AZERBAIJAN'S RELATIONS WITH CHINA

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001042

SIPDIS

SIPDIS

FOR EUR/CARC

E.O. 12958: DECL: 08/21/2017
TAGS: PREL PGOV ECON AJ CH GG TU
SUBJECT: AZERBAIJAN'S RELATIONS WITH CHINA

Classified By: DCM Donald Lu for reasons 1.4 (b, d).


1. (C) SUMMARY: Relations between Azerbaijan and China are
warm, with the potential for increased economic cooperation
in select spheres, particularly Chinese exports of consumer
goods and investment in manufacturing projects such as the
Ganja automobile assembly plant. China,s involvement in
Azerbaijan's oil and gas projects is limited to the on-shore
Kursengi-Garabaghli field; China also appears interested in
the sale of oil extraction equipment. Mutual support for
each other's separatist problems -- Nagorno-Karabakh and
Taiwan -- is a key pillar of the bilateral relationship. END
SUMMARY.

SHARED SEPARATIST PROBLEMS
--------------


2. (C) Baku and Beijing's support for each other's positions
on Nagorno-Karabakh and Taiwan is the political bedrock of
the relationship. A constant theme during
Azerbaijani-Chinese visits is mutual support for each other's
respective territorial-separatist problems. Public
statements during official visits typically reference Baku's
position that there is "only one China," while Beijing's
statements back Azerbaijan's "sovereignty and territorial
integrity." In our meetings with Azerbaijani and Chinese
diplomats, both sides affirmed that support for the other's
separatist problem was a pillar of the bilateral
relationship.

LIMITED ENERGY CONTRACTS
--------------


3. (C) Despite Beijing's growing interest in acquiring new
sources of energy, it is a limited player in Azerbaijan's oil
and gas projects. Local contacts report that China's role in
Azerbaijan's energy projects is confined to smaller onshore
projects. Ilham Shabanov, an energy expert at Turan News
Agency, told us that Beijing did not seek to be a central
participant in any of Azerbaijan's large-scale energy
contracts during the latter 1990s. Shabanov suggested China
began to take a more active interest in Azerbaijan in
approximately 2000. China sought to gain a share in several
smaller, onshore energy contracts that were less-publicized.
Shabanov highlighted the Chinese National Petroleum
Corporation (CNPC) and the Shengli Oil company as examples of
companies that pursued low-profile, onshore projects that
other companies have passed over. (NOTE: CNPC has a 62
percent share in the onshore Southwest Gobustan gas and oil
exploration project, according to the Department of Energy's
Energy Information Administration. Shengli Oil company has
concluded several oil exploration agreements in Azerbaijan.
END NOTE.)


4. (C) According to BP employee Seymour Khalilov, the key
onshore fields where China is involved in extraction are
located at Garachukhur, Southwest Gobustan, Pirsaat, and
Kursengi-Garabaghli. The Chinese National Petroleum Company
(CNPC) -- either directly or indirectly through subsidiary
companies such as Fal China -- plays a lead role in these
projects, according to Khalilov.


5. (C) Khalilov said that China's participation in Salyon
Oil's exploration of the Kursengi-Garabaghli field is
Beijing's top investment in Azerbaijan's energy sector. Two
CNPC subsidiary companies, Fal China and the China National
Oil and Gas Exploration and Development Corporation, each
have a 25 percent share in the project. (NOTE: According to
a contractual study on Azerbaijan's oil production by
Shabanov, the Kursengi-Garabaghli field is not a major oil
field relative to the more important offshore sites such as
Azeri-Chirag-Gunashli, although it is one of the larger
onshore fields. According to this same study, there was a
7.6 percent drop in production at the Kursengi-Garabaghli
field during the 2006 and first quarter of 2007 timeframe.)
AmCham Board Member (and former US Ambassador) Stanley
Escudero said that China's role in the Kursengi-Garabaghli
field was primarily driven by a desire to sell energy
extraction equipment in Azerbaijan. More broadly, Escudero
argued that China's top interests in Azerbaijan's energy
sector are to gain a market share in oil and gas extraction
equipment and petro-chemical plants.


