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