governments (on tax matters, for example) that they refused to share with UAE federal authorities. ADIA officials, however, stress that they provide all required information to host country regulators. (Comment: the down side of such secrecy is that it allows rumor and speculation to drive assessments of ADIA's wealth. ADIA has, however, a 31-year track record of being a low-key institutional investor. Although there are some within ADIA who have pushed for a more flashy public profile, there is still a general presumption that confidentiality is better than openness. Recent news articles about sovereign wealth funds, perceived as hostile by many UAE readers, only serve to reinforce this position. End Comment.) ¶8. (C/NF) Under Abu Dhabi's budget process, the state-owned Abu Dhabi National Oil Company (ADNOC) provides the bulk of the government's revenue. Under Secretary of the Abu Dhabi Finance Department Hamed Hurr Al-Suwaidi explained to Econchief that ADNOC provides the Finance Department with an estimated price of oil for budget purposes. Budget surpluses and ADNOC surpluses (beyond the commitment to the government and reinvestment needs) flow to ADIA. ADIA also keeps its return on investments. Budget deficits are financed by transfers from ADIA to the Finance Department. From the 1990s up until 2003, Abu Dhabi's budget was in deficit. International ratings agency Fitch estimates, however, that ADNOC's profits offset this deficit for most of the last 27 years and that ADIA's assets continued to grow due to its investment returns. Who's Who in ADIA? -------------- ¶9. (C/NF) As one of Abu Dhabi's crown jewels, ADIA attracts senior Abu Dhabi government supervision. The Chairman of the Board of ADIA is Abu Dhabi Ruler and UAE President Sheikh Khalifa bin Zayed Al-Nahyan. He had held the chairmanship as Abu Dhabi Crown Prince and kept it when he succeeded his father as UAE President and Ruler of Abu Dhabi in 2004. (Note: Sheikh Khalifa has carefully kept all of the emirate's key financial levers of power under his control. End note.) Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al-Nahyan (MbZ) is also on the board. Other members of ADIA's Board of Directors include UAE Deputy Prime Minister Sheikh Sultan bin Zayed Al-Nahyan, ADIA Managing Director Sheikh Ahmed bin Zayed Al-Nahyan, and Sheikh Mansour bin Zayed Al-Nahyan (all sons of UAE founder, Sheikh Zayed). Sheikh Mohammed bin Khalifa bin Zayed Al-Nahyan, the Chairman of the Abu Dhabi Finance Department (and Sheikh Khalifa's younger son) also serves on the board, as do non-ruling family members Presidential Advisor Mohammed Habroush Al-Suwaidi; Jua'an Salem Al-Dhaheri, Chairman of the Abu Dhabi Department of Municipalities; Hamad Hurr Al-Suwaidi, the Under Secretary of the Department of Finance; and Saeed Al-Hajiri, who is also ADIA's Executive Director for Emerging Markets. How does ADIA Work? -------------- ABU DHABI 00001294 003.2 OF 010 ¶10. (SBU) By law, ADIA's board of directors has the authority to formulate Abu Dhabi's general investment strategy and set investment policies. It is responsible for evaluating the results of ADIA's investment program and for determining "appointment, discharge, and replacement of investment managers." The board approves ADIA's annual balance sheet, profit and loss account, and annual report, and annually approves the appointment of ADIA's auditors. In addition, "no Director may have a direct or indirect interest in contracts, projects, and transactions entered into or executed by the Authority (ADIA)." ¶11. (SBU) ADIA's senior executive officer is the Managing Director (MD),Sheikh Ahmed bin Zayed Al-Nahyan. He has the authority to implement the decisions of the board and run ADIA in accordance with board decisions. He can propose the overall investment strategy for board approval, and distribute investments "among different fields and activities in compliance with the principles adopted by the Board of Directors." He can decide on investment proposals, within the general guidelines of ADIA's strategy and Board policies. He also monitors investment performance and reports to the board of directors and has a number of other authorities. ¶12. (C/NF) Internally, ADIA is structured much like any other big investment organization. The MD has several departments reporting directly to him, including an internal audit office, a tactical asset allocation unit (which advises on investments),and the Evaluation and Follow-up Department (EFD). EFD was set up in 1993 as an advisory body to the MD, Investment Committee, and other executive management. It reports directly to the MD and evaluates, advises, and monitors matters relating to strategy, planning, governance, and ADIA's international relations. EFD also provides advice on formulating investment guidelines, setting return targets, and looking at risk (operational, market, and political). EFD's American Senior Legal Advisor William Brown and British Senior Tax Advisor Robert Peake were heavily involved in the UAE's FTA negotiations with the U.S. and with Australia as representatives of the government of Abu Dhabi. ¶13. (C/NF) The Investment Committee operates under the chairmanship of the Managing Director. By statute, it includes three board members and the department directors of ADIA, who meet weekly. According to an ADIA official, investment proposals go to the Investment Committee and then are shopped to EFD for review and comment. The committee then makes a recommendation to the MD. If the MD has questions, he refers the proposal to EFD for further study. The Vice Chairman of the Committee is Ju'an Salem Al-Dhaheri and the First Deputy is the Executive Director of ADIA's Emerging Markets Department Saeed Al-Hajiri. According to one ADIA official, the MD rarely attends the Investment Committee meetings himself. ¶14. (U) ADIA's investment departments are broken down by asset class and then by geography and are managed by executive directors or directors. Nominal government bonds are a separate asset class from inflation indexed bonds. ADIA manages its portfolio both with external and internal managers. An April 2006 Euromoney article noted that outside managers ran between 70-80 percent of ADIA's assets. Al-Hajeri told Euromoney that ADIA relied heavily on external managers for new asset classes but that the goal would be to move to at least 40 percent managed internally. ADIA Senior Investment Advisor Jean Paul Villain added that some assets, such as those in Latin America, where ADIA has little experience are 100 percent managed by external managers. ¶15. (C/NF) ADIA officials stress that ADIA manages government money, not private money. In other words, they say, it does not manage the funds of the Abu Dhabi ruling family or of private citizens. During U.S.-UAE FTA negotiations, the UAE pushed for a side letter from the Treasury Department recognizing ADIA as an integral part of the Emirate of Abu Dhabi within the meaning of section 892 of the U.S. Internal Revenue Code for the purposes of an exemption from income taxation on certain categories of income. According to ADIA's senior tax advisor, no portion of ADIA's net earnings go to the benefit of any private person. Another ADIA advisor explained that the Abu Dhabi Department of Finance ABU DHABI 00001294 004.2 OF 010 was the only entity allowed to tap into ADIA's funds, which it would do for budgetary purposes. The emirate did create a pension fund in 2005 with a "one-off government contribution" of around USD 1.7 billion. ADIA's Senior Legal Advisor told Econchief that he provided expertise to set up the pension fund, as did other ADIA officials. The pension fund manages the funds of Abu Dhabi nationals and operates independently of ADIA. How big is ADIA? -------------- ¶16. (C/NF) ADIA officials will not comment on the size of its portfolio, except to say that it is large. Given the secrecy surrounding ADIA, we understand that only a few members of ADIA or the government of Abu Dhabi know the full extent of the portfolio. Outside estimates range from a low of $200 billion to a high of $875 billion. UAE-based bankers and financial analysts have told Econchief that ADIA's holdings are upwards of $600 billion. Yousef Al-Otaiba, International Affairs Director for Crown Prince MbZ, has told Ambassador, that ADIA's assets were "much less than half" of Morgan Stanley's $875 billion estimate. ¶17. (C/NF) Given that the UAE's international financial statistics are poor, most analysts use the UAE's current account surplus as a proxy for acquisition of foreign assets. According to the IMF, the UAE as a whole ran a cumulative current account surplus of $174 billion from 1980 to 2006. By taking some rough estimates of annual return on investments, one can project a total portfolio of USD 447 billion (at seven percent average annual growth) and USD 736 billion (at ten percent average annual growth) at end 2006. These figures don't take into