UAE SKEPTICISM ON SOVEREIGN WEALTH INITIATIVES;

C O N F I D E N T I A L SECTION 01 OF 04 ABU DHABI 001898

SIPDIS

SIPDIS

TREASURY FOR U/S MCCORMICK, U/S LEVEY, A/S LOWREY, A/S
OBRIEN, A/S GARDNER, DAS SAEED, DAS SOBEL, DAS DALY, DAS
BARTH, DAS MENDELSOHN, KMATHIASEN, JROSE, RKAPROTH, MTURNER
NSC FOR ZARATE, NRAMCHAND
STATE FOR NEA/IR, NEA/ARP
STATE FOR S/CT, EB/ESC/TFS, INL/C/CP
CIA FOR OTI

E.O. 12958: DECL: 11/04/2017
TAGS: AE ECON EFIN KTFN PREL PTER EINV
SUBJECT: UAE SKEPTICISM ON SOVEREIGN WEALTH INITIATIVES;
INVESTMENT FIRMS LAMENT POLITICAL RISK IN THE U.S.

REF: ABU DHABI 1696

ABU DHABI 00001898 001.2 OF 004


Classified By: Ambassador Michele J. Sison, for reasons 1.4 b and d.


1. (C) Summary. UAE government and finance officials remain
skeptical over U.S. and international sovereign wealth fund
initiatives, but eagerly await additional details to further
evaluate. UAE-based investment firms cite increased political
risk surrounding foreign investment in the U.S., and are
passing on U.S. deals as a result. The declining dollar
contributes to UAE's inflation numbers, and hurts expatriate
workers, but de-pegging from the dollar does not appear to be
on the horizon. Dubai businesses feeling pain and uncertainty
over U.S. financial measures targeting Iran. End Summary.


2. (C) On October 29 and 30, a delegation led by David
McCormick, Treasury Under Secretary for International
Affairs, visited Abu Dhabi and Dubai to discuss U.S. open
investment policy and build support for an IMF-led process to
develop voluntary best practices for sovereign wealth funds
(SWF). In addition, McCormick pressed for a smaller group,
led by the U.S., UAE and Singapore, to begin SWF
consultations in an effort to jumpstart the multilateral
process. McCormick and his delegation met with Sheikh Ahmed
bin Zayed al Nayhan, Managing Director of the Abu Dhabi
Investment Authority (ADIA); Dr. Mohammed bin Khalfan bin
Khirbash, Minister of State for Finance; Sheikha Lubna Al
Qassimi, Minister of Economy; Sultan bin Nasser Al Suwaidi,
Central Bank Governor; Khaldoon Khalifa Al Mubarak, CEO
Mubadala; Mohammed Gergawi, Minister of State for Cabinet
Affairs and CEO of Dubai Holding; Obaid al Tayer, Chairman of
the Dubai Chamber of Commerce and Industry (DCCI); Omar bin
Sulaiman, Governor of the Dubai International Financial
Centre (DIFC); Sylvain Denis, CEO of Private Equity for Dubai
International Capital (DIC); and David Jackson, CEO
Istithmar. McCormick also raised the new U.S. sanctions on
Iran and highlighted the risks of conducting business with
Iranian entities.

U.S. Open Investment Policy
--------------


3. (C) During meetings with government and finance officials,
U/S McCormick stressed that despite high profile setbacks
such as Dubai Ports World, the U.S. remained committed to an
open investment environment. McCormick pointed to the
President's May 2007 Statement on Open Economies, the new
Committee of Foreign Investment in the United States (CFIUS)
legislation, and the number of successful cross-board
investment transactions in 2006 as evidence that the U.S.
continues to welcome foreign investment. McCormick also
pressed for voluntary best practices covering sovereign
wealth funds, stating that doing nothing is no longer an
option in the face growing international concern stoked by
media coverage. McCormick's message was met with a variety of
responses, ranging from commitments to continue investing in
the U.S. to warnings on substantially disrupted investment
flows due to the current political atmosphere surrounding
foreign investment in the U.S.


Sovereign Wealth Fund Troika Proposal
--------------


4. (C) McCormick proposed that in order to jumpstart the
IMF-led best practices effort, the U.S, UAE and Singapore
could begin quiet consultations as regional leaders to
outline investment principals for SWFs. McCormick stressed
that action needed to be taken to get out in front of
developing protectionist sentiments that could result in
unilateral measures unduly restricting foreign investment
flows in the U.S., Europe, Asia and Russia.


