VZCZCXRO5562
PP RUEHDE RUEHDIR
DE RUEHAD #1696/01 2831236
ZNR UUUUU ZZH
P 101236Z OCT 07
FM AMEMBASSY ABU DHABI
TO RUEHC/SECSTATE WASHDC PRIORITY 9851
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 7348

UNCLAS SECTION 01 OF 03 ABU DHABI 001696 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ARP, EB/IFD/OMA 
TREASURY FOR DAS SAEED, ROSE, KAPROTH 
NSC FOR NRAMCHAND 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR AE
SUBJECT: ABU DHABI CAUTIOUSLY POSITIVE ON SWF BEST PRACTICES 
 
REF: ABU DHABI 1294 
 
ABU DHABI 00001696  001.2 OF 003 
 
 
 This cable contains business proprietary information. 
 
¶1. (SBU) Summary:  Abu Dhabi financial officials told a 
Treasury delegation, led by DAS Ahmed Saeed that they 
welcomed the opportunity to cooperate with the USG.  ADIA 
Managing Director Sheikh Ahmed bin Zayed Al-Nahyan and Yousef 
Al-Otaiba, Foreign Affairs Director for Abu Dhabi Crown 
Prince Sheikh Mohammed bin Zayed Al-Nahyan responded 
positively to Treasury's proposal for voluntary best 
practices for Sovereign Wealth Funds and expressed interest 
in further details.  Officials all stressed ADIA's role as a 
long term passive investor and that the new Abu Dhabi 
Investment Council (ADIC) would take the same position.  End 
Summary 
 
¶2. (SBU) On September 19, a delegation led by Ahmed Saeed, 
Treasury DAS for Middle East and Africa, including Robert 
Kaproth, Director of Treasury's Office of International 
Monetary Policy visited Abu Dhabi to explain Treasury's 
proposal for Sovereign Wealth Funds (SWFs) and investment 
recipient countries to work together under an IMF/WB umbrella 
to create voluntary best practices for SWFs.  They met with 
Sheikh Ahmed bin Zayed Al-Nahyan, Managing Director of the 
Abu Dhabi Investment Authority (ADIA); Hamad Hurr Al-Suwaidi, 
Under Secretary Abu Dhabi Department of Finance (and ADIA 
board member); Jean Paul Villain, Chief Investment Advisor 
ADIA; Khalifa Al-Kindi, Managing Director Abu Dhabi 
Investment Council (ADIC); and Yousef Al-Otaiba, Foreign 
Affairs Director for Abu Dhabi Crown Prince Sheikh Mohammed 
bin Zayed Al-Nahyan. 
 
¶3. (SBU) Saeed and Kaproth stressed the U.S. commitment to an 
open investment climate.  They noted that well-run SWFs such 
as ADIA have had a positive impact on international financial 
stability as long-term investors without leverage.  The 
growth in both the size and the number of SWFs, however, 
represented a structural shift in the international financial 
system that needed to be better understood.  In addition, the 
increased attention to these SWFs could lead to increased 
financial protectionism.  The proposal to develop voluntary 
best practices, jointly, would address concerns about these 
proliferating SWFs and would serve as a tool to resist 
protectionist sentiments in recipient countries.  In 
parallel, Treasury was suggesting that the OECD work together 
to create a voluntary code of best practices for recipient 
countries. 
 
¶4. (SBU) Best practices would cover areas such as fund 
objectives, operational and risk management, governance 
structure, accountability, and transparency.  In addition, 
they would ensure that SWF investment criteria were 
commercial/financial rather than foreign policy driven. 
Public statements from ADIA, as a passive portfolio investor, 
that its decisions are made on a strictly commercial basis 
would help allay public concerns.  Best practices would not 
deal with an SWF's asset allocation decisions.  Different 
SWFs had different philosophies, and appetite for risk and 
investment decisions should remain a decision for the SWF and 
its government. 
 