account, however, the fact that Abu Dhabi's trade is a share of total UAE trade, so the above figures could be somewhat overstated as representative of Abu Dhabi's overseas holdings. In addition, ADIA serves as a source of finance for the government of Abu Dhabi, which ran budget deficits through much of the 1990s, according to IMF figures. Using IMF budget figures for Abu Dhabi and taking the same rates of return above gives a range of USD 179 billion to USD 348 billion, a much lower figure for total holdings. (Note: Given that the IMF budget presentation does not include ADNOC profits, this figure might be on the low side. End note.) Since 2003, of course, with the hike in oil prices, Abu Dhabi's budget surplus has grown dramatically as have ADIA's holdings. In September 2006, then Deputy Managing Director Khalifa Al-Kindi told visiting EB A/S Sullivan and Treasury DAS Saeed that ADIA was then 11% in cash (or short term instruments such as 3 month T-bills), which is historically high. He noted that returns on these cash like investments were good (Ref B). ¶18. (C/NF) In the past year, Abu Dhabi government officials and ADIA officials have suggested that ADIA's assets, while large, are smaller than the public estimates. In April 2006, former ADIA Deputy Managing Director Khalifa Al-Kindi told then Treasury U/S for Domestic Finance Randal Quarles that ADIA's holdings of inflation indexed bonds (TIPS) were $3.7 billion. In September, he said that 3% of ADIA's inflow of cash was invested in inflation indexed bonds (60% of that in US TIPs). If the ratio held for ADIA's total holdings, it would imply a total portfolio of around $205 billion, which would be on the very low side of estimates. ¶19. (C/NF) The three international rating agencies, Fitch, Moody's, and Standard and Poors were all given a snapshot of ADIA's holdings as part of their June sovereign rating assessment visits to the Emirate of Abu Dhabi (ref H). Fitch was prohibited from publishing details about Abu Dhabi's net external holdings, but noted that Abu Dhabi had among the 10 highest per-capita external holdings of any country rated by Fitch. Richard Fox, Head of Middle East and Sovereign ratings for Fitch, told Econchief that the most recent publicly available statements on ADIA's holdings was an interview by S&P in which they said that Abu Dhabi's net assets were twice GDP (or between around $200 billion and $356 billion depending on whether S&P used Abu Dhabi or UAE GDP and its calculation of external liabilities). Fox speculated that S&P got into trouble for those remarks, but -- claiming confidentiality -- did not divulge the size of ADIA's external holdings. ABU DHABI 00001294 005.2 OF 010 How and Where is ADIA Investing -------------- ¶20. (C/NF) ADIA's dual responsibility as long term government investor and source of budgetary support for the government affects its investment decisions. Senior Legal Advisor William Brown has explained that ADIA can be thought of as a pension fund (such as Calpers) or an endowment (such as Harvard). He stressed, however, that the liability side is different than a pension fund's. ADIA needs to take into account sudden cash calls rather than a scheduled set of withdrawals. In other conversations, Villain has explained that ADIA needs to invest for a post-oil future, but also needs to finance the government while the price of oil is falling. ADIA has a long-term investor's perspective, but also wants to hedge against movements in the price of oil. The goal, Villain has noted, is for financial assets to be high when oil is low and visa-versa. In 2001, ADIA lost money at the same time as oil prices were low. Villain has confided that ADIA's returns were flat in 2002, but recouped its losses in 2003. ¶21. (C/NF) ADIA follows a large diversified investment strategy, which has evolved over time as new asset classes become available and ADIA's portfolio increases. Given the need to hedge against sudden drops in oil prices, there is a bias on liquidity. EFD Executive Director Salem Al-Mazroui has said that traditionally ADIA invested very conservatively, but is now diversifying its asset allocation to into real estate, hedge funds, small cap stocks, emerging markets, and mortgages and agencies as asset classes separate from government bonds. According to Brown, in 2006, over 80 percent of ADIA's portfolio was in market-traded securities. The rest was in real estate, private equity, and other alternative investments. ¶22. (C/NF) In