EB/CBA SPECIAL REPRESENTATIVE MERMOUD DISCUSSES

1. (C) SUMMARY. On May 4 the Department's Special
Representative for Commercial and Business Affairs Frank
Mermoud met with new Minister of Finance Samir Sharifov to
discuss improving the business climate, working more closely
with the private sector and managing fiscal and budgetary
constraints in the face of large oil revenue inflows.
Mermoud's visit came only days after Azerbaijani President
Aliyev's visit to Washington and highlighted many of the same
economic and business themes. Sharifov, who became Finance
Minister one week before the U.S. trip, told Mermoud that the
GOAJ wanted to improve the overall business climate and
attract U.S. companies to Azerbaijan. Mermoud welcomed the
GOAJ efforts and urged the government to stop corruption and
reduce bureaucracy. Sharifov requested U.S. assistance in
implementing the TDA Oil Fund Phase II project and developing
a national training center for accountants. At a separate
event on May 5 with the American business community, Mermoud
briefed on his meetings with GOAJ officials, noting to the
group that the GOAJ wanted to increase U.S. investment and,
hopefully, would soon take steps to improve the business
climate. The participants outlined to Mermoud the local
impediments to investment, citing lack of financing and rule
of law, government bureaucracy and the small domestic market.
END SUMMARY.



2. (C) On May 4 the State Department's Special Representative
for Commercial and Business Affairs Frank Mermoud and Charge
d'Affaires discussed with new Minister of Finance Samir
Sharifov building stronger ties with local businesses,
reducing bureaucracy and corruption and improving economic
cooperation with the U.S. Mermoud praised President Aliyev's
presentation in Washington during a lunch with business
leaders and noted that the overall visit went well.
Congratulating Sharifov on his new appointment, Mermoud
raised the importance of controlling inflation and fiscal
spending even as the economy continues to grow. He urged
Sharifov to remain engaged with the business community,
including the American Chamber of Commerce in Azerbaijan
(AmCham), and to reflect on AmCham's white paper
recommendations. (NOTE: AmCham presented its white paper to
President Aliyev in December 2005.)



3. (C) Mermoud also pressed Sharifov to improve the business
and investment climate by reducing bureaucratic red tape and
corruption. Mermoud noted that corruption represented a loss
of revenue for the government. He praised the idea of
creating a high-level economic policy committee to advise the
president on economic and financial issues and offered to
assist the GOAJ with the development of a strong non-oil
sector. Sharifov told Mermoud and Charge that President
Aliyev's visit to Washington had been a success and that he
valued the exchange of ideas. He noted that the trip created
a new vision of future U.S.-Azerbaijan relations. Sharifov
stated that Azerbaijan wanted to become a substantial player
in the region and that settlement of the Nagorno-Karabakh
problem would increase regional stability and economic growth.



4. (C) Turning to financial issues, Sharifov stated that the
GOAJ's top goal for the coming two to three years was curbing
inflation, noting that overcoming the economy's structural
problems will be a tremendous challenge. Sharifov agreed
with Mermoud's points of expanding relations with the
business community, noting that the GOAJ looked to create
favorable conditions for businesses and increased investment.
In addition, he noted that the GOAJ would consult with the
business community and the AmCham on future government
regulations that would affect business and investment. (NOTE:
This is the first time any GOAJ official has indicated the
government would collaborate with the private sector before
taking a policy decision.)



5. (C) Sharifov told Mermoud that the GOAJ looked to improve
the physical infrastructure of the country, including
building new highways, water and sewage systems, and
renovating school and hospitals. Interestingly, Sharifov
noted that the GOAJ was looking to reform the educational and
health care systems, adding that the GOAJ had just signed
loan agreements with the World Bank for health care and
judicial reform projects. He said that the judicial system
and courts needed to take legally correct and appropriate
decisions, especially when dealing with commercial disputes.



