US embassy cable - 03KUWAIT1213

C O N F I D E N T I A L SECTION 01 OF 03 KUWAIT 001213 
 
SIPDIS 
 
STATE FOR NEA/FO (DAS CHENEY AND DAS CROCKER) 
STATE FOR E (U/S LARSON) 
STATE FOR EB (A/S WAYNE), EB/CBA, AND EB/IFD 
USDOC FOR 3131/USFCS/OIO/ANESA 
USDOC FOR 4520/MAC/AME 
TREASURY FOR U/S TAYLOR AND OTA 
STATE PASS OPIC, USTDA AND EXIM 
STATE ALSO PASS USAID 
DOD FOR U/S FEITH 
 
E.O. 12958: DECL: 03/30/2013 
TAGS: EINV, ETRD, EAID, BEXP, PREL, IZ, KU 
SUBJECT: PROMOTING U.S. (AND OTHER FOREIGN) TRADE WITH, AND 
INVESTMENT IN A NEW IRAQ 
 
Classified By: Ambassador Richard H. Jones for reason 1.5 (D). 
 
INTRODUCTION 
------------ 
 
1.(C) While the world focuses on the short-term humanitarian 
needs of the Iraqi people, it is obvious that the 
resurrection of the Iraqi economy, demolished by decades of 
mismanagement, will require literally trillions of dollars. 
This burden cannot be borne by the international community; 
the vast bulk of this capital must come from the private 
sector.  Unique USG programs such as the Overseas Private 
Investment Corporation (OPIC), the U.S. Trade and Development 
Agency (USTDA) and the Export-Import Bank of the United 
States (EX-IM) can and should play a major role in 
facilitating the flow of U.S. trade and investment into the 
new Iraq.  Similar programs within the World Bank Group such 
as the Multilateral Investment Guarantee Agency (MIGA) and 
the International Finance Corporation (IFC) should also be 
encouraged to play significant roles at the multilateral 
level.  Finally, technical assistance programs, perhaps 
orchestrated by USAID and the Treasury Department's Office of 
Technical Assistance, could help capital-rich Persian Gulf 
states develop their own institutions to provide trade and 
investment finance programs similar to these, thereby 
mobilizing their wealth more effectively for investment 
projects in Iraq, Afghanistan, and elsewhere. 
 
PROPOSAL 
-------- 
 
2.(C) With the above in mind, Embassy Kuwait proposes: 
 
a) to shortly open a joint FCS/OPIC/TDA/EX-IM office in 
Kuwait to provide front line support to U.S. exporters 
seeking to do business in the new Iraq, possibly using MEPI 
funds to support the establishment of the operation 
 
b) that USDOC and Treasury work closely with IMIs such as the 
World Bank to encourage MIGA, IFC and other similar programs 
to consider rapidly establishing programs to promote the 
rebuilding of the Iraqi economy 
 
c) that USAID and Treasury's Office of Technical Assistance, 
possibly working with the World Bank and others, develop 
proposals for programs to help Kuwait and other Persian Gulf 
states develop trade and investment guarantee programs 
similar to OPIC and EX-IM. 
 
PROPOSAL A: US TRADE PROMOTION OFFICE 
------------------------------------- 
 
3.(C) To date, post has received hundreds of inquiries from 
Kuwaiti firms seeking information on how they can do business 
in the new Iraq, and many of these either already have U.S. 
partners or are actively looking for U.S. partners. 
Separately, many U.S. firms have expressed their intent to 
fully exploit the business opportunities opened by the fall 
of the Hussein regime.  However, it seems clear that Iraq 
will be a difficult place to do business for some time, and 
legal and regulatory structures and financial systems will 
require massive restructuring.  The perceptions of political 
risks are also likely to remain high, at least in the medium 
term. 
 
4.(C) U.S. exporters of goods and services are more than able 
to assess commercial risks, but will look elsewhere for 
protection from political risks.  These, of course, are 
exactly the risks agencies such as EX-IM and OPIC are 
designed to help firms mitigate.  For example, until a modern 
international payment system is in place, and until economic 
activity in Iraq expands to the point where consumers have 
disposable income, U.S. exporters are unlikely to sign 
significant supply contracts with revived Iraqi firms, nor 
are they likely to find banks willing to extend significant 
credit for such trade.  EX-IM guarantee and lending programs 
may provide sufficient comfort to exporters and lenders to 
encourage the onset of such trading activity.  And OPIC 
investment guarantee programs would similarly allow U.S. 
firms to more fully participate in the reconstruction of Iraq 
by shielding firms from political risks so they can focus on 
commercial investments that will create badly needed jobs and 
revive a decimated Iraqi economy.  Finally, TDA programs such 
as funding feasibility studies can introduce key officials in 
the new Iraqi government and in the private sector to U.S. 
firms and technologies that will help quickly reintroduce 
Iraq to the modern world economy. 
 
WHY KUWAIT? 
----------- 
 
5.(C)  Our proposal is to open a joint FCS/OPIC/TDA/EX-IM 
office here in Kuwait that will serve as a service center for 
U.S. firms coming to the region for business in Iraq.  The 
office should be led by US&FCS, with its extensive network of 
commercial offices throughout the U.S. and its expertise in 
business counseling.  We see the office located in Kuwait for 
several reasons.  First and foremost, Kuwait is the only Arab 
country that has publicly and repeatedly stated its support 
for coalition actions against Iraq.  In addition to this 
verbal support, Kuwait is providing literally hundreds of 
millions, if not billions, of dollars worth of support for 
the military effort. 
 
