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C O N F I D E N T I A L ALGIERS 000888 
 
SIPDIS 
 
STATE PASS TO USTR PBURKHEAD 
 
E.O. 12958: DECL: 09/28/2019 
TAGS: ETRD ECON PREL AG
SUBJECT: ALGERIA: FINANCE MINISTER BACKS ALGERIA'S NEW 
INVESTMENT RULES 
 
Classified By: Ambassador David D. Pearce; reasons 1.4 (b) and (d). 
 
SUMMARY 
------- 
¶1. (C) Minister of Finance Karim Djoudi told USTR Director 
for the Middle East and Europe Paul Burkhead September 28 
that the purpose of Algeria's new rules on imports and 
foreign investment was to lower imports, tighten control on 
hard currency outflows, reduce tax fraud, and protect and 
promote domestic industries.  Only a strong industrial base 
could make Algeria an equal partner with other economies. 
Djoudi asserted that rising imports threatened economic 
stability, and that the state had a responsibility to manage 
the transition to a free market economy.  Burkhead cautioned 
that Algeria's new investment rules created an unpredictable 
business climate and would deter investors.  Djoudi thought 
that Algeria would apply these measures for a limited period, 
until domestic industry was stronger and the balance of 
payments more favorable. 
 
¶2. (C) Summary continued:  Burkhead emphasized our interest 
in expanding bilateral trade and investment cooperation 
outside the hydrocarbons sector, and suggested bilateral 
talks under the 2001 Trade and Investment Framework Agreement 
(TIFA).  The U.S. stood ready to assist Algeria with its WTO 
efforts.  Djoudi agreed that the TIFA could be a useful 
mechanism for regular dialogue.  He asserted that WTO 
accession remained a goal for Algeria, but complained that 
the bar to WTO kept moving higher.  Algeria needed 
''balanced'' conditions for accession that fell short of full 
liberalization and permitted for a certain period the kind of 
measures Algeria had just introduced.  END SUMMARY. 
 
FOREIGN INVESTMENT, ON ALGERIA'S TERMS 
-------------------------------------- 
 
¶3. (C) During a September 28 meeting, Finance Minister Karim 
Djoudi told USTR Director for the Middle Eastern and European 
Trade Affairs Paul Burkhead that the United States was a 
strategic economic partner for Algeria.  Djoudi said that 
Algeria's investment policies aimed to diversify the economy 
while addressing the country's social development needs.  In 
an overview of Algeria's macroeconomic situation, Djoudi said 
foreign exchange reserves now equaled three years of imports, 
external debt was about 1 percent of GDP, and the country's 
stabilization fund was valued at 40 percent of GDP.  Djoudi 
said that growth outside the hydrocarbons sector was 6 
percent and that unemployment had decreased from 30 percent 
to 11.3 percent.  He attributed lower unemployment to a 55 
percent increase in jobs, 85 percent of which, he said, were 
created in the private sector. 
 
¶4. (C) Djoudi said that unchecked imports posed a threat to 
Algeria's economy.  The country's import bill had grown from 
USD 20 billion in 2006 to USD 39 billion in 2008.  Imports of 
services had seen a particularly sharp spike.  Algeria's 
economic strategy had to balance international trade rules 
with the need to promote national industries, which he said 
was the reasoning behind new investment rules included in the 
2009 complimentary finance law (CFL).  In the medium-term, 
Algeria planned to follow an infant industry strategy to 
boost export capacity in key industries and replace certain 
imports.  He argued that Algeria had to be a producer and not 
devote itself to ''pure commerce.'' 
 
¶5. (SBU) Djoudi said the CFL measures sought to encourage 
investment and tighten controls on hard currency outflows and 
prevent abuses.  The requirement of a 51 percent Algerian 
partner majority stake in all foreign investments would keep 
more profits in Algeria, as would the requirement that all 
foreign investment maintain a positive hard currency balance. 
 The letter of credit imposed as the sole method for 
financing imports would reduce the scope of over-invoicing 
and false import declarations.  Firms should reinvest a 
portion of profits in the local economy, he said. 
 
¶6. (C) Burkhead told Minister Djoudi that foreign direct 
investment was the key to diversifying Algeria's economy away 
from energy.  U.S. firms operating in Algeria and many 
potential U.S. investors were concerned about the CFL 
measures.  The key problem was a lack of predictability in 
the business climate.  Several CFL measures had caught 
foreign companies by surprise.  Burkhead said the 51 percent 
 
partnership rule for foreign investment and the 30 percent 
partnership rule for foreign import companies could hinder 
Algeria's ability to attract foreign investment.  Burkhead 
explained that foreign investors do not want to cede control 
of their investments to local partners.  Some might opt to 
 
curtail their operations or forgo future investments. 
 
¶7. (C) Djoudi replied that the CFL measures were only 
adjustments to existing policy and not an overhaul of 
Algeria's investment laws.  He claimed that Algeria 
recognized the importance and the role of foreign investment 
in economic development.  Djoudi noted, however, that global 
economic factors, particularly lower world oil prices, have 
impacted Algeria's economy.  Oil and gas exports in 2009 were 
50 percent lower compared to the same period last year. 
Djoudi said that under the 51 percent rule, foreign companies 
could partner with several Algerian firms, leaving the 
foreign investor with a relative majority that would give it 
authority over management and dividend distribution policies. 
 As to the 30 percent rule, Djoudi said it would only apply 
to foreign firms that imported finished goods.  Burkhead 
replied that most U.S. firms would not invest in any 
undertaking with less than a 51 percent share. 
 
