PRESIDENT ALIYEV LAYS OUT STRATEGIC VISION FOR

C O N F I D E N T I A L SECTION 01 OF 05 BAKU 001260

SIPDIS

SIPDIS

DEPT FOR EUR/AS FRIED AND DAS BRYZA, ALSO FOR EUR/CARC, OBO
FOR GENERAL WILLIAMS, USDOC FOR U/S LAVIN AND DG ISRAEL
HERNANDEZ

E.O. 12958: DECL: 08/23/2016
TAGS: PREL PGOV ECON ETRD KDEM PHUM AMGT ABLD AJ
SUBJECT: PRESIDENT ALIYEV LAYS OUT STRATEGIC VISION FOR
SUSTAINABLE DEVELOPMENT TO CHAIRMAN LUGAR

REF: BAKU 1248

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


1. (C) Summary: In an August 21 office call and subsequent
dinner, President Aliyev laid out for SFRC Chairman Lugar his
strategic vision for Azerbaijan's sustainable development,
including plans for infrastructure improvements, investment
in the non-oil sectors, poverty reduction and environmental
programs, and increased spending on education and social
programs. Aliyev said that increased human capacity would be
required to implement his modernization vision, adding that
he was considering a new Presidetial Scholarship Program to
send young Azerbaijais to study abroad. Aliyev said that
his goal ws to ensure that Azerbaijan's economy continued to
prosper after Azerbaijan's energy revenues are exhausted in
the next 30-50 years. Aliyev said that he recognizes the
dangers inherent in increased government spending (and
admitted that the GOAJ had seen some signs that the economy
was over-heating),but offered little detail on GOAJ plans to
prevent hyper-inflation. Aliyev added that he faces strong
popular pressure to spend the energy revenue now. Lugar
cautioned Aliyev that continued democratic development also
would be important for Azerbaijan's long-term prosperity.
Aliyev agreed, but argued that an evolutionary approach --
particularly one where parliament supports the Executive
Branch's work -- was necessary in Azerbaijan. (Comment:
Like a good CEO, Aliyev has a solid vision; the question is
whether Azerbaijan has the capacity and will throughout the
government needed to implement the tough decisions that lie
ahead.) Aliyev also confirmed his offer to provide a site
for the New Embassy Compound as a gift to the USG. End
summary.


2. (U) The Ambassador and Senate Foreign Relations Committee
Chairman Richard Lugar (R-IN) paid an office call on
President Aliyev on August 21. Chairman Lugar was
accompanied by SFRC Staff Ken Myers II, Ken Myers III,
OSD/Policy CTR Director Jim Reid, OSD/CTR Policy Advisor Andy
Weber, Captain Gene Moran, and pol/econ chief (notetaker).
Aliyev was accompanied by his Foreign Policy Advisor
Ambassador Novruz Mammadov. Later on August 21, Aliyev
hosted a dinner in honor of Lugar. The entire CODEL,
accompanied by Ambassador and pol/econ chief, attended the
dinner; Aliyev was accompanied at the dinner by Foreign
Minister Elmar Mammadyarov and former Azerbaijani Ambassador
to Washington Hafez Pashayev (recently appointed as Deputy
Foreign Minister and Dean of Azerbaijan's new Diplomatic
Academy).


3. (U) Aliyev welcomed Lugar to Azerbaijan, noting that his
trip was important not only to advance US-Azerbaijan
bilateral relations, but also to demonstrate to countries
throughout the region the strategic importance of good ties
between the US and Azerbaijan. Aliyev noted that he was
"very satisfied" with his April visit to Washington, telling
the Chairman that bilateral relations continued to develop
successfully in all areas following the Washington visit.
Lugar responded that he had come to Azerbaijan with a great
deal of excitement, eager to learn about Azerbaijan's
stunning economic growth and the opportunities that growth
presents to the Government of Azerbaijan to ensure that the
Azerbaijani people's lives are improved. (Television cameras
were present during the opening of the meeting, and both
Aliyev's and Lugar's initial remarks were broadcast.)

