Gulf States Newsletter

PEOPLE, POLITICS & RESOURCES IN THE GULF REGION

www.gsn-online.com Volume 33 • Issue 863 • 23 October 2009

Confrontation threatens Kuwait reform hopes

Despite the slow but steady progress now being made on policy issues, the prospect of an old-style ministerial
grilling threatens Prime Minister Sheikh Nasser Mohammed and may lead to the dissolution of parliament

B
arely five months into the life of Kuwait’s new parliament
– elected in May with the country’s first four women MPs
and a reinforced bloc of reformers – beleaguered Prime
Minister Sheikh Nasser Mohammed Al-Ahmed Al-Sabah is
again under threat. Veteran Popular Bloc leader Ahmed Al-
Saadoon has promised to interrogate him over the management
of office expenses and the handling of Kuwait’s investment
portfolio during the world financial crisis. Matters could come
to a head within days, risking yet another dissolution of the
National Assembly.
A new Group of 26 political and media figures campaigning for
pragmatism and compromise met Emir Sheikh Sabah Al-
Ahmed Al-Jaber Al-Sabah and the cabinet for talks this week.
But they fear that, this time, the exasperated head of state might
resort to a prolonged suspension of the distinctive parliamentary
system if Sheikh Nasser is pressured into standing down.
“We are always afraid that the Emir will get fed up and will
suspend the constitution for a long time,” Group of 26
spokesman Yousef Al-Jassem told GSN the day after the talks.
The risk of confrontation and dissolution has re-emerged just
months after Kuwaitis voted out a number of obstructive Islamist
MPs, opting instead to bolster the liberals and modernising
independents in parliament. This has led to a revived focus on
economic priorities: the assembly’s finance and economics
committee has begun a detailed review of the new five-year
development plan; it has already approved framework legislation
for a new non-bank financial regulator. But Al-Saadoon’s move
threatens a return to the old obsession with constitutional control
of the executive to the point where policy-making and project
decisions are almost paralysed.
The Popular Bloc may lack the votes to bring down Sheikh
Nasser Mohammed, and the G26 has urged him to answer the
critics face-to face, believing he could win the majority support
of MPs. However, in contrast to former education minister
Nouriyah Al-Subaih – who emerged triumphant from such a
grilling last year – Sheikh Nasser Mohammed is a man for the
corridors of power who may not have the personality to carry it
off. In any case, Sheikh Sabah may decide the process is beneath
CONTINUED ON PAGE 4

Circling Iran GCC capability Ailing Al-Bayaa head Mishaal in Geneva

Tehran is talking tough, but
the application by the United
States and its allies of trade
and financial controls, defence
co-operation and diplomacy
may yet throttle Iran’s atomic
ambitions. GSN’s latest
soundings found US analysts
focusing on cracks in the
Iranian regime; while Barak
Obama won the Nobel Peace
Prize, more bellicose ways of
confronting Iran are rising up
the agenda in DC. Meanwhile
efforts continue to squeeze
Tehran commercially – even if
exporters are still finding ways
to get their l/cs confirmed.
—SEE PAGES 7 AND 10
Gulf Co-operation Council
militaries are developing their
capabilities to deter threats in
the Gulf – with the focus on
Iran. Navies are leading the
way in the big-spending
United Arab Emirates,
Bahrain, Qatar and other
allies. They are supported by
the United States, whose
Department of Defence is
promoting ‘five pillars’ to
underpin GCC capability:
developing missile defence
and target hardening, naval and
aerial defence forces, credible
offensive capabilities and
command and control systems.
—SEE GSN VIEW, PAGE 16
Following rumours last month that
Prince Mishaal Bin Abdelaziz
may have suffered a stroke, the
Allegiance Commission (Al-
Hayat Al-Bayaa) chairman is in
Geneva for health care (GSN
861/7). A recent note on the Saudi
Ministry of Foreign Affairs website
said he received a phone call on
19 October from Yemeni President
Ali Abdullah Saleh, who “got
reassured about the health
condition of Prince Mishaal”. His
previous visits to Geneva included
undergoing surgery in June 2003.
The 83-year-old Mishaal – a major
businessman also known for his
love of camels (GSN 842/5) – was
appointed to head the commission
in late 2007 (GSN 815/6, 792/1).
The commission’s creation in
October 2006 was seen as a
significant step forward in Saudi
political development. Mishaal
was chosen as one of Ibn Saud’s
eldest surviving sons – and one of
the closest to King Abdullah Bin
Abdelaziz, who was establishing
himself on the throne. In a 2008
advertorial in Foreign Affairs,
Mishaal said his appointment by
King Abdullah meant he “will leave
his legacy both politically and
financially on the Kingdom of
Saudi Arabia”.
News of his reported illness will
draw even more attention to the
Al-Saud pecking order, the subject
of an opinion piece by guest writer
Sultan Al-Qassemi (see page 5).

ISSN 0953-5411 Cross-border Information

 Contents

POLITICS
KUWAIT: Confrontation threatens reforms 1
SAUDI ARABIA: Mishaal in Geneva for health care 1
IRAN: Communal tensions rise after suicide bombing 3
POLITICS: OPINION
SAUDI ARABIA: The rise of Mohammed Bin Nayef 5
Gulf States Newsletter
Volume 33 • Issue 863 • 23 October 2009 ROYALS WATCH
QATAR: Emir Sheikh Hamad in North Africa 6
Sales and Service SAUDI ARABIA: King Abdullah’s Syrian rapprochement 6
Direct: +44 (0) 1424 721 667 SAUDI ARABIA: Nayef in Egypt, MBN in DC 6
Fax: +44 (0) 1424 721 721 SAUDI ARABIA: Nura Al-Sheikh, Faisal Bin Khaled 6
Email: info@gsn-online.com
SAUDI ARABIA: Khalid Bin Sultan in France 6
Director Nick Carn
nick@gsn-online.com MARRIAGES: Bin Saud, Hithlain, Thunayyan 6
ABU DHABI: Meetings, Abdullah Bin Zayed 6
Editorial director
Jon Marks (jon@gsn-online.com) DEFENCE AND SECURITY
News editor IRAN: Military infrastructure still needs work 7
Eleanor Gillespie (eleanor@gsn-online.com)
Senior contributing editor ENERGY AND INDUSTRY
Paul Melly (paul@gsn-online.com)
SAUDI ARABIA: Bandar sues Transocean over contract 9
Contributing editors
Nadine Marroushi IRAQ: KRG oil deal exposes middlemen 9
John Hamilton
Kevin Godier (Finance) FINANCIAL RISK
James Gavin IRAN: Trade finance ‘fraught with burdens’ 10
Cartographer IRAN: UK blacklists businesses 10
David Burles
UAE: Carriers tap ECA money 11
Production
Jill Macfarlane-Miller (admin@gsn-online.com) BAHRAIN/REGION: Hardy, Arig insurance joint venture 12
Webmaster
Chris Light (webmaster@gsn-online.com) DIARY
Publications director EVENTS: What’s on around the region 12
Nick Carn (nick@gsn-online.com)
DATA
Gulf States Newsletter
Published fortnightly since 1974 INDICATORS: Governments lead financing 13
PO Box 124, Hastings, East Sussex TN34 1WP, UK DATA: Middle East risk indicators 13
Tel: +44 (0) 1424 721 667 DATA: Stock markets and exchange rates 13
Fax: +44 (0) 1424 721 721
Email: info@gsn-online.com RISK MANAGEMENT REPORT
Cross-border Information Ltd IRAQ: E/5 14
Registered office: 19 Wellington Square, Hastings, East Sussex
TN34 1PB, United Kingdom IRAQ: Licensing rounds 14
Directors: JJ Marks, JM Ford, NJ Carn KUWAIT: C/2 15
KUWAIT: Regional co-operation 15
© 2009 by Cross-border Information Ltd. All rights reserved.
Single subscriptions of GSN are sold by post, and email. Data and information GSN VIEW
published in GSN is provided to Cross-border Information Ltd (CbI) by its staff and GCC DEFENCE: ‘Five pillars of deterrence’ 16
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2 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009

