VZCZCXRO2813
PP RUEHDE RUEHDIR
DE RUEHAD #0372/01 0841251
ZNR UUUUU ZZH
P 241251Z MAR 08 ZDS
FM AMEMBASSY ABU DHABI
TO RUEHC/SECSTATE WASHDC PRIORITY 0608
INFO RUEHDE/AMCONSUL DUBAI 7646
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE

UNCLAS SECTION 01 OF 03 ABU DHABI 000372 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR E, NEA/ARP, EB/IFD/OMA 
 
********* C O R R E C T E D  C O P Y ********* 
 
E.O. 12958: DECL:  NA 
TAGS: ECON EFIN ETRD EINV AE
SUBJECT:  SCENESETTER FOR VISIT OF UNDER SECRETARY REUBEN JEFFERY III 
 
Ref: A) Abu Dhabi 299, B) Abu Dhabi 145, C) Abu Dhabi 45, D) Dubai 
101, E) 07 Abu Dhabi 1021, E) Abu Dhabi 320, F) Abu Dhabi 319 
 
ABU DHABI 00000372  001.6 OF 003 
 
 
This cable contains Business Proprietary Information. 
 
¶1. Embassy Abu Dhabi and Consulate General Dubai welcome the April 
6-8 visit of Under Secretary for Economic, Energy, and Agricultural 
Affairs Reuben Jeffery. 
 
Economic and Financial Growth Strong 
------------------------------------ 
 
¶2. (U) UAE economic growth continues to be strong, on the back of 
high oil prices, increasing foreign and domestic investment, and a 
construction boom.  Nominal GDP hit about USD 190 billion in 2007 and 
according to initial UAEG estimates, real GDP growth in 2007 was 
7.4%.  Despite holding nine percent of the world's proven oil 
reserves, the UAE has followed an aggressive policy of economic 
diversification to the point where only about 35 percent of nominal 
GDP comes directly from the production of crude oil and gas.  Fixed 
investment in 2007 increased by 19 percent to reach USD 39.4 billion 
(including about 18 percent into the real estate sector, reflected in 
the forest of cranes throughout Dubai and to a lesser extent the rest 
of UAE). 
 
¶3. (U) As strong as these numbers are, the UAE has ambitious growth 
plans.  The Emirate of Dubai's strategic plan forecasts 11 percent 
real growth through 2015.  Dubai is building the world's tallest 
building, the world's biggest airport and the world's biggest 
artificial island.  For its part, the Emirate of Abu Dhabi is also 
starting to flex its economic muscles.  There are between USD 330 and 
USD 350 billion in development projects in the pipeline in the 
Emirate of Abu Dhabi alone, including a brand new world class port 
facility and what may eventually be the world's largest aluminum 
plant.  In addition, the Emirate of Abu Dhabi has ambitious plans to 
increase oil production capacity to four million barrels per day by 
the 2014 timeframe. 
 
What are the risks? 
------------------- 
 
¶4. (SBU) Although the prognosis for the UAE is generally positive, 
there are geopolitical and economic risks.  Thus far, the UAE has 
benefited from being an oasis of stability in a dangerous 
neighborhood.  A major terrorist attack or sharp increase in tensions 
with Iran would likely cut economic growth, especially in the UAE's 
growing tourism and transport business.  The UAE is keenly aware of 
threats to its economy.  The Emirate of Abu Dhabi has established the 
Critical National Infrastructure Authority to protect the Emirate's 
vital facilities, including oil and gas installations, power 
plants/desalination facilities, and airports/sea ports. 
 
¶5. (SBU) Inflation, currently estimated by some analysts at around 11 
percent, presents a serious economic risk.  The rapid development of 
the UAE has put serious pressure on the housing market, causing sharp 
increases in rents.  It has also put pressure on all types of goods 
from foodstuffs to steel and concrete.  The vast number of projects 
in the UAE, and in the GCC generally, is putting extreme stress on 
human and material resources, thus increasing costs.  These increased 
costs are squeezing the UAE's largely expatriate middle class and 
making it more difficult for the UAE to attract necessary human 
capital.  Business contacts increasingly complain about the costs 
involved in attracting both skilled and unskilled workers.  In at 
least some cases, they have lost workers when salaries and benefits 
failed to match rising costs of living.  In other cases, lower paid 
workers are sending family members home as increasing schooling and 
housing costs force expenditure cutbacks.  UAE officials have 
responded by imposing (or negotiating) price caps on basic household 
items, rent caps in Abu Dhabi and Dubai, and by raising federal 
salaries by 70 percent. 
 
