VZCZCXYZ0000
RR RUEHWEB

DE RUEHNY #0400/01 0901241
ZNR UUUUU ZZH
R 311241Z MAR 06
FM AMEMBASSY OSLO
TO RUEHC/SECSTATE WASHDC 3713
INFO RUEHCP/AMEMBASSY COPENHAGEN 2042
RUEHHE/AMEMBASSY HELSINKI 7777
RUEHFR/AMEMBASSY PARIS 0895
RUEHRK/AMEMBASSY REYKJAVIK 0668
RUEHSM/AMEMBASSY STOCKHOLM 2809
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBS/USEU BRUSSELS

UNCLAS OSLO 000400 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
PARIS FOR OECD 
COMMERCE FOR 4212 MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: ECON EPET EFIN NO
SUBJECT: AMBASSADOR'S VISIT TO NORWEGIAN CENTRAL BANK: 
STRONG ECONOMY, RICH PENSION FUND, TROUBLING BLACKLIST 
 
 
SUMMARY 
- - - - - 
 
 ¶1.  (SBU) On March 28, Ambassador Whitney and Pol/Econ 
Officers visited the Norwegian Central Bank (Norges Bank), 
meeting with Central Bank Governor Svein Gjedrem, Deputy 
Governor Jarle Bergo and Knut Kjaer, Executive Director of 
the Pension Fund (formerly the Petroleum Fund).  Discussions 
centered on the Central Bank's role in the economy, the 
Norwegian economy's recent strong performance, and an 
overview of the Pension Fund, with the Ambassador expressing 
strong concern over the Fund's disproportionate 
"blacklisting" of U.S. companies.  According to the Bank 
officials, Norway's expansionist economy continues to roll 
ahead, fueled by high oil prices that have put the Pension 
Fund over the $200 billion mark.  Through the Pension Fund, 
which accumulates tax revenues from the petroleum sector, 
Norway hopes to leave a legacy to future generations after 
the resources are depleted.  As the Ambassador stressed, 
however, the Fund's divestment of investments in sixteen 
firms, ten of which are American, on ethical grounds is 
troubling.  Fund Executive Director Kjaer himself has mixed 
feelings about the divestments, on the one hand striving to 
maintain the broadest possible investment options but, on the 
other, defending the Norwegian "consensus" that certain 
corporate behavior, e.g. cluster bomb production, is 
unethical.  The Ambassador also encouraged the Bank's already 
active involvement in transparency and other initiatives to 
assist resource-rich developing nations in managing their 
wealth responsibly.  End summary. 
 
PETROLEUM-RICH NORWAY IN ENVIABLE ECONOMIC POSITION 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶2.  (SBU) Governor Gjedrem told the Ambassador that the 
Central Bank had three core responsibilities:  establishing 
monetary policy and setting interest rates, managing the 
Pension Fund, and overseeing the financial sector's payments 
system, including acting as lender of last resort and 
ensuring liquidity to the financial markets.  The bank had 
reduced its work force in the last several years, partly due 
to closure of regional offices and outsourcing of currency 
printing.  The Bank was led by a Board of Governors 
consisting of the Governor, Deputy Governor and five external 
members (currently two economics professors and three 
business community members). 
 
¶3.  (SBU) Gjedrem emphasized that Norway's economy remained 
robust, stimulated by low interest rates (directed by an 
inflation target of 2.5 percent) and strong domestic growth 
(including sectors outside of the prosperous oil industry). 
The petroleum sector generated 25 percent of Norway's GDP, 
though it employed only a very small percentage of the labor 
force.  Gjedrem also noted that Norwegian per capita income 
was extremely highly (roughly $55,000-$60,000 per person). 
 
GOVERNMENT PENSION FUND AMONG THE WORLD'S RICHEST 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶4.  (SBU) Gjedrem told the Ambassador that the government's 
tax take of petroleum sector profits was effectively 60-70 
percent, all of which went directly into the Government 
Pension Fund.  The Fund, currently valued at about $210 
billion, was invested entirely abroad, 40 percent in equities 
and 60 percent in fixed-income securities.  The projected 
strength of the Fund is staggering -- with increases forecast 
at $50 billion per year for another 4-5 years if high oil 
prices hold, the fund will equal Norway's entire GDP 
(currently about USD 260 billion) by 2008 and reach twice GDP 
by 2015.  The Fund's real return (currently about 4 percent) 
was given over to the government's budget, while capital was 
preserved for future generations.  Gjedrem stressed that the 
Fund was strictly apolitical, so it did not invest 
domestically in spite of many demands to do so.  He said 
Norway was committed to avoiding the mistakes of countries 
that earned resource-based "easy money" only to see their 
national competitiveness undermined, citing such historical 
examples as a massive, but destructive, New World gold influx 
to 16th century Spain and wastage of billions of petrodollars 
by oil-rich Middle Eastern states in the 1970s and 1980s. 
 