6. (C) Noting that corruption is a major problem and that it
is a serious concern of the GOAJ, Sharifov briefed Mermoud on

BAKU 00000695 002 OF 003


Azerbaijan's efforts in the Extractive Industry Transparency
Initiative (EITI). Sharifov stated that oil revenue into the
Oil Fund was transparent, but that the GOAJ had to improve
its macroeconomic and budgetary planning. He praised the
efforts of the USAID funded Public Investment Planning
Project, calling it "useful," and noted that he looked
forward to working with the U.S. Embassy team. Sharifov
recognized that modernizing the budget process will not be
easy due to the lack of capacity and expertise at line
ministries that could not prepare effective budgets and
spending need projections.



7. (C) Sharifov noted that the GOAJ has recently created the
State Investment Company with USD 100 million that will
invest in non-oil sector companies and projects. He
mentioned that he had already been in contact with the AmCham
president on several different projects for the new state
company. Sharifov stated that the Ministry of Finance will
look to develop capital markets and float one, two, three,
and five year bonds in the coming months. He told Mermoud
that Citibank and Moody's were working to provide a second
country sovereign debt rating that would enable the
government to borrow on international markets. Sharifov told
Mermoud that he planned to use the Oil Fund to manage any
excess liquidity at the Ministry of Finance rather than
create a treasury function within the ministry.



8. (SBU) Speaking about the Oil Fund, Sharifov noted that the
President would announce a new executive director soon and
that Oil Fund would not be transferred to the Ministry of
Finance. He noted, however, that the Minister of Finance
sits on the board that oversees the Oil Fund, and that he
will remain engaged for the time being. Sharifov urged
Mermoud to expedite funding for Phase II of the Trade
Development Administration's Oil Fund project. (NOTE: When
he was Executive Director at the Oil Fund, Sharifov raised
Phase II funding with TDA representative Dan Stein. As
discussed with Stein, the Oil Fund must complete Phase I's
report in order to develop phase II's terms of reference.)
Sharifov praised TDA's assistance and noted that phase two of
the project would develop needed capacity at the Oil Fund.



9. (C) Mermoud raised the importance of promoting
Azerbaijan's public image internationally. Mermoud suggested
that Sharifov attend international events, such as the World
Economic Forum in Davos, and offered to assist Sharifov if he
visited New York. Mermoud offered to arrange business and
media meeting for Sharifov in New York, including a visit to
Forbes magazine and a trip to the New York Stock Exchange.
Sharifov welcomed the opportunity to visit the U.S. and noted
the importance of improving Azerbaijan's international image.



10. (SBU) Sharifov requested from Mermoud assistance in
developing a national training center for accountants.
Sharifov noted that by 2008 all state-owned enterprises will
need to provide financial reports using international
financial accounting standards. He said that there was a
tremendous lack of trained accountants and that it was
critical to create a trained cadre of accountants. Mermoud
recognized the importance of this and noted that American
accounting firms may be able to assist, as well as USAID.
Sharifov also mentioned that President Aliyev would sign a
decree creating scholarships for Azerbaijani students to
study abroad in the U.S. or Europe to gain specific technical
skills that would develop the country. Mermoud welcomed the
idea and mentioned that the office of the Under Secretary for
Public Diplomacy Karen Hughes may be able to identify
potential U.S. universities and colleges for these students.
Sharifov hoped that by the fall of 2007 the first students
would be studying abroad.



11. (SBU) At a separate event on May 5, Mermoud met with 50
local U.S. business executives and representatives and
briefed them on his meetings with the GOAJ, highlighting the
successful trip of President Aliyev to the U.S. The meeting
participants told Mermoud about the difficulties of doing
business in Azerbaijan. Several participants noted that the
lack of access to capital was a major hindrance to further
investment and development, urging Mermoud to persuade a U.S.
financial institution to come to Azerbaijan. Others noted
that the lack of government transparency and the lack of rule
of law were impediments to economic growth. Mermoud stated
that the GOAJ needed to create incentives for the business
community to flourish, including reforming the tax code. One
participated noted that Azerbaijan's market was relatively
small and that the energy sector crowded out non-oil sector

BAKU 00000695 003 OF 003


enterprises. Mermoud stated that the GOAJ looked to build
strong connections to the business community and that
Azerbaijan's accession to the World Trade Organization would
also improve the investment climate.



12. (U) EB/CBA Special Representative Mermoud cleared this
cable.
HYLAND