AMBASSADOR'S INTRODUCTORY CALL ON FINANCE MINISTER

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001042

SIPDIS

SIPDIS

COMMERCE FOR U/S LAVIN
DEPT FOR EUR/CARC

E.O. 12958: DECL: 07/18/2016
TAGS: ECON EFIN ETRD ENRG EPET PREL AJ IR RU
SUBJECT: AMBASSADOR'S INTRODUCTORY CALL ON FINANCE MINISTER
SAMIR SHARIFOV

REF: ATHENS 1782

Classified By: Ambassador Anne E. Derse per 1.4 (b,d).


1. (C) SUMMARY: In her July 11 introductory meeting with
Minister of Finance Samir Sharifov, Ambassador Derse raised
the importance of WTO accession, the GOAJ's transparency and
anticorruption efforts and the importance of non-oil sector
development and effective management of oil revenues. She
also affirmed U.S. support for Azerbaijan's efforts to bring
Caspian gas to reach international markets. Briefing the
Ambassador on his energy discussions in Athens and Ankara,
Sharifov said Greece and Turkey were surprised that
Azerbaijan had taken the initiative on gas negotiations, and
pledged that the GOAJ would remain engaged. In his view,
Azerbaijan must first secure a bilateral transit agreement
with Turkey in order to confirm volumes to Greece and make
the overall gas plan work. Sharifov noted that Turkey and
Russia, including Gazprom, had their own energy regional
interests, complicating GOAJ's efforts to move forward. The
Ambassador praised the active role Azerbaijan played in EITI
and stressed that transparency and anticorruption efforts
were critical. END SUMMARY.


2. (C) Ambassador Derse, accompanied by Econoff and USAID
Country Coordinator, paid an introductory call on Finance
Minister Samir Sharifov on July 11. The Ambassador reviewed
U.S. economic priorities for the bilateral relationship,
highlighting the importance of WTO accession and the GOAJ's
transparency and anticorruption efforts; she also affirmed
U.S. support for Azerbaijan's efforts to bring Caspian gas to
European markets. Finance Minister briefed the Ambassador on
his recent visit to Ankara and Athens for discussions on
Azerbaijani gas purchase and sales to Greece and Europe.
Sharifov highlighted that Azerbaijan is taking the initiative
to push Azerbaijani gas exports to Europe. He noted that
Greece and Turkey were surprised that Azerbaijan had taken on
this initiative to begin the dialogue on obtaining gas sales
agreements with Greece/Europe. (NOTE: Finance Minister
Sharifov has continued to play an active role in GOAJ energy
policy since coming to the ministry from the State Oil Fund
in April, and indicated that he will continue in this role.)

GOAJ-GOT BILATERAL TRANSIT AGREEMENT
--------------


3. (C) Sharifov told the Ambassador that securing a bilateral
transit agreement with Turkey was key to supplying Greece,
Italy and other European countries with Caspian gas. He said
that Greece is interested in purchasing additional gas
volumes to diversify domestic supplies, which Azerbaijan or
Kazakhstan may be positioned to provide. In addition,
Greece's DEPA is interested in purchasing gas directly from
Azerbaijan without intermediaries, i.e. Turkey. Sharifov
stated that Azerbaijan would have 300 million cubic meters of
natural gas ready to supply Greece. Azerbaijan, however,
does not want to commit any gas volumes now without first
securing a transit agreement with Turkey. In addition to a
transit agreement, there needs to be a technical assessment
done by BP, Statoil and others on the Turkey-Greece-Italy
energy grid and its delivery capabilities.


4. (C) The Minister noted that Turkey wants to purchase
Azerbaijani gas and then resell it to Greece and other
European countries. Azerbaijan, however, does not agree with
this approach and wants to sell its gas directly to Europe.
According to Sharifov, there are minor technical issues with
the Greece-Turkey gas pipeline that also would need
to be finalized, and the pipeline needs to be filled with
"filler gas." Gazprom/Russia is telling Greece that only
Russian gas from the Blue Stream pipeline can be the filler
gas in the Turkey-Greece pipeline. Azerbaijan feels its gas
can also fill this pipeline. Sharifov told the Ambassador
that Greece is currently obtaining its gas from
Gazprom and that the existing Gazprom-Greece gas sale
purchase agreement is valid until 2016, supplying gas to
Greece at USD 125 per thousand cubic meters. Greece is
concerned about the pressure Russia can bring to bear as a
result.


5. (C) According to Sharifov, Greece is hesitant to press
Turkey on the Azerbaijani gas transit agreement issue. He

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noted that Greece-Azerbaijan relations have been damaged with
the recognition of northern Cyprus and the commercial flight
from Baku to the island in 2005, but appeared to indicate
this is not a factor in the gas discussions. Sharifov
thought that the EU should play a more active role in the gas
issue as part of its overall efforts to diversify its energy
supplies and use its position to influence Turkey to accept a
transit agreement with Azerbaijan. To gain EU support,
Sharifov explained to the Ambassador, Azerbaijan will work in
Brussels to convince the European Commission on the
importance of supporting efforts to provide Azerbaijani gas
to all European countries.


