SCENESETTER FOR DEPSEC WOLIN AND U/S HORMATS UAE VISIT

S E C R E T ABU DHABI 000055

NOFORN
SIPDIS
DEPARTMENT FOR E, NEA/FO, EEB/FO, EEB/IFD, AND NEA/ARP (MCGOVERN)
TREASURY FOR THE DEPUTY SECRETARY'S OFFICE

E.O. 12958: DECL: 2020/02/04
TAGS: EFIN ECON EINV ENRG PTER PGOV AE
SUBJECT: SCENESETTER FOR DEPSEC WOLIN AND U/S HORMATS UAE VISIT

CLASSIFIED BY: Richard G. Olson, Ambassador; REASON: 1.4(B),(D)


1. (SBU) Mission UAE looks forward to hosting Treasury Deputy
Secretary Neil Wolin and Under Secretary of State for Economic,
Energy and Business Affairs Robert Hormats in Abu Dhabi and Dubai
from February 14-16. This is a joint message from Embassy Abu
Dhabi and Consulate General Dubai




2. (S/NF) Summary: The UAE is a dynamic country that punches above
its weight in regional and international fora. We enjoy a strong
strategic partnership and shared views on many of the most
important issues of the day, including Iran, Iraq, Afghanistan, the
Israeli-Palestinian conflict, and terrorism, but also on energy,
economic, and educational issues. Senior officials have expressed
strong commitment to joint efforts to disrupt illicit financial
flows touching the UAE, and our cooperation is continuing to gather
momentum. The UAE's globalized economy, particularly highly
leveraged Dubai, has been hard hit by the global financial
downturn, and little growth is expected in 2010. However, the
country remains dynamic and is investing heavily in education and
economic diversification and citizens widely believe greater
integration will benefit the UAE economy. End Summary.



THE U.S., UAE AND THE WORLD

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3. (C) In the past five years, the United Arab Emirates has
emerged as one of the economic powerhouses of the region (our
largest export market in the Middle East) and attained a
commensurate level of political influence. No longer comfortable
hiding behind the Arab League or Saudi Arabia, the UAE's dynamic
young leadership stakes out independent positions on Afghanistan
(where UAE troops have been deployed since 2003),Pakistan, and
Iraq, and seeks a greater role on the world stage, as with its
recent success in winning the headquarters for the new
International Renewable Energy Agency (IRENA). Abu Dhabi is a
must-go stop for regional leaders like Abu Mazen, Karzai, and
increasingly for Western leaders as well.




4. (C) The Emirate of Abu Dhabi is run on a day-to-day basis by 49
year old Crown Prince Mohammed bin Zayed (MbZ),who assumed his
position in 2004. MbZ's vision for Abu Dhabi is transformational:
he wants to build a modern, knowledge based economy with a well
educated population, while conserving the core values derived from
its Bedouin heritage and its particularly moderate and tolerant
version of Islam. His primary domestic concerns, therefore, relate
to economic diversification (decreasing the importance of
hydrocarbon revenues),education (reform of the K-12 curriculum,
improving quality of schools, and removing lingering influence of
the Muslim Brotherhood) and health care (to reach a point where the
best advice for sick Emiratis is no longer to get on a plane).
These initiatives have a strongly American flavor with major U.S.
companies and institutions serving as consultants and implementers.




5. (S/NF) Internationally, the UAE is strategically aligned with
the United States and broadly sees the challenges of this region
the way we do. Abu Dhabi's primordial worry is Iran (this is
especially so for MbZ),which is 46 seconds away as measured by the
flight of ballistic missile. MbZ is convinced that a military
confrontation with Iran is near, and is pressing us for rapid
delivery of an integrated air defense system, including THAAD and
Patriots to complement an extant wing of the most advanced F-16
Fighters ever built (the UAE was the largest cash customer in 2009
for the USG under the Foreign Military Sales program). Under Abu
Dhabi's leadership, the UAE has taken quiet (very quiet) steps to
reduce other ties with Iran, including scaling back visas and
denying business permits to Iranians. We have an active and
effective partnership with Dubai authorities to stop illicit cargo
headed for Iran. Such policies can be controversial within the UAE
as they pit Abu Dhabi against the other emirates (principally
Dubai) that make their money by trade, not by pumping oil out of
the ground. Publicly, the UAE's position on Iran is more nuanced,
emphasizing non-interference and mutual respect. The gap between
public rhetoric and private action creates challenges for our Iran

policy, as does a tendency to overinterpret the U.S.
Administration's approach to engaging Iran. It is important that
you emphasize that our commitment to sanctions remains
undiminished, and that the point of engagement remains to change
Iranian behavior.