¶8. (C) Burkhead told Djoudi the U.S. shared Algeria's goal of 
building a robust, diverse economy, but Algeria's recent 
actions looked more like a return to a state-controlled 
system.  Djoudi admitted that the state was becoming more 
involved in economic matters, but argued that the state has a 
responsibility to manage the transition to a free economy. 
Djoudi said Algeria's IMF-prescribed economic liberalization 
in 1994 had caused a sharp fall of the dinar and the failure 
of many state companies, depriving Algeria of much of its 
industrial base.  Today few Algerian firms were 
internationally competitive.  Djoudi said the government 
would impose these measures for a time so that Algerian 
companies could increase their competitiveness and put 
themselves on a equal footing with foreign firms. 
 
REVITALIZING TIFA 
----------------- 
 
¶9. (C) Burkhead told Djoudi that one of the goals of his 
visit was to look for opportunities to expand our bilateral 
engagement on trade and investment.  He noted that in the 
past two years there had been little dialogue with Algeria on 
these matters.  The bilateral council established by our 2001 
Trade and Investment Framework Agreement (TIFA) had been 
inactive for several years.  As a way forward, Burkhead 
proposed revisiting the TIFA framework to guide regular 
bilateral meetings on bilateral trade and investment issues. 
Djoudi welcomed the offer. 
 
NO SHORT-TERM FIX FOR WTO OR PHARMA BAN 
--------------------------------------- 
 
¶10. (C) Djoudi reaffirmed his government's goal of joining 
the WTO, noting that Algeria had put a lot into that effort, 
and had also concluded an Association Agreement with the 
European Union.  Djoudi said there are monthly discussions on 
WTO with Prime Minister Ouyahia, but the general sentiment 
within the government was that for every concession Algeria 
made on liberalization, WTO just demanded more.  Djoudi 
believed that Algeria had overcome the major obstacles to 
membership, citing better access to Algeria's services 
sector, and suggested that any remaining concerns could be 
addressed after Algeria became a WTO member. 
 
¶11. (C) Burkhead agreed that WTO accession was a long and 
frustrating endeavor.  The requirements for joining tended to 
increase with time as membership grew and trade policies 
became more liberal.  Nonetheless, the U.S. wanted Algeria to 
succeed and stood ready to offer advice and assistance to 
reinvigorate Algeria's WTO bid.  Burkhead cautioned that 
decisions such as the CFL measures would complicate the 
negotiation process and raise concerns among WTO members.  He 
added that the government's import ban on pharmaceuticals 
contradicted the basic WTO principle of lowering trade 
barriers.  Each WTO applicant country had to comply with the 
same set of standards.  "Algeria is well positioned to take a 
leadership role in the WTO, but needs to address the basics 
first," Burkhead concluded.  Ambassador Pearce said another 
important benefit, sometimes overlooked, is that membership 
would give Algeria a seat at the table and hence the ability 
to influence the WTO framework. 
 
¶12. (C) Djoudi noted both points and stated a belief that the 
essential work for Algeria's WTO accession was already 
complete, allowing it to focus on remaining issues gradually. 
 On pharmaceuticals, Djoudi understood the ban was somewhat 
contradictory to Algeria's WTO aspirations, but the decision 
only banned the import of medications produced domestically. 
Furthermore, foreign pharmaceutical firms were welcome to 
 
partner with an Algerian operator to produce medications 
locally.  As with trade in other areas, Djoudi said, Algeria 
had to break the ''vicious circle'' of excessive imports, 
which created no wealth, and expand the domestic 
pharmaceutical industry.  He hoped WTO discussions would 
agree on a ''balance'' short of full liberalization that 
could offer partners such as the U.S. certain advantages. 
 
NABORS DRILLING 
--------------- 
 
¶13. (C) Ambassador reminded Djoudi of the 20 million dollar 
fine that Algerian Customs had imposed in 2007 against U.S. 
oil service company Nabors Drilling for moving a rig without 
formal approval from Customs.  Nabors' appeal had yet to be 
resolved.  The Ambassador said this was an extremely punitive 
judgement.  He recognized the need for companies to comply 
with customs regulations, but pointed out that, as a 
practical matter, it was extremely expensive to keep a 
drilling rig idle for a prolonged period when there were 
excessive delays in processing paperwork.  It was a cost 
borne not only by the company concerned, but equally if not 
more by Sonatrach and Algeria because it meant that the rig 
was not working to produce oil and gas.  Nabors was a 
reputable firm and a significant commercial partner in 
Algeria; it had drilled about ten percent of Algeria's wells. 
 The Ambassador emphasized the need for a quick decision and 
asked Djoudi to review the case.  Djoudi remembered the issue 
from a previous conversation with the Ambassador and admitted 
that administrative requirements sometimes are not compatible 
with efficiency.  While he took the point about business 
efficiency, he said that Customs was also correct to enforce 
its regulations.  That said, he noted that a compromise 
solution had been found in a similar Bechtel case, and he was 
hopeful this case could also be settled in a satisfactory 
manner. 
PEARCE