6.(C) Beyond these political factors, Kuwaitis control 
hundreds of billions of dollars of private capital, capital 
that will be badly needed to rebuild Iraqi farms, businesses, 
and factories.  Kuwait has a long history of commercial and 
family ties in Iraq, especially in the South, and Kuwaitis 
tell us that they already have their eyes set on 
reestablishing and building on those relationships.  Helping 
to build those relationships between Iraq, Kuwait, and the 
other states of the Gulf Cooperation Council will be 
important to reestablishing stability in the region. 
Finally, many Kuwaiti companies already have strong ties, as 
agents, distributors, or partners with U.S. firms, and those 
Kuwaiti firms could be an invaluable source of knowledge 
about Iraqi market conditions for U.S. firms seeking to enter 
the new Iraq. 
 
7.(C) Establishing the office quickly in the region will be a 
clear signal of U.S. intent to participate fully in the 
reconstruction effort in partnership with Kuwait and other 
GCC states.  It also will encourage U.S. firms to seriously 
consider partnerships with local firms as they pursue 
business opportunities.  Eventually, the office could be 
relocated to Baghdad, but Kuwait offers a safe and secure 
location, with excellent infrastructure, to initiate 
operations.  While individual agencies would likely absorb 
their own personnel costs, we suggest that MEPI funds could 
be a source for the start-up costs. 
 
PROPOSAL B: MIGA AND IFC 
------------------------ 
 
8.(C) Of course, U.S. firms are not the only companies that 
will look to do business in the new Iraq, nor could they 
provide all the capital needed.  Some projects may be so 
large that they will require the creation of multi-national 
consortia to undertake.  For these multinational efforts, one 
must turn to multinational agencies for support.  Hence the 
involvement of MIGA and the IFC will be vital.  We understand 
that neither has underwritten projects in Iraq for years, and 
that important issues such as IMF arrears will need to be 
addressed before they can resume such work.  However, we 
encourage Washington agencies to begin (or, more likely, 
accelerate) discussions with the IMIs to rapidly deal with 
any significant impediments and to quickly resume operations 
with a new Iraqi government.  MIGA investment guarantee 
programs are particularly influential on financial 
institutions making major lending decisions.  The ability of 
the IFC to take direct equity stakes in important projects in 
Iraq would be an important political signal to the Iraqi 
people of the international community's commitment to their 
economic well-being and its faith in their economy. 
 
PROPOSAL C: TA FOR OPIC/EX-IM LIKE PROGRAMS IN THE GULF 
--------------------------------------------- ---------- 
 
9.(C) As noted above, Kuwait (and other Gulf states) controls 
hundreds of billions of dollars in private capital, mostly 
held in Western equities.  This capital, properly mobilized, 
could be an invaluable source of funds for job and wealth 
creation for the Iraqis.  However, Gulf financial 
institutions tend to be relatively unsophisticated and 
notoriously risk-averse.  Arab-wide programs such as the 
Inter-Arab Investment Guarantee Corporation (IAIGC) are 
relatively small (IAIGC wrote only 3 investment guarantees in 
2001 according to its annual report), and, according to our 
Kuwaiti interlocutors, are prone to paralysis caused by 
political interference.  We believe that with the appropriate 
technical assistance, Gulf states could easily develop their 
own trade and investment guarantee organizations.  We have 
tested the idea of a "Kuwait Iraqi Private Investment 
Company" on a few select Kuwaiti contacts, and they expressed 
enthusiasm for the idea.  With a few tens of millions of 
Kuwaiti Dinars as capital, such an institution could mobilize 
hundreds of millions of private investment, with profits 
plowed back into the organization. 
 
10.(C) We are reluctant to shop the idea around too much, 
however, if we cannot provide the necessary support.  We see 
that Treasury's Office of Technical Assistance, perhaps 
working with USAID, would likely be the best source of the 
training and advice for Gulf states to establish their own 
domestic programs.  If Washington will signal is willingness 
and ability to provide such assistance (again, possibly 
funded by MEPI if not by the governments themselves), we can 
then engage more fully with our interlocutors to help them 
develop a formal proposal. 
 
CONCLUSION 
---------- 
 
11.(C) Fully engaging the U.S. and GCC private sector in 
Iraq's reconstruction effort will be vital to its success. 
The most important issues to achieve this will be the most 
basic -- transparent and predictable legal and regulatory 
structures, business friendly tax regimes, and the other key 
elements of the investment climate.  We look to the Office of 
Reconstruction and Humanitarian Assistance to work with the 
new Iraqi government to do everything possible to get these 
elements right.  These are the necessary conditions to 
attract trade and investment, but they are not sufficient. 
In addition, governments will need to take steps to encourage 
their firms to seriously consider entering the Iraqi market, 
and to provide comfort to those who do.  We believe steps 
such as those outlined above will go far to help attract 
foreign investment into Iraq, and more importantly, to ensure 
the Iraqi people benefit fully from their hard-won freedom. 
JONES