5. (C) Stressing the importance of cooperation and
appreciation for U.S. efforts, ADIA head Sheikh Ahmed stated
that he preferred to avoid appearances of secrecy or
exclusion. On the issue of IMF best practices more generally,

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Sheikh Ahmed gently advised that he understood the concerns
raised by U/S McCormick, but that it was important to
understand the actual situation before taking action, and
that all parties must be careful not to go too far. Sheikh
Ahmed asked for additional details on the proposals in
writing and informed that any final decision would need to be
approved by UAE President Sheikh Khalifa bin Zayed and Crown
Prince Sheikh Mohammed bin Zayed. McCormick promised to pass
a concept paper outlining the proposal for further
consideration. (Note: Sheikh Ahmed was joined at the meeting
by Hareb al Darmaki, who attended the October G-7 SWF
outreach dinner. The troika proposal did not appear to catch
Sheikh Ahmed by surprise, and his reaction thereto appeared
considered. End note.)


6. (C) In response to the troika proposal, Mubadala head
Khaldoon stated that he would need to survey views across Abu
Dhabi on such an exercise. Khaldoon strongly agreed that
steps need to be taken to protect cross-boarder investment
flows, and was open to considering all options. Khaldoon
worried openly about engaging in an exercise that would
associate his fund with other funds that merited concern,
such as Chinese and Russian entities. (Note: Mubadala has
greater incentive to embrace a proactive solution to the SWF
issue, as Mubadala's investment mandate involves
higher-profile transactions and controlling stakes more
likely to attract unwanted political and media attention,
such as the purchase of 7.5% of the Carlyle Group.
Alternatively, ADIA will likely avoid investments that may
attract negative attention, and therefore may feel more
secure trying to stay under the radar during this current
period of increased attention. End note.)


7. (C) Sheikha Lubna reacted more sharply to the Treasury
proposals. Sheikha Lubna expressed skepticism that best
practices would quell the protectionist tide, and worried
that instead they could become a tool to justify investment
restrictions in many countries. She rejected overly broad
assessments labeling UAE-based investment firms, other than
ADIA, as sovereign wealth funds, and advised that rising
protectionism was only a problem in the U.S. Sheikha Lubna
warned that new restrictions would simply result in Emirati
funds moving elsewhere in search of lower risk, higher return
investments. Sheikha Lubna opined that the political issues
driving protectionist sentiments were local in essence,
cautioned against endorsing a remedy without knowing possible
outcomes, and encouraged a U.S. solution for this U.S.
problem. Sheikha Lubna requested more information on what
possible guidelines would look like, as well as the details
of the troika proposal.


8. (C) Minister of State for Finance Dr. Khirbash conveyed
his surprise by the concern in recipient countries over
sovereign wealth investing and emphasized that he is not
prepared to &open his checkbook8 to everyone. He suggested
that the most straightforward solution would be to designate
certain sectors as off-limits to UAE investors. U/S
McCormick highlighted that this is exactly the type of
protectionist response we are trying to avoid in the US and
elsewhere, and noted further that the US has always believed
that it is in our interest to keep our markets open,
regardless of the investment climate in the investor,s
country. Dr. Khirbash recalled that following the rise in
oil prices in the late 1990s, GCC countries were called upon
to invest the surplus wisely. With rising revenues, UAE also
heeded calls for OPEC countries to increase production
capabilities. Dr. Khirbash encouraged further dialogue on the
SWF issue as a means to mitigate the need for action. Dr.
Khirbash requested a working paper proposal for the UAE to
review and respond.

Political Risk in the U.S.: the "X" Factor
--------------


9. (C) Investment firms Mubadala, Dubai International Capital
(DIC) and Istithmar described an increased level of
uncertainty surrounding potential U.S. investments due to the

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current political attention on foreign investment. Mubadala
executives now factor in political risk for every U.S. deal,
a criterion typically reserved for unstable investment
environments. Mubadala CEO Khaldoon openly worried that at
some point investing in the U.S., or in entities with U.S.
operations, would become not good business, as more and more
U.S. deals fall outside of their investment parameters.
Mubadala cited soaring costs for lawyers, lobbyists and
consultants for each U.S. deal. At the same time dramatic and
sincere, Khaldoon asked point blank whether Mubadala should
avoid investing in the U.S. for a period of time until
circumstances change.


10. (C) DIC, labeling this risk the "X" factor, informed that
it no longer considers making investments that will trigger
CFIUS review. DIC stated that CFIUS provisions demanded by
target companies are creating excessive risks, for example a
USD $100 million penalty should a transaction fail to
successfully exit the CFUIS process. DIC was concerned that
financial partners were backing away from deals with DIC
because of the increased uncertainties and delays in closing.
DIC added that during a recent negotiation, the CFIUS
provisions took over a week to resolve. DIC was caught off
guard by the uncertainties arising from the Bourse Dubai
transaction and the lack of clarity on what is meant by
"critical economic infrastructure." This development caused
DIC to carefully reconsider all U.S. investing as the goal
posts seemed to move to reflect political winds. DIC's
outside counsel is now advising that DIC must file all U.S.
transactions with CFIUS because it is viewed as
government-owned.


