Identifier
Created
Classification
Origin
06BAKU411
2006-03-16 11:10:00
CONFIDENTIAL
Embassy Baku
Cable title:  

ECONOMIC DECISION-MAKING AZERBAIJANI STYLE

Tags:  PINR ECON PGOV PREL AJ 
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C O N F I D E N T I A L SECTION 01 OF 05 BAKU 000411 

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/17/2016
TAGS: PINR ECON PGOV PREL AJ
SUBJECT: ECONOMIC DECISION-MAKING AZERBAIJANI STYLE

REF: STATE 27788

Classified By: Ambassador Reno L. Harnish III per 1.4 (b,d).

C O N F I D E N T I A L SECTION 01 OF 05 BAKU 000411

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/17/2016
TAGS: PINR ECON PGOV PREL AJ
SUBJECT: ECONOMIC DECISION-MAKING AZERBAIJANI STYLE

REF: STATE 27788

Classified By: Ambassador Reno L. Harnish III per 1.4 (b,d).


1. (C) SUMMARY: President Ilham Aliyev is the lead economic
and political decision-maker in Azeraijan. Aliyev, however,
makes most economic polcy decisions relying upon a small
close group ofbusiness contacts and trusted government
ministers. High-level economic decision-making in Azerbaijan
remains a mostly murky mystery with only whispers of rumors
escaping from the inner circle. Based on past and current
economic policy decisions, one can conclude that President
Aliyev and his close allies generally make key economic
decisions based on their personal business and financial
interests. That said, President Aliyev and some in his
government have also promoted several poverty reduction and
regional economic development programs. Most government
officials in Azerbaijan operate large, powerful personal
businesses that deal directly with the government. This
collusion between the GOAJ and private business controlled by
the economic elite makes the task of unveiling economic
decision-making difficult. END SUMMARY.


2. (C) Answers are keyed to reftel questions:


3. (C) A. With the changes in Aliyev's economic circle, which
officials are most likely to have decision-making authority
on key fiscal and energy issues?


4. (C) Fiscal decision-making in Azerbaijan is determined
haphazardly and without much economic strategy or long-term
planning. Within the GOAJ, Economic Development Minister
Heydar Babayev, a close personal friend of President Aliyev,
currently has the most sway over economic decision-making in
the government. As a successful businessman and former
banker in London, he has quite a bit to gain or lose based on
GOAJ economic, fiscal and monetary decisions. Despite his
personal interests, Babayev has declared to some
interlocutors that he has already made his fortune and does
not seek government office to make money.


5. (C) Babayev's family, like those of many government
officials, operates a large holding company, ABU Holdings,

that has many different subsidiaries, including Bank Standard
and ABU gasoline stations. While not directly connected to
the jailing of Former Economic Development Minister Farhad
Aliyev, he and his family's company have benefited
tremendously from the arrest and subsequent breakup of
businesses connected to Aliyev, particularly AzPetrol.
Babayev personally benefited with Farhad Aliyev's arrest by
assuming his position as Minister of Economic Development.
Babayev had previously been Chairman of the State Securities
Committee. In addition, Babayev's family oil and banking
businesses benefited with the breakup of the competitive
AzPetrol business and the investigation of the Farhad Aliyev
connected Bank of Baku.


6. (C) In addition, we believe that the current Minister of
Emergency Situations, former Chairman of the State Customs
Committee and another close contact of President Aliyev,
Kemalladin Heydarov, exerts significant influence over
economic decision-making, if only in an indirect way. While
neither his former position, nor his current Ministry has any
jurisdiction over economic, monetary or fiscal economic
policy, he certainly can influence policy using his close
ties to the President and his tremendous wealth.


7. (C) Heydarov was originally appointed by former President
Heydar Aliyev to the Customs Committee to facilitate
lucrative oil exports from Azerbaijan. While at Customs, he
oversaw a large source of budget revenue for the GOAJ in
tariff collections. He expanded Customs, income by
systematizing bribery within the organization. Post has
recently heard rumors that Customs "fees" for imports under
the new Customs Chairman Aydin Aliyev have increased six to
15 times in recent months. The "fee" increase is so high,
that some importers are holding their goods at the border
rather than bring them into the country.