¶6. (SBU) Rapid economic growth is also putting serious pressure on 
the UAE's infrastructure, particularly on power generation.  Abu 
Dhabi's water and electricity company's recent demand growth 
forecasts are for 6.7 percent average annual growth for the next 23 
years.  (Note:  this figure does not include "off grid" projects such 
as the new aluminum plant. End note.)  Moody's estimates that the 
Emirate of Dubai will need to triple its power generation capacity 
over the next ten years.  Although the northern emirates are starting 
from a much lower base, they also have ambitious development plans 
which are already overstressing their power generation capacity.  The 
mismatch between development and power in the northern emirates has 
hurt a U.S. investor, Guardian Industries, which built a USD 150 
million float glass plant in the Emirate of Ras Al-Khaimah only to 
discover that the Federal Electricity and Water Authority was unable 
to provide needed power.  The Embassy and Consulate General 
intervened on behalf of Guardian, which is now receiving some of its 
required power from FEWA, but is required to use expensive generators 
for the rest. 
 
ABU DHABI 00000372  002.2 OF 003 
 
 
 
¶7. (SBU) The sharp increases in projected power and water demand will 
require significant investments in power and desalination plants, but 
also raise a more fundamental question of feedstock sources. 
Although the UAE has the fifth larges proven natural gas reserves in 
the world, it is not producing enough natural gas to meet its current 
needs (including reservoir management).  Oil and gas belong to the 
seven individual emirates, not the UAE as a whole, and are unevenly 
distributed among the emirates (with Abu Dhabi having around 93-94 
percent of the total reserves).  Abu Dhabi does not produce enough 
gas to meet the demands of all of the other emirates. 
 
¶8. (SBU) Abu Dhabi has several projects underway to increase gas 
production available to power generation projects, including building 
a pipeline to connect offshore fields to the UAE mainland and a major 
onshore sour gas development project.  (Note: Although the deal has 
not been publicly announced or signed, U.S. firm ConocoPhillips has 
won the sour gas development project. End note.)  In addition, the 
UAE currently imports two billion cubic feet per day of natural gas 
from Qatar via pipeline (the Dolphin Project, with Occidental 
Petroleum holding a 24.5 percent stake).  Despite these projects, UAE 
officials estimate that the planned gas production will still be 
insufficient to meet projected demand growth and are examining 
alternatives.  Abu Dhabi is considering the development of peaceful 
nuclear power and has engaged in discussions with the USG about 
potential assistance.  It has also signed a nuclear cooperation 
agreement with the Government of France, though contrary to news 
reports, not with French companies. 
 
The Currency Peg 
---------------- 
 
¶9. (SBU) There is increasing public pressure on the UAEG to at least 
revalue the dirham, if not drop the dollar peg in favor of a peg to a 
trade-weighted basket of currencies. There are almost daily articles 
calling for a revaluation.  Many expatriates, especially from Europe 
and India, have complained about the "double hit" from the increasing 
local cost of living and the relatively lower income in comparison to 
their home currencies.  Although the Central Bank has asserted that 
domestic capacity constraints rather than dollar weakness are the 
main drivers of inflation, several bank economists have argued that 
low interest rates have sharply increased liquidity and by extension 
higher prices.  Although the counter arguments rarely make the 
papers, there are those who note that a revaluation would not be cost 
free to the UAE.  Abu Dhabi holds significant overseas financial 
assets, many dollar- denominated.  Revaluing the dirham would reduce 
the relative value of these assets.  It could also harm the UAE's 
efforts to diversify its economy by potentially making non-oil 
exports less competitive and making the UAE a less attractive 
destination for European tourists.  Efforts to move to a trade- 
weighted peg would be hampered by statistical shortcomings and poor 
information flow from the individual emirates (which track trade) to 
the federal government. 
 
¶10. (SBU) So far the UAE has steadfastly maintained its peg to the 
dollar and recently cut its rate by 75 basis points to match the 
Federal Reserve's cut.  UAE officials have also insisted, both 
publicly and privately, that they are committed to maintaining the 
peg.  They also note that as part of the GCC agreement to create a 
monetary union by 2010, member states agreed to peg their currencies 
to the dollar.  Any change would need to be a consensus decision. 
Should another GCC country revalue or drop the peg, however, the 
pressure on the UAEG would increase sharply. 
 
Investment and Sovereign Wealth Funds 
------------------------------------- 
 
¶11. (SBU) UAE institutions are major foreign investors, with the 
Emirate of Abu Dhabi's Sovereign Wealth Fund (SWF), the Abu Dhabi 
Investment Authority (ADIA), widely regarded as one of the world's 
largest SWFs.  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, although 
the UAE established the Emirates Investment Authority in November 
2007 to invest the assets of the federal government. 
 
