SCENESETTER FOR TREASURY SECRETARY HENRY PAULSON'S

S E C R E T SECTION 01 OF 04 DOHA 000407

E.O. 12958: DECL: 05/28/2018
TAGS: PREL ECON EFIN PGOV QA
SUBJECT: SCENESETTER FOR TREASURY SECRETARY HENRY PAULSON'S
JUNE 1 VISIT TO QATAR

Classified By: Charge d'Affaires Michael A. Ratney, reasons 1.4 (b) and (d).


1. (C) Mr. Secretary, your June 1 visit is an opportunity to
discuss four issues of immediate concern to Qatar and the
U.S.:

- Exchange rates and GCC currency pegs
- Counter-terrorist financing
- Iran
- Sovereign Wealth Funds and Foreign Investment in the U.S.

You have meetings confirmed with the Minister of Finance,
Yusef Kamal; the Governor of the Central Bank, Sheikh Abdulla
bin Saud Al Thani; and the Prime Minister/Foreign Minister
Sheikh Hamad bin Jassim Al Thani (HBJ).


2. (C) EXCHANGE RATES AND GCC CURRENCIES: Rhetoric from
Qatari officials has been inconsistent, with the Central Bank
Governor ruling out any de-pegging (though suggesting that
they might consider a revaluation),and the Prime/Foreign
Minister commenting publicly on the possibility of de-pegging
the currency. (In some local press coverage, de-pegging and
revaluation are often confused.) The Central Bank Governor
has downplayed the effect of a weak dollar on domestic
inflation, arguing that high construction and housing costs
in Qatar's booming economy is the primary factor. The
Governor also argues that Qatar has enjoyed decades of
financial stability with a dollar-pegged currency and is not
keen to jeopardize that in response to near-term economic
trends. This meeting is an opportunity to sound out the
Qataris on their current thinking and remind them of our
strong interest in open communication as Qatar considers its
currency policy.


3. (S) COUNTER-TERRORIST FINANCING: The long-standing CT
financing case of Al-Qaida facilitator Khalifa al-Subaie (aka
Katrina) had been a major bilateral irritant for over a year.
In the past months, following engagement by Treasury U/S
Levey, FBI Director Mueller, Attorney General Mukasey, and
CIA Director Hayden, cooperation on the case has improved
markedly. Qatari authorities arrested Al-Subaie in March,
and he is now in a Qatari jail serving the six-month sentence
handed down by a Bahraini court. The Qataris have frozen his
assets and tell us they will bar his travel when he is
released from prison. They have also begun cooperating more
closely on information sharing related to the case. Although
al-Subaie had been a Central Bank employee, neither the
Central Bank Governor nor the Finance Minister were closely
involved in the case. HBJ was involved very early on, but to
the consternation, we believe, of Qatar's security agencies.
If you raise the issue on this visit, it should be limited to
thanking the Qataris for their cooperation on the case and to
note that a request for al-Subaie's designation is now
pending before the UNSC 1267 Committee, which we hope the GOQ
will not seek to block. We believe any more detailed
discussion of the case should be done through the Qatari
Attorney General and intelligence service, and not with HBJ.


4. (S) IRAN: Iran hangs heavily over our relationship with
Qatar, which worries that we may have plans for Iran, perhaps
even military plans, that we are not sharing with them.
Qatar fears and deeply distrusts Iran, and shares our concern
about its nuclear program, which it regards as unstoppable.
But because of Qatar's geographic proximity, vulnerability of
its energy installations, and the fact that its massive
off-shore gas reserves are shared with Iran, Qatar will do
nothing to engender an antagonistic relationship. Officials
from Treasury, the Federal Reserve, and State have all
engaged Qatar on the risks of financial transactions with
Iran. The Central Bank and Qatari commercial banks tell us
they scrutinize all Iran-related transactions carefully. The
Central Bank has told us that the one Iranian bank in Qatar,
Bank Saderat, is used primarily by Iranians sending home
remittances. The Government has signaled that it will not
close Bank Saderat, arguing that doing so would force
remittance transactions into informal channels which are
harder to monitor.