11. (C) DIFC Governor Omar bin Sulaiman advised that the most
significant question was how many deals were not pursued as a
result of the current political climate and PR concerns,
stating that he was aware of at least dozen from his
participation on various corporate boards. Sulaiman described
uncertainty as to what types of investments were welcome and
what should be avoided.


12. (C) Istithmar CEO David Jackson explained the perception
that there are two sets of rules for foreign investment in
the U.S.: one for UK, France and other Western investors; and
another for China, Arabs, etc. For example, the Dubai Ports
chapter sent the message that it was acceptable for a UK
company to own a U.S. port facility, but not an Arab firm.
Jackson believed that the ultimate beneficiaries of the
current uncertainty surrounding the U.S. market were Asian
economies, such as China, as they welcomed increased foreign
investment. Jackson questioned fears over sovereign wealth
investors, believing that business and economic fundamentals
will ultimately squeeze out any actors pursuing political,
rather than financial, objectives.

Currency Peg and the Declining U.S. Dollar
--------------


13. (C) In a typically confrontational exchange, Central Bank
Governor Al Suwaidi relayed the growing pressure he faces
internally on UAE monetary policy, partially as a result of
the declining value of the U.S. dollar. Al Suwaidi cited
tremendous daily pressure on inflation and the declining
dirham, specifically citing South Asian journalists
representing the interests of expatriate workers whose
monthly remittances were falling. (Note: The UAE maintains a
fixed exchange rate regime, pegging the dirham to the U.S.
dollar. As the dollar has fallen versus several major
international currencies, so has the dirham against the
Indian and Pakistani rupees. End note.) Al Suwaidi asked
where the dollar was heading and queried not so subtly if at
some valuation the USG would intervene. Al Suwaidi bluntly
asked for U/S McCormick's views on UAE's dollar peg and
whether de-pegging would concern the USG. Upping the ante, he
advised McCormick that a de-pegging would result in Emirati
petrodollars exiting New York to rebalance against whatever
currency basket was adopted in place of the dollar peg.
McCormick stated that UAE's choice of exchange rate regime

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was a sovereign decision meriting careful consideration, but
that the Treasury Department did not want to be surprised by
UAE actions. (Note: While Governor Al Suwaidi is under
significant pressure from daily headlines on rising inflation
and the falling dollar, regional bankers and investment
professionals largely agree that UAE is unlikely to de-peg or
revalue unless Saudi Arabia moves first. The dollar peg is as
much as political statement in the UAE as a monetary policy.
End note.)


14. (C) In a separate meeting, Minister of State for Finance
Dr. Khirbash stated that within the GCC, there is no
discussion on moving away from the dollar peg.

Financial Measures on Iran
--------------


15. (C) During separate conversations with the Central Bank
Governor and Dubai Chamber of Commerce and Industry (DCCI),
U/S McCormick raised the recent USG sanctions targeting
Iranian entities involved in proliferation and terrorist
support activities, as well as the recent FATF advisories
regarding the risks posed by the Iranian financial system and
Iranian accounts. Governor Al Suwaidi repeated to McCormick
the information he conveyed to Treasury U/S Levey earlier in
the month, primarily that the Central Bank noticed a decline
in financial transactions between UAE and Iran for the month
of August. Without providing further details, Al Suwaidi
believed that this trend proved that UAE was not attracting
additional Iranian capital in the face of growing
international restrictions. Al Suwaidi speculated that either
Iran was retrenching, or was simply moving its business
elsewhere.


16. (C) DCCI head Obaid Al Tayer described an atmosphere of
uncertainty in Dubai with regards to U.S. financial measures
on Iran and other U.S. legislation that could potentially
affect trade and investment, such as the PATRIOT Act (NFI).
Al Tayer explained that Dubai merchants are very cautious in
dealing with U.S. companies as they fear unwittingly
violating U.S. laws, adding that the U.S. Department of
Justice is looking at all companies in Dubai that deal with
Iran (NFI). Al Tayer stated that U.S. companies are now
requiring Dubai-based firms to provide indemnities for
violation of U.S. sanctions on Iran. DCCI asked for
additional guidance on U.S. regulations pertaining to Iran.
(Note: Consulate Dubai and Treasury Section Abu Dhabi will be
leading information sessions for DCCI members on U.S.
regulations pertaining to Iran. End note.)


17. (C) DCCI participants speculated that the U.S. measures
will impact the people and private sector in Iran, but not
the Iranian regime or its decision making. DCCI lamented the
harm to Emirati businesses in the process. DCCI stressed that
the U.S. is an important trade partner and ally of the UAE,
but that Dubai also welcomes Iranian investment.

SISON