AZERBAIJAN: ECONOMIC DEVELOPMENT OF THE EXCLAVE OF

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000531

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/31/2016
TAGS: PREL PGOV ECON ETRD BEXP KFLU AJ
SUBJECT: AZERBAIJAN: ECONOMIC DEVELOPMENT OF THE EXCLAVE OF
NAKHCHIVAN

REF: BAKU 502

Classified By: DCM Jason Hyland per 1.4 (b,d).


1. (C) Summary: During a March 28-29 trip to Nakhchivan,
local officials provided a glowing review of economic growth
and investment opportunities in the isolated exclave.
According to Nakhchivan Ministry of Economic Development
statistics, GDP grew by 27 percent in 2005, with a 57 percent
increase in agricultural investment. Several new businesses
have opened in Nakhchivan in recent years, including a new
mining venture that has 49 percent U.S. ownership. Despite
Nakhchivan's rosy economic forecast, which is driven largely
by massive transfer payments from the central GOAJ budget and
remittances from abroad, Nakhchivan remains a difficult place
to do business. Foreign investment opportunities still seem
to be limited mainly to companies with ties to Nakhchivan's
powerful clans. Local officials also reported that
Nakhchivan had not yet suffered avian influenza outbreaks.
End summary.


2. (U) On March 28 and 29, emboffs traveled to Azerbaijan's
exclave of Nakhchivan -- which is separated from the bulk of
Azerbaijan by Armenian territory -- to explore Nakhchivan's
economy, as well as its trade relations with Iran and Turkey
(reftel). Emboffs met with the Nakhchivan Minister of
Economic Development (MED),the Deputy Minister for the MED,
the MED Head of the Apparat, the MED Director of Economic
Policy and Planning Department and the MED Head of the
Protocol Department, as well as the Turkish Consul General.

Background on Nakhchivan
--------------


3. (SBU) The exclave of Nakhchivan is approximately 5,500
square kilometers with an estimated population of 350,000.
Local residents believe the actual population is around
175,000, as fully half of the exclave's population is
believed to be working outside Nakhchivan. Its largest
border -- 221 km with Armenia -- has been closed since the
outbreak of the Nagorno-Karabakh conflict. Nakhchivan
depends on borders with Iran (179 km) and Turkey (9 km) for
access to the rest of the world. As part of its legacy as a
former Soviet autonomous republic, Nakhchivan has its own
government and constitution, though the exclave is heavily
dependent on transfers from the GOAJ and remittances for its
survival. According to the Nakhchivan MED and Embassy
research, the central government in Baku transfers between
USD 115-150 million to the Nakhchivan government each year,
or nearly USD 430 for each person officially listed as living
in the exclave. The Turkish and Iranian consulates are the
only diplomatic representation in Nakhchivan. In general,
Nakhchivan is a very isolated place, with its own culture and
power structure. Former President Heydar Aliyev made his
political comeback in Nakhchivan, and the Aliyev family's
connections there run deep.

Economic Indicators
--------------


4. (SBU) According to Nakchivan's Minster of Economic
Development, Famil Husseynov, Nakhchivan's infrastructuQ is
expanding, and its local production continues to increase.
He reported that over 70 percent of the population lives in
suburban regions and there is a high demand for construction
materials. As the government does not want the people within
the exclave of Nakhchivan to feel separate or abandoned by
Azerbaijan, the Government of Nakhchivan strives to meet
Nakchivanis' demands locally, without the aid of foreign
assistance. Currently 70 to 80 percent of Nakhchivan's
construction materials are produced locally, but Nakhchivan
does import equipment from the outside. Nakhchivan has 16
production facilities, ranging from spaghetti, sausages and
sugar to fruit and mineral water. Huseynov reported that in
2005, Nakhchivan experienced 27 percent GDP growth, general
economic growth of 56 percent and a GDP per capita increase
of 12.5 percent. Huseynov said that agricultural products
investment grew by 57 percent, retail sales by 14 percent,
financial services by 12 percent and foreign trade by 47
percent.

Future Economic Plans
--------------


5. (SBU) Huseynov hopes to maintain this growth in the
future. The MED plans to create more jobs, give more
incentives to small and mid-size businesses, allow for more
production facilities, ensure consumer rights are protected,

BAKU 00000531 002 OF 002


open up more local production facilities and explore modular
power plants. According to Huseynov, the MED does not plan
on exploring wind as a viable alternative energy source.
(Comment: This position differs significantly from the
Ministry of Energy and Industry's in Baku, which has pursued
a USTDA-funded study of wind power for Nakhchivan.)


6. (SBU) According to Husseynov, in April 2006, Nakhchivan
plans on opening a fruit drying facility, which will utilize
German-made equipment. Nakhchivan also will open a food
processing-juice producing plant, which will utilize
Italian-made equipment and will use roughly 40 percent of the
local harvest. Moreover, Nakhchivan will open a cigarette
factory using local tobacco production as well as a marble
production facility. In the spring of 2006, Politalin
Company plans to open up a chemical plant which will
manufacture Politalin. Lastly, Husseynov claimed that 75
percent of the furniture in Nakhchivan was produced locally.

Economic Opportunities for US Investment
--------------


7. (SBU) Husseynov suggested that there were business
opportunities for foreign investment in exploring
Nakhchivan's natural resources, such as salt, mining,
agriculture, livestock, as well as shoe and concrete
production. Emboffs visited the Azerbaijan Mining Operating
Company (AMOC),a company that has 49 percent U.S. ownership
under a production-sharing agreement. The gold-mining
venture opened in August 2005 and employs 105 people (all but
three of whom are local). AMOC intends on opening an ore
producing plant in 2007 that will mine ore for gold, which
will create an estimated 1,000 new jobs.

Avian Flu
--------------


8. (SBU) When emboffs queried Husseynov on avian influenza,
he stated that up until 1993, Nakhchivan had three main
poultry production facilities. Following 1993, these
production facilities closed; now over 70 percent of the
rural population keeps chicken in their backyards. According
to the Turkish Consul General, there was a human avian flu
death not too far from the Nakhchivan-Turkey border, but
there have been no confirmed human AI cases in Nakchivan. He
added that Turkey would undoubtedly provide assistance in the
event of an outbreak in Nakhchivan. (Note: Nakhchivan
borders the eastern Turkish regions that suffered an avian
influenza outbreak in January. Reports from one U.S. NGO,
the lone international NGO working in Nakhchivan, suggest
that at least three areas of the exclave may have experienced
mass bird deaths in January.)

Comment
--------------


9. (C) The touted economic growth in Nakhchivan is likely
the result of the massive transfer payments from the GOAJ's
central budget, as well as significant remittances from
Nakhchivanis working abroad. Thus, the Nakhchivani
officials' glowing economic forecast does not mean that there
are likely to be many investment opportunities for U.S.
companies. Unfortunately, Nakhchivan's isolated location and
authoritarian government reinforce the message that all ills
that beset mainland Azerbaijan's business climate exist, and
indeed are magnified, in Nakhchivan. The exclave remains a
singularly unattractive place for U.S. firms outside the
extractive industries to do business, with a small market,
high corruption, government interference, and limited
commerce routes with the outside world. Doing business in
Nakhchivan still requires extensive ties to the clans that
dominate Nakhchivan's politics and economy. As a result,
U.S. involvement in the AMOC deal is a bit of an anomaly;
most observers believe the deal came through only because
other companies with ties to the clan could not provide the
large amount of investment required.
HARNISH