Over-reliance on natural resources led to many failures, 
including an inability to produce goods and services, 
imprudent investments, or over-building the welfare system. 
Demographics posed the key future challenge for the Pension 
Fund, as an aging Norwegian population would place greater 
demands on the welfare/pension system. 
 
CONCERNS ABOUT PENSION FUND'S "BLACKLISTING" OF U.S. FIRMS 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
 
¶5.  (SBU)  Background on Pension Fund "Blacklist":  In 2004, 
the Ministry of Finance adopted ethical guidelines for 
Pension Fund investments that require the Central Bank to 
exclude investments in (or divest itself from) companies that 
engage in certain activities (e.g. production of cluster 
bombs and nuclear weapons) or that violate "fundamental 
ethical norms."  Over the last year, the Ministry has 
instructed the Central Bank to divest shares in 16 companies 
- 10 of which are American.  The U.S. companies affected are: 
Boeing, Honeywell, Northrup Grumman and United Technologies 
(for alleged involvement in nuclear weapons production); 
Lockheed Martin, General Dynamics, Raytheon, L3 
Communications and Alliant Techsystems (for alleged 
production of cluster bomb components); and Kerr-McGee (for 
concluding an oil concession deal with Morocco covering the 
disputed territory of Western Sahara).  The total 
disinvestment in U.S. firms amounts to $853 million.  The 
other six blacklisted firms are European.  The Embassy has 
been working with the American Chamber of Commerce and a 
number of concerned companies to address the blacklisting 
issue.  We have gained informal assurances from the Ethics 
Advisory Council that it is not considering divestment from 
U.S. petroleum firms operating in Norway, though other, 
smaller Norwegian investment funds have blacklisted some 
(mainly for alleged bribery in Equatorial Guinea). 
 
¶6.  (SBU) The Ambassador raised concerns about blacklisting 
American companies in a separate meeting with Pension Fund 
Executive Director Kjaer.  The Ambassador said labeling 
companies "unethical" was problematic and put Norway on a 
"slippery slope."  He noted, for example, that the Norway was 
pushing hard for more Joint Strike Fighter project contracts 
from Lockheed Martin, a company branded as unethical by the 
Pension Fund.  The Kerr-McGee case was another troubling 
example, as the firm seemed to be blacklisted for purely 
political reasons, i.e. its agreement with Morocco to explore 
for petroleum offshore the disputed territory of Western 
Sahara. 
 
¶7.  (SBU) Kjaer demurred, asserting that the Ministry of 
Finance made the ethics decisions, while the Fund's managers 
were concerned only with financial operations.  He clearly 
had mixed feelings about the ethical guidelines, noting that 
the Bank preferred having "as big an investment universe as 
possible" and that he personally favored a "high threshold," 
particularly given there were difficult "borderline" issues 
involved.  On the other hand, Kjaer asserted there was 
"widespread consensus" in Norway about the exclusions and 
that it was "perfectly legal and acceptable" to deny support 
to companies that, for example, manufactured cluster bombs. 
He added that companies involved in manufacturing such 
weapons should "look inward."  They could even benefit by 
shedding such product lines, given the potential financial 
impact of a black spot on their reputations.  The Ambassador 
noted that while Norwegians may have reached some consensus 
about the blacklist, the impact fell disproportionately on 
American firms with few local defenders, and it was certainly 
not the case that half of the unethical companies in the 
world were American. 
 
SHARING THE NORWEGIAN MODEL WITH THE DEVELOPING WORLD 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶8.  (SBU) Gjedrem and Kjaer both noted that the Bank and 
Pension Fund were taking an active part in bilateral and 
multilateral transparency and training initiatives for 
resource-rich developing countries to assist them in managing 
their wealth responsibly.  Officials from many countries, 
including Iraq, Kazakhstan and others, had visited the Bank 
 
to consult on the benefits of Norway's "petroleum sector 
model."  Kjaer cited the keys to successful petroleum sector 
management: transparency, clear investment benchmarks, strict 
division between business and politics, and establishing a 
corporate culture and business model for petroleum fund 
management.  The Ambassador noted the positive example Norway 
set for other oil-rich nations and encouraged the Bank's 
assistance efforts. 
Visit Oslo's Classified website: 
http://www.state.sgov.gov/p/eur/oslo/index.cf m 
 
WHITNEY