NEW EMBASSY COMPOUND
--------------


4. (SBU) The Ambassador thanked Aliyev for his offer to give
-- as a gift -- property to the United States for the site of
a New Embassy Compound. The Ambassador noted that the
property and subsequent New Embassy Compound would be a
symbol of the strong and growing relations between our two
countries; if the site were quickly identified and secured,
the USG would be able to move much more quickly on
construction, perhaps advancing the schedule by as much as
two years. As soon as we have a written offer from the
Government of Azerbaijan, the Ambassador said, we can
proceed. Aliyev responded that he had just checked with the
State Property Commission (SPC) earlier that day and had been

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told that three areas had been chosen that the embassy would
evaluate two. He added that he understood the embassy had
already rejected one site. (We later asked Presidential
Foreign Policy Advisor Novruz Mammadov and Foreign Minister
Mammadyarov to ensure that President Aliyev understands that
the Embassy has not yet received written offers for any of
the three sites, nor have we rejected any of them. As an
apparent result, the SPC asked to meet the DCM on August 24.)

A VISION FOR SUSTAINABLE DEVELOPMENT
--------------


5. (SBU) Briefing Aliyev on his visit to the West Azeri oil
platform and luncheon discussion with Minister of Economic
Development Heydar Babayev on Azerbaijan's development goals,
Lugar asked Aliyev to outline his own vision for Azerbaijan's
sustainable development. Specifically, how did Aliyev plan
to translate Azerbaijan's enormous energy revenue into
improved services and infrastructure -- including
environmental clean-up -- that would improve the lives of
Azerbaijani citizens? Aliyev responded that the two issues
-- energy and sustainable development -- were inter-related.
Without energy, he said, none of Azerbaijan's development
plans would be realistic. The challenge, he added, is to
translate Azerbaijan's significant financial resources into
human resources.


6. (SBU) Aliyev said he had begun thinking about this
problem in 2004, when he first created a rural development
program. Aliyev said that Azerbaijan faces a huge potential
danger of mass rural migration to Baku, which he hopes to
stop through the creation of decent conditions and
opportunities outside Baku. (Minister of Economic
Development Babayev separately told Chairman Lugar that rural
migration already is a pressing problem for the GOAJ, as
Baku's population is now estimated at 3.5 million.) Aliyev
said that poverty reduction and job creation were an integral
part of his approach. In 2005, he said, Azerbaijan had
reduced poverty from 49 percent to 29 percent; he hopes to
entirely eliminate poverty by the end of 2007. (Aliyev said
that Azerbaijan measures poverty by the common world standard
of per capita income of less than USD 2 per day.) Aliyev
added that over the last two and a half years, Azerbaijan had
created 435,000 new jobs.


7. (SBU) Infrastructure development also factors into
Aliyev's vision; he said that Azerbaijan plans to build six
new power stations by the end of 2007, each with a capacity
of 1,000 megawatts. Aliyev also plans to build highways,
connecting Azerbaijan to its neighbors, and wants to improve
Azerbaijan's water supply. Aliyev said that Azerbaijan is in
the process of completing a new USD 300 million water
pipeline that will bring potable water from northern
Azerbaijan to Baku. Aliyev also plans to improve health care
throughout the country, building ten modern regional
hospitals that will ensure citizens have easy access to a
degree of care previously available only in Baku. Aliyev
agreed with Chairman Lugar that Azerbaijan's environmental
issues were of concern, and said that he had recently
convened a Cabinet Meeting to discuss the issue, instructing
his Ministers to develop a program to clean up "all areas."
Aliyev noted that the World Bank already had expressed
interest in the project, and was working on a plan to clean
the entire Absheron peninsula and Baku Bay in the next 2-3
years.


