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