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DE RUEHAD #0055/01 0351317
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R 041317Z FEB 10
FM AMEMBASSY ABU DHABI
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/SECSTATE WASHDC 0245
INFO GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI

S E C R E T ABU DHABI 000055 
 
NOFORN 
SIPDIS 
DEPARTMENT FOR E, NEA/FO, EEB/FO, EEB/IFD, AND NEA/ARP (MCGOVERN) 
TREASURY FOR THE DEPUTY SECRETARY'S OFFICE 
 
E.O. 12958: DECL: 2020/02/04 
TAGS: EFIN ECON EINV ENRG PTER PGOV AE
SUBJECT: SCENESETTER FOR DEPSEC WOLIN AND U/S HORMATS UAE VISIT 
 
CLASSIFIED BY: Richard G. Olson, Ambassador; REASON: 1.4(B), (D) 
 
¶1. (SBU) Mission UAE looks forward to hosting Treasury Deputy 
Secretary Neil Wolin and Under Secretary of State for Economic, 
Energy and Business Affairs Robert Hormats in Abu Dhabi and Dubai 
from February 14-16.  This is a joint message from Embassy Abu 
Dhabi and Consulate General Dubai 
 
 
 
¶2. (S/NF) Summary: The UAE is a dynamic country that punches above 
its weight in regional and international fora.  We enjoy a strong 
strategic partnership and shared views on many of the most 
important issues of the day, including Iran, Iraq, Afghanistan, the 
Israeli-Palestinian conflict, and terrorism, but also on energy, 
economic, and educational issues.  Senior officials have expressed 
strong commitment to joint efforts to disrupt illicit financial 
flows touching the UAE, and our cooperation is continuing to gather 
momentum.  The UAE's globalized economy, particularly highly 
leveraged Dubai, has been hard hit by the global financial 
downturn, and little growth is expected in 2010.  However, the 
country remains dynamic and is investing heavily in education and 
economic diversification and citizens widely believe greater 
integration will benefit the UAE economy.  End Summary. 
 
 
 
THE U.S., UAE AND THE WORLD 
 
--------------------------- 
 
 
 
¶3.  (C) In the past five years, the United Arab Emirates has 
emerged as one of the economic powerhouses of the region (our 
largest export market in the Middle East) and attained a 
commensurate level of political influence.  No longer comfortable 
hiding behind the Arab League or Saudi Arabia, the UAE's dynamic 
young leadership stakes out independent positions on Afghanistan 
(where UAE troops have been deployed since 2003), Pakistan, and 
Iraq, and seeks a greater role on the world stage, as with its 
recent success in winning the headquarters for the new 
International Renewable Energy Agency (IRENA).  Abu Dhabi is a 
must-go stop for regional leaders like Abu Mazen, Karzai, and 
increasingly for Western leaders as well. 
 
 
 
¶4. (C) The Emirate of Abu Dhabi is run on a day-to-day basis by 49 
year old Crown Prince Mohammed bin Zayed (MbZ), who assumed his 
position in 2004.  MbZ's vision for Abu Dhabi is transformational: 
he wants to build a modern, knowledge based economy with a well 
educated population, while conserving the core values derived from 
its Bedouin heritage and its particularly moderate and tolerant 
version of Islam.  His primary domestic concerns, therefore, relate 
to economic diversification (decreasing the importance of 
hydrocarbon revenues), education (reform of the K-12 curriculum, 
improving quality of schools, and removing lingering influence of 
the Muslim Brotherhood) and health care (to reach a point where the 
best advice for sick Emiratis is no longer to get on a plane). 
These initiatives have a strongly American flavor with major U.S. 
companies and institutions serving as consultants and implementers. 
 
 
 
¶5. (S/NF) Internationally, the UAE is strategically aligned with 
the United States and broadly sees the challenges of this region 
the way we do.  Abu Dhabi's primordial worry is Iran (this is 
especially so for MbZ), which is 46 seconds away as measured by the 
flight of ballistic missile.  MbZ is convinced that a military 
confrontation with Iran is near, and is pressing us for rapid 
delivery of an integrated air defense system, including THAAD and 
Patriots to complement an extant wing of the most advanced F-16 
Fighters ever built (the UAE was the largest cash customer in 2009 
for the USG under the Foreign Military Sales program).  Under Abu 
Dhabi's leadership, the UAE has taken quiet (very quiet) steps to 
reduce other ties with Iran, including scaling back visas and 
denying business permits to Iranians.  We have an active and 
effective partnership with Dubai authorities to stop illicit cargo 
headed for Iran.  Such policies can be controversial within the UAE 
as they pit Abu Dhabi against the other emirates (principally 
Dubai) that make their money by trade, not by pumping oil out of 
the ground.  Publicly, the UAE's position on Iran is more nuanced, 
emphasizing non-interference and mutual respect.  The gap between 
public rhetoric and private action creates challenges for our Iran 
 
policy, as does a tendency to overinterpret the U.S. 
Administration's approach to engaging Iran.  It is important that 
you emphasize that our commitment to sanctions remains 
undiminished, and that the point of engagement remains to change 
Iranian behavior. 
 
