SCENESETTER FOR SECRETARY PAULSON'S MAY 31-JUNE 1

S E C R E T SECTION 01 OF 04 KUWAIT 000604

NOFORN

SIPDIS

TREASURY FOR SECRETARY PAULSON FROM AMBASSADOR JONES

///// C O R R E C T E D C O P Y -- NOFORN ADDED /////

E.O. 12958: DECL: 05/05/2018
TAGS: ECON EFIN PREL PTER KTFN KU
SUBJECT: SCENESETTER FOR SECRETARY PAULSON'S MAY 31-JUNE 1
VISIT TO KUWAIT

REF: 07 KUWAIT 0563

KUWAIT 00000604 001.2 OF 004


Classified By: Ambassador Deborah Jones for reasons 1.4 (b) and (d)


1. (C) Secretary Paulson, Embassy Kuwait welcomes you, Mrs.
Paulson, and the members of your delegation to Kuwait. While
we have requested meetings with the Amir and senior Kuwaiti
leadership, we are able at this time to confirm only the
Central Bank Governor, Kuwait Investment Authority Managing
Director, and a roundtable with private investors.
Unfortunately your visit coincides with the June 1 opening
session of Kuwait's new Parliament, elected on May 17. This
day of high-profile domestic politics poses a major
scheduling challenge: the Amir and Finance Minister have
both conveyed regrets that they will not be able to meet with
you, and at this point the Foreign Minister also appears
doubtful. Nevertheless our agenda for your visit --
Sovereign Wealth Fund (SWF) best practices, Kuwaiti
investment in the U.S., terrorism finance issues, GCC
monetary policy, Kuwait-Iraq relations, and financial issues
relating to Iran -- is a compelling one, and we are eager to
go forward with the program we have. We have a separate
program for Mrs. Paulson that we believe she will find both
informative and enjoyable.


2. (C) The Prime Minister is in the process of selecting his
new Cabinet, which will take the oath of office along with
the elected Members of Parliament on June 1. We expect a
number of changes to the Cabinet line-up including, perhaps,
the replacement of Finance Minister Al-Shimali; but the
position of the Foreign Minister seems secure. We are
waiting to see if a new Parliament and a new Cabinet will
mean a break in the domestic political deadlock that has
contributed to the Government's failure to implement a slate
of long-overdue economic reforms and new anti-terrorism
legislation. Unfortunately, aggressive and confrontational
public statements made by some of the newly elected MPs
suggest that domestic political bickering and the GOK,s
resulting policy paralysis are likely to continue.

--------------
Government-Parliament Tensions
--------------


3. (C) On March 19 an Amiri decree dissolving the National
Assembly relieved the protracted gridlock between the
Government and Parliament. This dissolution had been widely
anticipated in Kuwait, in particular after the entire cabinet
offered its resignation on March 16, to PM Shaykh Nasser Al
Sabah, citing a lack of cooperation from MPs that had
"undermined national unity and security." The move came
after many months of head-butting between Cabinet and
Parliament, resulting in stalled legislation, Cabinet
reshuffles, and the resignation of five government ministers
within the past year, and was generally viewed as a relief
from the ongoing political turmoil. New elections were held
on May 17. Of the 50 members of the new Parliament, 28 were
re-elected from the previous Parliament. Although Islamists
increased their representation, the overall distribution of
seats among the various blocs and factions, with Islamists
and conservatives in the majority, remains largely the same.
Women, in their second opportunity to compete in general
elections were once again unsuccessful in winning any seats.
The Cabinet resigned on May 19 and now serves as a caretaker
government until first session of Parliament on June 1, when
the new Cabinet (appointed by the Amir) will take the oath of
office along with the elected MPs. Changes to the Cabinet
are likely. We do not expect the outcome of this election to
have any significant effect on Kuwaiti foreign policy or its
relations with the U.S.

--------------
Regional Issues: Iran and Iraq
--------------


4. (C) Concerns about Iran remain at the top of the Kuwaiti
security agenda. The GOK has supported the GCC statement
that Iran has a right to peaceful nuclear power, as well as
the GCC initiative to develop its own civil nuclear power
program. However, the GOK has publicly expressed
environmental and safety concerns over the development of the
Bushehr reactor, which is located less than 150 miles from
Kuwait's border. The former Minister of Defense has publicly
stated on more than one occasion that Kuwait will not allow
the use of its territory to launch a military strike against
Tehran. Kuwait is still in the process of implementing UNSCR
1803 sanctions against Iran and has not yet provided a
response to the UNSCR 1737 Sanctions Committee.

