AMBASSADOR'S INTRODUCTORY CALL ON ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000989 SIPDIS SIPDIS COMMERCE FOR U/S LAVIN DEPT FOR OBO, EUR/EX, EUR/CARC E.O. 12958: DECL: 07/11/2016 TAGS: ECON EFIN ETRD EPET AJ IR RU ABLD SUBJECT: AMBASSADOR'S INTRODUCTORY CALL ON ECONOMIC DEVELOPMENT MINISTER HEYDAR BABAYEV Classified By: AMBASSADOR ANNE E. DERSE PER 1.4 (B,D). ¶1. (C) SUMMARY: In her July 7 introductory meeting with Minister of Economic Development Heydar Babayev, Ambassador Derse raised the importance of WTO membership, development of the non-oil sector, energy security and development of the banking sector. Babayev noted that he was not satisfied with the GOAJ's progress towards WTO membership but was hopeful that in 2007 Azerbaijan would show some more progress. Turning to Azerbaijan's growing role as regional energy provider, Babayev said that Azerbaijan wanted to grow also as an important energy transit country with the completion of BTC. He told the Ambassador that the GOAJ was anticipating Gazprom would increase gas tariffs this year and for this reason President Aliyev had ordered measures to increase domestic gas production. He added that the GOAJ was in negotiations with Iran and Georgia to supply Georgia with Iranian gas transiting Azerbaijan. Babayev briefed the Ambassador on several initiatives the GOAJ is promoting to diversify the economy and noted that the government is looking to strengthen the banking sector. Babayev strongly seconded the Ambassador's interest in improving commercial ties, noting that bilateral trade amounts to only USD 271 million and that Azerbaijan wants to purchase American goods. He said that President Aliyev asked Commerce Secretary Gutierrez to restore the Commerce FCS office in Baku and that Secretary Gutierrez said the issue would be addressed, and a SIPDIS trade mission sent to Azerbaijan. Babayev said that he had heard nothing further on either point as yet (see action requested in para 4). The Ambassador promised to follow-up with the USDOC and get back to Babayev. END SUMMARY. ¶2. (C) Ambassador Derse paid an introductory call on Economic Development Minister Heydar Babayev on July 7. The Ambassador reviewed U.S. economic priorities for the bilateral relationship, highlighting the importance of WTO accession, energy security and increasing U.S. commercial engagement in Azerbaijan. The Ambassador also requested Minister's Babayev's support in assisting the Embassy to find a new embassy compound, providing the minister with details on two separate sites. Babayev said he would review the documents, discuss with the President the issues, and "lend his support." Babayev told Ambassador Derse that the U.S.-Azerbaijan relationship was important and that without U.S. support Azerbaijan would not be in its current position, with the successful completion of BTC and a growing, dynamic economy. Babayev noted that in 2005 Azerbaijan's gross domestic product grew 26 percent, with the non-oil sector contributing 11 percent. Ambassador Derse briefly reviewed the U.S.-funded Public Investment Policy Project's efforts to assist the GOAJ with macroeconomic and budget processes. Babayev noted the benefits of the project, adding that he had recently approved the nomination of one of the Azerbaijani PIPP consultants as a deputy minister. U.S.-AZERBAIJAN TRADE -------------- ¶3. (C) Minister Babayev told the Ambassador that during President Aliyev's April visit to the U.S., he discussed with Commerce Secretary Gutierrez the importance of improving U.S.-Azerbaijan trade links, highlighting that U.S.-Azerbaijan trade was embarrassingly low at USD 271 million. He added that Azerbaijan traded more that USD 2 billion worth of goods and services with Russia and Dubai. Babayev continued that Azerbaijan wanted more U.S. goods, including American cars and furniture. Ambassador Derse highlighted the usefulness of organizing a U.S. city speaking tour with Minister Babayev, adding that such a tour would provide an excellent occasion to present Azerbaijan's business opportunities. In addition, Babayev said that President Aliyev had discussed with Secretary Gutierrez the return of the U.S. commercial service to Azerbaijan. Babayev said that Secretary Gutierrez promised to address the issue and also send a mission to look into expanding trade. Babayev told the Ambassador that he did not understand the reason the commercial program had ended in Azerbaijan. The Ambassador said that she would follow-up with the Commerce Department and on the return of the commercial service BAKU 00000989 002 OF 003 position in the Embassy. ¶4. (U) ACTION REQUESTED: Please advise on how Post should respond to GOAJ interest in heightened USDOC presence and a trade mission. We note that we look forward to detailed feedback from the regional commerce attache's office on the Embassy Baku's draft commercial strategy paper. Embassy is eager to ensure that U.S. firms are able to take advantage of commercial opportunities in the world's fastest growing country. GOAJ WTO EFFORTS -------------- ¶5. (C) Babayev briefed the Ambassador on Azerbaijan's efforts to enter the WTO. Babayev said that the GOAJ is attempting to change legislation and has created a special commission to review and analyze legislative changes and investigate potential