Iran
Communal tensions rise as suicide bomber kills
revolutionary guards
Everyone from ‘Great Satan’ America to Al-Qaeda has been blamed for a suicide bombing that targeted senior IRGC
commanders in Sistan va Baluchistan. The incident points to deepening confrontation in sensitive, often ethnically
distinct border regions such as Khuzestan province, where Tehran has rejected all challenges to its authority
T
he suicide bombing in Pishin, near the border with
Pakistan, has struck at the heart of the Iranian
Revolutionary Guard Corps (IRGC or Pasdaran), killing
six commanders, including deputy commander of ground forces
General Noor Ali Shooshtari and provincial commander
Rajab Ali Mohammadzadeh, and 37 others. The attack hit at
the core of President Mahmoud Ahmadinejad’s regime, in
which a number of IRGC members have gained senior
positions, and at the country’s Shia Islamic revolutionary
institutions. And it will raise speculation that ethnic and
religious minorities are seeking to exploit the unrest stemming
from June’s disputed presidential election.
A Sunni group, Jundallah (Soldiers of God), has claimed
responsibility for the attack, saying it was in response to the
“constant crime of the regime in Baluchistan”. It named the
bomber as Abdol Vahed Mohammadi Saravani. Iranian
officials have previously linked the group with Al-Qaeda,
although others suggest it may have links with the Pakistani
Taliban. But in classic style, Ahmadinejad accused unspecified
foreigners of involvement. “The criminals will soon get the
response for their anti-human crimes,” he said, according to the
official Islamic Republic News Agency (Irna). The IRGC pointed
to “the Great Satan America and its ally Britain”, according to
a statement released to the semi-official Fars news agency. The
US State Department condemned the “act of terrorism” and
said accusations of involvement were “completely false”.
According to Al-Jazeera Satellite Channel, three Iranians have
been arrested in connection with the attack.
The incident follows a pattern of tension in Iran’s frontier
regions. In May, Jundallah claimed responsibility for a suicide
bombing that killed 25 people at a Shia mosque in Zahedan,
the provincial capital. Thirteen members have been hanged by
the authorities for their alleged involvement. In the latest attack,
the bomber, with explosives strapped to his belt, blew himself up
in a hall where guards commanders and tribal leaders were due
to meet. The IRGC had taken over security in the province,
which is home to dissident ethnic and religious minorities.
Conflict in ‘Arabistan’
Largely overlooked by a media focused on the continuing
crackdown on dissidents and supporters of the opposition in
Tehran, the authorities have intensified their repression of
minorities. In the south-western province of Khuzestan this
month, seven out of nine local campaigners for the rights of
Arab speakers were sentenced to death after more than two
GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Politics
years in solitary confinement. Images of a public hanging have
begun to surface on opposition websites, although it is
impossible to verify the date. This summer, four local people
were shot dead by police, and others arrested. Eight students at
Chamran University in Ahwaz have been detained and taken to
secret locations.
There have also been arrests and the imposition of long prison
sentences, after clashes between security forces and local
protesters in the Shoeibiyah valley, where the government has
confiscated land from farmers to create three large sugar
plantations. In one case, a sentence of hand and leg amputation
was imposed on a UN-recognised refugee who had been
illegally deported from Syria back to Iran.
Over recent months, longstanding resentments over cultural and
local political rights have fused with anger at Ahmadinejad’s
official election victory. Mass protests in Ahwaz in June appear
to have provoked the authorities into taking a harder line.
As in other regions with large non-Persian or non-Shia
populations, the dissent stretches back many years. This
summer’s post-election confrontation has merely added a
further layer of anger to that already vented on numerous
occasions. Khuzestan’s population is 70% Arab, and there is wide
resentment at the imposition of Farsi as the sole language of
public, official and educational life. The stakes are heightened by
the province’s crucial economic and strategic value. Abutting
the Iraqi border, it accounts for up to 90% of national oil output.
With five rivers, it is also a fertile agricultural region that has
been largely spared the environmental damage visited by
Saddam Hussein on the neighbouring Iraqi areas of the lower
Tigris/Euphrates basin. For Tehran, this is a province that must
be defended at all costs, and it was the scene of some of the
bloodiest fighting in the 1980s Iran-Iraq war.
The province has a long history of activism in support of its
distinctive culture. In the early 20th century, it enjoyed
substantial autonomy, and it was with local ruler Sheikh Khazal
that the British negotiated to build their first oil refinery at
Abadan; indeed, the British even considered installing Khazal as
King of Iraq. Khazal was deposed in 1925 by Reza Shah, who
then sought to impose Farsi on a hitherto majority Arab-
speaking population. Ever since, the province – often referred
to as Arabistan by local rights campaigners – has been the scene
of sporadic protests against successive governments.
Khuzestan has only 8% of Iran’s population. But there are tribal
and cultural links with southern Iraq, and it has therefore been
3
Politics
a priority target of government efforts to ‘Persianise’ areas of the
country that have a substantially non-Farsi culture. Education
in Farsi, rather than Arabic, is compulsory.
An exiled cultural rights campaigner claims that much of the
indigenous Arab population is poor. But although there is no
dominant local feudal system – in contrast to many parts of Iran
– the state has taken over much of the land and largely allocated
it to Persian incomers. Tehran’s treatment of Khuzestan was
“like a colonial relationship”, he told GSN. There were hints of
a softening approach when Mohammad Khatami became
president; the climate became more tolerant and expressions of
indigenous Arab culture began to revive. But in 2005, during
Khatami’s final months in power, and with conservative
nationalists regaining control of parliament, there were reports
of a plan to shift the province’s population in favour of Farsi
speakers by forcing some Arabs to move to other parts of the
country. There were claims that vice president Mohammad Ali
Abtahi (currently in jail for his role in post-election protests)
had written a paper outlining the scheme, but he denied this.
Whatever the truth about its origins and authorship, the draft
plan signalled the return of a hardline approach as conservative
Kuwait’s latest parliamentary stand-off
CONTINUED FROM PAGE 1 Development. He remains a controversial figure, noted for his
the dignity of his premier and opt for dissolution instead. The
G26 will try to persuade Al-Saadoon to back off. But the Bloc
leader is not a man for compromise; some believe he still carries
the bruises of his eviction from the speakership many years ago,
when he was succeeded by the more easy-going Jassem Al-
Khorafi, a close ally of the palace.
Highlighting the destabilising consequences of a system that
allows any MP the right to summon a minister or premier to
face interrogation and a confidence vote, Al-Jassem said: “We
should rationalise the control of the prime minister in a way
that will help the government to do its work.”
Kuwait’s parliamentary system needs Al-Saadoon, the G26
believes. “He has a history of protecting the constitution and of
popular support, and a history of standing firm against
corruption in the country, especially in the government
agencies,”Al-Jassem told GSN. However, while the Bloc leader
believes the present government has no future, G26 believes
Nasser Mohammed’s team should be given the chance to show
what it can do, and then be held accountable. Although there
is no national consensus on how Kuwait should reform, G26,
sees scope for moving forward within the constraints of the
present system. This view appears to be shared quite widely.
The chief executive of one of Kuwait’s largest financial
institutions said financial crisis had provoked the government
into taking a more decisive leadership role. After years of
sluggishness, the administration is making a serious effort to get
the much-delayed five-year plan approved and into action.
4 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Iran & Kuwait
Farsi nationalists reasserted their clout in Tehran – an approach
that gained momentum when Ahmadinejad took over. Reports
of the plan sparked mass protests in Ahwaz, even while Khatami
was still in office. Crowds marched through the streets shouting
“Ahwaz is my home”. The protests were repressed by Basij
militia and IRGC units, leaving about 50 people dead.
The 2005 Khuzestan unrest sparked protracted protests by other
minorities, including Kurds and Azeris – which helps to explain
why the authorities have now taken such a tough line. Tensions
were heightened with the assassination in June 2007 of radical
pro-government cleric Hashem Saimari, who was noted for
fierce diatribes that condemned Sunnis as heretics. He was the
imam of the Zahraa mosque in Hey Al-Thawra, a poor, mainly
Arab district of Ahwaz.
The anti-government Ahwaz Human Rights Organisation
claims that more than 5,000 local people have been arrested, at
least 130 killed and 150 disappeared since the protests of spring
2005. The bodies of torture victims have washed up on river
banks. Pro-government supporters have accused local rights
campaigners of links to Sunni Wahhabi fundamentalists and to
British intelligence. The campaigners have dismissed the claims.
Reformers were dismayed at the reappointment to government
of Sheikh Ahmed Al-Fahd as Deputy Premier for Housing and
tribal networking and wide business connections.
The prospects for change extend beyond business. The
Constitutional Court has significantly advanced women’s rights
by scrapping a 47-year-old rule that obliged them to get the
permission of their husbands, fathers or guardians before getting
a passport in their own right. Women’s Cultural and Social
Society secretary-general Lulwa Al-Mulla told GSN rights
campaigners were planning a televised throwing away of
hundreds of scissors at the national book fair in Mishrif to
demand the scrapping of controls on book distribution imposed
at the height of the Islamist political ascendancy.
However, many Kuwaitis complain that clear strategy and
leadership for change remains absent, with Sheikh Nasser
Mohammed needing to overcome a serious problem of personal
credibility. He continues to be perceived as weak and indecisive,
and too ready to reverse policy decisions in response to pressure
from sectional interests or parliamentary groups. And senior
local bankers point to the embarrassing abandonment of a
petrochemicals joint venture with US giant Dow.
The premier is not helped by Al-Sabah family rifts and rivalries,
or by attempts to drag him into bitter quarrels between Sunni
traditionalist factions and the ill-defined group of Shia radicals
sometimes dubbed Hizbollah Kuwait. Critics have accused him
of relying on a clique of Shia figures and business interests.
Conspiracy theories abound. Even the rescue of Gulf Bank is
regarded with suspicion, despite senior financiers believing that
allowing a Lehman Brothers-style collapse would have shattered
consumer confidence in the entire banking system.
Saudi succession
Assassination attempt improves Mohammed Bin
Nayef’s fortunes
Regional attention is focusing on the assistant interior minister as a serious contender for the Saudi throne
following his narrow escape from a terrorist attack, writes Sultan Sooud Al-Qassemi*
T
here has been an unusual development in the much-
debated topic of the Saudi succession, with the late
August assassination attempt on Assistant Interior
Minister Prince Mohammed Bin Nayef Bin Abdelaziz Al-
Saud (MBN) by Yemeni-born suicide bomber Abdullah
Hassan Tali Al-Asiri catapulting the interior minister’s son
to the front of a group of third-generation contenders for
the throne (GSN 861/8, 860/1).
Observers have noted the difference between MBN and his
father, Prince Nayef Bin Abdelaziz, in dealing with Sunni
terrorists. The extremist mentality that was partially tolerated
by Nayef is being amended by MBN, who has overseen
much of the Saudi terrorist rehabilitation programme since
its inception. Shortly after the attack, the daily Al-Sharq Al-
Awsat published a detailed report on MBN’s role in fighting
extremists and commented:“They [the extremists] have lost
the kindest person dealing with them.” But while MBN may
have a softer touch where Sunni opponents are concerned,
GSN has previously noted that, working with his first cousin
and ally Eastern Province governor Prince Mohammed Bin
Fahd, he has been behind a number of heavy-handed
crackdowns against the Shia population (GSN 860/4).
Increasing prominence for Sudeiri grandsons
With Crown Prince Sultan Bin Abdelaziz out of the
Kingdom for nearly a year for treatment, Nayef – following
his elevation to second deputy premier in April – has been
undertaking the kind of duties normally reserved for the heir
apparent: meeting military officials, hosting provincial
governor meetings and receiving outgoing ambassadors
(GSN 851/1). This has allowed MBN an increased role in
the day-to-day running of the Ministry of Interior. Deputy
Defence Minister Prince Khalid Bin Sultan is in a similar
position, taking on more responsibility at the Ministry of
Defence and Aviation (GSN 846/5, 845/1). MBN was
recently in the United States for a three-day visit, during
which he met senior officials, including President Barack