8. (C) It remains to be seen what role Heydarov will play in
his new Ministry of Emergency Situations. He has alread
begun to exert political power by gobbling up sveral minor
agencies and his newly created super-ministry cuts across the

BAKU 00000411 002 OF 005


areas of interest of several different ministries. It
appears that Heydarov will now have his own armed troops
("militarized special guard service"),criminal investigation
capacity, and ships and wharfs formerly run by the Caspian
Specialized Emergency and Rescue. On a more interesting
note, President Aliyev also transferred to MES the former
State Agency for City Planning and Architecture, which means
that the MES may control city-related construction and
architecture issues. Observers have cynically noted this is
a potential windfall for Heydarov that on the surface seems
to have little link to emergency situations.


9. (C) The Ministry of Finance and National Bank of
Azerbaijan wield limited influence over fiscal and monetary
policy. Both Finance Minister Alakbarov and National Bank
Chairman Rustamov are long-time political players but do not
appear to have the personal connections or charisma that
would add weight to their efforts to reform the economy and
spur economic growth. They are both talented technocrats who
are attempting to perform their duties while surrounded by
disjointed and dangerous economic decision making.


10. (C) On energy, it appears that Valekh Alasgarov, formerly
head of the Foreign Investment Department at SOCAR, will
continue to have great influence over Azerbaijan's energy
policy in his new incarnation as one of Parliament's deputy
speakers and the chairman of Parliament's Energy Committee.
He had been instrumental in the negotiations for the
Baku-Tbilisi-Ceyhan pipeline and is now playing a leading
role on the intergovernmental agreement with Kazakhstan,
bluntly saying that the agreement will not pass Parliament in
its current form. Embassy contacts have been told that he is
taking his orders directly from the President.


11. (C) Another player in Azerbaijan's energy policymaking
circle is current SOCAR President Rovnag Abdullayev, who is
close to President Aliyev. Abdullayev is the former
president of the Heydar Aliyev Oil Refinery, an institution
closely connected to the leadership in Azerbaijan. He has
brought many of his deputies from the oil refinery to SOCAR.
Many of them are also politically connected to the
government. Abdullayev supposedly has a family connection to
someone in the presidential security apparatus. Several in
the international energy community in Baku have expressed
concern that SOCAR appears adrift under Abdullayev's
leadership. Some of this may be due to the fact that
Abdullayev seems focused on reorganizing SOCAR internally,
but the end result is that he seems much less involved in
setting national or international policy for the
organization.


12. (C) The status of current Minister of Energy and Industry
(MEI) and former SOCAR President Natik Aliyev is unclear.
According to some reports, he was not happy about his
reassignment to the MEI from SOCAR and appears to be on the
outs in the government. Others have characterized his new
position as a sinecure. However, in several meetings Aliyev
has said that he intends to focus on the industrial part of
his portfolio. This work will involve both expanding and
restructuring the MEI itself (it currently is very small) and
in getting a handle on the hundreds and hundreds of state
enterprises and public/private enterprises in Azerbaijan.
This will leave Aliyev little time to work on Azerbaijan's
national/international energy policies at anything more than
the broadest possible level. Aliyev has also disclaimed any
interest in taking over international negotiating functions
from SOCAR.


13. (C) Another figure in Azerbaijan's energy establishment
worthy of note is Samir Sharifov, the head of the State Oil
Fund of Azerbaijan. He appears to have carved out an
important role where macroeconomics intersects with energy,
especially when dealing with Western interlocutors. AIOC
President David Woodward has said that he believes Sharifov
is President Aliyev's primary strategic-level advisor on
energy issues. A second figure of note is former diplomat
Elshad Nazirov, SOCAR's vice president for marketing and
development. He represented SOCAR at the recent conference
called by Deputy Foreign Minister Araz Azimov to highlight
how Caspian energy resources can meet the demands of European
markets and deals a lot with the international community.
Both men are fluent English speakers and very comfortable in
the international arena.

BAKU 00000411 003 OF 005




14. (C) B. To what degree does Aliyev maintain final
authority on economic decision-making and how much does he
depend on expert advice?