effects on the economy. Babayev told the Ambassador that the process is not moving as fast as he would like and he is "not satisfied" with the progress. He noted with some frustration that Azerbaijan may be the "last country" to enter the WTO. Babayev noted that cooperation with other ministries regarding WTO has not always been easy. Babayev said the Government of Switzerland was assisting the GOAJ with the WTO process; he also recognized the assistance of the TDA-financed WTO consultant. Babayev expressed hope that in 2007 Azerbaijan would see better results in the WTO process. Regarding Azerbaijan's longer-term economic priorities, Babayev said that improving the country's infrastructure and routes, building the country's human resources capacity, strengthening the non-oil sector, and developing the agriculture and telecommunications sectors were critical to sustainable development. AZERBAIJAN'S STRATEGIC ENERGY ROLE -------------- ¶6. (C) Babayev told the Ambassador that Azerbaijan looked to use its geographic location to capitalize on the growing importance of diversifying global energy resources. With the completion of BTC, Babayev continued, Azerbaijan now wanted to grow as an energy transit country, building on BTC. Babayev said that the Shah Deniz project had more than a trillion cubic meters of gas that Azerbaijan looked to export to Europe and also consume domestically. He noted that Deputy Minister of Economic Development Jabbarov was in Athens negotiating with the Government of Greece gas purchase and sales agreements. ¶7. (C) Babayev said that Azerbaijan currently imports natural gas from Russia's Gazprom and the GOAJ expects Gazprom to increase tariffs this winter, characterizing the increase as "regional blackmail." Babayev clearly blamed Russia for creating this problem, adding that Azerbaijan is better positioned than Ukraine to manage energy disruptions. In anticipation of the increase, Babayev said the President has instructed AzeriGas to increase domestic natural gas production. In addition, he noted that the GOAJ was contemplating increasing domestic gas prices to reduce consumption and ending several other subsidy schemes in the utility sector to reduce costs and consumption. Babayev also hoped that the GOAJ would improve its tariff collection efforts in order to boost revenues. IRANIAN GAS TO GEORGIA -------------- ¶8. (C) Babayev told the Ambassador that the GOAJ was involved in negotiations between Iran and Georgia to provide Iranian gas to Georgia using existing pipelines that transit Azerbaijan. Babayev noted, however, that Iran's conditions made the discussions difficult. Babayev said that Azerbaijan was looking to use the situation created by Gazprom and Russia to its own advantage by acting as a transit country for Iranian gas to Georgia and decreasing Gazprom's regional leverage. BABAYEV'S TAKE ON GENERAL ECONOMIC ENVIRONMENT BAKU 00000989 003 OF 003 -------------- - ¶9. (C) Babayev said that the GOAJ is monitoring closely the macroeconomic effects on consumer prices and the potential damaging effects of the Azerbaijani manat's appreciation on the export sector. Babayev noted that prices have increased in all aspects of the economy, adding that energy companies are also experiencing a sharp increase in costs. Calling Azerbaijan's total potential energy revenue amount of USD 150 billion "not much money," Babayev said that the GOAJ had to avoid spending all the money and needed to save for future generations. Babayev briefed the Ambassador on the GOAJ efforts to diversify the economy using state-controlled fund companies, such as the State Investment Fund Company and the Entrepreneur Fund Company. He noted that the GOAJ planned to use the State Investment Fund Company as collateral in a bond issue worth USD 500 million. ¶10. (C) Babayev also said that the GOAJ was negotiating deals to build a petrochemical plant and to rehabilitate AzerKimia. In addition, he noted the GOAJ agreed to invest 25 percent in an EBRD project to fund a new development venture at the Garadagh cement company. Regarding the idea of developing an information technology park in Azerbaijan, Babayev thought it was a good idea and said that the Ministry of Economic Development was assisting the Ministry of Communication and Information Technology in its development. Babayev also noted to the Ambassador that the GOAJ is reviewing plans to develop a duty free economic trade zone for financial and industrial sectors. Babayev did not provide any additional details to the duty free zone, noting that all the details had yet to be finalized. BANKING SECTOR DEVELOPMENT -------------- ¶11. (C) Babayev said that the GOAJ wanted to develop Azerbaijan's banking sector. He characterized the banking sector as small but reliable. He noted the need to balance funding from the state-controlled funds to finance non-oil sector companies and projects while supporting the growing banking sector and its need to provide project financing. Babayev explained that the GOAJ might change the structure of the funds in order to avoid any detrimental economic distortion. He added that the banking sector needed to develop, noting that International Bank of Azerbaijan's dominating market position made it difficult for small to medium private banks to compete. DERSE