Obama (see Royals Watch).
The relatively young MBN’s most prominent role came in
June 2003, when Saudi terrorist mastermind Ali Al-Ghamdi
handed himself over to the prince. MBN has gone on to
show kindness to Al-Ghamdi’s family, helping them
financially and paying for medical treatment of family
GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Politics: opinion
members. After the attempted assassination on 27 August,
MBN rang the parents of Al-Asiri to express his condolences.
While such behaviour might be considered odd in western
countries, in the tribal societies of the Arab world it is a
public relations triumph not to mention paternal sentiments
towards wayward sons. But MBN’s softer side should not
overshadow his track record of fighting extremists – most of
the 45 Saudis on the Kingdom’s most-wanted list have been
killed or captured.
A flawed list of contenders
MBN’s chances of becoming the first sovereign from among
the grandsons of King Abdelaziz are also boosted by the
problems – ranging from corruption allegations to ill health
to foreign mothers – of some other contenders. From the
second generation, Prince Miqrin continues to be mentioned
as a strong candidate, although his mother wasYemeni, which
may count against him (GSN 828/3, 827/16, 820/8, 805/4,
772/7). Another younger-generation prince considered to
be in the running is Saudi Commission for Tourism chairman
Sultan, son of popular Riyadh governor Prince Salman Bin
Abdelaziz. There has also been some talk of Prince Bandar
Bin Khalid Al-Faisal Bin Abdelaziz, who does not yet hold
a public role but is considered by some to be a rising star due
to his profile outside the Kingdom. His father, Prince
Khalid, has been in the limelight following his appointment
as Makkah governor in May 2007 (GSN 822/7, 820/8,
806/7, 806/7, 805/40).
Few of the younger princes can match MBN’s credentials,
not least his impeccable bloodline – he is descended from
the Al-Saud family through both parents as his mother,
Jawahar Bint Abdelaziz Bin Musaid, is from the family’s
Jiluwi branch. He is also married to Reema Bint Sultan, a
daughter of the crown prince. Even without his father
becoming King as expected, MBN’s claims to the throne are
unrivalled in one aspect: out of some thousands of Al-Saud
royals, including the top 100 or so involved in security affairs,
MBN is one of the very few to be able to claim that he has
‘paid in blood’ for his country – and that is a tough claim to
beat.
* Sultan Sooud Al-Qassemi is a non-resident fellow of the Dubai
School of Government and a columnist forThe National newspaper
in Abu Dhabi.
5
Royals watch
QATAR
EMIR SHEIKH HAMAD: North Africa
Emir Sheikh Hamad Bin Khalifa Al-Thani has been in Algeria and
Libya for official talks. The Emir held meetings with Libyan leader
Colonel Muammar Qadhafi, Prime Minister Dr Al-Mahmoudi Al-
Baghdadi and Foreign Minister Musa Kusa (previously the foreign
intelligence head). In Algeria, Sheikh Hamad met President
Abdelaziz Bouteflika, Prime Minister Ahmed Ouyahia, Foreign
Minister Mourad Medelci and Finance Minister Karim Djoudi.
SAUDI ARABIA
KING ABDULLAH: Syria rapprochement
King Abdullah made a landmark two-day visit to Syria in early
October for talks with Syrian President Bashar Al-Assad. Syrian
state news agency Sana reported that King Abdullah and Al-Assad
agreed to “remove the obstacles” to closer ties. They also called for
the “joining of Arab, Islamic and international efforts to lift the
[Israeli] embargo imposed on the Palestinians and put an end to the
practices of Israeli occupation forces against the rights of the
Palestinian people and sacred sites of Islam”. Riyadh and Damascus
have had difficult relations for several years, especially following the
2005 assassination of the former Lebanese prime minister Rafiq
Hariri. There are also tensions over Syria’s friendship with Iran.
NAYEF BIN ABDELAZIZ: Egypt meetings
Interior Minister and Second Deputy Premier Prince Nayef Bin
Abdelaziz has been in Sharm El-Sheikh for a meeting of the interior
ministers of Iraq’s neighbouring countries. Nayef held talks with
Egyptian intelligence chief Omar Suleiman, and Prime Minister
Ahmed Nazif, and Iranian Interior Minister Mustafa Mohammed
Najjar.
MOHAMMED BIN NAYEF: In Washington
Assistant Interior Minister Prince Mohammed Bin Nayef was in
Washington in early October for a three-day visit. Prince
Mohammed met President Barack Obama, and senior officials
including US Attorney General Eric Holder; Secretary of Homeland
Security Janet Napolitano; Under Secretary of State for Political
Affairs William Burns and Commander, United States Central
Command General David Petraeus.
NURA AL-SHEIKH: Death
Nura Bint Abdullah Bin Hassan Al-Sheikh, the mother of Turki
Bin Abdullah Bin Abdulrahman and Khalid Bin Saud Bin
Abdelaziz, died on 10 October. Khalid’s father was Saud Al-Kabir
(1878-1960), who created the modern Saudi state. Turki and Khalid
went to see King Abdullah and Foreign Minister Saud Al-Faisal,
who offered their condolences.
FAISAL BIN KHALID/ MOHAMMED BIN NAYEF: Condolences
Following the death of a police officer in a terrorism-related shooting
in Jazan, two princes have been in the news: Asir governor Prince
Faisal Bin Khalid Bin Abdelaziz led the funeral prayers in Jeddah,
and Assistant Interior Minister Mohammed Bin Nayef Bin
Abdelaziz visited the officer’s family in their village near Abha.
Prince Mohammed was the target of a terrorist attack in late August.
6 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Qatar, Saudi Arabia & Abu Dhabi
KHALID BIN SULTAN: French meetings
Assistant Defence Minister Prince Khalid Bin Sultan attended the
joint Green Shield 2 exercises involving the Royal Saudi Air Force and
the French Air Force at Dijon airbase in France. Prince Khalid
reportedly held talks with French Defence Minister Hervé Morin in
Paris, and French Air Force chief General Jean-Paul Palomeros in
Dijon.
BIN SAUD, HITHLAIN, THUNAYYAN: A number of nuptials
There were four marriages on consecutive nights at Riyadh’s Palace of
Culture. On 14 October, Salman Bin Faisal Bin Mohammed Bin
Saud married a daughter of Saad Bin Abdullah Bin Abdelaziz of the
Turki branch. Among others, the bride’s brother Nawaf Bin Saad and
her uncle Bandar Bin Abdullah attended. Also in attendance were the
groom’s grandfather, Baha province governor Prince Mohammed and
Allegiance Commission chairman Prince Miqrin Bin Abdelaziz. The
following night, Saud Bin Fahd Bin Saad Bin Saud married a
daughter of the late Sheikh Abdullah Bin Saleh Bin Abdelaziz.
These two marriages were attended by a large number of King Saud’s
descendants: sons Sattam, Nayef, Faisal, Mansour and Ahmed,
grandsons Mishaal Bin Badr and numerous great grandsons. Yousef,
Nahar and Mansour Bin Saud attended both events. On 16 October
some princes, including Nahar Bin Saud and Jiluwi Bin Abdelaziz
Bin Musaid and many from the Al-Jiluwi branch attended the
wedding of two members of the Hithlain family. The Hithlain, from
the eastern Ajman tribe, were key supporters of the Al-Saud in the
20th century and married extensively into the family. King Abdelaziz
had three Hithlain wives; his son King Saud had one, and Saud Al-
Kabir’s mother was a Hithlain. On 17 October, Majid Bin Thamir
Bin Thunayyan of the Al-Thunayyan branch married a daughter of
Sheikh Bandar Bin Abdelaziz Al-Ayd. Various members of the Al-
Thunayyan branch attended, including the groom’s uncles Nayef,
Fahd and Bandar, cousins Saud (the chairman of Saudi Basic
Industries Corporation), Faisal and Khalid Bin Abdullah Bin
Mohammed, and his brothers Turki, Mohammed, Sultan and
Nawaf.
UAE – ABU DHABI
SENIOR AL-NAHAYANS: Receiving visitors
President Sheikh Khalifa Bin Zayed Al-Nahayan has held a meeting
with Lebanese parliament speaker Nabih Berri. Abu Dhabi Crown
Prince Sheikh Mohammed Bin Zayed Al-Nahayan has held talks
with Swaziland’s King Mswati III, who is on a Gulf tour, and
Nigerian Vice President Goodluck Jonathan. On 19 October, UAE
Higher Education Minister Sheikh Nahayan Bin Mubarak Al-
Nahayan held talks with visiting former British prime minister Tony
Blair.
ABDULLAH BIN ZAYED: South American tour
Foreign Minister Sheikh Abdullah Bin Zayed Al-Nahayan has been
on a long tour of South American states. He visited Brazil, where he
held talks with Minas Gerais state governor Carlos Edward;
Colombia, where he met President Alvaro Uribe; Peru, for talks
with President Alan García; Chile, for talks with President Michelle
Bachelet; Argentina, where he met Buenos Aires mayor Mauricio
Macri; Panama, for talks with President Ricardo Martinelli; the
Dominican Republic; Nicaragua and Cuba.
Iran
Iran shows off new military projects but its new
arsenal fails to impress
Despite an increasingly sophisticated military infrastructure, a fatal crash and a number of technical faults at a
recent air show have undermined President Ahmadinejad’s threats of retaliation if the US or Israel were to strike
I
ran’s late September announcement of a previously undisclosed
nuclear facility, just days before the UN General Assembly
session in NewYork, showed the Islamic Republic at its most
unrepentant. The facility, buried in a mountain about 30km
north-east of Qom, had been prepared since 2004, and has been
monitored since US satellites identified the site in 2005,
according to GSN’s sources in the US intelligence community.
Everything about the site suggests it is a covert uranium
enrichment facility; it is deeply buried, it has multiple entrances,
surface ventilation and electrical facilities are hardened and, most
significantly, its small size suggests it is not a plant for making fuel
for nuclear power plants but a facility where diverted fuel might
be quietly run through approximately 25,000 centrifuges in
secrecy. According to US government sources, the White House
and intelligence community are unsure how Iran learned of the
plant’s exposure, but it acted boldly, beating President Barack
Obama’s administration to the punch.
Amid mounting pressure from the US and European Union,
Russia and China, the Iranians have – as ever – come out of their
corner fighting. Chief nuclear negotiator Saeed Jalili told
reporters after the UN session that Iran would “go ahead and stick
to our nuclear rights” in terms of uranium enrichment. Elsewhere,
tougher words were spoken. At the 22 September parade marking
the anniversary of the Iran-Iraq war, President Mahmoud
Ahmadinejad warned:“If any individual would intend to pull a
trigger in any part of the world against the Iranian nation, his hand
will be powerfully severed from the arm.”
Military exercises and parades
Iran has responded to growing diplomatic pressure with typical
aplomb, launching military exercises and parades that signal the
regime’s willingness to stay the course. In Washington, GSN has
detected growing confidence – almost giddiness – over apparent
cracks in the Iranian regime, and Tehran appears concerned not to
give ground. Iran’s post-election protests breathed new life into
Washington’s regime changers, a community that had almost been
snuffed out by Obama’s determined pursuit of a policy of
engagement with Iran. Following the marches and protests, the
job of selling engagement is more difficult. Critically, the idea of
negotiating (through ciphers) with Rahbar (Supreme Leader)
Ayatollah Ali Khamenei has become less palatable following his
strong backing of Ahmadinejad.
The anniversary of the Iran-Iraq war always warrants major
parades, but according to GSN’s friends in the plane-spotting
community inTehran – a particularly dedicated group of reporters
with an eye for detail – the regime pulled out all the stops to give
the most impressive air show it could muster. The Sacred Defence
GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Defence and security
parade included the main combat fleets of the Islamic Republic of
Iran Air Force (IRIAF): the main air defence fighter, the MiG-29;
strike aircraft the McDonnell Douglas F-4 Phantom and Sukhoi Su-
24s; and the training and light attack fleet of Northrop Grumman
F-5s.
If the parades were meant to signal strength, they were a mixed
success. The IRIAF successfully showed off its Saeqeh multi-role
combat aircraft, a Frankenstein’s monster of an airframe based on
the F-5 and incorporating 20 years of Iranian reverse engineering
and tinkering with US, Chinese and Russian combat aircraft. The
first Saeqeh – which GSN has been monitoring since the mid-
1990s – will become operational with IRIAF frontline squadrons
in 2010, though no-one is holding their breath.
The air show was marked by a serious blow to IRIAF prestige
with the crash of Iran’s only airborne early-warning and control
system (AWACS) aircraft, an old Iraqi Ilyushin Il-76 variant that
was kept by Iran after Saddam Hussein flew it there in 1991.All
seven crew died in the crash. According to GSN’s sources, a
number of the planned F-5 sorties did not take off due to technical
faults, and two MiG-29s suffered a near mid-air collision. If the
IRIAF ever has to back up Ahmadinejad’s threats with action, they
will need to raise their game significantly.
Missile developments
Alongside aerial manoeuvres, the IRGC undertook a series of
missile tests in late September and early October. A number of
surface-to-air missiles (SAMs) were brought out at the parades,
including upgraded Russian S-200/SA-5 missiles and a
modernised indigenous clone of the Raytheon MIM-23B Hawk
missiles bought by the Shah in the late 1970s. Despite effective
tinkering, such large and ageing systems cannot compete with
the defensive electronic warfare suites on US or Gulf Co-
operation Council (GCC) aircraft.
The solution to Iran’s SAM requirements – a long-mooted
$800m deal for five batteries of S-300PMU1/SA-20 missiles
from Russia – is now further out of reach due to mounting
pressure on the nuclear file. Though neither Moscow nor
Tehran can be expected to admit it, the deal is largely dead. The