Terrorism finance

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6. (S/NF) In view of the UAE's military commitment in Afghanistan,
and its deep enmity with Al-Qaeda and Hamas, the leadership is
strongly committed to cooperate with us on curtailing any illicit
finance that may originate in or flow through UAE territory. With
our assistance, the UAE is taking steps to further scrutinize bulk
cash movements into and out of its territory, but still lacks
sufficient capacity to identify, investigate and prosecute
offenders. We will hold a major bulk cash smuggling training and
operational program in late February, which we will leverage to
pave the way for even greater intelligence and law enforcement
cooperation with the Emiratis. Your visit is an opportunity to
reiterate the high-level USG interest in greater cooperation and
exchange on illicit finance issues, which has been raised by
Secretaries Clinton, Geithner and Napolitano, as well as Amb.
Holbrooke and many other USG officials in the past six months.



Economic Outlook - A Tale of Two Cities?

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7. (C) The UAE economy (essentially Abu Dhabi and Dubai) continues
to feel the effects of the global crisis. Dubai was hit very hard
last fall when its property bubble popped, and it faces a
substantial debt burden (well over 100 percent of Dubai's GDP) that
will require careful management for years to come. Abu Dhabi
initially thought itself less likely to be affected, but the pinch
has become apparent here within the past nine months. Dubai style
layoffs and project cancellations or delays have occurred in Abu
Dhabi, even as the high profile projects will continue, albeit more
slowly. The International Monetary Fund recently predicted zero
percent growth in 2010, largely as a result of Dubai's significant
drag on the national economy. However, despite relatively stable
oil prices, Abu Dhabi entities are also more conservative. The
lavish spending of recent years has been cut dramatically partly
due to a more conservative approach, but also Abu Dhabi firms,
especially parastatals, have been systematically ordering price
cuts by contractors. Many fear there will be little growth unless
additional fiscal stimulus materializes. Although lending rates
have fallen due to strong Central Bank pressure, banks and private
sector firms continue to report credit conditions remain tight and
limit recovery.




8. (C) Dubai continues to attempt to deleverage and restructure a
significant load of its outstanding debt obligations. The IMF's
low growth rates are largely based on expected contraction in
Dubai's real estate sector and a persistent liquidity crunch due to
shell shocked and impaired Dubai banks. The overall struggles seen
in Dubai's real estate and banking sectors have also been
exacerbated by uncertainty about the progress and transparency of
current restructuring efforts at Dubai World and other Dubai
government related entities (GREs). Investors remain concerned
about Dubai's credit worthiness and the cost of borrowing - if
available - remains significantly high. Some Dubai entities -
including Ruler Sheikh Mohammed Bin Rashid's wholly owned Dubai
Holding conglomerate and Emirates NBD, the UAE's largest bank by
assets - have cut ties with international ratings agencies like S&P
following unfavorable downgrades. Observers predict it will take
years for Dubai to recover from the debt burden and loss of
confidence, even as in many ways the Emirate continues to serve as
a regional logistics, tourism and financial hub.


9. (C) Despite appearing to be a modern economy on the surface, in
many ways local regulations are outdated, inefficient and poorly
enforced. When the economy was booming in the middle of the last
decade, few cared that the regulatory framework was not keeping up.
Today, although many recognize policies must be modernized, reform
remains a slow and nontransparent process. Bankruptcy law, capital
markets regulation and the real estate sector all require
significant revisions, but, to date, there are few indications the
rumors of change are accurate.



ENERGY - THE PAST AND THE FUTURE

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10. (C) Dubai's service based economic model is relatively new and
unique, as most of the UAE's development, particularly in the
Emirate of Abu Dhabi, was funded by oil revenues. The hydrocarbon
sector was developed years before the UAE was established in 1971
and allows the government of this small country the wealth to
provide its population with a high standard of living. Abu Dhabi
exports about 2.2 million barrels a day of oil, primarily to Far
Eastern markets (none to the U.S),and is investing heavily to
raise production capacity from the current 2.8 mbd to 3.5 mbd by

2015. Although the UAE exports about 4 billion standard cubic feet
a day (scfd) of gas, the UAE's gas deposits are largely associated
and a significant portion of production is reinjected for enhanced
oil recovery. The relative shortage of gas is problematic, as
domestic production is insufficient to power the UAE's rapid
economic development. In 2001, the UAE, through its Offsets Group,
entered into a long term gas deal (Dolphin Energy) with neighboring
Qatar and today imports 2 billion scfd via a pipeline designed to
deliver 3.2 billion scfd. Dolphin Energy, partially owned by the
government of Abu Dhabi, would import more gas if Qatar's current
gas moratorium were lifted.