KUWAIT 00000604 002.2 OF 004




5. (C) Kuwait and Iraq are slowly building a diplomatic and
economic relationship. Iraqi President Talabani visited
Kuwait in November 2007 to discuss prospects for opening an
embassy in Baghdad and a consulate in Basra, forgiveness of
Iraqi sovereign debt dating back to the Iran-Iraq War,
reduction or suspension of UN Compensation Commission
payments from the Iraqi invasion of Kuwait, disbursement of
Kuwait's grant of USD 60 million for humanitarian aid,
resolution of border demarcation issues, and bilateral trade
and investment. Iraq and Kuwait signed a memorandum of
understanding for Iraq reconstruction, and President Talabani
briefed the Kuwait Chamber of Commerce and Industry (KCCI) on
investment opportunities. Six months later, we have seen no
progress on any of these issues. The GOK refuses to bend, at
least for now, on outright debt forgiveness or UNCC payment
reductions; the Kuwaitis won't send an Ambassador to Baghdad
until the GOI sends one to Kuwait; and the Kuwait Fund for
Arab Economic Development and most private Kuwaiti investors
say that the security situation and rampant corruption
prevent them from funding projects in Iraq. The Amir told
President Bush in January that Kuwait's borders are open to
Iraqi goods, but the opposite remains true. Kuwait hosted a
modest Basrah Economic Development Conference in March 2007,
but continues to refuse Iraqi imports and restricts visas for
Iraqi businessmen. On a positive note, the Iraqi Finance
Minister's visit to Kuwait this week may produce progress on
Iraq Airways' long-standing debt to Kuwait Airways, and
Kuwait hosted the April 22 Iraq Neighbors Conference which
was attended by Secretary Rice.

-------------- --------------
GOK/KIA/CBK attitudes towards SWF best practices
-------------- --------------


6. (C/NF) Though KIA continues to express skepticism, the
GOK is willing to engage in further dialogue on SWF best
practices, drawing on previous discussions in late 2007 with
U/S McCormick and then-DAS Saeed. KIA Managing Director
Bader Al-Sa'ad continues to resist, as evidenced by his April
9 speech at the First Luxembourg Foreign Trade Conference and
his May 19 interview with Der Spiegel. Al-Sa'ad has
suggested taking a bilateral approach based on reciprocity.
He continues to proclaim that SWFs do not cause instability,
pointing out that they are focused exclusively on long-term
financial returns. He argues that U.S. concerns are being
driven by China, and German concerns by Russia. Should he
retain his position as Finance Minister, Mustafa Al-Shimali
may be more open to SWF best practices, but his specific
position on this issue is still unknown to us. Central Bank
Governor Shaykh Salem Al Sabah is more positive about
collaborating with the IMF on this issue and says that he is
open to further dialogue.

--------------
CT Cooperation
--------------


7. (S) Your visit to Kuwait will offer an important
opportunity to reaffirm the USG's goals and priorities in
combating terrorist financing and money laundering (CTF/AML).
The GOK has proven to be a generous and reliable ally in
support of our efforts in Iraq, but the GOK's level of
cooperation on CT issues has been disappointing in a number
of areas (reftel). Kuwait offers both challenges and
opportunities in our CTF/AML efforts. The embarrassment that
Kuwait suffered as a result of the three recently reported
Kuwaiti suicide bombers in Mosul has put new pressure on the
GOK to take a more aggressive stand against Kuwaiti
extremists.


8. (S) On January 30, we informed the GOK of the UNSCR 1267
Committee's decision to designate Kuwaiti nationals Hamid
Al-Ali, Jaber Al-Jalamah, and Mubarak Mushakhas Al-Bathali as
terrorist facilitators and reminded the GOK of its obligation
to freeze the assets of these three individuals. While long
overdue, on May 12, officials from Kuwait's Central Bank
confirmed that they had frozen the accounts of the three
terrorist financiers upon instructions from the MFA. Bathali
is currently under detention following a local newspaper
interview in which he admitted to inciting young Kuwaitis to
fight in Iraq and Afghanistan.