5. (C) SOVEREIGN WEALTH FUNDS AND INWARD INVESTMENT: The
Qatar Investment Authority (QIA) is believed to have at least
$60 million under management, a number that is no doubt
growing rapidly. QIA's portfolio investments in the U.S. are
not publicly known. A Treasury delegation in September 2007
raised the issue of SWF transparency guidelines with Finance
Minister Yousef Kamal and QIA Managing Director Hussein
Abdalla. Senator Bayh met with Hussein Abdalla in February
2008, noting congressional interest in the issue but without
giving a clear idea of what steps the U.S. Congress might
take. The Amir told the visiting Mayor of Houston in April
that he feared there would be "restrictions" on foreign
investment in the U.S. and said Qatar had money to invest and
was interested in investing more in the U.S. At this point,
the Qataris are likely concerned about regulations that would
discourage foreign investment in the U.S. and unsure where
the SWF issue is headed. They may be coming to grips with
the inevitability of some sort of transparency guidelines on
SWFs. Beyond the SWF issue, they found the process of
gaining CFIUS approval for the Golden Pass regasification
facility in Texas in 2006 a painful experience, one that
might dissuade them from further such investments in the
future. You could use this visit to reassure the Qataris
that foreign - including Qatari - investment is welcome in
the U.S.; explain that we are looking not at restricting SWF
investments, but rather encouraging a measure of transparency
specifically to discourage politicizing them; and review the
new CFIUS regulations and note that we had worked hard to
ensure that the Golden Pass project by Qatar Petroleum,
ConocoPhillips, and ExxonMobil was a success.

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QATAR'S ECONOMY
--------------


6. (C) Over the past three years, Qatar's economy has been
booming, fueled by growing exports of oil (soon to reach one
million barrels/day) and liquefied natural gas (Qatar is now
the largest LNG exporter in the world and has the world,s
third largest reserves after Russia and Iran). Per capita
income is difficult to measure given Qatar's squirrely
population figures, but some estimates put it at USD 60,000.
Between now and 2012, Qatar's LNG exports will more than
double, bringing a corresponding growth to Qatar's economy
and global financial clout. That wealth is driving massive
infrastructure investment, including highways, a "downtown"
that was all but non-existent four years ago, a large new
airport, and rapid expansion by Qatar Airways, including
orders for USD 12 billion in Boeing aircraft. Unfortunately,
wild economic growth is also producing 14 percent inflation
(felt most acutely in the housing market) and feeding a
demand for cheap construction labor in a country that already
has a very poor record on treatment of foreign workers.

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The Qatar Financial Center and the Unified Regulator
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7. (SBU) The GOQ will soon announce the formal consolidation
of its financial regulators into a new, single entity.
Currently, there are four separate regulators governing
financial services in Qatar: the Central Bank for banking;
the Financial Markets Authority for the capital markets; the
Ministry of Economy and Commerce for insurance; and the Qatar
Financial Center Regulatory Authority (QFCRA) for firms
licensed to do business in the three-year old Qatar Financial
Center (QFC),a parallel financial services "free trade zone"
which had 69 licensed firms at the end of 2007. Citibank,
Morgan Stanley, Goldman Sachs, and Lehman Brothers are
currently operating in the QFC, and more companies are
expected to begin operations later this year.


8. (SBU) The full transition to the new regulator will likely
take one to three years but over time will significantly
change the dynamics of Qatar's financial services sector by
allowing more competition and raising the standard of
regulation. The merging of the regulators will be the next
major step in the GOQ's gradual, multi-year liberalization of
Qatar's financial framework. Long a conservative and small
financial sector compared to its fast-paced neighbors in
Bahrain and the UAE, Qatar is becoming a magnet for financial
services, as the country garners record budget surpluses and
enjoys ever-growing corporate and personal wealth. The
liquidity associated with this new wealth has catalyzed
exponential growth in the banking sector, as local banks
enjoy record profit margins and foreign banks seek a piece of
the action.

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THE U.S.-QATAR RELATIONSHIP
--------------


9. (C) The U.S. has a lot at stake in this small country:

- Qatar hosts - with no operational restrictions or
rental costs - the U.S. Central Command's most important
military installations in the Middle East.

- U.S. energy companies have invested tens of billions of
dollars in the oil and gas industry here, and Qatar will soon
become a major supplier of imported LNG to the U.S. market.

- Utilizing its extraordinary energy wealth, Qatar has
made a commitment like few other Arab states to modernizing
it education system, adopting not only the U.S. of education,
but importing the U.S. educational institutions themselves.

- The Qatari leadership has taken important steps toward
building a society where the rule of law is respected, the
country's citizens increasingly participate in its
governance, and a healthy civil society can flourish.
- Qatar is the home of Al Jazeera, the largest Arabic
media outlet in the world with an audience of over 50 million.

- An ambitious foreign policy, which includes friendly
relations with Hamas and Syria, has often put Qatar at odds
with the USG. Meanwhile, Qatar also maintains overt and
relatively positive ties with Israel.