September 2006, then ADIA Deputy Managing Director Khalifa Al-Kindi told A/S Daniel Sullivan and Treasury DAS Ahmed Saeed that about 45% of ADIA's inflow of cash was invested in equities (40% of that in US equities), 15% in global government bonds, 5% in corporate bonds, 3% in inflation indexed bonds (60% of that in US TIPs). Real estate, hedge funds (8%),and private equity (3%) make up smaller parts of the portfolio. In addition, Al-Kindi stated that ADIA is 11% in cash (or short term instruments such as 3 month t-bills),a percentage which is historically high. Brown has said that none of the alternative investments (such as hedge funds) meet the SEC test for significance, but that the numbers are large in absolute terms (billions rather than millions). ¶23. (C/NF) ADIA officials have noted that ADIA tends to keep its investments in companies under the various reporting thresholds. So much cash has been flowing into ADIA from the high oil revenues that it has had some difficulties meeting this goal and staying consistent with its asset allocation requirements. ADIA is also generally a passive investor and rarely takes management stakes in invested companies. ¶24. (C/NF) ADIA's investments have fixed weights by region, although these can be and have been adjusted over time. The U.S. and Europe continue to be major destinations for ADIA's investments. ADIA uses European financial institutions to manage some of its investments. It is difficult, therefore, to track exactly how much money is flowing into the U.S. or other destinations. Brown has said that ADIA's strategic plan calls for about one-third to be invested in the U.S., although he noted that as the portfolio increases, meeting that strategic goal is difficult, without moderating some of the risks. ¶25. (C/NF) As an example of ADIA's willingness to shift its weights, Villain has explained that in 1992 and 1993, when Japan made up 42% of world equity markets, ADIA did not want the bulk of its equity portfolio tied up in one country. It set a fixed weight for Japan at 20% (and later reduced that). Villain commented that this was the best decision ADIA ever made, since Japan has witnessed a 10-year decline in market capitalization. The Japanese DCM told econchief on July 25, that the Government of Japan has no clear information on the size of ADIA's investments in Japan, but a very unofficial ABU DHABI 00001294 006.2 OF 010 estimate was around USD 10 billion. He noted that ADIA uses European investment bankers to manage its investments. According to the Japanese DCM, the Europeans reportedly take a two percent commission while Japanese agents take another two percent so ADIA is interested in cutting out the middle man and dealing directly with Japanese firms. ¶26. (C/NF) ADIA has also moved into emerging markets, with Villain noting that it is already the largest investor in emerging markets equities. The size of its investments in China are reportedly limited. Al-Kindi once said that the Chinese authorities have limited ADIA to USD 200 million maximum investments in public equities, and Villain noted that ADIA has little to offer China, given the country's massive savings rate. Historically, ADIA has been historically underweight in Latin America (ref K). ADIA also has traditionally avoided investing in the Middle East region (except for some "strategic" regional investments that are now part of the Abu Dhabi Investment Council),because of the relatively small size of the market and the linkages of the economies with oil prices. ADIA officials stress that they do not invest in Iran. Villain runs a small Middle East investment fund for ADIA and has noted that the region was "starting to be a real place to invest." He argued that it was possible to make large returns investing in the region as the demand for capital exceeded local supply. ¶27. (C/NF) Jean Paul Villain further noted that bonds play a role in ADIA's portfolio both as a source of return and as insurance against low probability, but highly damaging events. ADIA, he said, was attracted by inflation indexed bonds, since they were essentially &no risk8 assets. As U.S. inflation linked bonds became more liquid, ADIA's appetite increased. He added that ADIA tended to try to keep a fairly constant flow into various asset classes and not make large sudden movements. Villain stated that ADIA's appetite for bonds extended across the yield curve. From the point of emerging market government debt, he told us in 2007, ADIA