AZERBAIJAN: PRESIDENTIAL ECONOMIC ADVISOR'S

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000731 SIPDIS SIPDIS E.O. 12958: DECL: 05/18/2016 TAGS: ETRD ECON EFIN PREL PGOV PINR AJ SUBJECT: AZERBAIJAN: PRESIDENTIAL ECONOMIC ADVISOR'S PERSONAL INFLUENCE DIMINISHES REF: (A) BAKU 724 (B) BAKU 718 Classified By: ACTING DCM JOAN A. POLASCHIK PER 1.4 (B,D). ¶1. (C) SUMMARY. Acting DCM paid a courtesy call on Presidential Economic Counselor Vahid Akhundov May 15 to discuss economic and financial developments in Azerbaijan. Akhundov, in his current position since the early 1990s, discussed the Government of Azerbaijan's efforts to manage its oil revenue and keep inflation low. He reiterated the GOAJ's intention to join the World Trade Organization and commented on Azerbaijan's pension system and anticorruption efforts. Once a leading economic decision maker, Akhundov appears to have fallen out of favor and is no longer a leading economic voice in the GOAJ. During the meeting, Akhundov made several comments that indicated he was not up to date on several key issues, including several erroneous comments. In addition, recent personnel moves and statements by President Ilham Aliyev indicate that the government is shifting to a more Western leaning economic decisionmaking, significantly diminishing Akhundov's role and influence over government economic policy making. END SUMMARY. ¶2. (C) On May 15 Acting DCM, EconOff and USAID economist met with Presidential Economic Counselor Vahid Akhundov to discuss economic and financial trends in Azerbaijan. Akhundov has been in his position since the early 1990s. Once a leading economic decision maker, Akhundov appears to have fallen out of favor and is no longer a leading economic voice in the GOAJ. Economic Development Minister Babayev specifically removed Akhundov's name from a budget and macroeconomic seminar organized by the Embassy in April, remarking that he had not "seen Akhundov in months." In addition, Akhundov did not travel with President Ilham Aliyev to Washington in late April. OIL REVENUE MANAGEMENT AND INFLATION -------------- ¶3. (C) Akhundov recognized that Azerbaijan's growing oil revenues will impact GOAJ economic policies and decision making. He reiterated that the GOAJ wanted to keep inflation low and attempt to manage the effects of "Dutch Disease." Akhundov noted that there is growing pressure from different ministries to spend more of the government's oil revenue on social and infrastructure projects. He stated that creating an economically sound and balanced policy would be difficult, adding that the GOAJ would welcome help from the U.S. Embassy. Acting DCM noted that the U.S. is assisting the GOAJ with its macroeconomic forecasting and budgetary processes at the Ministries of Economic Development and Finance. Akhundov said that the government wanted to increase public investment in physical infrastructure projects such as roads and power generation investments. He specifically said that the GOAJ wanted private sector investment in managing the country's water and gas utilities. Akhundov admitted that public financing was not always efficient and said that the government needed private investment without mentioning privatization. WTO ACCESSION EFFORTS -------------- ¶4. (C) Regarding Azerbaijan's efforts to join the World Trade Organization, Akhundov said that the GOAJ efforts had recently accelerated, noting that the MFA and Ministry of Economic Development had the lead for the government. Akhundov stated that in principle the GOAJ had no objections to joining the WTO and was reviewing the next steps and requirements. He added that agriculture is a priority area for the GOAJ and admitted that agriculture subsidies would have to end (a position not shared by the MFA and MED officials who are leading Azerbaijan's working party meetings). SOCIAL PROTECTION FUND -------------- ¶5. (C) A/DCM raised a business community concern regarding the payment of social security taxes by expatriate workers to the Social Protection Fund. Akhundov indicated that expatriate workers should be able to transfer any retirement savings accumulated in Azerbaijan to their home countries' pension systems. The Chairman of the Social Protection Fund explained to the Charge the concept in a previous meeting (REF B). Akhundov cited the example of the two million Azerbaijani citizens working in Russia who will be able, according to him, to transfer their retirement savings to the BAKU 00000731 002 OF 002 Social Protection Fund in Azerbaijan. Akhundov acknowledged the problem of noncompliance with income tax regulations, indicating that many retired individuals will not have access to pensions upon retirement since they had not reported to the government accurate income statements. GOAJ ANTICORRUPTION EFFORTS -------------- ¶6. (C) Akhundov admitted that corruption remained a serious problem in Azerbaijan and is more of a disincentive to direct foreign investment than taxes. He noted that the GOAJ has raised salaries, reduced taxes and worked to make more transparent the system but even these efforts have not reduced overall corruption. He added that the GOAJ has worked to improve transparency in the banking sector, citing reforms at the National Bank to combat money laundering. Akhundov indicated that creating a more liberal and efficient government should increase transparency and eliminate corruption. He ended the meeting by stating that the GOAJ was working hard on resolving the corruption issue and is on the right track. COMMENT -------------- ¶7. (C) Akhundov used to be a key economic decision maker in the government. Recently, however, it has become apparent that his influence has diminished, perhaps to the point of being out of decision-making entirely. It took the Embassy several months to get a meeting since Akhundov was reportedly on an extended "vacation." During the meeting, Akhundov made several comments that indicated he was not up to date on several key issues and he actually made several erroneous comments. Recent personnel moves and statements by current President Ilham Aliyev indicate that the government is shifting to a more Western leaning economic decisionmaking, significantly diminishing Akhundov's role and influence over government economic policy making (REF A). HYLAND