Identifier
Created
Classification
Origin
06BAKU1656
2006-11-14 13:58:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AMBASSADOR'S INTRODUCTORY CALL ON STATE SOCIAL

Tags:  ECON EFIN ETRD EPET PREL AJ 
pdf how-to read a cable
VZCZCXRO8356
RR RUEHDBU
DE RUEHKB #1656/01 3181358
ZNY CCCCC ZZH
R 141358Z NOV 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 1676
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1820
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHINGTON DC
RHMFISS/CDR USEUCOM VAIHINGEN GE
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001656 

SIPDIS

SIPDIS

DEPT PLEASE PASS TO USTDA DAN STEIN
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: 11/15/2016
TAGS: ECON EFIN ETRD EPET PREL AJ
SUBJECT: AMBASSADOR'S INTRODUCTORY CALL ON STATE SOCIAL
PROTECTION FUND CHAIRMAN

REF: (A) BAKU 1395 (B) BAKU 718

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

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001656

SIPDIS

SIPDIS

DEPT PLEASE PASS TO USTDA DAN STEIN
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: 11/15/2016
TAGS: ECON EFIN ETRD EPET PREL AJ
SUBJECT: AMBASSADOR'S INTRODUCTORY CALL ON STATE SOCIAL
PROTECTION FUND CHAIRMAN

REF: (A) BAKU 1395 (B) BAKU 718

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


1. (C) Summary: In a November 6 meeting with Ambassador, the
Chairman of the State Social Protection Fund (SPF) Salim
Muslumov briefed the Ambassador on Azerbaijan's reformed
pension system and the SPF's efforts to provide greater
pension benefits to citizens from Azerbaijan's new oil
wealth, as well as obtain additional contributions from all
foreigners working in Azerbaijan. Muslumov told the
Ambassador that one of President Aliyev's key goals is to
ensure that by 2008 all of Azerbaijan's pensioners live above
the poverty level and that retired Azerbaijanis' minimum
monthly pension would increase to USD 75 per month by 2008.
Muslumov recognized that the GOAJ could not give money from
the country's oil wealth directly to the citizens, indicating
that it would distort the macroeconomic environment and cause
the "financial system to collapse." The new accounts linked
to the Oil Fund would allow citizens to feel that they had
their share of the country's oil wealth. The Ambassador
requested from Muslumov the terms of reference required for
the U.S. Trade and Development Agency to begin reviewing
possible technical assistance on the GOAJ's plans to link
individual citizen pension retirement accounts at the SPF to
the Oil Fund. Muslumov said that the TOR would be ready in
several days and would be provided to the Embassy to forward
to TDA. The Ambassador emphasized the importance of GOAJ
remaining regionally competitive with respect to tax and
social contribution rates if it wishes to attract foreign
investment. Muslumov told the Ambassador that he would
visit Washington in late November or early December to

participate in a World Bank-sponsored event and would like to
establish a dialogue with the U.S. Social Security
Administration. We request Department's assistance in
arranging meetings for Chairman Muslumov to the Social
Security Administration and the Department of State. END
SUMMARY.


2. (C) Ambassador Derse called on State Social Protection
Fund (SPF) Chairman Salim Muslumov November 6. Muslumov
briefed the Ambassador on Azerbaijan's new social pension
insurance system (begun officially on January 1, 2006) and
the Social Protection Fund's efforts to reform and modernize
Azerbaijan's pension system. Muslumov told the Ambassador
that the SPF has broadened its international contacts,
including to the U.S. Social Security Administration, and is
now offering best practices and lessons learned to other
countries that are reforming government pension systems. The
SPF has been invited to present Azerbaijan's system at a
World Bank sponsored conference in Washington in November.
As another example, Muslumov cited a visit last week of a
delegation from Lithuania that visited the SPF to review its
system. The SPF has a total of 2,700 employees, with
approximately 2,000 working outside of the capital in the
regions.


3. (C) Muslumov told the Ambassador that one of President
Aliyev's key goals is to ensure that by 2008 all of
Azerbaijan's pensioners live above the poverty level.
Currently, more than 643,000 of 1.8 million pensioners
currently live below the poverty line. Muslumov stated that
over the next two years, the minimum monthly pension for
retired Azerbaijanis should increase to USD 75 per month,
enabling all pensioners to live above the poverty level.
Muslumov told the Ambassador that the pension accounts are
annually indexed for inflation. By 2009, Muslumov said that
individual pension information would be available to citizens
via the Internet. (NOTE: For additional background on the
State Social Protection Fund see REF B.)