has had to restructure its emerging market department to reflect a shift in government debt from dollar denominated debt to local currency debt. Fifty percent of the emerging market debt that ADIA invests in is now in local currencies, whereas in the past it was almost exclusively dollar denominated. ¶28. (C/NF) ADIA also invests in alternative investments, including real estate (since the 1970s),hedge funds (since the mid-80s),and private equity (since 1992-1993 in Europe now global). With one exception, ADIA tends to avoid commodities (especially oil and gas). According to Villain, however, ADIA is "long" in metals, which are energy linked. ADIA runs currency investments separate from its equities investments, although Villain admits that currency investments have not been very successful. He told econchief that in 2006, the currency managers were "a disaster." EFD Executive Director Salem Al-Mazroui has noted that ADIA finds U.S. real estate funds, private equity, and fixed income attractive. In alternative investments, William Brown has observed that the lack of a U.S. office has limited ADIA's willingness to participate in certain private equity or real estate transactions. The problem was not with access, but with timely information from eight to nine time zones away (ref K). ADIA is in final talks to take a nine to ten percent (non management stake) with the private equity firm Apollo Management, according to individuals connected with the deal. What are ADIA's concerns? -------------- ¶29. (C/NF) As a major government investor, ADIA is concerned about all of the traditional economic and financial questions: the strength of the dollar (equity investments tend to be unhedged),economic growth, etc. ADIA also has concerns about political risk, specifically rising protectionism in some of its investment markets and the security of ADIA's assets against freezing or seizure. ¶30. (C/NF) In general, UAE investors have expressed concerns about the security of their assets in the United States. These concerns pre-date the USA Patriot Act, but may go back to the freezing of the assets of the partially UAEG (not ADIA) owned Arab Bank for Investment and Foreign Trade ABU DHABI 00001294 007.2 OF 010 (ARBIFT) as a specially designated national entity of Libya. During a February 2006 meeting with Treasury U/S Stuart Levey, Salem Al-Mazroui explained that he wanted ADIA to feel more comfortable with the U.S. as a safe destination. Every time the U.S. freezes assets, he stressed, it affects investor confidence. ADIA as a global financial institution could wind up partnering with a country that the U.S. later decides to sanction. Although ADIA officials acknowledge that the risk is slight, the perception of risk does affect investment decisions (ref A). Given ADIA's focus on portfolio investments, it is less concerned about revisions to the U.S. CFIUS rules on foreign direct investment. ¶31. (C/NF) A number of ADIA and Abu Dhabi Emirate and Federal government officials are concerned about the implications of the closer focus on "sovereign wealth funds" and the push for them to be more transparent and open. They view this push for openness as potentially protectionist and invasive. At least some ADIA officials also view this debate as a potential disincentive to investing in the United States. ¶32. (C/NF) Repeatedly, ADIA officials have stressed that the organization is both private and dispute-shy. It is unlikely to pursue remedies in courts. In addition, the UAE is very likely just to "pay off" a complainant rather than permit an extensive process of legal discovery. Given Abu Dhabi's importance in bankrolling UAE federal expenditures and the other emirates, ADIA officials have also expressed concern that ADIA could be responsible for funding the commitments of others. During the FTA negotiations, ADIA officials pointed out clear areas where the UAE federal government could not bind the individual emirates to certain conditions. All it could do, they noted, would be to pay any penalty required if the individual emirates chose not to comply. Given that Abu Dhabi funds the bulk of the federal government, they pointed out that the payments would likely need to come from Abu Dhabi. In order to resolve some of these concerns, ADIA pushed during the U.S.