 
 
Terrorism finance 
 
----------------- 
 
 
 
¶6. (S/NF) In view of the UAE's military commitment in Afghanistan, 
and its deep enmity with Al-Qaeda and Hamas, the leadership is 
strongly committed to cooperate with us on curtailing any illicit 
finance that may originate in or flow through UAE territory.  With 
our assistance, the UAE is taking steps to further scrutinize bulk 
cash movements into and out of its territory, but still lacks 
sufficient capacity to identify, investigate and prosecute 
offenders.  We will hold a major bulk cash smuggling training and 
operational program in late February, which we will leverage to 
pave the way for even greater intelligence and law enforcement 
cooperation with the Emiratis.  Your visit is an opportunity to 
reiterate the high-level USG interest in greater cooperation and 
exchange on illicit finance issues, which has been raised by 
Secretaries Clinton, Geithner and Napolitano, as well as Amb. 
Holbrooke and many other USG officials in the past six months. 
 
 
 
Economic Outlook - A Tale of Two Cities? 
 
---------------------------------------- 
 
 
 
¶7. (C) The UAE economy (essentially Abu Dhabi and Dubai) continues 
to feel the effects of the global crisis.  Dubai was hit very hard 
last fall when its property bubble popped, and it faces a 
substantial debt burden (well over 100 percent of Dubai's GDP) that 
will require careful management for years to come.  Abu Dhabi 
initially thought itself less likely to be affected, but the pinch 
has become apparent here within the past nine months.  Dubai style 
layoffs and project cancellations or delays have occurred in Abu 
Dhabi, even as the high profile projects will continue, albeit more 
slowly.  The International Monetary Fund recently predicted zero 
percent growth in 2010, largely as a result of Dubai's significant 
drag on the national economy.  However, despite relatively stable 
oil prices, Abu Dhabi entities are also more conservative.  The 
lavish spending of recent years has been cut dramatically partly 
due to a more conservative approach, but also Abu Dhabi firms, 
especially parastatals, have been systematically ordering price 
cuts by contractors.  Many fear there will be little growth unless 
additional fiscal stimulus materializes.  Although lending rates 
have fallen due to strong Central Bank pressure, banks and private 
sector firms continue to report credit conditions remain tight and 
limit recovery. 
 
 
 
¶8. (C) Dubai continues to attempt to deleverage and restructure a 
significant load of its outstanding debt obligations.  The IMF's 
low growth rates are largely based on expected contraction in 
Dubai's real estate sector and a persistent liquidity crunch due to 
shell shocked and impaired Dubai banks.  The overall struggles seen 
in Dubai's real estate and banking sectors have also been 
exacerbated by uncertainty about the progress and transparency of 
current restructuring efforts at Dubai World and other Dubai 
government related entities (GREs).  Investors remain concerned 
about Dubai's credit worthiness and the cost of borrowing - if 
available - remains significantly high.  Some Dubai entities - 
including Ruler Sheikh Mohammed Bin Rashid's wholly owned Dubai 
Holding conglomerate and Emirates NBD, the UAE's largest bank by 
assets - have cut ties with international ratings agencies like S&P 
following unfavorable downgrades.  Observers predict it will take 
years for Dubai to recover from the debt burden and loss of 
confidence, even as in many ways the Emirate continues to serve as 
a regional logistics, tourism and financial hub. 
 
¶9. (C) Despite appearing to be a modern economy on the surface, in 
many ways local regulations are outdated, inefficient and poorly 
enforced.  When the economy was booming in the middle of the last 
decade, few cared that the regulatory framework was not keeping up. 
Today, although many recognize policies must be modernized, reform 
remains a slow and nontransparent process.  Bankruptcy law, capital 
markets regulation and the real estate sector all require 
significant revisions, but, to date, there are few indications the 
rumors of change are accurate. 
 
 
 
ENERGY - THE PAST AND THE FUTURE 
 
-------------------------------- 
 
 
 
¶10. (C) Dubai's service based economic model is relatively new and 
unique, as most of the UAE's development, particularly in the 
Emirate of Abu Dhabi, was funded by oil revenues.  The hydrocarbon 
sector was developed years before the UAE was established in 1971 
and allows the government of this small country the wealth to 
provide its population with a high standard of living.  Abu Dhabi 
exports about 2.2 million barrels a day of oil, primarily to Far 
Eastern markets (none to the U.S), and is investing heavily to 
raise production capacity from the current 2.8 mbd to 3.5 mbd by 
¶2015.  Although the UAE exports about 4 billion standard cubic feet 
a day (scfd) of gas, the UAE's gas deposits are largely associated 
and a significant portion of production is reinjected for enhanced 
oil recovery.  The relative shortage of gas is problematic, as 
domestic production is insufficient to power the UAE's rapid 
economic development.  In 2001, the UAE, through its Offsets Group, 
entered into a long term gas deal (Dolphin Energy) with neighboring 
Qatar and today imports 2 billion scfd via a pipeline designed to 
deliver 3.2 billion scfd.  Dolphin Energy, partially owned by the 
government of Abu Dhabi, would import more gas if Qatar's current 
gas moratorium were lifted. 
 
