AZERBAIJAN: TDA VISIT/PROGRESS ON ECONOMIC DEVELOPMENT PROJECTS

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001395 SIPDIS SIPDIS DEPT PLEASE PASS TO USTDA DAN STEIN GENEVA FOR AMBASSADOR ALLGEIER E.O. 12958: DECL: 09/22/2016 TAGS: ECON EFIN ETRD EPET ENRG PREL AJ SUBJECT: AZERBAIJAN: TDA VISIT/PROGRESS ON ECONOMIC DEVELOPMENT PROJECTS Classified By: AMBASSADOR ANNE E. DERSE, PER REASONS 1.4 (B, D) ¶1. (C) SUMMARY: In meetings with the Executive Director of the State Oil Fund Shahmar Movsumov, Minister of Finance Samir Sharifov and the Chairman of the State Protection Fund over the course of his visit to Azerbaijan September 10-13, Trade and Development Agency Regional Director Dan Stein discussed current and proposed TDA technical assistance projects. All of the Government of Azerbaijan (GOAJ) interlocutors welcomed additional TDA projects, noting the value of the assistance and professionalism of TDA contractors. As a result of the visit, TDA plans to review Phase II of its project with the State Oil Fund and will examine the possibility of assisting the State Protection Fund with its new project to develop individual pension retirement accounts linked to the Oil Fund. Minister Sharifov again urged U.S. engagement with the Government of Turkey to advance the discussions regarding a transit agreement for Azerbaijani gas to Europe. END SUMMARY. OIL FUND TDA PHASE I AND II -------------- ¶2. (C) In a meeting with Oil Fund Executive Director Shahmar Movsumov on September 11, Stein discussed with Movsumov the conclusions reached in TDA's Phase I technical assistance at the Oil Fund and the terms of reference for beginning Phase II. Movsumov highlighted the benefits of TDA assistance, noting that TDA's technical assistance project Phase I had been extremely productive and "built a sound foundation for the fund's future asset management." (NOTE: As part of Phase I and Phase II, U.S. asset management company Overture Financial provided technical asset management assistance.) ¶3. (C) Regarding Phase II, Movsumov stated that the Oil Fund wanted to move forward, adding that the World Bank Treasury would provide Reserve Asset Management Process technical assistance with the Oil Fund's asset allocation as part of the project. Movsumov explained that at his previous job as Director General of the National Bank, the National Bank had also worked successfully with the World Bank in asset management assistance. Stein told Movsumov that Overture would also be able to provide similar asset management services for the Oil Fund if it wished. 
MINISTER OF FINANCE -------------- ¶4. (C) In a meeting with Ambassador and Stein on September 12, Minister of Finance Samir Sharifov praised TDA and U.S. technical assistance to the State Oil Fund. In addition, Sharifov reiterated that the GOAJ and Oil Fund are "ready to move forward" with Phase II. Sharifov, who was the Executive Director of the Oil Fund prior to being appointed as Minister of Finance, has an excellent working knowledge of the Oil Fund and TDA's technical assistance project. Regarding the Oil Fund's agreement with the World Bank Treasury to provide asset management assistance, Sharifov said that the Oil Fund was aware of "TDA's financial constraints" and sought a "contingency plan." Sharifov explained that the World Bank Treasury would manage USD 200 million of the Oil Fund assets and in turn provide asset management assistance. Sharifov told Stein that TDA's projects are assisting many U.S. companies, including Overture and Bank of New York, as the Oil Fund's custodian. ¶5. (C) Sharifov indicated that he had heard the World Bank and its current international lending strategy was "crowding out" many financial institutions globally, including possibly in Azerbaijan. He continued that there were fewer and fewer countries to which the Bank could lend money and its current operations were competing with the private sector. Sharifov also said that World Bank loans are useful due to the conditionality that improves corporate governance in state-owned institutions. ¶6. (C) Minister Sharifov agreed that it is important to elevate the U.S.-Azerbaijan economic dialogue through a new Economic Partnership Commission. Sharifov indicated that he is interested in seeing the proposed agenda, which the Ambassador told him would be ready shortly. In addition, Sharifov told the Ambassador that Moody's would publish a new Azerbaijan sovereign debt rating (the country's second debt BAKU 00001395 002 OF 003 rating) this week. Based on the rating, the GOAJ would decide whether to float a bond issue in 2006 or later in 2007. INDIVIDUAL RETIREMENT ACCOUNTS -------------- ¶7. (C) Stein asked Minister Sharifov about the GOAJ's plans to link individual citizen pension retirement accounts to the Oil Fund. Sharifov said that the Chairman of the State Protection Fund was leading the initiative, along with the Ministry of Finance and Oil Fund. Sharifov said that Overture, the Oil Fund consultant, had already had discussions with the State Protection Fund about the project, adding that the GOAJ would consider co-financing a feasibility study for the project. Minister Sharifov told Stein that he should meet with Chairman Muslumov at the State Protection Fund and instructed an aide to