PRESIDENT ALIYEV REVIEWS THE BILATERAL ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001068

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/16/2017
TAGS: ECON EFIN ETRD PGOV PREL KCOR IR AJ
SUBJECT: PRESIDENT ALIYEV REVIEWS THE BILATERAL ECONOMIC
RELATIONSHIP AND IRAN WITH EEB A/S SULLIVAN

REF: A. BAKU 953


B. BAKU 1006

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Classified By: Ambassador Anne E. Derse per 1.4 (b,d).


1. (C) Summary: In an August 15 meeting with visiting EEB
A/S Sullivan and the Ambassador, President Aliyev said that
he recognized the need to diversify Azerbaijan's economy and
also was aware of the dangers of inflationary pressures.
Aliyev hopes to address these issues by combining the State
Entrepreneurship Fund and Azerbaijan Investment Company to
increase state investment in the non-energy sectors; he
argued that significant investment is needed in
infrastructure and social areas. Aliyev acknowledged that
corruption is a serious problem, and said his goal is to
create an economic situation that makes corruption
impossible. He believes the EU action plan is key to his
efforts, as it will introduce EU criteria. Aliyev affirmed
his support for WTO accession but argued that Azerbaijan must
protect itself from Russian and Iranian economic influences.
Sullivan briefed Aliyev on U.S. diplomatic efforts to halt
Iranian nuclear programs, and urged Aliyev to keep in mind
U.S. views during Ahmadinejad's August 21-22 visit to Baku.
Aliyev assured Sullivan that Ahmadinejad's visit would be
"short, without significant political statements." End
summary.


2. (C) In a relaxed, 90-minute meeting with visiting EEB
Assistant Secretary Sullivan and the Ambassador, President
Aliyev reviewed the bilateral economic relationship and Iran.
He also discussed recent regional energy developments
(septel). President Aliyev was accompanied by Economic and
Energy Advisor Ali Asadov. USTDA General Counsel Jim
Wilderooter, DOE's Tyler Tiller, EEB/ESC Rob Garverick and
Pol/Econ Chief (notetaker) also attened the meeting.

Assessing the Economic Partnersip Commission
--------------


3. (C) Emphasizing that the U.S. iscommitted to helping
Azerbaijan achieve prosperiy and economic stability, as well
as diversification, Sullivan told Aliyev that the U.S. views
thebilateral Economic Partnership Commission (EPC) as an
important vehicle to achieve these goals. Sullivan noted
that diverse issues such as WTO accession and anti-corruption
and anti-inflationary measures are in fact interwoven and,
tackled together, can strengthen Azerbaijan's macroeconomic
stability and prosperity. Sullivan told Aliyev that the
private sector is deeply concerned that corruption trends in
Azerbaijan are moving in the wrong direction; the U.S. also
is concerned by recent inflationary pressures.
Diversification of Azerbaijan's energy-focused economy will
also strengthen Azerbaijan's independence and prosperity.
Sullivan noted that he would review the goals articulated in
the joint EPC communique with Minister of Finance Sharifov
later in the day.


4. (C) Aliyev responded that he is aware of the need to
diversify Azerbaijan's economy. The World Bank recently
projected that, at USD 50/barrel, Azerbaijan will have USD
200 billion in energy revenue over the next 20 years. With
that revenue, Aliyev said he plans to invest "a lot" in
Azerbaijan's non-energy sector. Aliyev said he had
instructed the Ministry of Economic Development to consider
combining the Fund for Entrepreneurship with the Azerbaijan
Investment Company. If these two entities are combined,
Aliyev plans to give the new organization an extra USD 100
million per year, bringing its total investment capital to
USD 300 million per year. Aliyev said the state, through
this new entity, would provide 20 to 25 percent of start-up
capital needed for new projects and would plan to sell its
shares after the project was on its legs. He added that the
GOAJ already is investing in IT, social infrastructure, roads
and power stations, and is increasing salaries and pensions
twice a year.


5. (C) Aliyev said he is well aware of growing inflationary
pressures. The current inflation rate is 15 percent and is
expected to double in the next decade. Aliyev attributed
recent rises in inflation to January increases in utility
tariffs, the effects of which still are reverberating through
the economy. Electricity tariffs, Aliyev noted, had tripled,

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but the increase had allowed the GOAJ to normalize the energy
sector. Consumption had decreased by 12 percent, Aliyev
said, and domestic gas consumption had dropped by 100 million
cubic meters (mcm). The GOAJ also had installed gas meters,
an important anti-corruption measure that eventually will
include pre-paid cards. Aliyev noted that similar electronic
measures already had been put in place for the distribution
of salaries and pensions, a development that he argued had
reduced corruption.