ADIA Value Cooperation -- Avoid Public Exposure 
--------------------------------------------- - 
 
¶5. (SBU) Saeed explained that the US Treasury views ADIA as a 
valuable member of the international financial system.  SWFs 
were proliferating, however, and the size of assets under 
management was increasing to trillions of dollars, which 
raised a very real risk of protectionist backlash.  He said 
Treasury had sent delegations to Asia, Europe, and now the 
Middle East.  He stressed that he thought ADIA was already 
doing much of what might be considered best practices. 
Sheikh Ahmed said ADIA officials had become aware of growing 
fears and protectionist sentiment with regard to SWFs.  He 
stressed that he had no problem dealing with other 
governments and assured Saeed that ADIA was willing to 
cooperate with the U.S. to look for solutions.  He stressed, 
however, that ADIA did not want to either raise its public 
profile or talk to the media.  Saeed probed saying he sensed 
ADIA supported the concept of guidelines, mutually agreed on 
in coordination with the IMF/WB, but wanted to be sure that 
he was correct in his understanding.  Sheikh Ahmed responded 
that it would be no problem, that he was ready to cooperate 
on the proposal, and that he would be interested in learning 
 
ABU DHABI 00001696  002.2 OF 003 
 
 
more about it after Ramadan. 
 
¶6. (SBU) Sheikh Ahmed explained that ADIA has always been a 
conservative organization, whose first aim is to protect and 
maintain the assets of the Emirate of Abu Dhabi.  ADIA's 
second goal, he noted, was to increase the size of these 
assets.  Sheikh Ahmed asked whether the delegation had seen 
other SWFs.  Kaproth explained that he had made two trips to 
Asia and Europe and that Treasury had separate contacts with 
China.  In response to Sheikh Ahmed's question, Kaproth noted 
that China was very interested in minimizing financial 
protectionism issues.  More broadly, he added, there was 
strong interest in Asia in IMF/WB guidelines.  He had the 
impression that some of the older SWFs were concerned that 
the rise of new funds raised reputational risks.  He 
explained that in Europe, Norway came to the G-20 meeting at 
Treasury's invitation to show how it managed its funds. 
Saeed explained that the proposal for voluntary best 
practices would serve as a benchmark to help ADIA and other 
well-run SWFs distinguish themselves from some of the newer 
SWFs, which were not so well-run. 
 
Abu Dhabi Investment Council -- "We just want to make money" 
--------------------------------------------- -------------- 
 
¶7. (SBU) Khalifa Al-Kindi stressed that both ADIA (where he 
previously served as Deputy Managing Director) and ADIC were 
passive investors.  ADIA had decided "a long time ago" not to 
buy a stake in any one company larger than the relevant 
regulator's disclosure limit (normally never more than four 
percent).  He also asserted neither ADIA nor ADIC would push 
hostile takeovers of companies.  It would pose "a problem for 
us," he stated.  ADIA's overall objective, he explained, was 
to beat the average OECD inflation rate by about five to six 
percent.  He noted that the strategy and allocations had 
developed over the last 17 years.  The major difference 
between ADIA and ADIC, he said, was that ADIA had liabilities 
to the government of Abu Dhabi. (Note:  ADIA manages the bulk 
of the Emirate of Abu Dhabi's external assets and serves as 
the Emirate of Abu Dhabi's "check book" or supplementary 
source of financing. End Note.)  The government has told ADIC 
that it would have no liability to the government, which 
would allow it to invest in more illiquid assets. 
 
¶8. (SBU) Al-Kindi asked what the concern was about SWF, 
noting that "I assume our custodians are disclosing" 
investments to relevant regulators.  Kaproth explained that 
the growth in the size and number of these funds was drawing 
attention.   Al-Kindi asserted that the entire GCC foreign 
asset holdings were "small beans" compared to China's. 
Kaproth replied that oil exporters' foreign assets roughly 
matched Asia's. Al-Kindi also questioned the public 
perception of ADIA's size, stating "$750 billion is way too 
big" and that he annually gave the IMF figures on the size of 
ADIA.  He stressed, however, that ADIA -- as a matter of 
policy -- did not disclose the size of its foreign 
investments publicly.  Confidentiality, he noted, was a 
policy directed "from above." 
 
