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. -------------- 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. -------------- -------------- The Qatar Financial Center and the Unified Regulator -------------- -------------- ¶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. -------------- 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