TREASURY SECRETARY GEITHNER MEETS WITH SAUDI

S E C R E T RIYADH 000985

NOFORN
SIPDIS

TREASURY FOR DAVID COHEN AND ANDREW BAUKOL
TREASURY ALSO FOR SARA AVIEL

E.O. 12958: DECL: 07/21/2019
TAGS: ECON EFIN EINV PREL KTFN KWBG SA
SUBJECT: TREASURY SECRETARY GEITHNER MEETS WITH SAUDI
FINANCE MINISTER AL ASSAF

Classified By: CDA Richard Erdman for reasons 1.4 (B) and (D)


1. (S) Summary: On July 14, Treasury Secretary Timothy
Geithner met with Saudi Finance Minister Ibrahim Al Assaf in
Yanbu, Saudi Arabia. They discussed issues of mutual
interest, including recovery of the global economy, the
riyal-dollar peg, illicit finance, cooperation at the G-20
and IMF, and the price of oil. Assaf was joined by Deputy
Finance Minister for Economic Affairs Dr. Hamad Al Bazai, and
Deputy Governor of the Saudi Arabia Monetary Agency Dr.
Abdulrahman Al Hamidy. The Secretary was accompanied by
Charge d'Affaires Ambassador Richard Erdman, Assistant
Secretary for Terrorist Financing and Financial Crimes David
Cohen, Acting Assistant Secretary for International Affairs
Andrew Baukol, Deputy Treasury Attache Amanda Edwards, and
Special Assistant to the Secretary Sara Aviel. End summary.

GLOBAL RECOVERY: PACE OF DECLINE
IS SLOWING, BUT "TOO SOON TO RELAX"
--------------


2. (S) Geithner described his priorities as: 1) slowing the
force at which the economy was falling and 2) restoring
financing stability. He discussed the modestly encouraging
signs that the global crisis was receding. He indicated the
pace of decline in the United States had slowed to one to two
percent in the second quarter of 2009 and that we expected
modest but positive growth in the second half of the year.


3. (S) While noting that the recovery would be "bumpy,"
Geithner stated that business and consumer confidence had
begun to "churn" as a result of international cooperation.
He emphasized that recovery required that "the world move in
concert" on fiscal stimulus and financial stability programs.
He applauded the large infrastructure projects under
development in the Kingdom.


4. (S) Referring to Saudi Arabia's conservative regulatory
strategy that had shielded the Kingdom from the worst of the
global recession, the Secretary said the U.S. was trying to
become "more Saudi" by being more cautious moving forward and
using less leverage. That said, Geithner stressed that
recovery would be slower than normal and that confidence is
fragile.


5. (S) Assaf described the economic situation in the Kingdom,
noting that the oil sector was pulling down growth but it was
difficult to say by how much. Oil-price volatility remained
a concern, and it would be important to regulate
non-commercial oil contracts so prices would reflect
fundamentals, not speculative activity. Assaf said they were
working to increase investment and production both upstream
and downstream. Specifically, they were at an advanced stage
of a joint venture project to build what will be the largest
oil refinery in the world.


6. (S) Assaf indicated that the Saudi government (SAG) was
deferring collection of taxes and royalties as an investment
incentive for Aramco to increase production. The Secretary
shared with Assaf that the U.S. had not found a "good way" to
limit oil-price volatility. If the Minister had ideas on
this, we would welcome them. Assaf said any steps that would
prevent bubbles would be welcomed. Geithner said that it
would be positive for the global recovery if oil prices did
not rise further, whether from speculation or OPEC production
cuts. Assaf commented that the King had stressed $75 per
barrel as a reasonable oil price that would protect both
consumers and producers and that the world now seemed to be
converging toward that price.


7. (S) Later in the conversation, Assaf shared his optimism
that he was hopeful the global economy would turn around by
the end of the year, but noted that "some weren't so
optimistic." He believes the Kingdom's conservative policies
are what saved them from the downturn others have
experienced. When asked about inflation, Assaf said that
inflation was currently around 5.2%, but that he would like
to see it lower. (Note: Inflation was at eleven percent in

2008. End note.)

THE DOLLAR AND OPEN INVESTMENT
--------------


8. (S) Assaf said "we still believe that the dollar will be
the dominant reserve currency and trading currency for a long
time to come." Our policy, he continued, is to support this
and maintain the riyal-dollar peg. The Secretary said the

U.S. appreciated Saudi Arabia's continued support. He noted
that, despite some political talk of moving away from the
dollar, China has in fact increased its dollar holdings and
had confirmed that shifting from the dollar was not its
policy. Assaf said the Kingdom encouraged foreign investment
on both sides -- U.S. investment in Saudi Arabia and vice
versa. We needed to work on this in Saudi Arabia, he said,
establishing principles and legal framework, and were
organizing a conference toward this end. Geithner said we
share a commitment to open investment.


