|06BAKU412||2006-03-16 11:57:00||CONFIDENTIAL||Embassy Baku|
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C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000412
1. (C) SUMMARY: EUR A/S Dan Fried and Ambassador Harnish
discussed the importance of strengthening Azerbaijan,s
economic and financial development with Economic Development
Minister Heydar Babayev on March 14. Babayev told Fried that
his job is to make Azerbaijan stronger economically and that
he is ready to use his influence to achieve this goal. Fried
warned Babayev that the GOAJ needed to act quickly to
strengthen the economic, banking, and financial services base
in order to manage the increasing oil revenues. Babayev
discussed with Fried the 2007 budget and the need for an
improved system of budgetary planning. In addition, Babayev
touched upon diversifying the economy and energy issues. END
2. (C) In a March 14 meeting with Minister of Economic
Development Heydar Babayev, EUR A/S Dan Fried and Ambassador
Harnish stressed the critical importance of continuing
economic and financial reforms in the face of growing oil
revenues. Minister Babayev told Fried that he wanted to help
strengthen bilateral relations and cooperation, noting that
he wanted Fried to leave with a good impression of
Azerbaijan. Babayev told Fried that Azerbaijan,s GDP was
growing at 26.4 percent and industrial growth totaled
approximately 30 percent. Fried warned Babayev that the GOAJ
needed to act quickly to strengthen the economic, banking,
and financial services base in order to control the
increasing oil revenues. Babayev said that Azerbaijan,s
main economic objective was to use properly its oil revenue.
Babayev added that he would use his personal relations and
exploit the inherent weakness of corrupt bureaucrats to fight
corruption in the GOAJ.
FUTURE OIL REVENUE
3. (C) Fried asked Babayev to explain the GOAJ,s plans to
use its future oil revenues to strengthen the country.
Babayev responded that the government was aware of the
economic dangers that increasing oil revenue could pose,
specifically higher inflation and corruption. He noted that
the GOAJ would use its oil revenue to develop the country,s
infrastructure, solve social problems and assist refugees and
IDPs. Babayev noted that the GOAJ has implemented poverty
reduction and regional economic development programs.
4. (C) Babayev noted to Fried that the GOAJ needed to improve
and strengthen its procurement procedures. He lamented that
current procurement practices are haphazard with different
ministries and agencies each procuring different items that
might not be compatible within the government (i.e. computer
software programs). Babayev added that the GOAJ needs to
systemize the procedures for announcing tenders and bids for
government contracts. He said that the Ministry of Economic
Development should be more active in these areas in order to
improve overall government coordination. Babayev noted that
individual agencies, budgets, such as AZAL, Caspar and
SOCAR, were a headache and the GOAJ needed to create an
effective system of budgetary control.
5. (C) Turning to the growth of state budget expenditures,
Babayev predicted that the GOAJ,s 2007 budget would increase
an additional 50 percent over the 2006 budget. He said that
he did not see a problem with such large budgetary increases
since the budget was smaller during the 1990s. Babayev
agreed with Ambassador Harnish on the need to organize and
coordinate macroeconomic and budgetary goals among all the
ministries. (NOTE: The Ministry of Economic Development, the
Ministry of Finance and the U.S. Embassy plan to organize a
macroeconomic and budgetary planning seminar for senior GOAJ
decision-makers in early April.)
6. (C) Babayev noted that President Aliyev needed to push
budgetary coordination within the government in order to
create a new treasury spending system for improved budget
formulation. Babayev told Fried that he was not going to
"fight" with the Ministry of Finance or others in the
President,s office regarding the coordination of the budget.
He said he would raise the issue with the President, noting
that the GOAJ needed an effective system to control and
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7. (C) Babayev hinted that the Tariff Council plans to raise
the price of gasoline. (NOTE: In January, the Tariff Council
doubled the price of diesel.) Babayev noted that the process
of economic development was slow and gradual. He added that
Azerbaijan had only experienced sustainable economic growth
over the past five years.
