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Cablegate: Bank of Sudan Announces Conversion to Euro Citing U.S.

VZCZCXRO7573
RR RUEHGI RUEHMA RUEHROV
DE RUEHKH #0031/01 0090845
ZNR UUUUU ZZH
R 090845Z JAN 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC 9674
INFO RUCNFUR/DARFUR COLLECTIVE
RUCNIAD/IGAD COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 000031

SIPDIS

DEPT FOR AF/SPG, S/CRS, AF SE WILLIAMSON
ADDIS ABABA FOR USAU
DEPT PLS PASS USAID FOR AFR/SUDAN

SQITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL EFQ EAID ECOQKPKO SOCI AU UNSC SU
SUBJECT: BANK OF SUDAN ANNOUNCES CONVERSION TO EURO CITING U.S.
SANCTIONS

1. (U) SUMMARY: The Central Bank of Sudan (CBOS) announced on
January 7 that it converted its reserves to the euro and other
currencies, and that it will no longer use the U.S. dollar for
financial transactions. The CBOS named U.S. sanctions as one of the
primary reasons for this change. Leading economic analysts and
businessmen have been less than supportive of this decision,
predicting this change will negatively impact Sudan's small
businesses and that the CBOS will ultimately return to using the
dollar. END SUMMARY.

2. (U) At a January 7 press conference, Dr. Sabir Mohamed Hassan,
the Governor of the Central Bank of Sudan and his two deputies,
Elijah Malouk and Bader El-Din Mahmmoud Abbas, announced that the
CBOS completed the conversion of the bank's reserves from the U.S.
dollar to other foreign currencies, primarily the euro, the
sterling, and currencies from Arab Gulf states. Hassan stated that
U.S. economic sanctions imposed on Sudan since 1997 are one of the
primary reasons for this decision. Hassan specifically mentioned
that the continued use of dollars has led to frozen assets, delays
in transfers, and an overall increased risk of having any
transaction blocked.

3. (U) Hassan stated that it is advisable, though not compulsory,
for the private sector and Sudanese citizens to follow suit and
avoid using the U.S. dollar. He added that the private sector and
Sudanese citizens have the right to keep their accounts in U.S.
dollars, but warned that these individuals must realize the risk
involved with potentially having these transactions and transfers
blocked.

4. (U) The Governor also stated that the CBOS completed the
conversion of Sudanese Dinars (SD) to the new Sudanese Pound (SDG)
in full compliance with the 2005 Comprehensive Peace Agreement. He
stated that the total cost of this conversion was $150 million
dollars, as estimated by the International Monetary Fund. He stated
that partners in the Intergovernmental Authority on Development
(IGAD) and the international community provided $40 million,
international donors contributed $30 million dollars, and the U.K.
and Holland contributed $10 million. He reported that only $22
million of these funds were received and the remaining $110 million
will be paid by the Sudanese Government of National Unity (GoNU).

5. (U) On January 8, Abdel Rahim Hamdi, an ex-Minister of Finance
turned businessmen and NCP advisor, told EconOff that the CBOS's
conversion to the euro will have an impact on Sudanese businesses.
He said that "businessmen will need to become aware of this change
and react accordingly." Hamdi added that the CBOS needs to ensure
that there are sufficient euros in Sudan for sustained business
activity. He noted that small international businessmen will be
impacted the most, particularly when working in geographic areas
that prefer the dollar. Hamdi specifically mentioned that Arab Gulf
States prefer to operate with dollars, as oil is priced and paid for
in U.S. currency. He also said that businessmen will be hurt by the
one-half to one percent exchange fees that will incur when
transferring their money back and forth between different
currencies, and that this will ultimately hurt their profits. He
noted "these business people might have to sacrifice a bit and they
are apprehensive about this."

6. (U) Professor Ali Abdalla Ali, an advisor at the Khartoum stock
exchange and lecturer of Economics at Sudan University, told EconOff
on January 8 that the CBOS's move to the euro "is an emotional
political reaction rather than sound economic policy." Ali
predicted that the Sudanese will find this conversion to the euro
unmanageable and "depending on the political mood" will return to
the dollar in six months to a year. Ali also expressed concern
about the value of the Sudanese Pound, as the exchange rate of the
pound is managed with respect to the dollar. He also stated that if
the CBOS's conversion to euro is to be successful, there will have
to be a change in the overall mentality of Sudanese citizens "who
prefer to calculate the value of items in dollars and Sudanese
pounds, not the euro or other currencies."

7. (U) COMMENT: The CBOS's decision to move to the euro and other
currencies represents one of the most significant and concrete
actions taken by the Government of Sudan to circumvent U.S.
sanctions. While the government immediately sold off some of its
assets and placed minor restrictions on foreign currency
transactions following the May 28, 2007 tightening of U.S.
sanctions, the Government of Sudan repeatedly denied that these
actions in May and June were related to U.S. sanctions. GoS
officials and the CBOS leadership have all acknowledged that this
latest move to the euro will mitigate the pressure of U.S.
sanctions, though it remains to be seen whether this action will be
economically tenable for months and years to come. END COMMENT.

KHARTOUM 00000031 002 OF 002

FERNANDEZ

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