AMBASSADOR'S INTRODUCTORY CALL ON STATE OIL FUND

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001473

SIPDIS

SIPDIS

DEPT PLEASE PASS TO USTDA DANIEL STEIN

E.O. 12958: DECL: 10/19/2016
TAGS: ECON EFIN PREL PINR EAID AJ
SUBJECT: AMBASSADOR'S INTRODUCTORY CALL ON STATE OIL FUND
EXECUTIVE DIRECTOR SHAHMAR MOVSUMOV

REF: (A) SECSTATE 158764 (B) BAKU 1395 (C) BAKU 1274

Classified By: AMBASSADOR ANNE E. DERSE, PER REASONS 1.4 (B,D)


1. (C) SUMMARY: During her September 29 introductory call on
State Oil Fund Executive Director Shahmar Movsumov, the
Ambassador stressed the critical role the Oil Fund plays in
maintaining macroeconomic stability and in providing a
long-term savings vehicle for the Azerbaijani people.
Movsumov briefed on Oil Fund operations, noting that current
assets total USD 1.5 billion and that Azerbaijan stands ready
to receive more than USD 200 billion in energy revenues over
the next decade. Movsumov stated that the largest
outstanding question remains "how to spend the money?" The
Ambassador and Movsumov discussed at length the steps the
Government of Azerbaijan (GOAJ) needed to implement in order
to prepare the economy for the coming "Tsunami of money."
Movsumov highlighted the lack of government capacity in the
government, in all sectors, as a major impediment. He stated
that the government lacked skilled technocrats to handle
Azerbaijan's increasingly complex economy, noting that there
is also no government advisory economic body or even
effective inter-ministerial process to counsel the president.
Movsumov praised the U.S. Trade Development Agency's
technical assistance to the Oil Fund and welcomed the
proposed visit of TDA Director Thelma Askey to Azerbaijan in
December. The Ambassador briefed Movsumov on U.S. efforts to
elevate the bilateral economic dialogue, including the
development of the Economic Partnership Commission meeting.
Movsumov welcomed the EPC concept, noting the value of an
elevated dialogue and said that he would be interested in
contributing. He will attend the EITI meeting in Norway and
looks forward to discussing the EPC with A/S Sullivan there.
END SUMMARY.


2. (C) The Ambassador paid an introductory call on Executive
Director of the State Oil Fund Shahmar Movsumov on September

29. Movsumov briefed on current Oil Fund operations,
touching upon the Trade Development Agency's phase II
technical assistance and the Oil Fund's role in the
Extractive Industries Initiative (EITI). Movsumov told the
Ambassador that EITI has changed the public's perspective on
the Oil Fund and that civil society, NGOs and opposition
parties now agree that the Oil Fund is transparent. He added
that the largest outstanding question remains "how to spend
the money?" Movsumov also briefed on his meetings in New
York with EUR A/S Daniel Fried and NSC Director for Eurasia
Judy Ansley, noting that it was an "interesting meeting" but
that some of the questions went beyond his mandate at the Oil
Fund (Reftel A). Movsumov told the Ambassador that he
planned to travel to Oslo for the next EITI meeting and that
he looks forward to meeting EB A/S Sullivan there..

OIL FUND BACKGROUND, OPERATIONS AND REVENUE STREAM
-------------- --------------


3. (C) While relatively new to the State Oil Fund, Executive
Director Shahmar Movsumov brings a wealth of knowledge and
management skills that will enhance his stature in his new
position and assist his role in the government's economic
decision-making process. Current assets at the Oil Fund
total approximately USD 1.5 billion and the fund's assets are
expected to grow exponentially over the coming decade as
Azerbaijan's oil revenue steadily increases. In 2009, the
GOAJ could receive as much as USD 20 billion in oil revenues
and in total the Oil Fund is prepared to receive more than
USD 200 billion in overall revenue from the
Azeri-Chirag-Guneshli (ACG) oil field.


4. (C) Through the Oil Fund, Azerbaijan has set up
transparent procedures to account for its energy revenues.
The real challenge lies in ensuring that these funds are
utilized correctly by the government once they are
transferred to the state treasury for budget support and
infrastructure projects. Movsumov is the former Director
General of the National Bank and right-hand executive of
current National Bank Chairman Elman Rustamov and has a
Master's degree in Public Administration from the John F.
Kennedy School of Government at Harvard University.

2007 STATE BUDGET
--------------


5. (C) Movsumov told the Ambassador that even though the 2007

BAKU 00001473 002 OF 003


state budget was finalized, many ministries were still
requesting additional funding, putting more pressure on
Minister of Finance Sharifov. Movsumov said that the GOAJ
needed to develop a medium-term spending framework and
prioritize macroeconomic spending. Movsumov told the
Ambassador that the Oil Fund has two primary missions:
accumulation of resources and money management for future
generations. Movsumov added that the Oil Fund acted to
restrain inflation in 2005 and that without it, inflation
would have been much higher.