Obama administration has not only applied the stick of political
pressure to Moscow, but brought out the carrots of scaled-back
US ballistic missile defence in Eastern Europe. Even the
Russian defence press, which is notorious for spreading false
rumours of massive Russian arms sales, admitted in early
October that no advance payments had been made and there
was little chance of a purchase because it had “ceased to be just
a commercial deal”.
7
Defence and security
Iran continues to enjoy more success with ballistic missile
technology. Working with Korea, it has made solid steps in
developing the single-stage liquid-propellant Shahab-3
medium-range ballistic missile (MRBM) and the two-stage,
solid-propellant Sajil-2 (Sejil-2) MRBM. On 28 September,
days before the UN session, Iran test-fired a Shahab-3 and a
number of short-range ballistic missiles (SRBMs), including the
Shahab-1, Shahab-2, Fateh-110 and Tondar-69. The missile
trajectory of the Shahab became unstable, but the SRBM flights
were successful. The growing arsenal of unguided SRBMs is of
growing concern to the GCC states and the US. The US
military considers Hizbollah’s use of tactical rockets in clashes
with Israel to be the most significant development in regional
military capability for over a decade, and Iranian SRBMs are
considered difficult to intercept.
Iranian subs in the Gulf
In addition to aircraft, missiles and rockets, Iran has also unveiled
plans to deploy a new class of small submarine in the next two
years. On 3 October, it said it would launch the first Qaeem-
class 500-tonne submarine in 2011. The class fits into an
unusual category; it is not a 120-tonne mini-submarine or
“midget submarine” like Iran’s North Korean-inspired six
Qadir-class 29-metre submarines or its single Nahang-class 25-
metre submarines. Nor is it the size of its three Russian 877
EKM Kilo submarines, which displace 3,076 tonnes.
Instead, the Qaeem is a mid-sized vessel that appears to have
been deliberately designed to give the IRGC a longer-range
delivery system that can comfortably operate in the shallow
waters of the Gulf. The Qadir and Nahang-class mini-subs are
too small to comfortably operate against shipping or ports on
the GCC side of the Gulf, and they are unable to stay “on
station” or carry enough weapons for multiple attacks. The
Kilos are too large to safely navigate the Gulf, particularly if
maritime patrol aircraft and anti-submarine frigates are hunting
them. The Qaeem appears to be designed to harass shipping
GSN view: GCC’s deterrence plans
CONTINUED FROM PAGE 16
GSN has previously written about the powerful fleet of muscular gunboats
and landing craft being built by Abu Dhabi Ship Building (ADSB),
including 12 Ghannatha fast troop carriers, plus six mortar-carrying and six
cannon-armed fire-support variants. ADSB is now beginning to sell landing
craft to other GCC states, notably Bahrain. Manama has ordered two 42-
metre landing craft, each capable of carrying an infantry company (about
130 men) onto enemy-held coastlines. Bahrain is also buying two 16-
metre Sea Keeper fast assault craft capable of moving at 25 knots and
disgorging a platoon of troops or two-wheeled armoured vehicles.
As well as churning out landing craft, the UAE is training its air forces,
special forces and army aviation to support over-water assaults. Though
it is early days for such cross-service ‘joint’ operations, US trainers report
the beginnings of preparation for amphibious strike missions. The key
assets would be the UAE’s Boeing AH-64A Apaches, its BAE Systems Mk
8 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Iran and Gulf waters, View continued
around Gulf ports, attack US amphibious ships anchored off
Iranian beachheads and even hunt ships in the strong currents
of the Strait of Hormuz.
Israeli subs in the Indian Ocean?
As Iran tries to figure out a way to use submarines in the Gulf,
the Israelis are taking their first (public) steps to bring their
1,900-tonne German-built Dolphin submarines into Iranian
coastal waters. Though Israel has long been rumoured to have
sent Dolphins around the African coast, the Israeli Navy went a
step further when the INS Leviathan, one of three Dolphins,
passed through the Suez Canal for the first time. The mission
– and plans to deploy two more Dolphins by 2013 – are a
warning to Iran, which recently deployed anti-piracy patrol
vessels in the Red Sea. The Dolphins – based on the German
Type 212A submarine – are able to land special forces and
launch nuclear and conventional cruise missiles. New
capabilities will allow them to stay submerged for up to 14 days,
giving Israel a potent pre-emptive or retaliatory strike capability
to add to its long-range Jericho MRBMs and its nuclear and
conventional long-range strike aircraft.
After Obama’s first months in power, when observers in
Washington discounted the prospect of military action, some
sources believe an Israeli strike on Iran’s nuclear facilities is once
more looming into view. US military sources told GSN that
Israel had been enquiring – through back-channels – about the
likely US reaction to an attack on Iran from the air, which
would involve over-flying US-policed Iraq.
Analysts believe that were Israel to strike, the Iranian armed
forces have reached a size and sophistication that could make
them a major complicating factor. However, Iranian sabre-
rattling this autumn has once again revealed a flawed military
infrastructure. This suggests that while Tehran could offer a
degree of resistance to any incursion, it would ultimately be
unable to stop a US strike. Threats of retaliation thus remain its
only realistic deterrent.
61 Hawks and Lockheed Martin Block 60 F-16s. In addition to upgrading
the 30 Apaches to D model standard (the same standard as US forces),
the UAE is investing heavily in anti-vehicle or anti-shipping weaponry such
as 360 Hellfire missiles and 4,200 Hydra-70 rockets. UAE Special
Operations Command is also developing littoral air-assault capabilities,
building counterparts to regional outfits such as the Qatar Emiri Navy’s
capable Naval Special Warfare wing.
Reclaiming the islands
These developments bring to mind a familiar question: would the UAE ever
try to reclaim Abu Musa or the Tunb Islands from Iran? GSN periodically
poses this question to US planners involved in the Gulf Security Dialogue
bilateral defence planning sessions with the UAE. Whereas once the
question drew snorts of derision and references to Dubai’s overwhelming
trade ties to Iran, it now provokes a pause. As one planner told GSN: “They
might try it if something else was happening at the time.” This scenario
– a UAE occupation of Abu Musa during a US-Iranian conflict – is quickly
moving within the grasp of the UAE Armed Forces.
Saudi Arabia & Iraq
Saudi royal sues Transocean over contract
Al-Khobar-based company Soroof International alleges offshore drilling giant induced it to divulge valuable
proprietary and confidential information and trade secrets
S
oroof International, an Al-Khobar-based company
belonging to Prince Bandar Bin Abdullah Bin
Mohammed Al-Saud, has filed a suit in US courts against
the offshore drilling giant Transocean and its subsidiary R&B
Falcon Inc. The case highlights the difficulties sometimes caused
by the ruling that foreign companies cannot do business in the
Kingdom without a licensed local agent.
In the complaint filed on 12 October, Soroof says it has close ties
with the Saudi government and Saudi Aramco and that, in early
2007, it was approached by Houston-based Transocean, which
wished to enter into an agency agreement. Transocean, which
then had no significant presence in the Kingdom, was seeking
a replacement for its existing agent, Abdullah Fouad Holding
Company. Soroof claims Transocean “induced” it to provide
valuable proprietary and confidential information and trade
secrets, which it then used to establish a Saudi presence.
Soroof says it entered an exclusive agency agreement with R&B
alcon in May 2007, and that under the agreement the USW
firm agreed to pay it a percentage of revenues derived from
contracts as a result of its services. However, “neither R&B
Falcon nor Transocean ever intended to honour the agency
agreement”. Following the agreement, Soroof went on to
obtain for Transocean four Aramco projects, but in each case
drilling equipment which Transocean had said was available
suddenly became unavailable, and it declined to participate in
the tenders. Soroof says it later discovered that by using
“information… and trade secrets obtained from Soroof ”,
Transocean pursued these opportunities through what initially
appeared to be a competitor, GlobalSantaFe (GSF). Soroof
learned of Transocean’s interest in GSF only when a press release
was filed with the US Securities and Exchange Commission in
July 2007. According to Soroof, Transocean was able to gain
leverage in its deal to acquire GSF (which had a strong position
in the Saudi market), by using information from Soroof to
demonstrate its knowledge of key opportunities in the
Kingdom.
Soroof ’s lawyers, Houston-based Kasowitz, Benson, Torres &
Friedman LLP, allege that Transocean “disclosed Soroof ’s…
information and trade secrets to GSF and its Saudi agents who
used such information to prepare bid packages related to
Aramco projects… Transocean was able to profit from Soroof ’s
services without having to compensate Soroof under the agency
agreement.”
Soroof was established in the late 1990s and is owned by Prince
Bandar and members of his family. Bandar is a descendant of the
Al-Saud’s Al-Kabir ‘cadet’ branch, named after Ibn Saud’s
cousin Saud Al-Kabir (who married King Abdelaziz’s favourite
sister Nura in an attempt to unify the branches). Bandar’s wife
GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Energy and industr y
is Princess Mashael Bint Faisal Bin Turki Bin Abdelaziz, who
is well-known for her support of Saudi women in business. She
is a granddaughter of Ibn Saud’s first son, Turki. Mashael has
served as president of the Business Women’s Forum-Eastern
Province organisation and on the committee of the Saudi
Women’s Chamber of Commerce, also in Eastern Province. She
often speaks at overseas conferences on women in business.
Prince Bandar has a degree in aeronautical science, and had a
long career in the Royal Saudi Air Force, based at the King
Abdelaziz airbase in Eastern Province. He has two master’s
degrees, from Washington’s National Defence University and
George Washington University. In a 2007 interview with Foreign
Affairs, Bandar said: “It is not my vision or goal to be a trade
company… my core motivation is to be an intellectual property
owner… Our investments go into various areas that are unusual
for other Saudi companies.” Soroof focuses on research in
energy, water and ICT, and puts 75% of its profits into research
and development. Soroof ’s major clients are said to be Saudi
Aramco and Bahrain’s Shura Council; partners include King
Faisal University in Dammam and University of North Carolina.
In September 2006, the Bangladeshi cabinet approved Prince
Bandar’s bid for a 67% stake in the state-owned Rupali Bank.
Bandar has also been a shareholder in the TSX-listed GGL
Diamond Corporation, alongside another major Eastern Province
businessman, Abdelaziz Ali Al-Turki (GSN 836/147).
IRAQ
Political middlemen exposed in
KRG oil deals
Former ambassador Peter Galbraith, who retired from the US
State Department in 2003, and who recently made headlines
after resigning as deputy head of the United Nations in
Afghanistan, has admitted that he was negotiating a potentially
lucrative oil deal in Iraqi Kurdistan in 2004 at the same time as
he was advising the regional government on constitutional
issues. An investigation by Norwegian business daily Dagens
Næringsliv (DN) revealed on 15 October that Galbraith’s
Delaware-registered company Porcupine was awarded a 5% stake
in a production-sharing contract (PSC) for the Tawke oil field
in 2004. He was working as a consultant for London-based
Pinemont Securities, an investment company controlled by high-
profile Norwegian businessman Endre Røsjø, who also
acquired a 5% stake. At the time, Galbraith was advocating
autonomy for Kurdistan and helping to draft the Iraqi
constitution.
9
Financial risk
Norwegian oil company DNO, which recently settled a
damaging argument with the Kurdistan Regional Government
(KRG), has said it is defending arbitration proceedings against
third-party claimants (GSN 862/1). Galbraith and Yemeni
business magnate Shaher Abd Al-Haq, who may have
purchased Røsjø’s stake in 2007, are understood to have asked
for $500m compensation, having been removed from the PSC
in 2008 (GSN 846/8).
Iranian trade finance ‘fraught with burdens and
worries’ but still alive, bankers report
As international financial sanctions tighten, Iran has slipped off the radar of most banks, but import letters of credit
are still being issued by Iranian banks and may be confirmed by a handful of western counterparts
M
ired in political disputes and sanctions, Iran is no longer
a trade finance market on a world scale. But, according
to a Dubai-based banker who preferred to remain
anonymous, the country “is still an interesting and doable market,
and we have recently seen a bit more business”. Another trade
financier told GSN his southern Europe-based institution’s
Iranian business was “extremely lucrative” – even though it was
“fraught with burdens and worries”. Pricing of transactions is
around 10-12%/yr, he said, but “more sanctions will certainly
hamper our activity but I do not think they can kill it”.
China and Russia have been instrumental in blocking new
United Nations sanctions, but this has not halted momentum in
the United States, where, in mid-October, legislation barred
companies selling fuel to Iran from winning US government
contracts, potentially piling more pressure on Tehran over its
suspected nuclear programme. In March, the US Treasury said
