VZCZCXRO9888
PP RUEHDE RUEHDIR
DE RUEHMS #1061/01 3231206
ZNR UUUUU ZZH
P 191206Z NOV 07
FM AMEMBASSY MUSCAT
TO RUEHC/SECSTATE WASHDC PRIORITY 8994
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE

UNCLAS SECTION 01 OF 04 MUSCAT 001061 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR NEA/ARP 
H PASS 
FROM AMBASSADOR GRAPPO TO REPRESENTATIVE JAMES MORAN 
 
E.O. 12958: N/A 
TAGS: OREP PGOV PREL ECON ETRD ELAB PHUM MU
SUBJECT: SCENESETTER FOR CODEL MORAN'S VISIT TO OMAN 
 
 
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Summary 
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¶1. (U) Embassy Muscat and I warmly welcome you and your 
delegation to Oman.  We look forward to your arrival on 
November 25 to discuss regional stability and economic 
development issues in the context of our overall bilateral 
relationship.  In order to fulfill these objectives, we are 
seeking an audience with Sultan Qaboos bin Said, Oman's head 
of state, as well as meetings with Yousef bin Alawi, Minister 
Responsible for Foreign Affairs, Ahmed bin Abdul Nabi Macki, 
Minister of National Economy, Maqbool bin Ali Sultan, 
Minister of Commerce and Industry, and General Ali bin Majid 
al-Ma'amari, Minister of Royal Court.  End Summary. 
 
----------------------------- 
Strong Bilateral Relationship 
----------------------------- 
 
¶2. (SBU) The United States enjoys a strong bilateral 
relationship with Oman, one that officially dates back to 
1833 with the signing of the Treaty of Amity and Commerce. 
The Sultan and his government are decidedly pro-West and a 
firm American ally, as evidenced by our long-standing base 
access agreement with Oman, which was signed, in 1980, at a 
time when other Gulf nations were at odds with our policies. 
Oman has since supported all of our military requests, 
including substantial basing and access needs, during the 
height of Operation Enduring Freedom, Operation Iraqi 
Freedom, and Desert Storm.  Given its geographical location, 
Oman will remain a key ally.  In addition to presiding over 
the shipping lanes of the Strait of Hormuz, its location 
makes it a natural hub outside of the Gulf to support current 
or future operations in Afghanistan, Iran, Iraq, or the Horn 
of Africa. 
 
¶3. (SBU) Our continued engagement with the Omani military 
continues to grow and deepen, especially with the presence of 
our War Reserve Materiel (WRM) sites, the recent purchase of 
12 F-16s, and greater interest in cooperating on border 
security matters.  Oman's use of FMF and FMS has proven 
effective, as the items they purchase are integrated smoothly 
into their military's operations.  Oman's FMF budget has been 
in decline, however, with FY08 figures equaling $10.1 
million, down from $19.8 million in FY05.  Oman has also 
judiciously used its approximately $1.08 million IMET 
allocation for U.S. military training, with its graduates 
rising to high positions within Oman's armed forces. 
 
--------------- 
Regional Issues 
--------------- 
 
¶4. (SBU) A traditionally staunch supporter of the Middle East 
peace process, Oman takes an objective, pragmatic and 
non-confrontational approach to pressing regional security 
issues.  On Iran, Oman maintains a cordial, although mostly 
non-substantive, relationship with Tehran.  The Sultanate 
prefers dialogue and cooperation on maritime security and 
other shared interests -- including the possible importation 
of Iranian gas -- rather than isolating the regime in Tehran. 
 The Omanis are concerned about the impact of Iran's nuclear 
enrichment program on the region's stability, but believe 
that harsher economic sanctions against Iran would not have a 
strong deterrent effect, as it might constrain diplomatic 
maneuverability in the long-term. 
 
¶5. (SBU) Oman remains generally supportive of our efforts to 
promote security and political stability in Iraq, but is very 
concerned about the ability of Iraq's leadership to overcome 
allegiance to particular factions/groups in meeting this 
long-term goal.  Like its neighbors, Oman is worried that 
extremism and sectarianism in Iraq could spill over into the 
region.  Oman is not a source or transit country for either 
illicit funds or foreign fighters destined for Iraq. 
 