15. (C) By all accounts, President Aliyev follows closely the
macroeconomic situation and retains final economic
decision-making power. While President Aliyev most certainly
makes some economic decisions based upon his personal and
family wealth interests, he has led GOAJ efforts to reduce
poverty and increase the economic development of Azerbaijan's
regions. He is widely rumored to be Azerbaijan,s richest
person and his wife Mehriban Aliyeva is from the politically
powerful Pashayev family. While it is widely assumed that
Aliyev controls vast assets, Aliyev is not linked either
publicly or privately to any known business ventures in
Azerbaijan. Most Azerbaijanis believe that President Aliyev
transferred all of his personal assets into his wife,s name
upon taking office in 2003; she also is not linked either
publicly or privately to any known businesses in Azerbaijan.


16. (C) It is unclear if President Aliyev relies on expert
advice. President Aliyev once grumbled to the Ambassador
that he cannot rely on his ministers to provide him with
sound technical advice and often has to read up on key policy
decisions on his own. The advice that Aliyev receives from
his ministers and advisors would tend to be slanted towards
their own personal business and financial interests. The
President would certainly filter any advice he receives
through his own complex personal business and financial
interests in order to make final economic policy decisions.


17. (C) Minister Babayev is rumored to have been the man in
charge of the First Family's money, which may make Ilham's
filter a little less dark when dealing with Babayev, who
probably has many of the same types of interests. Another
influential figure, the President's Chief of Staff, Ramiz
Mehdiyev, maintains significant business interests in Russia,
is rumored to have connections to Lukoil and holds extensive
property in Baku. There are no known high-level foreign
advisors to the President, although most certainly his
international bankers could, if requested, provide some
economic and financial advice.


18. (C) At a recent brainstorming meeting with the
Ambassador, Babayev removed Presidential Economic Advisors
Vahid Akhundov and Ali Asadov from a proposed guest list for
a macroeconomic and budget workshop. Babayev remarked that
he had not seen Akhundov in months and that "the President
does not listen to Asadov." In theory, both Akhundov and
Asadov are supposed to be close economic advisors to the
President. It was clear from Babayev that he did not
consider them to be relevant. In addition, Post has been
trying since early January to arrange a meeting with Akhundov
but has been repeatedly told he is on "vacation."


19. (C) Some of Azerbaijan,s economic decisions appear to be
modeled after Russian President Putin's decision-making
style, teetering on the brink of an oligarchy. Reminiscent
to the Yukos affair in Russia, Azerbaijan recently pulled
apart AzPetrol, a company connected to the jailed brother of
former Minister of Economic Development Farhad Aliyev, and
gave different parts of the company to insiders, including
Jalal Aliyev, brother of late President Heydar Aliyev and
uncle of Ilham. The principal owners of AzPetrol, Rafik
Aliyev, and his brother, former Minister of Economic
Development Farhad Aliyev, remain jailed on charges of
plotting a coup in November 2005. All the businesses in
Azerbaijan with any connection to the Aliyev brothers have
been inspected by government authorities and in some cases
owners have been jailed on suspicion of collusion with the
Aliyev brothers.


20. (C) The recent AzPetrol case highlights that the GOAJ
believed that Farhad Aliyev had gone too far politically and
had too much influence economically. The government's final
decision to remove Farhad Aliyev most likely was based on a
political fear that he, along with others inside and outside
of Azerbaijan, were planning a coup. As a result of Aliyev's
removal and his brother Rafik Aliyev's detention, business
rivals in the GOAJ, including Babayev, seized upon the
opportunity to break up the successful and competitive
AzPetrol gasoline stations business model. The fact that the

BAKU 00000411 004 OF 005


President decided to remove him from office only weeks before
a highly anticipated Parliamentary election could indicate
the willingness of the President and his close associates to
risk international condemnation for political and economic
gain. Economic interests aside, however, President Aliyev
seems to genuinely believe that Farhad Aliyev posed a real
security risk.


21. (C) C. Which officials in the economic sphere are most
resistant to advice from the international financial
institutions? Can post speculate on the reasons behind this
resistance?


22. (C) To one extent or another, all of Azerbaijan,s key
decision makers are resistant to advice from the
international financial institutions (IFI). Economic
Development Minister Heydar Babayev is the most resistant to
the International Monetary Fund and its past efforts to
reform the economy, and especially its attempts to privatize
the state-owned International Bank of Azerbaijan. Babayev
also has criticized the role of the European Bank of
Reconstruction and Development for its investments in
mid-tier banks, such as Bank of Baku and UniBank.