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BACKGROUND ON ECONOMIC COOPERATION
--------------


6. (C) Ministry of Foreign Affairs Eastern Asian Division
Director Elchin Seyidov told us the bilateral relationship is
on a solid footing and has been gradually expanding.
Remarking on the overall relationship, Seyidov commented that
"China has established itself as a solid partner to
Azerbaijan." Seyidov highlighted several important dates in
the relationship: diplomatic relations were established in
1992, Azerbaijan opened an embassy in Beijing in 1993, former
President Heydar Aliyev visited China in March 1994, and
President Ilham Aliyev visited in March 2005. Seyidov said
over 35 bilateral agreements have been signed, covering a
broad range of issues from transportation to economic
cooperation to cultural exchanges.


7. (C) Shabanov told us that corrupt business deals were a
key feature of bilateral relations in Azerbaijan's initial
post-independence period. In particular, there were several
suspect agreements between Chinese construction companies and
the State Oil Company of Azerbaijan (SOCAR). Shabanov
claimed that Rasul Guliyev, who served as the Vice President
of SOCAR in the early 1990s and is now an oppositionist
in-exile, was heavily involved in these dealings.

SELECTIVE ECONOMIC GROWTH
--------------


8. (C) Local contacts report that China has modest economic
interests in Azerbaijan, particularly as an export market.
Seyidov and Wiedong told us the trade volume between
Azerbaijan and China for 2006 was approximately USD 300
million. According to the Economist Intelligence Unit (EIU),
China is the fifth largest source of imports (5.3 percent)
for Azerbaijan, trailing Russia (17.1 percent),Germany (9.1
percent),UK (7.4 percent),and Turkey (6.1 percent). While
the Chinese share of Azerbaijan's imports remains modest, the
EIU observes that China's importance as a supplier of
consumer goods to Azerbaijan is growing. Seyidov told us
that China's primary exports to Azerbaijan are home
appliances, metallic equipment, spare automobile parts, cars,
clothes, and shoes. China seeks to increase exports in the
following categories: textiles, industrial goods, road
construction services, and other construction-related
equipment. Elshan Mammadzadeh, Head of the International
Economic Cooperation Department at the Ministry of Economic
Development, also highlighted that the key areas of growth
for Chinese imports in 2006 were soaps, cleaners, plastic
goods, mechanical and electrical appliances, and associated
spare parts.


9. (C) According to Mammadzadeh, there was a 30 percent
growth in imports from China, comparing the first three
quarters of 2005 and 2006. Despite this increase, there was
a net decline in the total trade turnover between Azerbaijan
and China. (NOTE: According to these figures, there was a
30 percent rise in imports from China and a 87 percent
decrease in Azerbaijani exports to China. While we cannot
verify these numbers -- given the black box of official GOAJ
statistics -- the reported increase in China imports tracks
with our anecdotal observations at local stores and bazaars
that China sees Azerbaijan as an export market.


10. (C) The GOAJ statistics however, report a decline in
toys and sporting goods from China, even though local stores
and markets are awash with these items. The two most likely
explanations for this seeming aberration on toys and sporting
goods are a member of the elite has a share of this trade or
the trade is being pushed into the black market, where the
GOAJ cannot track the volume of trade.


11. (C) During a meeting with pol/econ chief, Chinese
Embassy Counselor Sun Wiedong downplayed the level of China's
economic interests in Azerbaijan. Wiedong maintained that
China's interest in Azerbaijan's energy sector is minimal.
According to Wiedong, China annually purchases approximately
20 million tons of oil from Azerbaijan and this is only a
minor amount based on China's total oil consumption. Wiedong
also said Beijing has seen little benefit from its
investments in Azerbaijani on-shore oil projects.


12. (C) The majority of average Azerbaijanis have a negative

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view of China's influence in Azerbaijan. Most see China as
an exporter of cheap consumer goods to Azerbaijan.
Azerbaijanis are naturally suspicious of China's geopolitical
intentions in Eurasia and are quick to criticize the quality
of Chinese products. Many stores in Baku carry a variety of
cheap Chinese plastics, clothing, or household goods. For
example, Shabanov estimated that 80 percent of the goods sold
at Baku's Airport Bazaar -- the largest market in Azerbaijan
-- are from China. Shabanov also claimed that China earns
more money from the sale of consumer and textile goods than
from its oil contracts.