8. (C) In general, Aliyev said, Azerbaijan needs to "work as
if we don't have any oil," and make the reforms and
investments now to ensure that Azerbaijan's non-oil sectors
are vibrant when Azerbaijan's oil reserves are exhausted in
30 or 50 years. To that end, Aliyev said that he had asked
the Ministry of Industry and Energy to develop a plan for
Azerbaijan's industrialization, with a particular focus on
attracting foreign investment. Aliyev noted that he had also
established a State Investment Committee (with USD 150
million in capital) that will provide seed capital to new
enterprises. Separately, the GOAJ has unveiled a new USD 100
million investment fund for small and medium enterprises,
which account for fully 75 percent of Azerbaijan's private
sector. Aliyev said he personally would like to ensure that
most of that investment fund is spent in agriculture. Noting

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that agriculture is Azerbaijan's second largest sector (after
energy),Aliyev said that the health of Azerbaijan's
agricultural sector also is very important from a social
point of view. Continuing on social issues, Aliyev said that
he was very aware of the dangers posed by unemployment among
Azerbaijan's youth, and was building a network of sports
facilities and theaters to ensure that youth -- particularly
in the regions -- were occupied in productive activities and
not tempted by the dangers of drugs Qlcohol.


9. (C) Aliyev commented that Azerbaijan now has the
resources to undertake all of these efforts on its own,
without depending on loans from the international financial
institutions. We can create a modern economy in a short
period of time, he said, but must continue to rely on outside
experts -- particularly from the IFIs -- to achieve
Azerbaijan's objectives. Aliyev added that Azerbaijan was
moving from an aid to a consultative relationship with the
IFIs, but acknowledged that Azerbaijan's weak and
under-developed banking sector posed challenges. Azerbaijan
had started to change its lending practices this year, with a
new program of preferential loans for first-time homebuyers
that the GOAJ would evaluate after six months. (During a
separate August 21 meeting with Chairman Lugar, Minister of
Economic Development Heydar Babayev elaborated on some of the
problems in Azerbaijan's banking sector. He said Azerbaijan's
large number of banks (43) and low capitalization made the
sector inefficient. Commercial lending terms were
prohibitively difficult -- 25% over three years -- and
salaries in general were too low to support these rates.
Babayev commented that Azerbaijan hopes to address some of
these problems through the new mortgage law and soft loans
from the State Entrepreneurship Fund.)

BALANCING THE PRESSURES TO SPEND -- AND NOT TO SPEND
-------------- --------------


10. (C) Aliyev said that in the immediate future,
Azerbaijan's biggest challenge would be imposing internal
restrictions on spending. The GOAJ already has seen "some
element of the economy over-heating," Aliyev said, and the
GOAJ needs to be "very accurate" in its spending plan. With
"everyone waiting for BTC," Aliyev said that popular
expectations are very high right now. The Government will
fulfill people's expectations but will not escalate
inflation. With a strong banking system and a market economy,
Aliyev said that Azerbaijan can enter a new stage of economic
development. Since independence, he said, Azerbaijan had
always fought for an improvement in its standard of living.
Now, the challenge is not to spend, to ensure that
Azerbaijan's stunning economic growth does not lead to
hyper-inflation. At the same time, Aliyev said, all social
problems must be resolved.


11. (C) Aliyev said that his economic policy constitutes a
mix of a social system and market economics. Noting that
many elements of Azerbaijan's economy still have a strong
social element, Aliyev said that a significant part of
Azerbaijan's population is poor, and the government has a
responsibility to take care of the poor. To that end, the
GOAJ is working to improve the living conditions of
Azerbaijan's large refugee and IDP population. Aliyev said
that the GOAJ intends to move all refugees and IDPs into new
housing by 2010. As part of the new housing complexes, the
GOAJ also is building new hospitals and schools.

EDUCATION NEEDED TO BUILD HUMAN CAPITAL
--------------


12. (C) The real challenge, Aliyev said, is to develop
Azerbaijan's human capital. He said the GOAJ built 300 new
schools in 2005 and, by 2008, will ensure that none of
Azerbaijan's 450,000 schools remains in poor condition, and
that all have computers and internet access. Azerbaijan
needs to have "skilled young managers who have studied
abroad," he said, adding that he had asked the Ministry of
Education to prepare a study on the young Azerbaijanis who
are educated abroad. Very few study abroad on international
programs; the rest, he said, must find their own financial
resources. Aliyev hopes to rectify this situation by
creating a GOAJ-funded program for "100 to 200" young