TDA AND SPF TERMS OF REFERENCE
--------------


4. (C) The Ambassador requested from Muslumov the Terms of
Reference required for the U.S. Trade and Development Agency
to begin reviewing possible technical assistance on the

BAKU 00001656 002 OF 003


GOAJ's plans to link individual citizen pension retirement
accounts at the SPF to the Oil Fund (REF A). The State
Protection Fund is leading the initiative, along with the
Ministry of Finance and the Oil Fund. Muslumov reiterated
that the SPF had USD 1 million to fund this initiative with
the Oil Fund and that the TOR would be ready in several days
and would be provided to the Embassy to forward to TDA. The
Ambassador told Muslumov that TDA Director Thelma Askey
planned to visit Azerbaijan in early 2007 and indicated that
it would be good to organize a signing event during the
visit. Embassy will follow-up with the Social Protection
Fund regarding the TOR and forward any documentation to TDA.


5. (C) Muslumov told the Ambassador that with the aim of
ensuring Azerbaijan's citizens receive their share of the
country's new energy wealth, the GOAJ is considering creating
two sub-retirement 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. Muslumov
highlighted that this new 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 recognized that the GOAJ could not
give money from the country's oil wealth directly to the
citizens, indicating that it would distort the macroeconomic
environment and cause the "financial system to collapse."
The new accounts linked to the Oil Fund would allow citizens
to feel that they had their share of the county's oil wealth.


MORE FOREIGN WORKERS NEED TO PARTICIPATE
--------------


6. (C) Muslumov said that more than 20,000 foreigners work in
Azerbaijan and that only 2,119 have registered with the SPF,
including ten U.S. citizens, and are paying social security
contributions. Most foreign workers registered with the SPF
are from Turkey, Georgia and Russia. Muslumov highlighted
that 80 percent of foreign workers in Azerbaijan work in the
energy sector and that the GOAJ had not previously requested
these employees participate in the national pension system.
Muslumov stated that under the new pension system, the GOAJ
expected that these workers would participate and that he was
meeting with BP executives to negotiate a process in which
foreign workers would also contribute to the SPF. He also
added that these workers, upon retirement, would be able to
access their retirement pension savings at the SPF from the
country they lived in. Muslumov stressed the "portable"
nature of the accounts. He asked for engagement with the
U.S. Social Security Administration on structuring the
relationship and procedures to facilitate this process.

NEW PENSION SYSTEM HURTS REGIONAL COMPETITIVENESS
-------------- --------------


7. (C) The Ambassador suggested to Muslumov that the GOAJ
needed to develop incentives that increase the level of
foreign direct investment and business development by both
domestic and international companies and to consider
Azerbaijan's regional competitiveness with respect to tax and
social contribution rates. The Ambassador questioned whether
Azerbaijan's 25 percent social security contribution level
was higher than its neighbors and could make Azerbaijan less
attractive for FDI. Muslumov stated that the Ministry of
Finance and SPF are considering developing a "regressive"
social contribution system in the future in which workers
that are paid up to USD 5,000 would pay 22 percent and
declining rates would apply to higher salaries typically paid
to expatriate workers.


8. (C) Muslumov responded that he "was confident that
Azerbaijan would remain competitive" with its Caspian Sea
neighbors with the new pension system. He continued that
companies would be able to classify any SPF contributions as

BAKU 00001656 003 OF 003


"expenditures" and thereby reduce their corporate tax
liability. Muslumov pointed to Kazakhstan's pension system,
noting that workers pay more of the social tax than
employers, in comparison to Azerbaijan. In Azerbaijan,
employees pay only three percent of the total 25 percent SPF
contribution, leaving the company to pay the remaining 22
percent. In Kazakhstan, according to Muslumov, workers pay
10 percent, while companies pay 11 percent. The Ambassador
highlighted that companies in Kazakhstan pay less in social
contribution, making it more attractive to operate there.

VISIT TO WASHINGTON AND COOPERATION WITH SSA
--------------


9. (SBU) Muslumov requested the Ambassador's assistance in
enhancing and increasing the level of cooperation between the
State Social Protection Fund and the U.S. Social Security
Administration. He told the Ambassador that when he and his
team visit Washington in late November early December to
participate in the World Bank-sponsored event, he would like
USG assistance in arranging meetings at the SSA and the
Department of State. Embassy has alerted SSA's International
Activities office to the request and asks that EUR/CARC
follow-up.
DERSE