¶6. (SBU) The Israeli-Palestinian conflict continues to be a 
source of high-level interest; the Omani government supports 
the President's November 26-27 Middle East peace conference 
in Annapolis.  On Lebanon, Oman supports the government of PM 
Siniora (who met with the Sultan in January 2007), but hopes 
that the different Lebanese factions can reach a consensus to 
resolve the current political crisis there. 
 
¶7. (SBU) Oman has been free from terrorist activity and works 
closely with the USG on terrorism-related issues.  It is not 
a regional or offshore financial center; accordingly, it does 
 
MUSCAT 00001061  002 OF 004 
 
 
not have a significant money laundering problem.  Its small 
banking sector is closely supervised by the Central Bank of 
Oman, and the government has issued a series of decrees to 
combat money laundering. 
 
----------------- 
Economic Overview 
----------------- 
 
¶8. (U) Oman's economy is based primarily on revenues derived 
from petroleum and natural gas, which are expected to account 
for 79% of the government's income in calendar year 2007. 
Oman's proven recoverable oil reserves are estimated at 4.8 
billion barrels, though Ministry of Oil and Gas officials are 
optimistic that over 35 billion barrels remain to be 
recovered.  The main oil producer is the government 
majority-owned Petroleum Development Oman (PDO, in 
partnership with Royal Dutch Shell), which controls 90 
percent of reserves and the lion's share of total production. 
 U.S.-owned Occidental Petroleum is the second largest 
producer in Oman, and has committed to investing over $3 
billion over the next several years in enhanced oil recovery 
efforts in mature fields. 
 
¶9. (U) High oil prices over the past several years have led 
to solid Omani budget surpluses and GDP growth, despite 
declining oil production.  Oman's economy, with GDP estimated 
at $35.5 billion, grew over 15% in 2006, and is on track to 
gain at least another 8% for this year.  The government 
intends to spend approximately $4 billion more than in the 
past year on investment-related expenditures, with $1.5 
billion allocated to enhancing oil production capabilities 
and $1 billion on gas production capabilities.  The hefty 
investment budget reflects continued government emphasis on 
reversing declining oil production rates, locating additional 
pockets of gas reserves, and promoting diversification of the 
economy.  Under the government's seventh Five-Year Plan, to 
cover 2006-2010, the average investment rate over the 
five-year period is estimated to be 24 percent of GDP. 
 
-------------------- 
Using Its Oil Wealth 
-------------------- 
 
¶10. (SBU) With its coffers flush with oil revenue, one of the 
government's highest priorities has been debt reduction.  In 
2006, the government used part of its estimated $6.4 billion 
surplus to lower its debt from $1.6 billion to $1 billion. 
In addition to debt reduction, the government has used its 
surplus to strengthen a series of reserve funds.  For 
example, part of the surplus is directed to the State General 
Reserve Fund (SGRF), its traditional reserve fund, which 
stood at over $8 billion in mid-2006. In order to protect 
this equities-based fund for future generations, the 
government also created a $1.5 billion emergency fund, to be 
used to finance future budget deficits, as well as a $1 
billion Oman Investment Fund to participate in primarily 
Asian industrial gas-based projects. 
 
¶11. (SBU) The government is keen on using part of the surplus 
to shore up its 21-year old pension system.  Previously, the 
government had not kept up with its funding obligations, 
leaving a deficit of over $7 billion.  The government is now 
starting to reduce this deficit with the goal of having the 
system fully funded by 2016.  The government is also planning 
to consolidate its 14 pension funds into two, one for 
military personnel and one for civilians.  To better manage 
pension investments, the government intends to establish one 
management board for each fund, which would then report to a 
pension board. 
 