it had blacklisted 11 companies linked to Bank Melli Iran.
Sanctions in the financial sector have tightened so much in
recent years that most of the handful of banks now confirming
letters of credit (l/cs) from Iranian banks have links to the
Iranian banking system and deal in currencies other than the
dollar (GSN 862/15, 857/15, 849/12).
“It is so long since I have seen any business involving Iran,” said
a senior executive at a forfaiting house in London which was
once a regular player in the Iranian market. “Banks are too
frightened of the big regulators, especially the US, which, it
seems, will take action against anyone doing business regardless
of whether they have a US presence or not.” In the United
Kingdom,“the Financial Services Authority (FSA) seem to tug
their forelocks in acquiescence to the might of the US”, he said.
A banker in northern Europe agreed that “the majority of banks
of a certain standard are afraid of the regulatory risk coming
from the US”, where the Treasury’s Office of Foreign Assets
Control (Ofac) administers and enforces economic and trade
sanctions. “We have knowledge of a few European banks that
10 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Iran
A report published by StatoilHydro in October 2008 revealed a
similar deal. It said an unnamed Norwegian businessman and
European politician who had “strong personal relationships with
KRG officials” proposed an exploration contract to Norsk
Hydro (which subsequently merged with Statoil) before the
Gulf war in 2003. They asked for a 10% participating interest
in the licence. Hydro eventually rejected the offer and paid the
businessman a fee of $244,460.
were actually dealing with Iran that got a visit from the [US]
Federal Reserve,” the source said. “They were told that the US
authorities have a window into all of the transactions going
through Swift in Brussels, and can see who is dealing with
whom. If they find a bank dealing with Iranian counterparts,
they will visit and say ‘we know your activities – it is now up to
you whether you want to continue with your banking presence
in the US’.”
Avoiding sanctions can take several forms, many involving third
parties and intermediaries, and including routing oil export
receipts through third countries. The United Arab Emirates
appears to be at the heart of much of this activity. “In Jebel Ali,
you can observe that 50% of the boats go to Iran, usually over-
laden and leaving in the dark,” said the Dubai-based banker. An
increasingly popular method is to use Islamic money transfers
known as hawala transactions, said the northern European
banker. “You can go to the best-known transfer offices, and ask
to send €1m to reach your vendor the next day,” he said. “The
way that the unofficial system works is through family
connections, where perhaps a family in the UK might pay a
family in Germany, and might receive a €50,000 commission
UK blacklists Iranian businesses
In a move to increase pressure on Tehran, the British government has
followed US moves by banning all UK-based companies from entering
into or continuing any transactions or business relationships with Bank
Mellat, one of Iran’s largest state banks, as well as with state-owned
Iran Shipping Lines on the grounds of violating United Nations
sanctions. In a statement to parliament Treasury Minister Sarah
McCarthy-Fry announced that Bank Mellat had been blacklisted after
being “involved in transactions related to financing Iran’s nuclear and
ballistic missile programme”. Iran Shipping Lines was blacklisted after
being found to have “transported goods for both Iran’s ballistic missile
and nuclear programmes”. It is not thought that freezes of European-
based assets are a part of sanctions. Further talks with Iran over its
nuclear programme are under way.
Iran & UAE
on the €1m. The advantage is that there are no trails or
references, whereas the Swift system has filters.”
The banker argued that sanctions were counter-productive in
one specific way. “Thanks to [former British prime minister
Tony] Blair and [former US president George W] Bush, some
big favours have inadvertently been extended to the Iranian
community. Three to four years ago, banks were forced to stop
confirming l/cs, at a time when confirmations were costing 8-
10% per annum. Now the Iranians are buying goods and paying
the cash up front, on open account terms. They have to import
virtually everything, because the economy is still all about oil, so
now those imports are, in effect, 10% cheaper.”
Reports in May indicated that many German companies were
prepared to do business with Iran, even without export
guarantees, with several of them involved in major Iranian
infrastructure projects, especially in the petrochemical sector.
Payment risk good
One potential benefit for importers has been that payment for
l/cs used for trade can be deferred for periods of up to 24
months. “If the financing system is forced into total collapse,
those importers will get the benefit of not paying at all,” the
banker said. But this is merely academic for most European
banks mulling over lost Iranian business that, by some accounts,
represented 25% of their trade finance revenues before the
political crisis deepened. “All the major European banks that
have a presence in the US – names such as KBC, Credit Suisse,
UBS, HSBC, Standard Chartered, BNP Paribas and Deutsche
Bank – have had to kiss this goodbye,” the banker said.
… political risk bad
According to recent remarks by Bank Markazi (Central Bank of
Iran) deputy governor Hossein Ghazavi, Iran’s hard currency
reserves now stand at over $100bn. But while payment risk is
negligible, political risk has probably never been higher. As well
as suspicion over its nuclear ambitions, Iran is besieged
domestically: some economists claim real inflation is 40-50%/yr.
“Imports require both a payment and a licence, and are becoming
harder than ever as the religious factions in charge don’t want to
lose their power, which they would if it was an open economy,”
said the northern European banker. He said the message recently
passed on by his bank’s representative in Iran was ominous:“He
told me that everybody on the street is opposed to the regime, and
that the second revolution has started.”
UNITED ARAB EMIRATES
Carriers tap ECA money
The UAE’s two leading airlines have tapped nearly $650m in
bond and debt facilities backed by export credit agencies
(ECAs), reflecting the attractiveness of long-term ECA support
at a time when commercial debt remains scarce and highly
priced.
GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Financial risk
The larger of the two deals involved an innovative guarantee
from the Export-Import Bank of the United States (Ex-Im
Bank), backing a $413.7m bond issue by Dubai’s Emirates
airline to finance three Boeing 777-300ER aircraft. The issue, at
a fixed rate of 3.465%, comes at a time when Dubai is struggling
to ease concerns that it can service debt estimated to exceed
$80bn, and indicates that at least some of the emirate’s state-
owned companies are still able to finance growth.
Preceding the Emirates bond, Abu Dhabi-based UAE national
carrier Etihad Airways financed its first two aircraft using ECA
money, under a $1bn export credit guarantee programme.
HSBC global head of export finance Peter Luketa said ECA
financing “is coming into its own in the Middle East as a vehicle
for financing the continued growth of the region”. HSBC was
the arranging bank that led the first transaction for Etihad
Financing milestone
Emirates, the largest Arab airline, said on 8 October that it had
set a new benchmark in airline financing through the inaugural
US bond offering guaranteed by Ex-Im Bank. Emirates has
sold bonds before, but largely for working capital, and not to
fund aircraft purchases. It said the notes, payable on a quarterly
basis, mature in 2021.
“This transaction is very important for the industry as it
represents the first offering of its kind directly into the global
public capital markets. We believe bond markets represent an
important source of capital for the airline industry in general
and for Emirates in particular,” said senior vice president,
corporate treasury Brian Jeffery. “Emirates is constantly in
search of innovative structures and alternative sources of
financing for our aircraft acquisition programme, and this
structure will go a long way in bridging the funding gap which
is evidently present in these difficult market conditions.”
Goldman Sachs and Company and Calyon Securities acted as
joint book-runners and joint structuring agents. Analysts say
the transaction could help the airline build a 450-aircraft fleet
by 2020 that will turn Dubai into the world’s largest hub for
international passenger traffic. Although Emirates and other
airlines have traditionally turned to commercial debt to finance
aircraft purchases, the global financial crisis has meant banks are
reluctant to make new loans to an industry which is cutting
capacity. The International Air Transport Association predicts that
worldwide airline passenger traffic will fall by 4% this year.
Emirates has a $55bn order book for aircraft from Boeing and
Airbus, but the financial crisis has strained expansion plans.
According to the airline’s latest financial statements, it had long-
term borrowings and lease liabilities of Dh15.1bn ($4.1bn) as of
31 March. Concerns about how Dubai and its companies will
service that debt have pushed its cost of borrowing higher, as
shown by the cost of existing Emirates bonds, issued in
Singapore dollars, which are yielding at least 7%.
But global demand for bonds is soaring as low interest rates on
US dollars have triggered a boom in demand. According to
figures from Thomson Reuters, bond sales in the six GCC
11
Financial risk
countries rose by 61% in the first nine months of this year, even
as total funds raised by companies and governments fell by
roughly two-thirds.
Etihad Airways
Abu Dhabi government-owned Etihad has signed its first export
credit transactions, backed by ECAs from France, Germany and
the UK. The two transactions, totalling $233m, will finance
the purchase of two Airbus A340-600 aircraft, and are part of a
wider $1bn aircraft financing programme for the acquisition of
eight aircraft to be delivered by the end of 2010.
Under the first agreement, HSBC led Etihad’s introduction to
the ECA product and provided $122m in debt over a 12-year
period. It acted as the mandated lead arranger, lender, facility
agent, security trustee and hedge provider, and is understood to
have won a further mandate from Etihad to finance another
aircraft delivery in late 2009. The second transaction was signed
with Landesbank Baden-Württemberg, which acted as mandated
lead arranger, lender, facility agent and security trustee. Debt
placement was undertaken by SkyBlue Capital. Both loan
facilities were led and are guaranteed by the UK’s Export Credits
Guarantee Department, with reinsurance provided by Coface and
Euler Hermes Kreditversicherungs AG.
A source close to the deals told GSN that “although the Abu
Dhabi government is inherently very wealthy, it is also keen to
encourage financial discipline and financial independence
amongst its strategic corporations”. He added:“In this respect,
Events across the region
1-3 November: SAOGE 09 Conference & Exhibition, Dammam
Email: exhibition@saoge.org Web: www.saoge.org
2-4 November: Islamic Funds World Middle East 2009, Dubai
Web: www.terrapinn.com/2009/iiwme
3 November: World Islamic Infrastructure Finance, Doha
Email: andrew@megaevents.net Web: www.megaevents.net/islamic_finance
4-5 November: The International Real Estate Finance Summit
To be held in London. Web: www.islamicrealestate.com
10-12 November: The Abu Dhabi Conference, Abu Dhabi
Web: www.meedconferences.com/abudhabi
23 November: The World in 2010 Executive Forum, Abu Dhabi
Web: www.economistconferences.com/wi2010
5-7 December: Iraq Energy EXPO and Conference, Baghdad
Web: www.iraqenergyexpo.com
12 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Bahrain/Region & Events
Etihad has recognised the strong advantages of ECA facilities at
present, offering as they do the potential to tap an alternative
funding source which still has the capacity to deliver bigger
numbers and longer tenors.”
Oman and others will follow
The source said other GCC-based airlines, including Oman Air,
had requested proposals for ECA-backed finance, and that other
borrowers in the sector were seriously considering following
suit.
BAHRAIN/REGION
Hardy, Arig announce insurance
joint venture
Specialist Lloyd’s of London insurer Hardy Underwriting has
entered into a joint venture with Arab Insurance Group (Arig)
to develop reinsurance business in the Middle East and North
Africa. Hardy Arig Insurance Management (Haim) will be based
in Arig’s existing offices in Manama, equally owned by Arig and
Hardy’s Lloyd’s Syndicate 382, which had a 2009 underwriting
capacity of £250m. Hardy said the company would initially
focus on construction and engineering business along with
onshore energy risks, and will look to develop further lines in
due course. Haim will commence writing business incepting in
2010 with effect from Q4 09.
6-8 December: World Islamic Banking Conference (WIBC)
To be held in Bahrain. Web: www.megaevents.net/islamic_banking
7-9 December: Iraq Petroleum, London
Web: www.cwciraqpetroleum.com/
2010
24-26 January: MENA-EX 2010, Jeddah
Web: www.mena-ex.com
25-27 January: Qatar Projects, Doha
Web: www.meedconferences.com/qatar
1-2 February: Prospects for Middle East & North Africa Energy
To be held in London. Web: www.chathamhouse.org.uk/mena_energy
1-3 February: Gulf C4iSR 2010, Abu Dhabi
Email: info@wbr.co.uk Web: www.wbresearch.com/gulfc4i
7-8 February: Middle East Insurance Forum, Manama
Web: www.megaevents.net/insurance
14-16 February: Middle East Project Finance 2010, Manama
Tel: +971 (0) 4 390 0699. Web: www.meedconferences.
Risk indicators Equities and exchange rates