9. (S) There has been some improvement in the GOK's
regulation of the domestic collection activities of Kuwaiti
charities, but we remain concerned about the activities of
overseas branches of some Kuwaiti charities especially the
Revival of Islamic Heritage Society (RIHS). On May 12 the GOK

KUWAIT 00000604 003.2 OF 004


was notified of USG intentions to domestically designate RIHS
and seek a UNSCR 1267 Committee designation by the end of
May. The GOK maintains there is insufficient evidence to
justify a UNSCR 1267 designation of RIHS and insists that the
USG must provide substantial additional evidence of RIHS's
ties to terrorism before the GOK can support a designation.
The GOK remains protective of all its Islamic charities and
feels, rightly, that a UN designation of RIHS would be a
tremendous embarrassment to Kuwait. The GOK has also
expressed the belief that the work of RIHS, among other Sunni
charities, helps to fend off Iranian incursions overseas.


10. (C) The USG continues to provide technical assistance
and training to the GOK on money laundering and the
monitoring of illicit funds. The Central Bank of Kuwait
hosted a conference on anti-money laundering and terror
finance on December 2-3 attended by over 400 professionals
from government, law enforcement, and the banking sector.
From March 31-April 2, 2008, the Central Bank of Kuwait (CBK)
in cooperation with Treasury and Justice hosted a Financial
Intelligence Unit (FIU) Implementation Seminar. The
three-day event was attended by 53 GOK officials including
representatives from the Central Bank (CBK),Ministry of
Interior (MOI),Ministry of Justice (MOJ),Ministry of
Commerce and Industry (MOCI),and the Public Administration
of Customs. The conference was organized pursuant to the
GOK's request for technical assistance in anti-money
laundering/combating the financing of terrorism (AML/CFT)
with the goal of creating an FIU that meets international
standards. The GOK welcomes continued USG technical
assistance to improve its AML/CFT operations. We should
continue to offer new training and assistance opportunities
as part of our bilateral CT efforts.


11. (C) The GOK's National Committee to Combat Money
Laundering and Terrorist Financing, chaired by the Governor
of the Central Bank, is in the final stages of revising
Kuwait,s 2002 AML law. The new law is expected to
criminalize the financing of terrorism, strengthen the
Kuwaiti FIU to ensure Egmont Group eligibility, permit
financial institutions to refer suspicious activity reports
directly to the FIU instead of the Public Prosecutor, and
strengthen currency declaration policies. The GOK has not
yet taken us up on our offer to review the final draft of the
new law. We do not know when the GOK intends to present the
law to the National Assembly for approval.

--------------
Kuwaiti Investment in the U.S.
--------------


12. (C) Although we do not have the ability to directly
track private Kuwaiti investments in the U.S., we have not
heard any private Kuwaiti investors express grave concerns
over the dollar, the subprime crisis, the long-term strength
of the U.S. economy, or rising protectionism of a degree that
would drive them to divert their investments elsewhere. KIA,
despite its stated aversion to the SWF best practices scheme,
seems no less enthusiastic about the U.S. as a destination
for its investment dollars, as evidenced by the positions it
took it Merrill Lynch and Citigroup last year. Kuwait
Petroleum Corporation has, however expressed concerns over
the risks posed to its U.S. assets by anti-OPEC legislation.
As KPC's proposed USD 9.5 billion investment in a joint
petrochemical venture with Dow Chemical Company begins to
make its way through the recently revamped CFIUS process,
Kuwaiti investors will be watching closely for any signs of
protectionism or perceived discrimination.

--------------
GCC Monetary Union/Dollar De-peg
--------------


13. (C) In May 2007, Kuwait's Central Bank dropped the
dollar peg to gain more monetary policy flexibility and
tackle inflation. The dinar has risen by approximately eight
per cent against the dollar since then. Despite de-pegging,
Kuwait continues to suffer from rising inflation, albeit less
than some of the other GCC countries which retained their
dollar pegs. In January, the Central Bank reported a 9.5
percent year-on-year rise in its consumer price index.
Regarding the implications of de-pegging on the prospects for
GCC monetary union, the Kuwaitis have said that the adoption
of a single currency was still desirable but not likely to
happen by the 2010 target. GOK officials remain committed to
their exchange rate basket. Central Bank Deputy Governor Dr.
Nabeel Al-Mannae said in late 2007 that, although all the GCC
member states are convinced that a monetary union is better

KUWAIT 00000604 004.2 OF 004


in the long-term, monetary integration by 2010 was an overly
ambitious goal. He would not venture a guess as to when GCC
monetary union might become possible.

********************************************* *
For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s

Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************* *
JONES