arrange a meeting that afternoon. Sharifov said that the GOAJ wanted to create a system to develop individual retirement accounts for Azerbaijani citizens linked to the Oil Fund. ¶8. (C) During their meeting, Social Protection Fund Chairman Muslumov explained to Stein that the GOAJ is considering creating two sub-accounts for Azerbaijani nationals at the State Protection Fund. One pension account would accumulate social security contributions and the other "virtual" pension account would be linked to an account at the State Oil Fund. The goal was to have this system developed and implemented prior to the 2008 presidential elections. The system would also be beneficial in controlling GOAJ access to Oil Fund assets, by allocating them to individual accounts while maintaining the money at the Oil Fund. Muslumov stated that many details of the proposal still need to be studied. He indicated that he would formally request from TDA assistance in funding part of the feasibility study and that he had USD 1.2 million budgeted to pay for the study. Stein said that he was encouraged with the project, noting its macroeconomic benefits, and upon receipt of the Social Protection Fund's request, would study the proposal. Embassy will follow-up with the Social Protection Fund regarding the request and provide any additional assistance. NEW PETROCHEMICAL PLANT -------------- ¶9. (C) Sharifov told Stein that the GOAJ had commissioned a feasibility study with an unnamed U.S. company to examine the possibility of building a gas-powered petrochemical plant in Sumgayit or near the Sangachal terminal south of Baku. He explained that the GOAJ would not directly fund the project but rather the GOAJ would use financing from the State Investment Fund and international borrowers to provide the costs associated with the project. SOCAR REORGANIZATION PROJECT FINANCING -------------- ¶10. (C) Sharifov told Stein that SOCAR was likely to pre-pay the USD 150 million EBRD loan that was part of the TDA SOCAR restructuring project Phase I (details of Stein's meeting with SOCAR President Abdullayev septel). Sharifov indicated that SOCAR had implemented some of the recommendations from Phase I and was interested in continuing its reorganization process, including the option of co-financing with TDA the next phase. EBRD's local representative, Raymond Conway, told Stein in a separate meeting that SOCAR planned to pay back the loan early, incurring "penalties" that could total USD 300,000. Conway was dismayed at SOCAR's insistence on pre-paying the loan since EBRD had been interested in restructuring the loan to SOCAR's benefit. GOAJ WTO ADVISOR -------------- ¶11. (C) Noting that he wanted to be clear on this point, Minister Sharifov reiterated the GOAJ's strategic goal of joining the World Trade Organization. That said, he stressed that Azerbaijan needed to take a different approach, i.e., strengthening certain sectors of the economy before joining. The Ambassador told Sharifov that the current U.S. Ambassador to the WTO Peter Allgeier will visit Baku in October and meet with government officials to discuss WTO membership and methods other countries use to reform various sectors in BAKU 00001395 003 OF 003 preparation for WTO accession. Sharifov noted that the GOAJ was already modernizing and reforming the economy step-by-step, citing the new law on insurance and the liberalization of the banking sector. (NOTE: Minister Sharifov has always been cautious on WTO accession understanding the fundamental weaknesses of the economy and its overreliance on energy exports.) TRANS-CASPIAN PIPELINE & TRANSIT AGREEMENT WITH TURKEY -------------- -------------- ¶12. (C) Stein told Minister Sharifov that TDA was planning to move forward with a trans-Caspian pipeline feasibility study that would be directly awarded to a U.S. company. Sharifov was pleased with the news of the study. Turning to the transit agreement with Turkey, Minister Sharifov raised again the need for U.S. engagement in the effort to obtain an agreement to conduct a technical survey of the Turkish gas grid and also draft the legal transit agreement by providing technical assistance to Azerbaijan which the GOAJ is willing to co-finance. He stated that the current discussions are going "nowhere" at the moment and noted that Turkey must understand that the transit agreement has full U.S. support. He disagreed with Minister of Industry and Energy Aliyev's proposal to organize a multi-country working group that included BP and Statoil, noting that the companies had their own commercial biases. Sharifov said that the GOAJ was ready to co-finance any assistance or studies that would lead to obtaining a transit agreement with Turkey. MINISTER OF CULTURE SEEKS FURTHER COOPERATION WITH TDA -------------- -------------- ¶13. (SBU) In a September 15 meeting with the Minister of Culture and Tourism, Stein reviewed with the minister cooperation to date in the tourism sector. The minister asked Stein to consider new TDA projects, including one to provide expert advice on developing Azerbaijan's cinema business, which he emphasized would promote the use of exclusively licensed films, and a follow-on tourism study looking at one region of Azerbaijan. Stein said he would study these requests. DERSE