11. (C) In 2007, Abu Dhabi Emirate began a study of the UAE's long
term electricity needs and determined that the UAE would be unable
to produce enough gas or develop sufficient renewable capacity to
meet growing demand. After dismissing oil and coal as
environmentally unfriendly, Abu Dhabi determined that nuclear power
would best serve the Emirate's long-term electricity needs.
Recognizing that nuclear power in the Gulf region would be
disconcerting to many, the UAE choose to publically renounce
uranium enrichment and reprocessing (ENR). In addition to
codifying this policy in the US-UAE 123 Agreement, which was
brought into force on December 17, the UAE's October 2009 nuclear
law also bans ENR. The program has moved quickly and, in December
2009, Abu Dhabi awarded a tender for the UAE's first four nuclear
power plants to Korea's KEPCO, whose remarkably low price beat out
GE/Hitachi and France's AREVA.




12. (C) Concurrently, Abu Dhabi is also investing heavily in
renewable energy. The government set a target to produce 7 percent
of total electricity demand from renewables by 2020, an effort led
by Masdar, the Abu Dhabi Future Energy Company, which is owned by
Mubadala. Masdar has four main divisions: Masdar Power, Masdar
Carbon, Masdar Sustainable Cities and Masdar Institute. The first
invests in renewable technologies, the second supports the
reduction of carbon emissions, the third develops model
zero-carbon, zero-waste cities, like Masdar City in Abu Dhabi, and
the last promotes research, through a partnership with MIT. The
selection of Abu Dhabi to host the new International Renewable
Energy Agency (IRENA) in June 2009 is in part demonstrative of
Masdar's success. While in many ways the company is pushing the
limits of current renewable technology, the effort is noteworthy
and is increasingly attracting regional and global interest in
renewables. The similarity between UAE efforts and those under the
Obama Administration has paved the way for greater US-UAE energy
cooperation, including planned DOE-Masdar collaboration on
renewable energy research, technologies and application.



INVESTMENT AND SOVEREIGN WEALTH FUNDS

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13. (SBU) Thanks to high oil prices and a miniscule population, UAE
institutions are major foreign investors, with the Emirate of Abu
Dhabi's leading sovereign wealth fund (SWF),the Abu Dhabi
Investment Authority (ADIA),generally recognized as one of the
world's largest SWFs by assets. Since its establishment in 1976,
ADIA has followed a largely passive, diversified, long-term
strategy. Since, constitutionally, natural resources belong to the
individual emirates rather than the UAE as a whole, SWFs and other
investment vehicles are emirate-level rather than federal-level
organizations. Abu Dhabi officials have consistently assured us
that the Abu Dhabi Government would never use its foreign
investments as a foreign policy tool and provided details overviews
of their investment principles and allocation strategies. ADIA and
Government of Abu Dhabi officials worked closely with the Treasury
Department and the Government of Singapore to develop the "Santiago
Principles" for SWFs and for countries receiving SWF investment.




14. (C) Although ADIA is a largely passive, portfolio investor,
other UAE investment organizations and State-owned enterprises take
larger active stakes in overseas investments, particularly in
global energy assets. Abu Dhabi's Mubadala has invested in
aerospace technologies, manufacturing, health and energy assets and
partnerships, both domestically and internationally.
Government-owned International Petroleum Investment Corporation
(IPIC) has made both domestic and international investments in
refineries, pipelines, and other production facilities. These are
just a few of the billions of dollars of UAE investments abroad,
which include real estate, financial sector, and automotive assets,
to name only a few. DP World's ultimately failed 2006 attempt to
purchase P&O's U.S. assets is still a fading source of local
resentment, although UAE-based government-owned investors have
subsequently made several high-profile acquisitions in the U.S. In
your conversations with UAE officials, you may still hear concerns
about "political risk" premiums for foreign investment in the U.S.



BILATERAL TRADE - STRONG BUT STATIC?

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15. (C) Success of bilateral commercial relationship (always one of
the strongest in the region) means there is little interest from
the UAE in expanding ties through a Free Trade Agreement, or even
the existing Trade and Investment Framework Agreement (TIFA). Our
efforts to negotiate a Free Trade Agreement ended about 2 years
ago, reflecting a lack of consensus on key issues (investment in
UAE energy sector, local agent rules for US companies, and UAE
compliance with international labor standards). The UAE's current
approach is to seek bilateral liberalization in discrete sectors,
as UAE private sector remains strongly opposed to greater
liberalization that would benefit foreign firms, but have little
upside for Emirati businesses. While some give lip service to an
interest in greater trade and investment policy coordination and
cooperation, there is no indication this is a high priority for
federal or local governments.
OLSON