-UAE FTA negotiations for mandatory confidential mediation prior to arbitration in investor-state SIPDIS disputes. ¶33. (C/NF) ADIA officials have also expressed concern about taxation issue. During the FTA negotiations, they pushed for U.S. recognition that ADIA was an "integral part" of the Abu Dhabi government for purposes of section 892 of the Internal Revenue Code, which excludes certain income from taxation. ADIA officials may raise this point as a separate issue following the suspension of FTA talks. ADIA's "Kid Brother" the Abu Dhabi Investment Council (ADIC) -------------- -------------- ¶34. (C/NF) In June 2006, President Khalifa established the Abu Dhabi Investment Council (ADIC) to take over ADIA's stake in UAE and regionally-based investments, such as the 73% stake in the National Bank of Abu Dhabi, and the 65% stake in the Abu Dhabi Commercial Bank. Law Number 16 of 2006, which created ADIC, specifies that "the Council shall assume all the investment activities in the emirate that used to be under the Abu Dhabi Investment Authority." (Note: There is an Abu Dhabi Investment Company, owned by ADIA, which is also referred to locally as &ADIC.8 We are using the acronym to refer to the new Council, not the Company. End Note.) Although separating ADIA's local and regional investments had apparently been discussed intermittently for some time, the timing of the announcement caught many inside and outside ADIA by surprise. For several months after the creation of ADIC, observers were unclear as to whether (or when) the transfer would actually take place. ADIA's UAE holdings never fit comfortably within the ADIA portfolio, being considerably larger ownership shares than ADIA preferred. In addition, given the importance of some of ADIA's local holdings to the UAE economy, ADIA could not treat them like a normal part of the portfolio. During the 2006 stock market correction, there would have been a major outcry if ADIA had sold its local shares and further depressed the market (ref D). ¶35. (U) In January 2007, President Khalifa reshuffled ADIC's Board of Directors. Khalifa serves as Chairman of the Board. Several of the Directors, including Sheikh Sultan bin Zayed, Sheikh Mohammed bin Zayed, Sheikh Mansour bin Zayed, and ABU DHABI 00001294 008.2 OF 010 Mohammed Habroush Al-Suwaidi are also board directors of ADIA. Other Directors include the Managing Director of ADIC, Khalifa Mohammed Al-Kindi (former Deputy Managing Director of ADIA),Sheikh Hamed bin Zayed Al-Nahyan, and Younis Hajji Khouri, Under Secretary at the Ministry of Finance (and former Abu Dhabi Department of Finance official). ¶36. (C/NF) ADIC is now up and running, with a number of ADIA transferees serving as officers. Although ADIC's investment strategy is not publicly available, Under Secretary of the Department of Finance Hamed Hurr Al-Suwaidi told Econchief that ADIC would start its focus with more local and regional investments, but that it would develop into an "ADIA - II" over time. Eissa Mohamed Al-Suwaidi, Director for Equities and Fixed Income at ADIC, also said that the council would be a smaller version of ADIA. A widely held rumor in Abu Dhabi is that Abu Dhabi's oil surplus revenue is now flowing to ADIC rather than ADIA. Officials have refused to confirm the rumor, though on ADIA official has noted that ADIA's earnings are large enough that it does not need the oil revenues. (Comment: The last few years of high oil prices have given ADIA an embarrassment of cash, so the idea of seeding ADIC with excess oil revenues does make sense. End Comment.) ¶37. (C/NF) Eissa Al-Suwaidi did note one critical difference between ADIA and ADIC: ADIC would be a more active investor in petrochemicals in the UAE and in the region. He noted that ADIC wanted to capture more of the hydrocarbon value chain. (Note: ADIA has generally avoided investing in hydrocarbons in an effort to hedge against falling oil prices. End Note.) A local businessman told econchief that that the way Abu Dhabi's various investment companies were coordinating their investments was that ADIC would concentrate on downstream petrochemicals, the International Petroleum Investment Corporation would focus on refineries and pipelines, ADNOC would continue its focus on oil and gas development in the UAE, and Mubadala would look at oil and gas developments outside the UAE. ¶38. (U) On July 10, President Khalifa announced the creation of a new bank, Crescent Bank, which would be a joint-stock company 100% owned by ADIC and would be capitalized at AED four billion (USD 1.09 billion). According to the press release, the Bank was part of Abu Dhabi's efforts to boost the banking