¶12. (SBU) Although ADIA is a largely passive, portfolio investor, 
other UAE investment organizations and State-owned enterprises take 
larger stakes in overseas investments.  DP World's ultimately failed 
attempt to purchase P&O's U.S. assets is still a 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 are likely to hear 
concerns about "political risk" premiums for foreign investment in 
the U.S. 
 
¶13. (SBU) Abu Dhabi officials have consistently assured us that the 
 
ABU DHABI 00000372  003.2 OF 003 
 
 
Abu Dhabi Government would never use its foreign investments as a 
foreign policy tool.  ADIA and Government of Abu Dhabi officials 
worked closely with the Treasury Department and the Government of 
Singapore to develop a series of best practice policy principles for 
SWFs and for countries receiving SWF investment.  Abu Dhabi officials 
jointly released these principles with Treasury Secretary Paulson and 
officials from Singapore on March 20 as a way to encourage the IMF 
and the OECD's work to develop voluntary best practices for both SWFs 
and inward investment regimes. 
 
¶14. (SBU) With regard to investment in the UAE, the investment 
climate still favors locals.  Outside the UAE's many free zones, 
there is still a legal requirement to have local ownership of 51 
percent of a company or industrial enterprise.  The UAEG has been 
considering revisions to the Commercial Companies Law and a new FDI 
law, which reportedly would permit greater foreign ownership in 
certain sectors, but those laws have not yet been passed.  The 
inclusion of natural resources became a stumbling block in our 
efforts to conclude an FTA with the UAE.  That said, the Emirate of 
Abu Dhabi has always allowed foreign equity participation in the oil 
sector.  ExxonMobil has a 9.5 percent stake in the onshore oil 
company and a 28 percent stake in the offshore Upper Zakum field. 
ADNOC has all but concluded an agreement with ConocoPhilips to 
develop an onshore sour gas field, although neither party has 
officially announced the deal.  This would be the first time that a 
foreign company would have access to an upstream gas development 
project. 
 
Strengthening the Economic Relationship 
--------------------------------------- 
 
¶15. (U) The U.S.-UAE economic and trade relationship remains strong 
with USD 12.9 billion in two-way trade and the U.S. running almost a 
USD 10.3 billion trade surplus.  There are over 750 U.S. firms 
physically present in the UAE, many serving the wider region. 
 
¶16. (SBU) Although both parties decided last year that we would not 
be able to conclude a Free Trade Agreement in the time permitted 
before the lapse of trade promotion authority, FTA negotiations made 
progress in a number of areas, including in making revisions to the 
UAE's Agency Law that tied the length of an agency agreement to the 
length of the contract between the foreign principal and the UAE 
agent.  The revised Agency Law also required mutual consent to renew 
an agreement, where previously the UAE agent could unilaterally 
re-register the agreement.  Issues related to dispute settlement and 
treatment of natural resources in the investment chapter had not been 
resolved, nor had issues related to opening up the telecommunications 
sector.  In addition, the UAE's lack of rights of association and 
collective bargaining remained a serious problem. 
 
¶17. (SBU) The UAE and the U.S. agreed to a TIFA-Plus arrangement to 
further promote trade ties.  The two sides held the first council 
meeting in late June of 2007, but have not held subsequent meetings. 
The UAE has agreed to participate in Anti-Counterfeiting Trade 
Agreement negotiations with the U.S., but there has been little 
visible progress in other areas of TIFA-Plus engagement.  UAE 
economic engagement continues in other fora, however, for example 
through ADIA's cooperation with the Department of Treasury. 
 
¶18. (SBU) The UAE had expressed interest in exploring a Bilateral 
Investment Treaty (BIT).  The USG had expressed concern that issues 
that had caused problems in the FTA investment chapter would cause 
similar problems with the BIT.  The UAE has not pushed for BIT 
negotiations, but at least some of the UAE's negotiators have 
privately said that they see more flexibility in the model BIT text 
than in the FTA investment chapter. 
 
¶19. (SBU) The UAE's February cabinet reshuffle has also changed the 
UAE's economic team.  Sheikha Lubna Al-Qasimi, who as Minister of 
Economy was a co-chair of the UAE negotiating team, is now the head 
of a newly created Ministry of Foreign Trade.  Minister of State for 
Financial and Industrial Affairs, Dr. Mohamed Khalfan bin Kharbash, 
the other FTA co-chair, was replaced by Obaid Humaid Al-Tayer, who as 
head of the Dubai Chamber of Commerce and Industry had publicly 
expressed skepticism about the benefits of the FTA to UAE businesses. 
 These shake-ups (and changes in USTR) will likely complicate 
near-term efforts on the trade front, but could also give us an 
opportunity to re-energize our overall economic cooperation.  A first 
step would be an open discussion with the UAE on core needs and 
interests moving forward. 
 
Quinn