Middle East risk indicators – governments take up the slack

AFTER A TURBULENT YEAR FOR SEVERAL GCC ECONOMIES, private
sector underwriters and trade finance banks say they will remain wary
of Saudi trade paper until a clearer understanding emerges of how
much the Saad Group crisis is going to cost banks in the region (GSN
862/12). Pricing for Saudi bank risk has risen by 25-50% in recent
months. Dubai is throwing out a range of small credit insurance
claims linked to the burst real estate and construction bubble.
GOVERNMENT FINANCING IS PLAYING A CRITICAL
supporting infrastructure schemes, with international commercial
banks still reluctant to lend. Project finance professionals point to the
Saudi government’s decision to finance the Landbridge rail project as
typical of the trend. Riyadh stepped in to bankroll the estimated $7bn
project after bid rounds over two years failed to award a contract
under the original build-operate-transfer structure; this has been
scrapped in favour of a state-backed engineering, procurement and
ROLE in construction model to build the 945km Riyadh-Jeddah railway.

Middle East risk indicators

Preferred Moody’s Fitch Ducroire Delcredere ONDD medium- to
Country payment Coface sovereign sovereign short-term political long-term political
terms grading rating rating risk rating risk rating
Bahrain OA A3 A2 A 2 2
Iran CIA D — — 5 6
Iraq CIA D — — 6 7
Israel OA A4 A1 A 3 3
Jordan OA B Ba2 — 3 5
Kuwait SD/OA A2 Aa2 AA 2 2
Oman OA A3 A2 — 1 2
Palestine CLC — — — 7 7
Qatar OA A2 Aa2 — 2 2
Saudi Arabia OA A4 A1 AA– 1 2
Syria ILC C — — 4 6
Turkey ILC B Ba3 BB– 3 4
United Arab Emirates OA A2 Aa2 AA* 2 2
Yemen ILC C — — 3 6

Key: ULC = Unconfirmed letter of credit. ILC = Irrevocable letter of credit. CIA = Cash in advance. OA = Open account. SD = Sight draft. * = Abu Dhabi
Sources: Agencies and Cross-border Information Ltd, Hastings, UK.