TDA TECHNICAL ASSISTANCE
--------------


6. (C) Mosumov welcomed TDA Director Thelma Askey's proposed
trip to Azerbaijan in December to participate in the Oil
Fund-TDA technical assistance phase II signing ceremony,
calling it "wonderful" (Reftel B). Movsumov told the
Ambassador that engaging and retaining qualified employees
was the most difficult challenge facing the Oil Fund and the
government. There is a serious lack of human capacity in the
government and the country. He added that the Oil Fund
competes for qualified personnel with private banks in
Azerbaijan and with international financial institutions. He
said the Oil Fund has only 40 employees, half of which are
substantive and he recently lost four employees to the
private sector. Movsumov said that USAID was reviewing a
plan to assist the Fund with employee retention and that the
Finance Minister was aware of the problem and may be able to
help. The Ambassador raised Overture Financial's offer to
provide the Oil Fund with similar World Bank Treasury reserve
asset management services. Movsumov said that he would look
at Overture's options, although he said that there may be a
conflict of interest since Overture is the consultant for the
phase II technical assistance.

MACROECONOMIC MODELING UNIT
--------------


7. (C) Movsumov told the Ambassador that the BP-funded
macroeconomic modeling group at the Oil Fund was operating
and that there would be a ministerial briefing in mid-October
(REF C). The macroeconomic modeling unit, according to
Movsumov, has provided the GOAJwith "an additional
instrument for economic poliy making." Movsumov explained
that Oil Fund obtained the modeling group because it was a
"neutral place" and that the Oil Fund has become the de facto
GOAJ coordinator of oil revenue management for "informed
decision-making." Movsumov reiterated that the pressure to
spend more oil revenue was "enormous," adding that the public
is waiting for the oil money to improve its daily lives.

LACK OF CAPACITY HURTING AZERBAIJAN
--------------


8. (C) Movsumov said that Azerbaijan is rapidly reforming but
that more work still needs to be done. He added that the
policy making process is not "prepared to handle" the large
amounts of energy revenue inflows. Movsumov highlighted the
need for bank/financial sector reform, noting that the
government's regulatory tools are weak but getting better.
Movsumov noted that in Moody's recently completed rating of
Azerbaijan, Moody's highlighted Azerbaijan's lack of capacity
in economic decision-making, which he views as the single
largest issue for the GOAJ. He continued that Azerbaijan has
an increasingly sophisticated, complex economy without
experienced technocrats to manage and guide it.


9. (C) In addition, Movsumov said that there is currently no
government economic advisory board or effective
inter-ministerial policy making process to counsel the
president on economic decisions. According to Movsumov, the
ability of government managers to comprehend oil revenue
management is low; with oil revenues increasing more skilled
managers are needed urgently. He briefed the Ambassador on
President Aliyev's program to turn "Black Gold into Human
Gold" by offering scholarships to students for training and
studies abroad. The Ambassador told Movsumov that the U.S.
helps GOAJ efforts to send students abroad for training
through exchange programs. The Ambassador also told Movsumov
about a U.S. program that has trained ministerial interns to
work in several different government ministries.


10. (C) In a separate conversation with the Ambassador,

BAKU 00001473 003 OF 003


Movsumov said he had once recommended while at the National
Bank that Azerbaijan hire Michael Porter, the Harvard
economist who advised Kazakhstan on its reforms.


11. (C) The Ambassador told Movsumov of Minister of Industry
and Energy Natiq Aliyev's attempts to develop the non-oil
sector. Movsumov questioned whether the GOAJ should be
taking a role in such activities, remarking that the market
should decide which industries and state-owned properties
survive or die. Movsumov believed that both Finance Minister
Sharifov and Economic Development Minister Babayev felt the
same way that market forces should lead economic development.
Movsumov stated that the government should "create the
environment" through structural reforms for industry to
develop. From this, he opined, macroeconomic stability can
be maintained without government interference and distortion.

ECONOMIC PARTNERSHIP COMMISSION
--------------


12. (C) The Ambassador briefed Movsumov on U.S. efforts to
elevate the bilateral economic dialogue, including the
development of the Economic Partnership Commission. Movsumov
welcomed the EPC concept, noting that an intensified economic
policy dialogue is timely given the looming economic
challenges, and he stated that he would be interested in
contributing.

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


13. (C) In addition to being a valuable Embassy contact,
Movsumov is also one of the few informed voices in the
government that advocates loudly for government fiscal
discipline, economic reform, market liberalization and
improved inter-ministerial coordination in the budget
process. Movsumov moved quickly at the Oil Fund to engage on
EITI issues. Based on recent Embassy meetings with Movsumov,
he is likely to continue the government's strong EITI role
and commitment to increased transparency. In addition, he is
a valuable proponent of efficient and transparent management
and utilization of Oil Fund assets, a key U.S. goal. Now
reporting directly to President Aliyev, Movsumov will be a
valuable interlocutor.
DERSE