ABU DHABI CAUTIOUSLY POSITIVE ON SWF BEST PRACTICES

UNCLAS SECTION 01 OF 03 ABU DHABI 001696

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA/ARP, EB/IFD/OMA
TREASURY FOR DAS SAEED, ROSE, KAPROTH
NSC FOR NRAMCHAND

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR AE
SUBJECT: ABU DHABI CAUTIOUSLY POSITIVE ON SWF BEST PRACTICES

REF: ABU DHABI 1294

ABU DHABI 00001696 001.2 OF 003


This cable contains business proprietary information.


1. (SBU) Summary: Abu Dhabi financial officials told a
Treasury delegation, led by DAS Ahmed Saeed that they
welcomed the opportunity to cooperate with the USG. ADIA
Managing Director Sheikh Ahmed bin Zayed Al-Nahyan and Yousef
Al-Otaiba, Foreign Affairs Director for Abu Dhabi Crown
Prince Sheikh Mohammed bin Zayed Al-Nahyan responded
positively to Treasury's proposal for voluntary best
practices for Sovereign Wealth Funds and expressed interest
in further details. Officials all stressed ADIA's role as a
long term passive investor and that the new Abu Dhabi
Investment Council (ADIC) would take the same position. End
Summary


2. (SBU) On September 19, a delegation led by Ahmed Saeed,
Treasury DAS for Middle East and Africa, including Robert
Kaproth, Director of Treasury's Office of International
Monetary Policy visited Abu Dhabi to explain Treasury's
proposal for Sovereign Wealth Funds (SWFs) and investment
recipient countries to work together under an IMF/WB umbrella
to create voluntary best practices for SWFs. They met with
Sheikh Ahmed bin Zayed Al-Nahyan, Managing Director of the
Abu Dhabi Investment Authority (ADIA); Hamad Hurr Al-Suwaidi,
Under Secretary Abu Dhabi Department of Finance (and ADIA
board member); Jean Paul Villain, Chief Investment Advisor
ADIA; Khalifa Al-Kindi, Managing Director Abu Dhabi
Investment Council (ADIC); and Yousef Al-Otaiba, Foreign
Affairs Director for Abu Dhabi Crown Prince Sheikh Mohammed
bin Zayed Al-Nahyan.


3. (SBU) Saeed and Kaproth stressed the U.S. commitment to an
open investment climate. They noted that well-run SWFs such
as ADIA have had a positive impact on international financial
stability as long-term investors without leverage. The
growth in both the size and the number of SWFs, however,
represented a structural shift in the international financial
system that needed to be better understood. In addition, the
increased attention to these SWFs could lead to increased
financial protectionism. The proposal to develop voluntary
best practices, jointly, would address concerns about these
proliferating SWFs and would serve as a tool to resist
protectionist sentiments in recipient countries. In
parallel, Treasury was suggesting that the OECD work together
to create a voluntary code of best practices for recipient
countries.


4. (SBU) Best practices would cover areas such as fund
objectives, operational and risk management, governance
structure, accountability, and transparency. In addition,
they would ensure that SWF investment criteria were
commercial/financial rather than foreign policy driven.
Public statements from ADIA, as a passive portfolio investor,
that its decisions are made on a strictly commercial basis
would help allay public concerns. Best practices would not
deal with an SWF's asset allocation decisions. Different
SWFs had different philosophies, and appetite for risk and
investment decisions should remain a decision for the SWF and
its government.

ADIA Value Cooperation -- Avoid Public Exposure
-------------- -


5. (SBU) Saeed explained that the US Treasury views ADIA as a
valuable member of the international financial system. SWFs
were proliferating, however, and the size of assets under
management was increasing to trillions of dollars, which
raised a very real risk of protectionist backlash. He said
Treasury had sent delegations to Asia, Europe, and now the
Middle East. He stressed that he thought ADIA was already
doing much of what might be considered best practices.
Sheikh Ahmed said ADIA officials had become aware of growing
fears and protectionist sentiment with regard to SWFs. He
stressed that he had no problem dealing with other
governments and assured Saeed that ADIA was willing to
cooperate with the U.S. to look for solutions. He stressed,
however, that ADIA did not want to either raise its public
profile or talk to the media. Saeed probed saying he sensed
ADIA supported the concept of guidelines, mutually agreed on
in coordination with the IMF/WB, but wanted to be sure that
he was correct in his understanding. Sheikh Ahmed responded
that it would be no problem, that he was ready to cooperate
on the proposal, and that he would be interested in learning

ABU DHABI 00001696 002.2 OF 003


more about it after Ramadan.


6. (SBU) Sheikh Ahmed explained that ADIA has always been a
conservative organization, whose first aim is to protect and
maintain the assets of the Emirate of Abu Dhabi. ADIA's
second goal, he noted, was to increase the size of these
assets. Sheikh Ahmed asked whether the delegation had seen
other SWFs. Kaproth explained that he had made two trips to
Asia and Europe and that Treasury had separate contacts with
China. In response to Sheikh Ahmed's question, Kaproth noted
that China was very interested in minimizing financial
protectionism issues. More broadly, he added, there was
strong interest in Asia in IMF/WB guidelines. He had the
impression that some of the older SWFs were concerned that
the rise of new funds raised reputational risks. He
explained that in Europe, Norway came to the G-20 meeting at
Treasury's invitation to show how it managed its funds.
Saeed explained that the proposal for voluntary best
practices would serve as a benchmark to help ADIA and other
well-run SWFs distinguish themselves from some of the newer
SWFs, which were not so well-run.

