WTO AMBASSADOR ALLGEIER DISCUSSES WTO MEMBERSHIP

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001531

SIPDIS

SIPDIS

DEPT PLEASE PASS TO USTR FOR SHAUN DONNELLY, BETSY HAFNER
AND PAUL BURKHEAD
NSC FOR MATT PALMER
GENEVA FOR AMBASSADOR ALLGEIER
TREASURY FOR CLAY LOWERY, NANCY LEE AND JEFF BAKER
USDOC FOR U/S LAVIN

E.O. 12958: DECL: 10/20/2016
TAGS: ECON EFIN PREL AJ ETRD
SUBJECT: WTO AMBASSADOR ALLGEIER DISCUSSES WTO MEMBERSHIP
AND ECONOMIC REALITY WITH LOCAL IFI REPRESENTATIVES

REF: BAKU 1367

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


1. (C) SUMMARY: Over dinner October 15 with visiting U.S.
Ambassador to the World Trade Organization Peter Allgeier,
representatives from four international financial
institutions agreed that economic reform was critical for
Azerbaijan's future and that the WTO accession process could
advance the reform agenda. Ambassador Allgeier told the
group that Azerbaijan could leverage the WTO membership
process to "lock in economic and political reforms." The IFI
representatives stated that GOAJ efforts to advance toward
WTO membership were slow and, in order to convince the GOAJ
of the advantages of the WTO, the international community
needs to identify "key allies" in the government who stood to
gain from membership, and to "build alliances within the
system." One of the largest challenges facing the GOAJ and
its efforts to join the WTO was the current system of
"franchises" in which the economy is divided up into many
different pieces controlled by powerful political figures.
Thus, economic policy reflects these actors' focus on
short-term gains, despite long-term economic dangers. IFI
representatives noted the GOAJ needs to have both the
political will to reform the economy and the need to build up
government capacity to implement change. The group discussed
the current macroeconomic environment, noting the strength of
the energy sector and the weak development of the non-oil
sector. Several participants highlighted the risk of
political instability and the rise of political Islam if the
GOAJ mismanages its oil revenues and economic development.
END SUMMARY.

GOAJ AND WTO MEMBERSHIP
--------------


2. (C) On October 15, Ambassador Derse hosted a dinner with
local representatives from the European Bank for
Reconstruction and Development, World Bank, International
Monetary Fund and UNDP in honor of visiting U.S. Ambassador
to the World Trade Organization Peter Allgeier. The group
stated that Azerbaijan was still several years away from
joining the WTO membership and needed to implement
wide-ranging economic and legislative reforms to qualify for
membership. The two main challenges to WTO membership were
the lack of political will and the lack of capacity within
the government to enact changes. Despite the Presidential
Decree of August 2006 that outlined the time-line by which
the GOAJ would reform its economy and amend legislation for
WTO membership, some of the dinner group questioned the
government's intentions. Ambassador Allgeier stated that
joining the WTO was a long-term process that would take
several years. Allgeier stated that the WTO membership
process would enable Azerbaijan to "lock in economic and
political reforms." The dinner group agreed that rapid
reform is essential to provide Azerbaijan the basis to manage
its new oil wealth. They noted that several powerful
government officials were aware that the WTO was an
organization that "has teeth," unlike other multilateral
organizations Azerbaijan has joined, adding that if
Azerbaijan violated WTO rules it could be faced with hard
economic and political decisions.


3. (C) Dinner participants briefed Ambassador Allgeier on
GOAJ efforts to join the WTO and on the importance for the
GOAJ to pursue WTO and reform multiple economic sectors in
order to avoid political and macroeconomic instability.
Several participants noted that WTO membership did not appear
to be on the top of the government's agenda and that the
Government of Georgia during the late 1990s had worked harder
to join the WTO. Ambassador Derse stated that the message to
the GOAJ, and in particular to President Aliyev, needed to
highlight the "political advantages" of joining the WTO. All
agreed that the international political advantages of
"joining the club" had resonance with President Aliyev, who
wanted to be taken seriously on a global level. Some stated
that even with the president's political will, efforts to
advance WTO efforts would be difficult due to entrenched

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economic forces.