DIVERSIFYING THE ECONOMY
8. (C) Fried asked Babayev about the GOAJ,s efforts to
diversify the economy, including the idea of offering
companies tax and other investment incentives. Babayev
agreed that the GOAJ was reviewing different investment
options, including providing duty free zones. Ambassador
Harnish raised U.S. firm J. Ray McDermott,s desire to base
its oil platform/rig construction operations in Azerbaijan
and Babayev agreed to meet with the company to develop
possible ideas. Babayev explained that the Parliament and
President,s office were drafting a revised investment law.
He told Fried that the previous version of the law was based
on Russian investment code. Fried noted, and Babayev agreed,
that international companies would invest in Azerbaijan if
the GOAJ created a stable business environment.
9. (C) Fried raised the issue of Azerbaijan,s small banking
sector, probing Babayev on the best manner to strengthen the
sector. Babayev noted that the National Bank of Azerbaijan
is responsible for promoting as well as regulating the
banking sector. He added that the GOAJ needed to adjust the
NBA,s mandate and transfer banking sector promotion efforts
into a new "financial services authority." Fried raised the
example of Kazakhstan,s strong and robust banking sector,
which Babayev agreed was a good model for Azerbaijan.
Babayev stated that the GOAJ needed to support all financial
services in order to strengthen the financial sector,s base.
WORLD BANK AND IMF RELATIONS
10. (C) Babayev told Fried that the World Bank acted as the
GOAJ,s best international economic and financial advisor.
He derided the role of the IMF, noting that it had "killed
the financial sector." Babayev added that he believed the
Bank and IMF were playing "good cop-bad cop" roles in their
dealings with the government. (NOTE: This is not the first
time that Babayev has criticized the IMF while praising the
efforts of the World Bank to help Azerbaijan.)
11. (C) Turning to political issues, Babayev said that the
GOAJ should not focus on Nagorno-Karabakh for the next five
years, and instead, focus on economic and military
development. He continued to say that after five years, the
military budget will be larger than Armenia,s and better
prepared for any hostilities. Babayev quickly noted that
Armenia would be the first to attack and provoke war with
Azerbaijan. Fried warned Babayev that a war with Armenia
would kill the economy and ruin all the work the GOAJ had
done to build a working economy.
12. (C) Babayev remarked to Fried that Russia will continue
to use its energy monopoly to blackmail the West. He noted
that Azerbaijan buys natural gas from Russia at high prices
since it was cheaper than domestic gas sources. Babayev told
Fried that Azerbaijan currently has a three-month supply (1
bcm) stored in several facilities around the country.
Babayev said that Azerbaijan was supplying Georgia with gas
and electricity free of charge. Babayev claimed that the
electricity blackout in Baku and northern sections of
Azerbaijan in mid-January was exacerbated by a cut in Russian
energy supplies, something that Babayev characterized as a
"punishment" of the GOAJ for unspecified reasons.
13. (C) Turning to BP,s gas and oil operations, Babayev
noted that the GOAJ needed to discuss with BP its contracts.
Babayev alluded that the GOAJ should investigate the
quantities of oil and gas the international companies are
taking from the country since, in his view, the GOAJ needed
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to retain some of the oil and gas for itself. Babayev also
noted that Azerbaijan should renegotiate the pricing scheme
for natural gas sold to Turkey, noting that the originally
agreed upon price was too low. Finally, he speculated that
the price of oil could reach USD 100 a barrel by the end of
the year thus increasing the country,s oil revenues.
(COMMENT: Babayev's remarks on energy issues were light on
details and not always in line with what GOAJ energy
officials say. However, the general tone of his remarks is
in line with Azerbaijan's recently increased assertiveness in
dealing with international energy companies. END COMMENT).
14. (U) A/S Fried did not have the opportunity to clear this
message prior to departing post.