23. (C) In several meetings with Ambassador Harnish, Babayev
has gone out of his way to criticize the IMF and the EBRD.
In the latest meeting to review the agenda for an upcoming
macroeconomic and budgetary workshop, Babayev requested that
the IMF resident representative not give a presentation.
Instead, Babayev said that a World Bank representative should
make the presentation, noting that the World Bank "gives us
money and is trying to help us."


24. (C) Babayev's dislike for the IMF may be connected to his
personal business and financial sector interests. His family
controls or is shareholder in many different businesses in
Azerbaijan. Babayev's family operates ABU Holdings, which
has interests in banks (Bank Standard),gasoline stations and
other businesses. The IMF's financial and economic
prescriptions would adversely affect ABU's preferential
position and its many businesses.


25. (C) Babayev's dislike for EBRD seems to come from his
personal business dealings in Russia. He has told the
Ambassador that the EBRD invested heavily in banks in Russia
during the 1990s, similar to its current efforts in
Azerbaijan. This investment, according to Babayev, led the
banks to bankruptcy. EBRD's private equity investments in
certain banks in Azerbaijan also threaten the competitiveness
of Babayev's family bank, Bank Standard. Babayev also
appears to have a personal dislike for the Canadian head of
the EBRD.


26. (C) Any resistance to IFI policies by other key economic
actors would be due to their personal business and financial
interests. Presidential Chief of Staff Ramiz Mehdiyev
maintains extensive business interests and looks more towards
Russia for economic advice than the West and the IFIs.
Minister of Emergency Situations and former Chairman of the
Customs Committee, Kemalladin Heydarov, is one of the
principal shareholders in ATA Holdings, along with the
current Minister of Taxation Fazil Mammadov. Mammadov was
the deputy to Heydarov at Customs in the 1990s. ATA
Holdings, which comprises firms in banking, insurance and
financial services, construction, and industry, would stand
to profit or lose based on IFI reform directives and
policies.


27. (C) D. What relationships do key energy decision makers
maintain with energy officials in Russia and Turkey? Do they
share business ties?


28. (C) In general, there is a great deal of business and
trade between Russia and Azerbaijan. Banking contacts have
told Embassy officers that as much as USD 3 billion per year
flows between the two countries, while GOAJ officials put the
figure only at USD 1 billion. Two-thirds of this amount
never enters the banking system and operates in a "gray
market" of business deals negotiated between contacts in Baku
and Moscow. While we do not have specific figures, it is
safe to assume that a significant portion of this trade is
due to personal connections between Azerbaijani government
officials and Russian businesses. Azerbaijan also trades

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extensively with Turkey. Turkish goods and clothing in
local stores and shops compete directly with Russian
manufactured goods. Turkish construction companies are
actively participating in the construction boom in Baku and
other areas of Azerbaijan.


29. (C) Presidential Chief of Staff Ramiz Mehdiyev, in
particular, maintains significant business interests and
wields enormous political power. Mehdiyev has deep
commercial ties to Russia, including rumored political and
Lukoil connections. With construction booming in Baku,
Mehdiyev also controls elements of the lucrative trade in
construction materials, including high quality Russian steel
rebar. Mehdiyev may be involved with the GOAJ's efforts to
force out Turkish electric company Barmek from Azerbaijan andQreplace it with Russian electric company UES.


30. (C) Post has little information on ties among energy
decision makers in the region. It is certainly probable that
many energy decision-makers have ties to Russia, or Turkey,
or both, given historical experience. However, any such
relationships are probably personality-based. The Turkish
electrical-distribution company Barmek has had great
difficulties in Azerbaijan and is facing a possible shutdown
in Azerbaijan. The energy sector appears to be one area
where Russian influence has not penetrated. Russian
interests tend to aim more at blocking or blunting
Azerbaijan's initiatives, for example by trying to sew up the
gas market in southern Europe to prevent a greater role for
Azerbaijani gas in Europe. Russian officials (unlike Turkish
officials) are not invited to or do not attend international
energy meetings in Baku. This is in contrast to the
privileged position that Russian companies have acquired in
the non-energy sector, in areas ranging from the construction
industry to shipping registries.


31. (C) Post notes, however, that while there may be a number
of commercial energy deals (Azerbaijan buys some gas from
Gazprom),Russian and Turkish firms do not appear to own or
control any pipelines and have only minor offshore gas and
oil interests compared to other Caucasus countries.
HARNISH