 
 
¶11. (C) In 2007, Abu Dhabi Emirate began a study of the UAE's long 
term electricity needs and determined that the UAE would be unable 
to produce enough gas or develop sufficient renewable capacity to 
meet growing demand.  After dismissing oil and coal as 
environmentally unfriendly, Abu Dhabi determined that nuclear power 
would best serve the Emirate's long-term electricity needs. 
Recognizing that nuclear power in the Gulf region would be 
disconcerting to many, the UAE choose to publically renounce 
uranium enrichment and reprocessing (ENR).  In addition to 
codifying this policy in the US-UAE 123 Agreement, which was 
brought into force on December 17, the UAE's October 2009 nuclear 
law also bans ENR.  The program has moved quickly and, in December 
2009, Abu Dhabi awarded a tender for the UAE's first four nuclear 
power plants to Korea's KEPCO, whose remarkably low price beat out 
GE/Hitachi and France's AREVA. 
 
 
 
¶12. (C) Concurrently, Abu Dhabi is also investing heavily in 
renewable energy.  The government set a target to produce 7 percent 
of total electricity demand from renewables by 2020, an effort led 
by Masdar, the Abu Dhabi Future Energy Company, which is owned by 
Mubadala.  Masdar has four main divisions: Masdar Power, Masdar 
Carbon, Masdar Sustainable Cities and Masdar Institute.  The first 
invests in renewable technologies, the second supports the 
reduction of carbon emissions, the third develops model 
zero-carbon, zero-waste cities, like Masdar City in Abu Dhabi, and 
the last promotes research, through a partnership with MIT.  The 
selection of Abu Dhabi to host the new International Renewable 
Energy Agency (IRENA) in June 2009 is in part demonstrative of 
Masdar's success.  While in many ways the company is pushing the 
limits of current renewable technology, the effort is noteworthy 
and is increasingly attracting regional and global interest in 
renewables.  The similarity between UAE efforts and those under the 
Obama Administration has paved the way for greater US-UAE energy 
cooperation, including planned DOE-Masdar collaboration on 
renewable energy research, technologies and application. 
 
 
 
INVESTMENT AND SOVEREIGN WEALTH FUNDS 
 
-------------------------------------------- 
 
 
 
¶13. (SBU) Thanks to high oil prices and a miniscule population, UAE 
institutions are major foreign investors, with the Emirate of Abu 
Dhabi's leading sovereign wealth fund (SWF), the Abu Dhabi 
Investment Authority (ADIA), generally recognized as one of the 
world's largest SWFs by assets.  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.  Abu Dhabi officials have consistently assured us 
that the Abu Dhabi Government would never use its foreign 
investments as a foreign policy tool and provided details overviews 
of their investment principles and allocation strategies.  ADIA and 
Government of Abu Dhabi officials worked closely with the Treasury 
Department and the Government of Singapore to develop the "Santiago 
Principles" for SWFs and for countries receiving SWF investment. 
 
 
 
¶14. (C) Although ADIA is a largely passive, portfolio investor, 
other UAE investment organizations and State-owned enterprises take 
larger active stakes in overseas investments, particularly in 
global energy assets.  Abu Dhabi's Mubadala has invested in 
aerospace technologies, manufacturing, health and energy assets and 
partnerships, both domestically and internationally. 
Government-owned International Petroleum Investment Corporation 
(IPIC) has made both domestic and international investments in 
refineries, pipelines, and other production facilities.  These are 
just a few of the billions of dollars of UAE investments abroad, 
which include real estate, financial sector, and automotive assets, 
to name only a few.  DP World's ultimately failed 2006 attempt to 
purchase P&O's U.S. assets is still a fading 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 may still hear concerns 
about "political risk" premiums for foreign investment in the U.S. 
 
 
 
BILATERAL TRADE - STRONG BUT STATIC? 
 
----------------------------------- 
 
 
 
¶15. (C) Success of bilateral commercial relationship (always one of 
the strongest in the region) means there is little interest from 
the UAE in expanding ties through a Free Trade Agreement, or even 
the existing Trade and Investment Framework Agreement (TIFA).  Our 
efforts to negotiate a Free Trade Agreement ended about 2 years 
ago, reflecting a lack of consensus on key issues (investment in 
UAE energy sector, local agent rules for US companies, and UAE 
compliance with international labor standards).  The UAE's current 
approach is to seek bilateral liberalization in discrete sectors, 
as UAE private sector remains strongly opposed to greater 
liberalization that would benefit foreign firms, but have little 
upside for Emirati businesses.  While some give lip service to an 
interest in greater trade and investment policy coordination and 
cooperation, there is no indication this is a high priority for 
federal or local governments. 
OLSON