6. (C) Sharifov was confident that with a gas transit
agreement with Turkey, Kazakhstan would be more interested in
joining the venture and providing more gas volumes. He added
that if Turkey hesitates on finalizing a gas transit
agreement, it may lose an opportunity to move Caspian gas to
Europe, as Gazprom would lock in long-term agreements with
European countries. Sharifov believed that Turkey should not
let its stated desire to become an "energy hub" country
preclude finalization of a gas transit agreement with
Azerbaijan. Sharifov told the Ambassador that the proposal
to create a four-party (Turkey, Greece, Italy and Azerbaijan)
energy working group was not a productive idea and most
likely a delaying tactic by the Turks. He felt that a
Turkey-Azerbaijan bilateral energy working group led by each
country's special energy ambassadors (Ambassador Balcan from
Turkey, for example, and an as-yet unnamed Azerbaijani
counterpart) would be more productive.


7. (C) According to Sharifov, the Greece-Russia relationship
is dynamic and the Turkey-Russia relationship is complex.
Turkey is courting Russia for Russian oil to put in a new
Samsun-Ceyhan pipeline. Sharifov told the Ambassador that
Turkey wants Russian oil. Azerbaijan believes that the gas
issue is part of a larger regional "game" involving oil and
pipeline supply and control. The Samsun-Ceyhan pipeline idea
could fail if Turkey does not lock in Russian oil supplies.


8. (C) Finally, Sharifov stressed to the Ambassador that the
Azerbaijani gas initiative will not succeed without U.S.
support. He noted that the discussion between President
Aliyev and President Bush on energy issues had been
productive and that as a follow-on the U.S. and Azerbaijan
needed to work together and consult regularly.
He stressed that Azerbaijan is open to U.S. views and ideas
and that Azerbaijan will remain active on the gas to Europe
issue. The Ambassador agreed and stated that she would brief
Sharifov on her energy discussions upon her return from
Istanbul and Athens.

U.S.-AZERBAIJAN ECONOMIC RELATIONS
--------------


9. (C) Turning to financial affairs, the Ambassador told
Shariov that the U.S.-Azerbaijan economic relationship as
maturing and becoming more multifaceted. TheAmbassador
stressed that accelerated economic refrm would support
democratic and social reform. he Ambassador told Sharifov
that the U.S. was inerested in raising the level of the
economic diaogue to a higher level like that the USG pursueswith other more developed economic partners. Sharifov said
that Azerbaijan appreciated the U.S. assistance and was
interested in raising the level of economic dialogue (septel
reports President Aliyev and Sharifov's agreement in Istanbul
to move forward with a new economic dialogue). The
Ambassador praised Azerbaijan's active role in the Extractive
Industries Transparency Initiative (EITI) and stressed the
importance of transparency for combating corruption.
Sharifov recognized that Azerbaijan suffers from many
problems and said that it cannot resolve them overnight. He
added that Azerbaijan was moving in the right direction.


10. (C) Sharifov briefed the Ambassador on the GOAJ's
strategy to invest in physical and social infrastructure,
noting that during the past 20 years little investment had
been made in the non-oil sectors of the economy.
Consequently, many sectors, and notably agriculture, are
severely underdeveloped. He recognized the economic dangers
of spending too much money too fast, but added that while the
GOAJ would combat inflation, an

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increase in inflation was "normal" for a fast developing
country like Azerbaijan. Sharifov noted the imbalance
between the supply base and domestic demand, noting that the
GOAJ needed to spend more to relieve the supply constraints.
The Minister told the Ambassador that Azerbaijan was
committed to reform and would accelerate
reform, build on its regional economic initiatives and
improve the business climate.


11. (C) The Ambassador stressed to Sharifov the value of
joining the WTO for improving legal, regulatory and
institutional infrastructure reforms. Sharifov cautioned
that Azerbaijan was still a developing country with respect
to sectors other than energy and could not fully open its
markets before these sectors were more mature. He added that
that economic base of the country was too narrow and not
prepared for an influx of imports. Sharifov agreed that WTO
membership was important but argued that the GOAJ needed to
ensure there was a proper economic balance before moving too
quickly in order to not damage emerging sectors. The
Ambassador told Sharifov that the U.S. would be willing to
engage in a dialogue with the GOAJ on how to advance its WTO
accession while ensuring that critical economic sectors were
not hurt.


12. (C) At the end of the meeting, USAID Country Coordinator
briefly outlined several U.S. assistance programs at the
Ministry of Finance. Minister Sharifov indicated that he was
aware of the projects and grateful for the U.S. support.
USAID Country Coordinator emphasized that the GOAJ's interest
in accelerated investment in physical and social
infrastructure, with modest inflation, can benefit from
rigorous implementation of U.S. assistance activities on
revenue management, capital spending, and expenditure
tracking. He also stated that these projects are "poised" to
help the GOAJ move ahead rapidly with these programs as
government revenues and spending increase. The Ambassador
and AID Country Coordinator explained to Sharifov that the
future of U.S. assistance to Azerbaijan included
"co-financing" of projects. Sharifov told the Ambassador
that he is prepared to work with the USG to move towards
"burden sharing" on assistance. Sharifov noted the
timeliness of this issue and suggested that developing a
co-financing strategy (Embassy side referenced the recent
agreement between the U.S. and Kazahkstan as a possible
model) be taken up as a major focus of the next
U.S.-Azerbaijan Joint Economic Task Force meeting,
tentatively scheduled for October 2006.
DERSE