9. (S) On the dollar, the Secretary indicated it was
benefitting from the flight to quality and emphasized the
U.S. commitment to a strong dollar. The USG was dedicated to
reversing the exceptional measures it had taken in the
financial sector once recovery was self-sustaining. It was
important to avoid the mistakes of the past by putting on the
brakes too soon, thereby setting back economic recovery.
(Note: In a subsequent conversation with the Charge, Assaf
said he was in full agreement with this approach. End note.)

COUNTER-TERRORIST FINANCE COOPERATION
--------------


10. (S) Assaf raised raised the issue of fighting terrorism,
including terrorist financing, and emphasized this was an
important area of cooperation. The U.S. and Saudi security
services were working closely together on these issues, and
the King was committed to supporting this effort 100%. In
this regard, our active exchange of information would
continue, he promised, while expressing disappointment that
they sometimes received negative messages from "financial
institutions" indicating a concern about doing business with
the U.S. due to our sanctions programs.


11. (S/NF) The Secretary expressed appreciation for the level
of cooperation, while noting there was more to do and
concerns remained in some areas. He cited, in particular,
our concern that funds from Saudi Arabia were still finding
their way to terrorist organizations outside the Kingdom.
The Secretary emphasized that need to expand the net
continuously so that the terrorists and their supporters
could not find a way around our measures to prevent such
financing. Assaf stressed we should handle these issues in
security channels when there is intelligence. "We don't want
money going abroad to fund terrorism," he said, noting that
the presence of over a million Pakistanis in the Kingdom
complicated efforts. Geithner said Treasury sought to ensure
there was close cooperation between the intelligence
communities.

ABN AMRO
--------------


12. (S) Assaf turned to a regulatory issue surrounding ABN
Amro -- a financial institution fined by U.S. regulators in
2005 for its dealings with Iranian beneficiaries. ABN Amro's
40% ownership of a Saudi bank -- Saudi Hollandi Bank (SHB) --
had reportedly caused difficulties for the local bank. Assaf
contested that SHB was uninvolved in ABN Amro's Iran dealings
and the Saudis were trying to resolve the issue with the U.S.
Department of Justice. Deputy Governor Hamidy noted that was
not helpful to politicize issues around financial
institutions. Geithner promised Assaf he would look into the
issue, as appropriate.

FINANCIAL REFORM, IMF, AND G-20
--------------


13. (S) On the G-20, Geithner outlined that the G-20 agenda
should include: 1) stock taking on the global economy, 2)
moves to push ahead with financial reforms, 3) a review of
IMF resources and governance, 4) strategies to ensure more
balanced global growth going forward, and 5) more on trade
and climate. The G-20, Geithner said, was a useful mechanism
and it would be more effective with Saudi participation. On
King Abdullah's attendance at the G-20 in Pittsburgh, Assaf
shared that they are still working on his attendance, but
that the meeting coincided with the opening of the King
Abdullah University for Science and Technology. (Note: The
King subsequently told Geithner he would not attend. End
note.)


14. (S) Turning to the IMF, the Secretary noted that Congress
had approved our contribution to the New Arrangements to
Borrow (NAB). We saw the NAB as a way to catalyze governance
reforms at the IMF. Geithner said the U.S. was "completely
committed," but that Europe was not yet ready to think about
reforms. Assaf welcomed the reform process and said Saudi
Arabia believed, as part of this, that "some countries"
needed a greater "say" in IFI decision-making. In
determining new quotas, both a country's willingness and
ability to play a helpful role needed to be taken into
account. Saudi Arabia, he added, would continue its support,
but this would become "harder and harder" if the Kingdom's
quota share was reduced.


15. (S) The Secretary said that our basic strategic judgment
was that China and the other emerging economies wanted
strengthened financial institutions and needed to have
greater investment in these institutions. Assaf said China
definitely deserved an increased quota, but some others did
as well. If they didn't see their quotas increased, he
cautioned, they would move away from multilateral to
bilateral solutions.

GCC CURRENCY REGIME
--------------


16. (S) Geithner and Assaf briefly spoke about the GCC
monetary union. Assaf did not believe that it would be
possible to reach the goal of establishing a GCC currency
regime by 2010, particularly now that there are only four
economies willing to participate instead of five. (Note: This
is a reference to the UAE pull out from the monetary union.
End note.)

REGIONAL ISSUES
--------------


17. (S) In a separate session, Secretary Geithner expressed
appreciation for the Kingdom's efforts to support key
regional players, such as the Palestinian Authority,
Afghanistan and Pakistan. He inquired about the Kingdom's
plans to disburse funding to the Palestinian Authority,
noting that the U.S. disburses funds directly to the PA
budget. Assaf noted that the Kingdom continues to provide $7
million per month in budget support and has large additional
funds allocated to project financing. The project funds,
however, would not move quickly given difficulties on moving
projects forward.


18. (U) This message was cleared by Secretary Geithner's
staff.
RUNDELL