BARMEK'S TROUBLES PAINT GRIM PICTURE FOR POWER

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000370

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/CARC AND EB/ESC
DEPT OF ENERGY FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 03/07/2016
TAGS: ENRG ECON AJ TR
SUBJECT: BARMEK'S TROUBLES PAINT GRIM PICTURE FOR POWER
SECTOR REFORM IN AZERBAIJAN

Classified By: DCM Jason Hyland, reasons 1.5 (b),(d) and (e).


1. (C) SUMMARY: The truce between Azerbaijan state
electricity company AzerEnergy and Turkish power company
Barmek, which buys electricity from AzerEnergy for
distribution to consumers, has broken down. President Aliyev
lent support to AzerEnergy chief Pirverdiyev's public attack
on the company and the International Bank of Azerbaijan has
cut off its line of credit. Barmek has also been hit with
criminal charges alleging corruption, embezzlement, misuse of
state property, and links to deposed former Economic
Development Minister Farhad Aliyev. There is open
speculation that Barmek will pull out of Azerbaijan.
Although Barmek may well have engaged in corrupt activities,
the friction with AzerEnergy stems also from Barmek's
deduction of the cost of unpaid GOAJ bills from its payments
to AzerEnergy, which it is apparently entitled to do under
its contract. This, coupled with AzerEnergy's rejection of
an EBRD loan (which would have required certain reforms) and
the GOAJ's decision not to establish an indepe
ndent energy regulator all indicate a bleak outlook for power
sector reform in Azerbaijan. END SUMMARY.


2. (SBU) Barmek is the Turkish power-distribution company
operating in Baku. It buys electricity from AzerEnergy, the
state power company, and distributes this electricity to
consumers. Barmek was brought into Azerbaijan by the late
President Heydar Aliyev, who envisioned a large-scale
restructuring of the power sector along market principles.
Following his death, this process slowed. Currently, many of
Barmek's customers, especially large government entities, are
not paying their bills. About two years ago, Barmek began
deducting the cost of these unpaid bills from the amount it
pays to AzerEnergy, which it is allowed to do under its
contract.


3. (C) The GOAJ, led by AzerEnergy and supported by the Tax
and Finance Ministries, began a serious assault on Barmek
over this issue in the summer and fall of 2005, including
harassment and public criticism. The GOAJ backed off for a
while, apparently due to the intervention of President Aliyev
and perhaps due to a request from high levels in the Turkish
Government. On February 27, however, AzerEnergy President
Etibar Pirverdiyev had a public audience with President
Aliyev which observers have characterized as a staged
performance. Pirverdiyev attacked Barmek as responsible for
recent power outages in the country and accused Barmek of not
paying its bills to AzerEnergy. President Aliyev, in an
angry response, instructed AzerEnergy and the Cabinet of
Ministers to take the situation "seriously" and to take
"drastic measures" to deal with Barmek's alleged failures.


4. (C) USAID contractors working on power sector issues (PA
Consulting) interpreted the public audience as the beginning
of a new GOAJ campaign against Barmek. Indeed, on February
28, Barmek chief Huseyn Atabul encountered some harassment at
the airport at the start of a planned journey to Ankara.
That same day, the International Bank of Azerbaijan (IBA)
rescinded Barmek's line of credit, which the company uses to
make its payments to AzerEnergy. Thus, Barmek was unable to
make its January payments and therefore is technically in
breach of contract.


5. (C) On March 6, the Prosecutor General brought criminal
charges against Barmek for corruption, misuse of state
property and embezzlement. The Prosecutor General also
alleged a connection between Atabul and former Minister of
Economic Development Farhad Aliyev, who was detained in
October 2005 on charges of plotting a coup. Specifically,
Barmek is accused of transferring large sums of money to a
British company linked to Farhad Aliyev for "unfulfilled
services." Atabul's plans are unknown, but many consider it
likely that Barmek will pull out of Azerbaijan. Earlier,
Barmek survived only because of President Aliyev's
intervention. Now, as a Turkish Embassy official put it,
"President Aliyev is clearly in AzerEnergy's camp."


6. (C) At the same time that he denounced Barmek, Pirverdiyev
announced that AzerEnergy was no longer in negotiations with
the EBRD for a loan to rehabilitate some of its facilities.
A feasibility study was done by PA Consulting but AzerEnergy
was uncomfortable with the conditionalities EBRD wanted to
impose on the loan (NOTE: This is not the first time a
state-owned company has refused lending from an IFI at the
last moment. In most cases, the lending conditions prove too
stringent or the conditions of the financing do not meet the

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government's satisfaction). They may deal with a Russian
company instead. RAO UES is rumored to be interested in
Azerbaijan's market, and RAO UES executive Anatoly Chubais
visited Azerbaijan to explore such opportunities last year.


7. (C) COMMENT: Some in the international energy community in
Baku are unsympathetic to Barmek's plight. These observers
believe that Barmek secured its original entry into the
market back in 2000 via a corrupt deal with Farhad Aliyev and
others. How else, they ask rhetorically, would an obscure
Turkish company manage to beat out international giant
Siemens for the tender, and to secure operating conditions
far more generous than the German company had been promised?
But regardless of how Barmek got into Azerbaijan and where it
goes from here, its experience, coupled with AzerEnergy's
rejecting the EBRD's loan and with the GOAJ's decision not to
go ahead with the creation of an independent energy
regulatory agency, paints a grim picture for the future of
power sector reform in Azerbaijan. In addition, the
government's harassment of Barmek and its possible departure
send the wrong signal to international investors looking to
do business in Azerbaijan. END COMMENT
HARNISH