Stock markets and exchange rates

Stock Market Index value Index % change Since 2008 Exchange rate
(Index) (22 October 2009) One week 01.01.09 performance Currency £ $ € ¥ (x100)

Bahrain1 1,558.21 0.54
-13.63 -34.52 (Dinar) 0.6266 0.3770 0.5654 0.4137
Iran 2 12,176.30 2.16
40.67 -11.10- (Rial) 16,429.90 9,885.00 14,827.00 10,847.70
Iraq3 n/a n/a n/a n/a n/a (New Dinar) 1,911.42 1,150.00 1,724.94 1,262.00
Jordan4 2,624.40 -0.92  -4.86 -24.94 (Dinar) 1.1771 0.7082 1.0623 0.7772
Kuwait 5 7,607.90 -1.30  -2.24 -38.03 (Dinar) 0.4743 0.2854 0.4280 0.3131
Oman6 6,609.45 -1.14  21.47 -39.78 (Rial) 0.6393 0.3846 0.5769 0.4221
Qatar7 7,285.14 -0.79  5.79 -28.12 (Rial) 6.0512 3.6407 5.4609 3.9953
Saudi Arabia 8
6,515.81 1.02
35.66 -56.49 (Rial) 6.2332 3.7502 5.6251 4.1154
UAE – Abu Dhabi9 3,119.56 -3.19  30.52 -47.49 (Dirham) 6.1050 3.6731 5.5094 4.0308
UAE – Dubai10 2,244.03 -2.60  37.14 -72.42 (Dirham) 6.1050 3.6731 5.5094 4.0308
Yemen n/a n/a – n/a n/a (Rial) 341.620 205.535 308.292 225.553

1 Bahrain Stock Exchange – All Shares Index. 2 Tehran Stock Exchange – Tepix Index. 3 Iraq Stock Exchange – ISX Price Index. 4 Amman Stock Exchange Index.
5 Kuwait Stock Exchange Index. 6 Muscat Securities Market – MSM 30 Index. 7 Doha Securities Market – DSM 20 Index. 8 Tadawul All Shares Index.
9 Abu Dhabi Securities Exchange. 10 Dubai Financial Market.
Sources: Cross-border Information, Hastings. Financial Times, London.

GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009 13

Risk management report Iraq

GSN Risk Grade — E/5: More attacks, deteriorating diplomacy, stagnant oil industry point to uncertain future

Political and social developments Economic and commercial outlook

Overview: A stronger government and better-trained police and military
forces have led to an improving security situation, with successful elections
confirming the general upturn. Prime Minister Nouri Al-Maliki significantly
strengthened his position during 2008 after mastering state structures, and he
has built strategic alliances between his (Shia) Daawa Party, its former Sunni
enemies now gathered in the Sahwa ‘Awakening Councils’ and other groups
that helped to roll back the insurgency. Maliki has cultivated his image as
Iraq’s new ‘strong man’, but he is not all powerful, despite a recent purge of
the interior ministry. Other factions are weakened but have not gone away.
These include Moqtada Al-Sadr’s supporters and, on the Shia side, the Al-
Hakim family’s Supreme Iraqi Islamic Council. But a recent split within both
Sunni and Shia political groupings, preventing the forging of alliances to fight
in January’s elections, may herald an end to Iraq’s destructive confessional
politics. Continued terrorist atrocities and thuggish political behaviour
suggest that a factionalised, violently bickering polity may still emerge during
the next phase of Iraq’s transition. This leaves Iraq’s allies to deal with an
uncertain partner. The continued bombings, which are expected to increase
in the run-up to January’s national elections, have thrown into question the
assumption that Iraq is becoming a more secure place.
Foreign relations: Relations with the US continue amicably, with a major
military presence underwriting the new political dispensation until at least 2011
following implementation of the Status of Forces Agreement (Sofa), despite
withdrawal of troops from the cities. But regional relations are becoming a
major issue. Baghdad’s relations with Iran continue to deteriorate as a growing
number of Iranian-backed Shia insurgents cross the border into Iraq. But Syria
has been at the centre of the latest diplomatic dispute, with Baghdad accusing
Damascus of harbouring terrorists responsible for bomb attacks in the capital.
Since resuming diplomatic links in 2006 after 20 years of hostility, relations have
improved little, with Turkey acting as broker. Disputes with neighbours and
internal security threats signal uncertainty in the upcoming months following
a US withdrawal – both military and political – after the Obama administration
decided to focus on Afghanistan. The country is reaching a crucial period in
shaping its political future at a time when budget cuts are likely to take a chunk
out of spending on security services.
Kurdistan: Baghdad and the Kurdish Regional Government (KRG) remain
at odds over the KRG’s status and the extent of its remit. Although federal
President Jalal Talabani is a major Kurdish leader, their ambiguous status is
reflected in the tensions generated by the KRG’s efforts to create a distinctly
Kurdish oil industry. Despite Baghdad’s refusal to recognise Kurdistan’s
production-sharing contracts, the licensing process appears efficient and well-
managed, with its legality endorsed by international lawyers in Erbil. But
financial arrangements regarding the DNO deal have highlighted a lack of
transparency in the model, and the KRG cannot afford international investors
to lose confidence (GSN 862/1). Security remains an issue, and there are fears
of more armed clashes, particularly as US forces complete their withdrawal.
Overview: The economy continues to improve steadily, particularly with the
rise in oil prices, but remaining heavily reliant on oil revenues makes it
vulnerable to sharp fluctuations. Efforts to bring foreign investors into the oil
industry to boost output have disappointed (at least outside the KRG area),
even though improved security and the reopening of the northern pipeline
to Turkey have contributed to higher output and exports. Attempts to issue
oil licences remain problematic. Other major issues are poverty and
corruption, but there are some positive macroeconomic pointers: inflation has
dropped substantially after reaching a high of 36% during 2006. The
International Monetary Fund’s most recent Article IV report said that
“economic activity picked up in 2008 and growth for the year is expected to
be robust” (the IMF report is available in GSN’s Subscriber Reference Library
at www.gsn-online.com). Important structural reforms will continue, including
the restructuring of Rafidain and Rasheed banks with assistance from
international partners such as the World Bank. An upturn in export credit
agency and international support reflects growing international confidence in
the economy. Meanwhile, in the north, the KRG continues to attract
investment from international oil companies among others, creating a
business centre in Erbil that aims to bring in “giant companies”.
Licensing rounds and legal framework: The BP/CNPC joint venture to
develop the Rumaila oil field – Iraq’s second largest – has been ratified by the
cabinet, marking the first step in the development of Iraq’s significant oil
resources. However, the 30 June licensing round remains a failure on the whole,
after failure to award seven of the eight licences. But the Ministry of Oil has
started to back down on licence terms, giving the green light for an Eni-led
consortium developing the Zubair field. The next licensing round is scheduled
for 12 December, but it is unlikely to deliver results unless the government
offers serious compromises over bidders’ concerns about issues of legality and
process. The much-anticipated federal petroleum law is now unlikely to appear
in any form this year – and will probably have to wait for the election of a new
parliament in January 2010. Oil companies are concerned about signing
contracts with a government that could be replaced in January, and whether
such contracts will be honoured by a new administration.
Oil production: Plans to drill around 150 wells next year will see output
rise by an estimated 250,000 b/d, but there are growing concerns that overall
crude exports could fall by around 10% in 2009 as OPEC announces a
significant drop in demand. State Oil Marketing Organisation (Somo) said
average exports could slip to around 1.6m-1.8m b/d, some 100,000-200,000
b/d below the 2008 average, as a direct consequence of the oil ministry’s
failure to sign short-term technical service contracts with six oil majors in the
first, failed, round. But BP/CNPC aim to increase the output of the Rumaila
field to 2.85m b/d from the current 1.1m b/d, and companies are hopeful of
December’s round. Average production at Kirkuk and northern fields is only
200,000 b/d, compared with a 680,000 b/d pre-war peak. Plans to raise
production to 6m b/d by 2013 remain highly optimistic.

IRAQ: Licensing rounds IRAQ: Selected economic indicators

ENI AWARDED ZUBAIR: A consortium led by Italy’s Eni has been awarded the Zubair
field after renegotiations of June’s licensing bid, pending cabinet approval. Eni, 2007 2008 2009f 2010f
partnered by South Korea’s Kogas and US company Occidental, accepted the initial Nominal GDP ($bn) 62.4 70.6 78.4 87.5
$2/bbl on all production over 1.125m b/d after the Ministry of Oil compromised GDP per capita ($) 2,109 2,321 2,510 2,730
over other terms and conditions, raising the overall value of the contract. Eni was Real GDP growth (%) 1.5 9.5 4.3 5.8
forced to drop Sinopec as a partner after the Chinese company’s entry into Oil production (m b/d) 2.1 2.2 2.5 2.7
Kurdistan enraged Baghdad. The compromise offers new hope for Iraq’s second Oil exports (m b/d) 1.6 1.6 1.8 2.0
licensing round after June’s first round failed over what were regarded as CPI inflation (%) 30.8 2.7 6.9 6.0
unacceptable terms on both sides. Current account (% of GDP) 10.1 13.3 28.4 -15.2
SECOND ROUND: International oil companies are preparing themselves for the Trade balance (% of GDP) 2.3 1.8 4.7 7.0
second licensing round, due on 12 December, with Norway’s Statoil and Imports of goods (% of GDP) -49.5 -45.7 -42.7 -40.8
ExxonMobil of the US well placed. But competition is likely to be fierce, particularly Exports of goods (% of GDP) 47.3 47.5 47.4 47.8
if MOO offers substantial compromises over the conditions proposed in June’s Total debt (% of GDP) 90.4 84.2 79.7 74.6
failed round. ExxonMobil withdrew its bid for the giant Rumaila field, allowing the e – estimate. f – forecast.
licence to be awarded to BP and CNPC.
Source: IMF World Economic Outlook, October 2009; IMF Article IV report