-------------------- 
Moving Away from Oil 
-------------------- 
 
¶12. (U) In efforts to diversify its economy, Oman actively 
seeks private foreign investors, especially in the 
industrial, information technology, tourism, and higher 
education fields.  The permitted level of foreign ownership 
in privatization projects is 70 percent, with up to 100 
percent in certain cases.  The largest single industrial 
investment target is the port city of Sohar, near the UAE 
border.  It has witnessed over $12 billion in government 
investment alone in the financing of several industrial 
projects, including a petrochemical plant (with Dow 
Chemical), a steel rolling mill, a fertilizer plant, and an 
aluminum smelter (being built by Bechtel).  In efforts to 
triple the industry's one percent contribution to GDP, the 
 
MUSCAT 00001061  003 OF 004 
 
 
government's tourism development company is moving forward 
with private investors on plans to construct 16 luxury hotels 
within the next five years.  Oman is developing its port 
infrastructure with investments in facilities at Salalah, 
Sohar, and Duqm, and is promoting free trade zones close to 
its ports to develop downstream industries. 
 
-------------------- 
Free Trade Agreement 
-------------------- 
 
¶13. (U) In its pursuit to expand trade ties, Oman entered 
into Free Trade negotiations with the United States in March 
¶2005.  While we completed the FTA ratification process in 
October 2006, implementation of the Agreement remains 
pending.  We have made considerable progress in working 
through issues related to intellectual property, customs, 
telecommunications, transparency, and labor, among others. 
Nevertheless, before setting an implementation date, we await 
the government's promulgation of draft tender, copyright, and 
industrial property laws, in addition to its adoption of 
telecommunications licensing and customs administration 
procedures.  The Sultan has a personal interest in the FTA 
and has instructed his ministers to work actively for its 
success. 
 
¶14. (U) The Omani government recognizes the importance of the 
FTA in raising the Sultanate's profile internationally.  In 
addition to the direct U.S. investment that the FTA will 
attract, Oman has taken note of the spillover benefits that 
would be equally important.  For example, Dow's planned 
investment in a petrochemicals complex had already spurred an 
additional $350 million in investment from India.  To attract 
further foreign interest, Oman will continue to promote 
itself as a country that adheres to the rule of law and 
facilitates the ease of doing business.  Toward this effort, 
the government is planning a promotional roadshow of the U.S. 
in 2008, with proposed stops in New York, Chicago, Houston, 
Los Angeles, and Washington. 
 
-------------- 
Labor Advances 
-------------- 
 
¶15. (SBU) The Omani government introduced sweeping changes to 
its 2003 labor code to comply with the FTA's labor 
provisions.  Under the reforms, workers now are allowed to 
organize unions, conduct strikes, and engage in collective 
bargaining - freedoms that place Oman in the forefront of 
labor rights in the region.  Due to the quick pace of reform, 
however, government, business and labor representatives are 
uncertain about their future relationships with each other, 
and have reached out to the USG for support. 
 
--------- 
Elections 
--------- 
 
¶16. (SBU) Thanks in part to concerted government efforts to 
get out the vote, a larger than expected 62.7% of registered 
Omani voters reportedly cast ballots in the October 27 Majlis 
al-Shura elections.  According to the results of a speedy 
electronic vote count, newcomers won 46 of the 84 seats in 
the Majlis; 38 members of the outgoing Majlis retained their 
positions.  None of the 20 female candidates (including one 
women running for re-election) was elected, though the Sultan 
appointed 14 women to serve in the Majlis al-Dawla, Oman's 
upper chamber.  By all accounts, voting went smoothly at the 
Sultanate's 102 polling places.  Nevertheless, the newly 
elected majlis' authorities are limited to reviewing and 
making recommendations to the government on legislation 
related to a few areas, e.g., economics, education, health, 
etc. 
 
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TIP Concern 
----------- 
 
¶17. (SBU) While our relationship is generally free of 
bilateral irritants, the Omani government reacted strongly to 
its Tier 3 designation on the State Department's Trafficking 
in Persons (TIP) report.  Nevertheless, the designation has 
gotten their attention.  Since the designation, the Omani 
government has drafted, with the assistance of a prominent 
U.S.-based expert, an anti-TIP law that both criminalizes TIP 
and establishes a national committee to coordinate anti-TIP 
initiatives.  The government, which sent a delegation to the 
United States to learn from and observe U.S. colleagues in 
 
MUSCAT 00001061  004 OF 004 
 
 
their handling of TIP crimes, plans to hold its first 
internal anti-TIP workshop in mid-December.  The draft law 
and formation of a national committee represent significant 
steps by the government in addressing our concerns. 
 
 
 
 
 
GRAPPO