¶9. (SBU) Looking forward, Khalifa noted that he was seeing 
asset price inflation and shrinking expected returns in 
traditional asset classes.  Investors would need to diversify 
their investments.  In response to the question of whether he 
worried about the increasing rhetoric surrounding SWFs, 
Khalifa said no, but acknowledged a need to be careful.  He 
stressed that neither ADIA nor ADIC wanted conflict with the 
countries in which it invested.  For that reason, he 
stressed, neither company took large stakes in companies. 
 
¶8. (SBU) Al-Kindi stated that all local banks in Abu Dhabi 
were exposed to sub prime mortgage backed securities.  The 
funding costs to the region had increased dramatically 
already.  In order to meet the development plans of the 
region, the banks were relying on medium term notes to fund 
this expansion, a market which, he noted, was now largely 
closed.  He said that he foresaw bank profitability suffering 
and a drop in returns for investors.  In the case of Dubai, 
he stated that Dubai was highly leveraged and "buying 
equities with borrowed cash." 
 
Crown Prince's Office -- Concerned about Protectionism 
--------------------------------------------- --------- 
 
¶9. (SBU) Al-Otaiba opened the meeting with Saeed by noting 
that some in the UAE were a bit paranoid after DP World and 
 
ABU DHABI 00001696  003.2 OF 003 
 
 
asking whether these new SWF proposals targeted the UAE or 
everyone.  Saeed replied that these guidelines would be 
developed for all SWFs and would be developed in concert with 
investor nations and nations receiving investment.  He 
stressed that the Administration remained committed to 
maintaining an open investment climate and wanted to prevent 
future problems.  The growth of SWFs to trillions of dollars 
increased attention and the risk of a protectionist backlash 
from some countries.  He noted that the UAE would be 
announcing two high-profile investments in the upcoming week. 
(Note:  The Dubai Bourse-NASDAQ deal and Mubadala's purchase 
of a non-voting stake in the private equity firm Carlyle. End 
Note.) 
 
¶10. (SBU) Al-Otaiba asked whether the various SWFs would sign 
up to creating these voluntary best practices, noting that 
consensus-building among funds with widely different 
investing styles would be difficult.  Kaproth noted that best 
practices already existed for fiscal and monetary policy and 
for reserve management.  Kaproth noted that working with the 
IMF and the World Bank also allowed both commodity and other 
SWFs to participate.  Al-Otaiba said his view was that ADIA 
was fairly sophisticated and that the targets for 
protectionism were Russia and China.  His concern was that 
any legislation would cause collateral damage. 
 
¶11. (SBU) Saeed stressed that guidelines would allow ADIA to 
distinguish itself from other SWFs. Al-Otaiba noted that SWF 
guidelines seemed like a good preemptive measure and that 
working with the IMF would remove the perception that this 
was a US-imposed solution.  He said that he thought Abu 
Dhabi's investment organizations would be helpful as long as 
they did not feel "singled out or pressured" and as long as 
the guidelines were not too intrusive.  He explained that he 
would be visiting Washington late September/early October to 
discuss the UAE arms package and said that he would raise the 
issue of SWF with his congressional interlocutors, if 
necessary. 
 
Comment 
 
¶12. (SBU) All Abu Dhabi interlocutors welcomed the 
opportunity to cooperate with the USG.  Both Sheikh Ahmed and 
Al-Otaiba responded positively to the proposal for voluntary 
best practices  although Sheikh Ahmed stressed that he would 
want to see further details.  Al-Otaiba even welcomed the 
idea of working through the IMF/WB since it would minimize 
the impression that this initiative was being forced on SWFs 
by any one country.  Al-Kindi was too focused on ADIC's 
portfolio management responsibilities to be able to focus on 
a bigger political picture although, as a government 
employee, he is not likely to oppose an Abu Dhabi government 
decision.  One sticking point for Abu Dhabi on the question 
of SWF guidelines could be the degree of transparency that is 
sought.  Sheikh Ahmed and Al-Suwaidi stressed that ADIA did 
not want to keep secrets from governments in recipient 
countries, but strongly expressed their discomfort with the 
idea of raising ADIA's public profile or speaking to the 
press.  Post will continue to follow up with ADIA, ADIC, 
Mubadala, and the Emirate of Abu Dhabi government. End 
Comment. 
 
¶13. (U) This cable was cleared by DAS Saeed's party. 
SISON