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Azerbaijanis to study in the West. Aliyev said he hopes to
lure them back to good government jobs, in part by closing
the gap between government and private sector salaries.
Aliyev said he also is concerned that many well-educated
young Azerbaijanis leave to pursue jobs abroad, commenting
that Azerbaijan needs to create the conditions to keep people
here. He added that he is considering creating a new
Presidential Scholarship Fund. Over dinner, Mammadyarov and
Pashayev elaborated on GOAJ plans to create a new Diplomatic
Academy that will grow from a small training academy for
Azerbaijani diplomats to a full-fledged four-year university
that will train civil servants from across the Azerbaijani
government and the entire region. Also over dinner, Aliyev
said that far-reaching education reform is important.
Mammadyarov noted that Azerbaijan had signed on to the
Council of Europe's Bologna Education reform process and was
committed to its implementation.

DEMOCRACY MUST BE PART OF THE VISION
--------------


13. (C) Briefing Aliyev on his earlier discussion with
Speaker of Parliament Ogtay Asadov (ref),Lugar commented
that Azerbaijan's continued democratic development would be
equally important for its sustained stability and prosperity.
Aliyev rued that popular perceptions of parliament in
Azerbaijan differ from parliament's actual mandate. While
Azerbaijan's parliament should be dedicated to passing
legislation, he said that Azerbaijani citizens have the idea
that parliamentarians should be responsive to their
individual needs, for example traveling regularly to villages
to solve citizens' problems. Aliyev commented that during
Azerbaijan's November 2005 parliamentary elections,
well-known politicians were defeated for the first-time by
"unknowns with resources" who promised to take care of
problems in the regions. Aliyev complained that this
development was not positive for Azerbaijan, adding that
Members of Parliament should be lawyers and politicians who
are skilled at passing legislation. Lugar cautioned that
members of parliament can never forget who sent them to
parliament, and have an obligation to try to serve their
constituents' interests. While some members of parliament
try to "bring home the bacon," there are others who will look
at the country's overall interests.


14. (C) Aliyev said that while Parliament's role in
Azerbaijan is not big, it is an important one and, for this
reason, relations between the parliament and the president
must be very good. Aliyev noted that Azerbaijan does not
have a tradition of a strong parliament, but said this
"probably" will change as Azerbaijan becomes more developed.
For today's national interest, Aliyev concluded that it is
important that parliament and the president work together to
strengthen Azerbaijan's independence.


15. (C) In summary, Aliyev told Lugar that Azerbaijan has "a
lot to do" to ensure that its own wealth translates into
sustainable development. He recounted a recent Cabinet
meeting in which, for the very first time in his presidency,
Azerbaijan's energy programs were not discussed. Aliyev said
Azerbaijan is focused on a program of "total modernization"
that will develop Azerbaijan as an economically and
politically strong and independent country, that is a true
friend of its partners and can be useful when needed. Oil
has played and will continue to play an important role in
shaping Azerbaijan's future, Aliyev said, but for now, the
focus is on broad-based development.

COMMENT
--------------


16. (C) A confident and relaxed Aliyev clearly relished the
opportunity to share his strategic vision for modernization
and sustainable development with Chairman Lugar. In fact, he
told the Ambassador over dinner that he regretted he had not
had more time to go into greater detail on specific issues.
Like a good CEO, Aliyev has a solid vision in place; the real
question is whether Azerbaijan has the capacity -- and the
political will throughout the government -- to take on some
of the difficult issues such as combating corruption and
reining in government spending that will be necessary to

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ensure his vision is not overtaken by the Oil Curse. Aliyev
is handicapped by the severe lack of technical capacity
within the GOAJ, and his desire to maintain tight control
over parliament will not help create the culture of
transparency and accountability needed for Azerbaijan to
successfully navigate the coming tsunami of energy revenue.
Continued high-level USG engagement with the GOAJ, including
dialogue with senior officials such as Senator Lugar, is
needed to help Aliyev make the hard choices that lie ahead.


17. (U) CODEL Luga did not have the opportunity to review
this mesage.
DERSE