sector by providing additional funding for development projects. Later press reports stated that the bank would be an Islamic financial institution. ¶39. (C/NF) According to Eissa Al-Suwaidi, also Chairman of Crescent Bank, the vision is of a full-service bank. It would be an Islamic bank, but mostly because that seemed to be where the growth in demand was. He commented that he was a board member for the National Bank of Abu Dhabi, which had problems attracting "good people" due to their religious concerns (NBAD is a traditional full service bank). His best guess was that it would take about a year to have the bank fully operational, with the possibility of a "soft opening" slightly earlier. He commented that "Dubai has a reputation for efficiency," and that he did not think Abu Dhabi needed to try and beat Dubai's start-up time of a year to make its new investment bank operational. In response to econchief's comment that the UAE Central Bank had generally expressed reluctance to issue new banking licenses, given the number of banks already on the market, he commented that the Central Bank had issued two licenses -- one to Abu Dhabi and one to Dubai. He speculated that these licenses had been issued for "political reasons." ¶40. (C/NF) Bio Note: Eissa Al-Suwaidi is also the director of Equities and Fixed Income at the Abu Dhabi Investment Council. He was formerly in charge of Far Eastern Investments for ADIA (Japan, Hong Kong, Australia, and China) and is a 1982 graduate of Northeastern University. He speaks excellent English and appeared comfortable talking to econchief, though he stressed that the discussion should be kept confidential. According to one ADIA official, as the size of ADIA's far eastern investments grew, portions of Al-Suwaidi's portfolio were carved off, presumably because management believed it was too big for one man to handle. The same official noted that Al-Suwaidi was part of the group that tended to side with Al-Kindi, many of whom followed him to ADIC. End Bio Note. ABU DHABI 00001294 009.2 OF 010 Other Government Investment Arms -------------- International Petroleum Investment Corporation (IPIC) -------------- -------------- ¶41. (C/NF) The International Petroleum Investment Corporation (IPIC) was established in 1984 as a wholly-owned Government of Abu Dhabi investment vehicle. It was established to invest in hydrocarbons and related sectors outside the emirate of Abu Dhabi. Originally, most observers understand that it was a 50-50 joint venture between ADNOC and ADIA, but it is now a separate entity with its own board and CEO. Although IPIC does have larger investments, it typically targets a significant minority equity participation level of around 25-40 percent. IPIC does not typically participate in the day-to-day management of companies, but does play an active role on company boards. IPIC's focus has largely been in Asia, Africa, and Europe in order to capture more value for ADNOC's oil exports. In April, IPIC's Managing Director, Khadem Al-Qubaisi, told econchief that he believed that IPIC should invest into the North American market in order to diversify its investment base. He commented, frankly, that IPIC's risk/return profile was fairly risky and entry into the North American market would help reduce the risk (ref J). ¶42. (C/NF) According to IPIC, it holds a portfolio valued at close to 10 billion. Investments include a 17.6 percent stake in the Austrian oil and natural gas company OMV Aktiengesellschaft, a 65 percent stake in Austria's Boreales and other international investments. IPIC will be constructing a strategic pipeline to carry 1.5 million barrels of oil per day from Abu Dhabi to the Emirate of Fujairah, bypassing the Straits of Hormuz. Although there is a strategic rationale for this pipeline, Al-Qubaisi has insisted that it would be commercially viable. IPIC is studying (with the U.S. firm Conoco Phillips) building a new green field refinery in Fujairah Emirate as well. The cost of building new refineries has skyrocketed, however, bringing the near term commercial viability of the project into question. Mubadala Development Company -------------- ¶43. (SBU) Mubadala Development Company was established in October 2002 as a public joint stock company, 100% owned by the government of Abu Dhabi. The Company's mandate is to establish new companies and to acquire strategic holdings in existing companies, either in the UAE or abroad. Mubadala will focus on generating sustainable