Abu Dhabi Investment Council -- "We just want to make money"
-------------- --------------


7. (SBU) Khalifa Al-Kindi stressed that both ADIA (where he
previously served as Deputy Managing Director) and ADIC were
passive investors. ADIA had decided "a long time ago" not to
buy a stake in any one company larger than the relevant
regulator's disclosure limit (normally never more than four
percent). He also asserted neither ADIA nor ADIC would push
hostile takeovers of companies. It would pose "a problem for
us," he stated. ADIA's overall objective, he explained, was
to beat the average OECD inflation rate by about five to six
percent. He noted that the strategy and allocations had
developed over the last 17 years. The major difference
between ADIA and ADIC, he said, was that ADIA had liabilities
to the government of Abu Dhabi. (Note: ADIA manages the bulk
of the Emirate of Abu Dhabi's external assets and serves as
the Emirate of Abu Dhabi's "check book" or supplementary
source of financing. End Note.) The government has told ADIC
that it would have no liability to the government, which
would allow it to invest in more illiquid assets.


8. (SBU) Al-Kindi asked what the concern was about SWF,
noting that "I assume our custodians are disclosing"
investments to relevant regulators. Kaproth explained that
the growth in the size and number of these funds was drawing
attention. Al-Kindi asserted that the entire GCC foreign
asset holdings were "small beans" compared to China's.
Kaproth replied that oil exporters' foreign assets roughly
matched Asia's. Al-Kindi also questioned the public
perception of ADIA's size, stating "$750 billion is way too
big" and that he annually gave the IMF figures on the size of
ADIA. He stressed, however, that ADIA -- as a matter of
policy -- did not disclose the size of its foreign
investments publicly. Confidentiality, he noted, was a
policy directed "from above."


9. (SBU) Looking forward, Khalifa noted that he was seeing
asset price inflation and shrinking expected returns in
traditional asset classes. Investors would need to diversify
their investments. In response to the question of whether he
worried about the increasing rhetoric surrounding SWFs,
Khalifa said no, but acknowledged a need to be careful. He
stressed that neither ADIA nor ADIC wanted conflict with the
countries in which it invested. For that reason, he
stressed, neither company took large stakes in companies.


8. (SBU) Al-Kindi stated that all local banks in Abu Dhabi
were exposed to sub prime mortgage backed securities. The
funding costs to the region had increased dramatically
already. In order to meet the development plans of the
region, the banks were relying on medium term notes to fund
this expansion, a market which, he noted, was now largely
closed. He said that he foresaw bank profitability suffering
and a drop in returns for investors. In the case of Dubai,
he stated that Dubai was highly leveraged and "buying
equities with borrowed cash."

Crown Prince's Office -- Concerned about Protectionism
-------------- --------------


9. (SBU) Al-Otaiba opened the meeting with Saeed by noting
that some in the UAE were a bit paranoid after DP World and

ABU DHABI 00001696 003.2 OF 003


asking whether these new SWF proposals targeted the UAE or
everyone. Saeed replied that these guidelines would be
developed for all SWFs and would be developed in concert with
investor nations and nations receiving investment. He
stressed that the Administration remained committed to
maintaining an open investment climate and wanted to prevent
future problems. The growth of SWFs to trillions of dollars
increased attention and the risk of a protectionist backlash
from some countries. He noted that the UAE would be
announcing two high-profile investments in the upcoming week.
(Note: The Dubai Bourse-NASDAQ deal and Mubadala's purchase
of a non-voting stake in the private equity firm Carlyle. End
Note.)


10. (SBU) Al-Otaiba asked whether the various SWFs would sign
up to creating these voluntary best practices, noting that
consensus-building among funds with widely different
investing styles would be difficult. Kaproth noted that best
practices already existed for fiscal and monetary policy and
for reserve management. Kaproth noted that working with the
IMF and the World Bank also allowed both commodity and other
SWFs to participate. Al-Otaiba said his view was that ADIA
was fairly sophisticated and that the targets for
protectionism were Russia and China. His concern was that
any legislation would cause collateral damage.


11. (SBU) Saeed stressed that guidelines would allow ADIA to
distinguish itself from other SWFs. Al-Otaiba noted that SWF
guidelines seemed like a good preemptive measure and that
working with the IMF would remove the perception that this
was a US-imposed solution. He said that he thought Abu
Dhabi's investment organizations would be helpful as long as
they did not feel "singled out or pressured" and as long as
the guidelines were not too intrusive. He explained that he
would be visiting Washington late September/early October to
discuss the UAE arms package and said that he would raise the
issue of SWF with his congressional interlocutors, if
necessary.

Comment


12. (SBU) All Abu Dhabi interlocutors welcomed the
opportunity to cooperate with the USG. Both Sheikh Ahmed and
Al-Otaiba responded positively to the proposal for voluntary
best practices although Sheikh Ahmed stressed that he would
want to see further details. Al-Otaiba even welcomed the
idea of working through the IMF/WB since it would minimize
the impression that this initiative was being forced on SWFs
by any one country. Al-Kindi was too focused on ADIC's
portfolio management responsibilities to be able to focus on
a bigger political picture although, as a government
employee, he is not likely to oppose an Abu Dhabi government
decision. One sticking point for Abu Dhabi on the question
of SWF guidelines could be the degree of transparency that is
sought. Sheikh Ahmed and Al-Suwaidi stressed that ADIA did
not want to keep secrets from governments in recipient
countries, but strongly expressed their discomfort with the
idea of raising ADIA's public profile or speaking to the
press. Post will continue to follow up with ADIA, ADIC,
Mubadala, and the Emirate of Abu Dhabi government. End
Comment.


13. (U) This cable was cleared by DAS Saeed's party.
SISON