14 GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009

Kuwait
GSN Risk Grade — C/2: New government to push on with constitutional reform and civil liberties
Political and social developments
Overview: Prime Minister Sheikh Nasser Al-Mohammed Al-Sabah
unveiled his fifth government in June, following parliamentary elections on
16 May in which there were gains for liberals, losses for Islamists and the
election of the country’s first female MPs. With parliament due to
reconvene after its summer recess, a number of divisive issues will be on the
agenda, including electoral reform and national debt. Emir Sheikh Sabah Al-
Ahmed Al-Jaber Al-Sabah has pleaded for parliament and the executive to
“set aside previous conflicts, start with a clean slate, and adopt a new political
approach to end years of development process suspension”. After dissolving
the National Assembly earlier this year for the third time in less than three
years, the premier will need all the goodwill he can muster among liberals
and parliamentary newcomers if he is to prevent further gridlock.
Electoral reform: The National Assembly’s interior and defence
committees have approved, in principle, a draft law transforming Kuwait into
a single electoral constituency. Head of the panel, MP Jamaan Al-Harbash,
said the move would erase the current five-constituency system and the
inequality created by a disproportionate number of voters. The current
system of five constituencies was implemented in 2006, reducing the number
from 25, and has been fiercely criticised during the last two elections because
each constituency elects 10 MPs irrespective of the huge population
differences between them. Tribal politics continue to remain an issue, and in
an effort to stop election primaries being held across the border in Saudi
Arabia, the government voted in May to deprive eight MPs of immunity
from prosecution over alleged participation in the illegal practice (GSN
858/6).
Bank loan relief: Efforts to ease growing public debt continue, with
several MPs questioning a number of draft laws. The bills, calling for the
government to purchase all existing personal loans and reschedule
repayments over a number of years after scrapping interest, has so far been
rejected by the government, with Finance Minister Mustafa Al-Shamali
saying the writing off of KD6bn ($21bn) of loans and interest would be
highly expensive and harmful to the national economy. The government has
said it is ready to increase the capital of a KD500m fund established last year
to help defaulters. MPs supporting the bills have criticised Al-Shamali and
threatened to grill him in the assembly over the issue.
Women’s rights: After electing four women to parliament for the first time
in its history, Kuwait has given further freedoms to women after the
Constitutional Court ruled to abolish an article in the passport law which
banned women from obtaining passports without their husband’s consent.
The court ruled the article unconstitutional, breaching all citizens’ human
rights. Aseel Al-Awadhi, one of the new MPs, welcomed the ruling as a
victory for the constitution and democracy in Kuwait, adding that it has
eliminated a long injustice against Kuwaiti women (see Politics, above).
KUWAIT: Selected economic indicators
2007 2008 2009 2010f
Nominal GDP ($bn) 111.8 158.1 99.2 – in January 2010, despite an earlier statement requesting a delay, citing
GDP (% change) 2.5 6.3 -1.5 3.3
CPI (%) 5.5 10.5 4.6 4.4
Current account
balance (% GDP) 44.7 44.7 29.4 35.3
Oil revenue (% GDP) 51.5 52.4 36.8 – Muscat could be operational by 2017, according to its project manager. The
Exports (% change) 63.7 88.2 40.0 – project will see 2,000km of line running from Kuwait City through Saudi Arabia,
Imports (% change) -18.5 -21.2 -19.7 –
e – estimated. f – forecast. GDP – gross domestic product. CPI – consumer price
inflation.
Source: IMF, World Economic Outlook October 2009, Article IV report.
GULF STATES NEWSLETTER • VOLUME 33 • ISSUE 863 • 23 OCTOBER 2009
Risk management report
Economic and commercial outlook
Overview: Kuwait posted a budget surplus for the fiscal year 2008-09 and
successfully weathered the global economic downturn. But the Kuwait Stock
Exchange shed 38.03% of its value in 2008. The banking sector is a
significant contributor to the non-oil economy, accounting for 10.6% in
2007, compared with 3.5% in 1994. Falls continued into early 2009, but
while the stock exchange regained much lost ground, the early part of the
summer saw fresh wobbles. Bureaucracy and the slow pace of reform
continue to damage the country’s investment profile. Key reforms, such as
stock market and privatisation laws, are yet to be implemented. The economy
remains over-reliant on oil revenues, but attempts are being made to diversify
income and develop the private sector. The economy contracted 1.5% during
2009, but an IMF forecast predicts growth of 3.3% during 2010.
Budget: The 2009-10 budget envisaged a KD4.85bn deficit, based on an
average oil price of $35/bbl. But higher oil prices during 2009 saw a
KD4.25bn budget surplus in the first five months of the fiscal year, with
revenue of KD6.64bn, 82% of the yearly forecast. Kuwait has a tradition of
conservative budget projections. National Bank of Kuwait forecasts that the
price of oil will continue in the $63-$71/bbl range, and expects spending of
5-10% less than budget projections, producing a KD4.2bn-KD7.3bn surplus
before the 10% Reserve Fund for Future Generations (RFFG) allocations.
The 2008-09 budget was set at $50/bbl and forecast a deficit, but produced a
KD6.1bn surplus, with actual prices averaging $78.5/bbl. The current fiscal
year is expected to produce a similar surplus.
Financial sector: Central Bank of Kuwait reduced its three repurchase rates
by 25 basis points in mid-July to try to encourage lending. Credit growth
remained subdued in Q3, following a trend going back to Q4 08, and credit
facilities remain restricted by the ongoing slowdown in economic activity.
Liquidity in the banking system seems to be at comfortable levels. Since the
beginning of August, the CBK kept the dinar exchange rate with the dollar
within a narrow band, resulting in the dinar losing ground to the euro,
reaching a level close to its all-time low of April 2008.
Hydrocarbons sector: The government remains committed to increasing
output to 4m b/d by 2020, but it may struggle. Major international oil
companies have started to withdraw top executives as new technical service
contracts and Project Kuwait remain stalled. US oil giant Chevron closed its
head office in Kuwait over the summer (GSN 859/9). But officials remain
optimistic that Project Kuwait will go ahead with the support of IOCs,
boosting production from northern oil fields from 450,000 b/d to 900,000
b/d. Questions remain over the cancellation of the KDow deal and the future
of the proposed fourth refinery, an issue due to be resolved when parliament
reconvenes. Kuwait Petroleum Corporation director Jamal Al-Nouri has
resigned from his post after two years. Neither Al-Nouri nor KPC
commented on the reasons for his departure. He is to be replaced by the
chairman and managing director of KPC subsidiary Oil Development
Company, Hashim Al-Rifai.
KUWAIT: Regional co-operation
RESTORED SUPPORT FOR SINGLE CURRENCY: The Ministry of Finance has reaffirmed its
commitment to seeing a single currency and monetary union in the Gulf launched
incomplete preparations. Kuwait is due to host the forthcoming Gulf Co-operation
Council (GCC) annual summit in December, where a decision on the single
currency is expected to be taken by all members. But many experts continue to
believe that a 2010 launch is ambitious and unrealistic.
KUWAIT-OMAN RAILWAY: An ambitious GCC rail network project linking Kuwait with
Bahrain, Qatar and the UAE before terminating in Oman. The network would
provide transport for freight and passengers throughout the Gulf region, with a
final decision to proceed with the project expected in 2011. The project will cost
around $10bn, but it is not clear how this will be funded.
15
GSN view

Encouraged by Washington, GCC builds up ‘five pillars of deterrence’

It is not just through trade and financial controls that the United States and its
allies are gradually encircling Iran in an effort to throttle the Islamic Republic’s
nuclear ambitions. And the Gulf Co-operation Council (GCC) states are playing
a larger role in this process than seemed likely earlier this decade, when Saudi
King Abdullah Bin Abdelaziz led a move towards rapprochement with Tehran.
Thus, according to GSN’s contacts in the Pentagon’s J-5 cell – the long-range
military planners – the US is slowly developing GCC capabilities to meaningfully
deter Iranian military threats in the Gulf, with the United Arab Emirates (UAE)
Armed Forces playing an important role, meshing more closely with Bahraini,
Qatari and other counterparts.
The US effort focuses on a programme to develop five pillars that will underpin
GCC military capability. This comprises missile defence and target hardening;
building a ‘naval tripwire’ that will deter or hold Iranian forces until US support
arrives and its aerial counterpart; developing credible offensive capabilities that
hold Iranian economic targets hostage to GCC strike aircraft; and putting in place
the command and control (C2) systems that hold these capability areas together.
In recently months, some of the most striking developments in GCC capabilities
have taken place in the naval sphere. As GSN recently reported, the GCC navies
are beginning to take command of small regional flotillas and are playing a fuller
role in the security of choke points, sea lanes and offshore exclusive economic
zones (GSN 860/9).
The UAE continues to lead the effort, with plans to develop ‘sea control’
capabilities (to actively patrol deep into the centre of the Gulf) and the steady
development of a powerful amphibious arm capable of harming Iranian-held
islands in the Gulf (GSN 851/8). Although the centrepiece of the UAE Navy’s
effort is the Bayyunah programme – an $817m initiative to develop six well-
armed Bayyunah-class corvettes – other aspects of the Emirates’ naval
development are equally impressive.
UAE Navy commander Rear-Admiral Ahmed Al-Tenaji has sought to develop
advanced C2 capabilities to extend the view of the combat vessels “over the
horizon”. Maritime patrol aircraft (MPA) are the key to this effort. In the interim,
the UAE Navy aims to work with the UAE Air Force and Air Defence
(UAEAF&AD) to covert four Bombardier-8 airliners into MPA. In the longer
term, Al-Tenaji is said to be pushing for political backing to go to the US with a
formal letter of request for Northrop Grumman E-2D Advanced Hawkeye
airborne early warning and control (AEW&C) aircraft. Though serving under
UAEAF&AD control to undertake its primary role of ‘look down’ cruise missile
detection, the aircraft would provide a major advance in naval intelligence and
targeting data.
The timing of such a request needs to be perfect. Arms requests from the
Emirates have never been turned down by US Congress and Abu Dhabi is keen
not to set a precedent. With the memory of the congressional snub over Dubai
Ports World still looming large for UAE and US government decision-makers, the
approach to E-2D sales has been more cautious than the UAE armed forces
would like.
As well as looking into C2 capabilities, the UAE’s air, land and sea forces are all
quietly learning how to work together to undertake lethal amphibious operations
against an unnamed foe – which US defence officials candidly admit to be Iran.
CONTINUED ON PAGE 8

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