OTHER ECONOMIC VENTURES
--------------


13. (C) Local contacts point to Chinese investment in a
Ganja automobile manufacturing plant as a key benchmark to
gauge the state of Azerbaijani-Chinese economic cooperation.
According to local press, Chinese corporations Li Fan and
Chan Gan agreed with the Ganja automobile assembly plant in
July 2006 to produce Chinese autos. In the same month, the
plant announced that it would cease producing Russian UAZ
automobiles, citing the poor quality of the cars' parts.


14. (C) It remains unclear whether this new venture will be
profitable. In one early indication of success, local press
reported that the factory opened an office in the Azerbaijani
exclave of Naxchivan in September 2006 to sell the Chinese
cars. In April, during a trip to Ganja, we repeatedly
attempted to arrange a visit to the factory through a local
executive authority (ExComm) representative. The official
was evasive with our request. When we asked local Ganja
residents about the factory, they played down the importance
of Chinese cars, observing that the factory was not very
active and also produced other foreign vehicles, including
Belarussian tractors.

SUPPORT FOR THE RAILROAD UNDER QUESTION
--------------


15. (C) The GOAJ likes to point to the
Kars-Akhalkalaki-Tbilisi-Baku railway project as a exemplary
project showcasing Azerbaijan's regional leadership. Local
interlocutors and press occasionally highlight China's
interest in participating in this grand project, by linking
up with the Kazakhstani railroad system. Proponents of the
railroad argue that the new transit route would broaden
China's access to European and other regional markets.
Chinese Counselor Wiedong privately was less enthusiastic
about Beijing's interest in this project. He told pol/econ
chief that the media rhetoric about the project does not yet
match reality. Wiedong did note, however, that China would
like to take part in the project if it was capable of
advancing Beijing's interest in increased market access to
Europe and Eurasia.

EVERY RELATIONSHIP HAS ITS WRINKLES
--------------


16. (C) There are episodic incidents that introduce tensions
in the relationship. Seyidov mentioned that in 1998-1999,
the GOAJ was displeased with reports that China sold missiles
to Armenia. Local press from September 2006 reported the
GOAJ was investigating reports that Beijing sold missiles to
Yerevan. While Post cannot confirm the veracity of these
reports, the public nature of the two episodes suggests there
are periodic wrinkle in the relationship. Seyidov also noted
a problematic agreement between Chinese Oilfield Services and
the Iranian North Drilling company for the repair and upkeep
of a floating platform that could be used at the Alov
oilfield. (NOTE: The Alov oilfield is located in a section
of the Caspian Sea that is disputed between Azerbaijan and
Iran.) Finally, Seyidov raised a 2005 incident in which a
Chinese chess player sought to attend an chess match in
Khanakendi/Stepanakert without permission from the GOAJ.
After the GOAJ criticized the illegal nature of the
competition, the Chinese citizen did not attend the match.

GOAJ INFIGHTING MAY RESTRAIN TIES TO BEIJING
--------------


17. (C) Inter-elite squabbles within the GOAJ may limit
bilateral economic cooperation. Shabanov told us some elites

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favor closer ties with South Korea, rather than China.
Specifically, Shabanov claimed Deputy Prime Minister Yagub
Eyyubov backed close ties with China, while Minister of
Emergency Management Kamaladdin Heydarov favored links to
South Korea, because Heydarov has a financial cut on the
import or sale of South Korean Hyundais in Azerbaijan. (A
South Korean company recently was awarded a large contract to
develop new commercial port facilities in Baku.)

COMMENT
--------------


18. (C) Support for their separatist conflicts and China's
interest in Azerbaijan as an export market appear to be the
"glue" binding this bilateral relationship. Azerbaijan,
which aspires to a regional leadership role and is
increasingly confident in its foreign policy approach,
probably sees ties with China as an opportunity to showcase
its multi-vector foreign policy and win more international
support for its position on the Nagorno-Karabakh conflict.
Geographical distance, Azerbaijanis' general dislike for
Chinese products, and Baku's preference for a
western-oriented foreign policy will, however, constrain the
overall development of this relationship.
DERSE