economic benefits for Abu Dhabi and invest in a wide range of strategic sectors. Mubadala took the Emirate of Abu Dhabi's stake in a number of international projects formerly held by the UAE Offsets Group (a defense offsets program). The biggest project it has is a 51 percent stake in Dolphin Energy, a multi-billion dollar project to bring natural gas from Qatar to Abu Dhabi. Many of Mubadala's investments are in projects or joint ventures in the UAE, including a 40 percent stake in the company Abu Dhabi Ship Building, a 20 percent stake in the UAE's second telecommunications company (du) and a 50-50 joint venture with Dubai Aluminum to build the world's largest aluminum smelter in the Emirate of Abu Dhabi. Mubadala is increasing its foreign investment portfolio as a minority partner in upstream oil development in Libya and Oman and a 5 percent iconic stake in Ferrari. Unlike ADIA, Mubadala is much more public about its investments. According to Mubadala CEO, the company's focus -- in addition to generating returns -- is to drive "sustainable economic development in the Emirate of Abu Dhabi. Al-Mubarak is also a member of Abu Dhabi's Executive Council and the head of the Executive Affairs Authority, a government think tank reporting to MbZ. ¶44. (C/NF) Interestingly, the Chairman of Mubadala's board is Crown Prince Mohammed bin Zayed (MbZ),rather than President Khalifa, and there are no other ruling family members on the board. The difference in board membership and management partially accounts for the difference in style. Mubadala reflects the views of its chairman, MbZ, who is much more focused on aggressive change and development in the emirate ABU DHABI 00001294 010.2 OF 010 than his older half brother President Khalifa, who has a more conservative approach to change. Abu Dhabi National Energy Company -) Taqa -------------- ¶45. (C/NF) Taqa is a publicly listed Abu Dhabi energy company established in 2005. The Government of Abu Dhabi (through the Abu Dhabi Water and Electricity Authority) owns 51% of the company. An additional 24.1% of the company is allocated to the emirate owned "farm owners' fund." The rest is traded on the Abu Dhabi Stock Market. Taqa, through its subsidiaries, provides around 85% of the water and electricity consumed in the Emirate of Abu Dhabi and has been engaging in an ambitious program of international expansion. In February, for example, it bought the Middle East, Africa, and India businesses of CMS Energy for $900 million. Taqa has USD 10.2 billion in loans outstanding (including a USD 3.5 billion bond issued in 2006) and about USD 14 billion in total assets. First quarter 2007 revenues were USD 286 million with a profit of USD 17 million. Moody,s and Standard and Poors upgraded Taqa's rating in July to AA2 and AA (-) shortly after issuing ratings on the Emirate of Abu Dhabi. Taqa's CEO has told econchief that he is looking at further borrowing to fund the company's expansion (refs G, I). Comment -------------- ¶46. (C/NF) ADIA gives every impression of being a government institution filled with dedicated, generally high-quality professionals. ADIA instincts toward confidentiality and conservatism are deeply ingrained and its occasional forays into publicity are generally not-well handled. As the "steward" of Abu Dhabi's public purse, ADIA officials are concerned about anything that might have a negative impact on ADIA's assets (which are the assets of Abu Dhabi). They worry that too much openness will expose ADIA to both "tin cupping" from other governments and "predatory" law suits on issues that are out of their control ("camel jockey" law suits have come up in conversations). Finally, many ADIA officials are worried about what they see as increasing protectionism in the countries they invest in. During his visit to Washington, Abu Dhabi Crown Prince MbZ specifically raised POTUS' May 10 statement on open economies, in which POTUS welcomed foreign investment. Some Abu Dhabi officials have viewed the increasing scrutiny on "sovereign wealth funds" as the latest in a series of potentially investor-unfriendly actions (ranging from asset freezes to hostile public scrutiny of FDI, including DP World's divestment of P&O's U.S. assets). In recent years, some ADIA officials have opened up to USG interlocutors on a "comity of governments" basis. ADIA officials present themselves as the best kind of foreign investors -- long term, portfolio, and avoiding management control. End Comment. SISON