4. (C) Dinner participants told Allgeier that to convince the
GOAJ of the advantages of the WTO he would
need to identify "key allies" in the government that stood to
gain from membership and to "build alliances within the
system." Dinner participants noted that current GOAJ
economic policy reflects the interests of influential actors
seeking short-term gain despite long-term economic dangers.
Several participants noted that the Customs Committee in
particular would stand to lose the most and thus would be the
most resistant to change. One participant estimated that
once the GOAJ accelerated the WTO process, it would still
need at least three to five years to implement all the
necessary requirements, such as amending current legislation,
and would be ready to accede by 2010 or 2011 at the earliest.

"FRANCHISE SYSTEM"
--------------


5. (C) The dinner participants highlighted the need for
structural economic reform, moving away from the current
"franchise system" and towards a more open and transparent
liberal economy. In the current "franchise" system, as
explained by several IFI participants, the economy is
dominated by different economic franchises, with powerful
political figures controlling vast economic resources. The
franchise system extends throughout the economy and ensures
that all participants profit, including the highest
government officials. For the GOAJ to reform the economy in
preparation for WTO membership, several dinner participants
said there needed to be an internal GOAJ dialogue led by the
president on how to break up the franchise system. Such a
dialogue would be difficult for the president over the next
two years since he relies upon many different political and
economic actors for his 2008 presidential bid. After the
presidential elections, however, President Aliyev may be in a
position to reform the economy and modernize as he looks
towards his historical legacy. The WTO accession process
could assist President Aliyev in reforming the economy. All
agreed that to advance towards WTO membership, there needed
to be a "champion of the WTO" within the government to push
the process.

ECONOMIC ENVIRONMENT
--------------


6. (C) Dinner participants told Ambassador Allgeier of an
increasingly difficult economic operating environment,
highlighting the role of multiple monopolies in controlling
the economic system. The non-oil sector, according to the
group, was slowly suffocating and the GOAJ did not appear to
have a well thought through plan to diversify the economy.
The president appears focused on short-term infrastructure
projects and public investment development in the run-up to
the 2008 presidential elections. In addition, the GOAJ will
raise the salaries of 500,000 of the 650,000 civil servants
by approximately 75 percent over the next year, in a further
political move to win votes. (COMMENT: Higher salaries are
needed to fight corruption. END COMMENT)


7. (C) Dinner participants discussed the critical role of the
banking sector in the country's economic development. One
representative noted that several individual banking
institutions in neighboring Kazakhstan each had more assets
than the entire banking system in Azerbaijan. (NOTE:
Azerbaijan's banking sector has approximately USD 500 million
in capital.) One participant noted that the state-owned
banks, International Bank of Azerbaijan and Kapital Bank,
operate as powerful monopolies and dominate the sector,
keeping out international financial institutions.
International energy companies are informally required to
maintain their accounts at IBA, further adding to the bank's
dominant role. Of the 44 banks, approximately 10 to 12
mid-size banks operate in a competitive environment. Bank
Standard, the family bank of Economic Development Minister
Babayev, is one of the fastest growing banks.


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POLITICAL ISLAM GROWING INFLUENCE?
--------------


8. (C) Several of the dinner participants recognized that
there appears to be a growth in religiosity in Azerbaijan. A
few dinner participants highlighted the risk of political
instability and the rise of political Islam if the GOAJ
mismanaged its oil revenues and economic development and if
the lives of the general population did not improve (REFTEL).
Some participants cautioned that in the near-term, political
Islam did not appear to be a threat to the GOAJ, noting that
after years of Soviet domination when religious activity was
prohibited, it was normal for Azerbaijanis to rediscover
their religion. According to one participant, in the
longer-term, political Islam could develop into a powerful
force. Dinner participants believed that Islamic movements,
modeled on Hamas, could develop to provide Azerbaijan's
citizens with services and assistance that the GOAJ could not
or was not willing to provide. One participant warned that a
version of political Islam modeled on Iran's brand of Islam
could also develop in Azerbaijan if the GOAJ did not manage
effectively the economy and public expectations. Some of the
participants downplayed the threat of Azerbaijan's increasing
religiosity, indicating that it would never be as prevalent
or wide-spread as in other Muslim countries.
DERSE