194. Memorandum From Secretary of the Treasury Blumenthal to President Carter1


  • Economic/Financial Initiatives Toward Saudi Arabia

At the PRC meeting on April 27,2 it was agreed to seek early resolution of some of our more minor economic/financial problems with Saudi Arabia in an effort to improve the atmosphere for subsequent discussions of oil and Middle East peace. You asked to review those proposals. I will be seeing [Page 639] Saudi Finance Minister Abalkhail in Paris on June 14, and would plan to convey the following to him unless you object.

Several of the outstanding U.S.-Saudi issues are in the tax area (outside of petroleum). Some relate to the large U.S. investments of SAMA, the Saudi central bank, and some to the creditability of Saudi taxes against the U.S. tax liabilities of non-oil firms. On all of these matters, I will be able to either assure my Saudi counterpart of a favorable outcome or express confidence that such a result will eventuate. There is also the long-run possibility of a U.S.-Saudi tax treaty, but I do not plan to push this one now because few benefits are likely to result for the United States and because submission to the Senate might be more propitious at a later date.

As we discussed, the creditability of Saudi taxes on petroleum remains a difficult issue. The IRS will shortly be proposing new regulations in this area to resolve a number of outstanding questions. They will likely have the effect of disallowing credits for ARAMCO unless the Saudis make changes in their tax system. I will discuss this with Abalkhail, but because of the complex issues involved, resolution of the situation will probably require extended negotiations.

A second major issue relates to Saudi deposits with DOD for weapons purchases. We have not been paying the Saudis any interest on these funds, and they have been demanding for several years that we do so. We have reached inter-agency agreement on arrangements whereby the Saudis will earn interest on funds that are clearly excess balances according to DOD contractual guidelines. Ambassador West will advise the Saudis that they will be able to earn interest on these funds when he returns to Jidda this week. In my discussions with Saudi Finance Minister Abalkhail next week, I will also refer to this in seeking to persuade the Saudis to alter their boycott guidelines to enable U.S. firms to continue doing business in Saudi Arabia without violating our laws—but I am not at all sure that they will do so. (It would be possible for us to be more generous, but this would have several disadvantages: higher costs to our FY 79 and subsequent budgets, greater risk of triggering similar requests from other depositors, and potential public/Congressional criticism that we “were being nice to the Saudis when they were gouging us on oil”.)

A third area of Saudi concern relates to U.S. technology transfer. The Saudis feel that a number of our laws and regulations, as in the anti-boycott and tax areas, discourage U.S. firms from doing business with Saudi Arabia and therefore retard their own economic progress. In addition to the tax issues mentioned above, I plan to indicate that OPIC (and perhaps the Export-Import Bank) will be doing more to help in the near future. I will also reiterate that we stand ready to use the U.S.-Saudi Joint Economic Commission, which Minister Abalkhail and I co-chair, to further encourage technology transfer; the Commission, which is completely funded by the Saudis, already sponsors 22 projects (including solar energy and desalination projects) worth about $1 billion upon completion.

I have considered the possibility of suggesting to the Saudis that we open negotiations on a Trade and Cooperation Arrangement. Such an Arrangement could include provisions to facilitate trade and investment between the two countries, though it would contain more symbolism than substance. At this point, however, I see little advantage in pursuing any major new initiative of this type—particularly as it would probably require Congressional ratification, or at least informal approval.

On the oil issue, both Ambassador West in his conversations and I in my conversations with the Finance Minister intend to follow the approach agreed on unanimously in the SCC meeting chaired by Zbig last week3—namely, that it is in our mutual interests to reduce high international spot prices for oil and that a temporary increase in oil production by Saudi Arabia would contribute to that objective, particularly during the interim six months before the agreed upon 5% conservation measures take effect.

W. Michael Blumenthal4
  1. Source: Carter Library, National Security Council, Institutional Files, Box 74, PRC 102, 4/27/79, Saudi Arabia. Secret.
  2. See Document 190.
  3. Reference is likely to the June 1 meeting of the SCC which addressed international oil issues. Documentation on this meeting is in the Carter Library, National Security Council, Institutional Files, Box 104, SCC 168, 6/1/79, International Oil Problem.
  4. Blumenthal signed “Mike” above this typed signature.