SCENESETTER FOR CODEL LUGAR'S AUGUST 20-22 VISIT

UNCLAS SECTION 01 OF 02 BAKU 001198

SIPDIS

SIPDIS

FOR CHAIRMAN LUGAR FROM CHARGE HYLAND

E.O. 12958: N/A
TAGS: PREL PGOV PHUM KDEM ECON EAID MARR AJ
SUBJECT: SCENESETTER FOR CODEL LUGAR'S AUGUST 20-22 VISIT
TO AZERBAIJAN



1. (U) Chairman Lugar, on behalf of Ambassador Derse who
looks forward to greeting you on arrival, I warmly welcome
you to Baku next week. President Aliyev's April 28 meeting
with President Bush at the White House was a resounding
success in advancing the bilateral relationship, and the
relationship has never been stronger. We hope that your visit
will build on the momentum of the Aliyev visit in the three
key areas of our cooperation: security, energy and reform.

SECURITY: COOPERATION STRONG
--------------


2. (U) Azerbaijan is a steadfast partner in the Global War on
Terror. In Iraq, 151 Azerbaijani (Shiite Muslim) infantry
troops stand alongside U.S. Marines guarding the Haditha Dam.
Azerbaijan is also contributing troops in Afghanistan and
peacekeepers in Kosovo. Azerbaijan provides blanket
over-flight rights for U.S. aircraft, as well as strong
information sharing and law enforcement cooperation in
fighting terror.


3. (U) Azerbaijan recently completed an Individual
Partnership Action Plan (IPAP) with NATO that has promoted
good cooperation in a number of areas. The USG and NATO
partners would like to see Azerbaijan do more to advance IPAP
implementation. In support of Azerbaijan's IPAP goal, the
U.S. is working with the Ministry of Defense to make a
military airfield "Nato compatible," which could be used by
NATO aircraft as a "gas and go" location for operations in
Central Asia.


4. (U) The U.S. is working with the Azerbaijani Navy to
upgrade the capabilities of five ships and a naval commando
unit to assist in interdicting trans-national threats on the
Caspian Sea. The Proliferation Prevention Initiative (PPI)
encompasses the Coast Guard and we hope very soon, the Navy,
to complete the mission requirements of surveilling the
Azerbaijani sector of the Caspian Sea in order to detect and
interdict WMD. This program represents a historic first for
Cooperative Threat Reduction (CTR) programs. Rather than
disabling and destroying WMD, CTR funds will be used to
detect and prevent proliferation. Shepherding this complex
and first-ever undertaking is a major priority for this
mission. Separately, the Biological Threat Reduction Programs
(BTRP) are doing well. BTRP has biosafety and security
upgrades underway at the Republic Antiplague Station and will
soon begin an upgrade program at the Republic Veterinary
Laboratory. We are also working to improve Azerbaijan's first
responders' ability to react to a WMD incident.

ENERGY: MOVING BEYOND BTC
--------------


5. (U) Last month's Baku-Tbilisi-Ceyhan (BTC) first oil
ceremonies in Turkey highlighted the outstanding level of
U.S.-Azerbaijani cooperation on energy issues and
Azerbaijan's growing role as a regional energy producer and
transit country. In June, Azerbaijan and Kazakhstan signed an
Intergovernmental Agreement (IGA),enabling Kazakh crude to
reach global markets via the BTC pipeline. With the
completion of the South Caucasus Pipeline later this year,
Azerbaijan will begin exporting Shah Deniz gas to Turkey, and
possibly Western Europe. Full field development of Shah
Deniz and a possible new Transcaspian Gas pipeline would
allow still higher volumes of Caspian gas to reach
international energy markets, further enhancing European
energy security. Both Russian and Turkish commercial
interests however, complicate Azerbaijan's plans to play a
still greater role as a regional energy transit hub.

MANAGING THE OIL BOOM
--------------


6. (U) With GDP growth of 36%, Azerbaijan has the fastest
growing economy in the world, driven nearly entirely by a
rising "tsunami" of energy revenue. The government's economic
planning, and the country's judicial, regulatory and banking
sectors are weak and ill-prepared to manage this enormous
influx of revenue. Significant institutional reform and
capacity-building will be required to manage the stable
growth of Azerbaijan's economy and to prevent the onset of
Dutch disease. Corruption, which is pervasive throughout
Azerbaijan, further complicates matters. The U.S. is
providing technical assistance to help Azerbaijan manage this
transition, with technical advisors in the Ministries of Tax
and Finance, anticorruption programs, rule of law programs
and a program to help strengthen the GOAJ's consolidated

BAKU 00001198 002 OF 002


budgeting process. Moreover, we believe the WTO accession
process is the key vehicle through which we can implement
successful economic and political reform that will keep
Azerbaijan's development on a stable path.

REFORM: PROGRESS, SET BACKS AND OBSTACLES
--------------


7. (U) Azerbaijan's November 2005 parliamentary elections
were an improvement over previous elections in some respects.
The Government accepted several OSCE recommendations to
strengthen the process including permitting an
(AID-sponsored) exit poll, finger inking, and domestic
observation. However, the election overall failed to meet
international standards because of credible allegations of
widespread fraud in the vote tabulation process on election
night. The May reruns of ten canceled parliamentary districts
addressed problems in the vote count and were generally an
improvement. In the aftermath of the elections, the OSCE made
several recommendations for institutional reform that we
support, most important, changing the composition of local
election commissions which are heavily stilted in favor of
the ruling Yeni Azerbaijan Party (YAP).


8. (U) Parliamentary reform and media freedoms are key areas
for further democratic reform. We have seen some positive
signs that new Speaker of Parliament Ogtay Asadov (whom you
will meet) hopes to change the Parliament from a Soviet-era
rubber stamp body to a somewhat more empowered institution.
We hope your visit will encourage reform and being a
continuing dialogue to further refrom efforts. Key reforms
under consideration include adding personal staff, and
decreasing the number of members required to form a faction.
We are currently developing a Parliamentary assistance
program that we hope to launch when the fall session of
Parliament convenes in October. On the downside, recent
months have seen a decline in media freedom in Azerbaijan.
There have been two, high-profile, physical assaults on
opposition newspaper journalists in recent months by
unidentified assailants. Separately, Government officials
have increasingly resorted to civil and criminal libel suits
against opposition-affiliated journalists to silence
criticism. Finally, Azerbaijan's most influential independent
media conglomerate, ANS TV, continues to face difficulties in
getting its broadcast license renewed by media regulators.


9. (U) Your visit next week provides an excellent opportunity
to advance the USG's agenda in Azerbaijan. Ambassador Derse,
and all of us at this Mission, look forward to welcoming you.
HYLAND