10. (S) A VITAL MILITARY RELATIONSHIP: Al-Udeid Air Base and
other U.S. military facilities are critical to CENTCOM
operations from Iraq to Afghanistan to the Horn of Africa.
Qatar hosts approximately 9,000 U.S. forces, some 100 U.S.
and Coalition aircraft, as well as the CENTCOM Forward
Headquarters, the Combined Air Operations Center, SOCCENT
Forward Headquarters, and other important DOD facilities.
Qatar is funding over USD 700 million in construction for the
U.S. at Al-Udeid Air Base, regularly sends military personnel
to the U.S. for training, and after years of sourcing their
military hardware in Europe, will soon be making major U.S.
defense purchases.


11. (C) A STRATEGIC PARTNER IN ENERGY: Qatar is
exceptionally friendly to U.S. energy companies and
appreciates the competence and expertise they bring to the
country's economic development. Since 1999, there has been
USD 60 billion in foreign investment in Qatar's energy sector
with the majority, about USD 40 billion, coming from U.S.
firms, including ExxonMobil and ConocoPhillips. Qatar is
also of growing importance to U.S. energy security as this
small emirate will next year become a major supplier of LNG
to the U.S. following opening of the Golden Pass terminal in
southeast Texas.


12. (SBU) COMMITMENT TO EDUCATION, RULE OF LAW, RELIGIOUS
FREEDOM: Beyond strong military and energy relationships,
there is a lot going right in Qatar,s domestic agenda.
Qatar's commitment to modernize its educational system is
exemplified by Education City, a 2500-acre campus on the
outskirts of Doha. Managed by the Qatar Foundation, the
umbrella organization chaired by the Amir's wife, Sheikha
Mozah, Education City is home to six U.S. university branch
campuses currently educating some 800 students:

- Texas A&M University (engineering)
- Carnegie Mellon University (business and IT)
- Weill-Cornell Medical School (medicine)
- Georgetown School of Foreign Service (foreign affairs)
- Virginia Commonwealth University (design)
- Northwestern University (journalism)


13. (SBU) Meanwhile, primary and secondary school curriculum
is being reformed along U.S. standards and a network of
competitive charter schools is gradually replacing out-moded
government-run schools. Rule of law, if not full
democratization, is taking root firmly, though slowly. Qatar
hosts frequent conferences on inter-religious dialogue and
Christian churches are being built on GOQ-supplied land ) a
Catholic church just opened and four others are planned.


14. (S) TROUBLESOME POLITICAL RELATIONSHIP: Since the
beginning of Operation Iraqi Freedom in 2003, the U.S.-Qatar
political relationship has soured badly, driven in particular
by Qatar's foreign policy initiatives, including high-level
engagement with Hamas, Syria, the Sudanese leadership, and
its maddening behavior on the UN Security Council from
2006-07. Qatar is also often accused of funneling money to
Hamas, though we have seen little definitive evidence that
this is happening. Meanwhile, the senior Qatari leadership
appears to have grown jealous of our relationships with
regional rivals (including Egypt, Saudi Arabia, and Jordan)
and annoyed that we don't give Qatar more attention,
including senior-level visits and visibility in our own
regional initiatives. Qatar nevertheless deserves
considerable credit for its successful effort to broker an
agreement among Lebanese factions and the recent announcement
by Qatari Diar, the real estate arm of the Qatar Investment
Authority, of a $300 million investment in housing in the
Palestinian territories.


15. (C) IRAQ: The Amir thinks we made a big mistake toppling
Saddam Hussein, but shares our view that restoration of order
and a successful democratic transition in Iraq are of
paramount importance not only to Iraq but to the region.
While the Qataris have expressed concerns about civil war in
Iraq, their officials also state publicly that the Coalition
needs to stay in the country to establish wider security.
However, a strong distaste for Iraq's Shia-dominated
government drives Qatar's resistance to follow through on
some of our priorities, including comprehensive debt
forgiveness and greater political engagement


16. (C) AL-JAZEERA: Al-Jazeera is by far the region's most
prominent media outlet and the bane of many governments in
the region, though no longer the irksome centerpiece of
U.S.-Qatari relations. The network is nearly 12 years old
with an Arabic-speaking audience of some 50 million viewers.
In November 2006, it launched an English-language channel
with a potential audience of 70 million and ambitions to
compete with the major U.S. and British satellite networks
worldwide. Since early 2006, the USG has seen a bumpy
downward trend in inflammatory anti-Western bias and
inaccuracy in Al-Jazeera's content, though biased and
inaccurate reporting continues to appear. We have also been
making more methodical efforts to get official USG voices on
the network.
RATNEY