What Can We Do? Arrest Everyone?
--------------


6. (C) Aliyev said this his goal is to create an economic
situation that makes corruption impossible. He acknowledged
that Azerbaijan still has "the unjustified involvement of
regulating ministries in the economy" but claimed that this
involvement is decreasing. Aliyev said that he has made a
point of naming successful businessmen to his cabinet and to
the notoriously corrupt local administrations (ExComms),as
these already wealthy individuals would have no reason to
engage in corrupt activities. Aliyev pointed to Minister of
Labor and Social Welfare Fizuli Mammadov (one of Aliyev's
close personal friends) as an example of his successful
policy.


7. (C) Aliyev acknowledged that corruption is a serious
problem in Azerbaijan, laughing that "corruption in the
United States is an exception but in Azerbaijan, it is the
other way around." "What can we do," Aliyev asked, "arrest
everyone?" Aliyev argued that Azerbaijan needs to pursue a
mixed approach of prosecution, reform, careful appointments,
and salary increases. He said that salary increases in
Azerbaijan's road police had led to a "dramatic" decrease in
corruption. While Aliyev acknowledged that he could not say
that he had eradicated 100 percent of the corruption in the
road police, he said that only ten percent remains.
(Comment: The average Azerbaijani motorist, regularly
stopped for bribes of ten to twenty manat -- USD 12 to USD 24
-- likely would disagree.)


8. (C) Aliyev said that, from his perspective, the main
importance of Azerbaijan's new EU action plan was that it
would bring Azerbaijan to EU standards. "We know they (the
EU) won't accept us now," Aliyev said, but "we need their
criteria." Continuing that Azerbaijan does not want to be
like Iran or "even" Turkey, Aliyev said that Azerbaijan
intends to "keep our national identity" but adopt a "European
management style." Aliyev mused that "maybe we'll adopt a
European political system -- but not exactly -- because it
will not work here."

Inflation and the WTO
--------------


9. (C) Turning again to inflation, Aliyev said that
Azerbaijan's consolidated 2007 state budget totaled USD 9
billion, a massive increase over the last four years. The
2003 state budget, Aliyev noted, was only USD 1.5 billion.
This rapid increase in state spending included sorely needed
infrastructure investment. Given the massive amounts of
government revenue and expenditure, Aliyev said the GOAJ
needed strengthened financial controls and greater
transparency, such as already exists in the State Oil Fund
(SOFAZ). For this reason, Aliyev said, he had appointed
former SOFAZ head Samir Sharifov as Minister of Finance.
Aliyev said he told Sharifov to bring the same degree of
transparency to state financial processes that he had brought
to SOFAZ.


10. (C) Affirming his support for WTO accession, Aliyev said
Azerbaijan is in the process of finalizing its protocols. He
had asked the Ministry of Economic Development to draft two
papers, outlining the "plusses and minuses" of WTO accession.
"We need to minimize the negatives while preserving the
benefits," Aliyev said, and "identify minuses that are not so
dangerous for Azerbaijan." "WTO accession is in our
program," Aliyev emphasized. "The rest of the world is in the
WTO and we cannot be the exception."

Fears of Economic Domination
--------------

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11. (C) Aliyev cautioned, however, that Azerbaijan must
protect itself. Azerbaijan's neighbors also are benefiting
from increasing oil prices, and they do not have mechanisms
of control. Russia, for example, is using its oil money to
influence events in Azerbaijan. "I put barriers against
Russian oligarchs' investment," Aliyev said. "Only Lukoil is
here, and that is because we needed them in the early days."
"Now," Aliyev continued, "pipeline and mobile phone companies
are trying to come here. If we open up completely, they will
come. How can I protect myself?" Aliyev asked. "From Iran
too," he pointedly added. "At this stage, we cannot open
completely our market. Economic domination will lead to
political domination. We have been a colony of Russia and
Persia for centuries. We must protect our independence and
work toward Euro-Atlantic integration," Aliyev concluded.


12. (C) Sullivan responded that he would work to encourage
deeper U.S. private sector engagement with Azerbaijan,
particularly since U.S. firms would bring high standard,
world-class technology, management training, ad a commitment
to building local capacity. The mbassador added that it was
strategically importnt to increase U.S. investment, for the
reasons that President Aliyev had outlined. To that end, the
Ambassador had reached out to the U.S. Business oundtable,
who had invited her to speak about opportunities in
Azerbaijan. The Ambassador hoped that she could share a good
news story about the steps the Government of Azerbaijan had
taken to level the business playing field. She noted that
business representatives believe real corruption issues
remain, and suggested that President Aliyev revive his former
practice of regular meetings with the business community, as
requested by the AmCham. Nodding his head, Aliyev said that
Azerbaijan had a "good experience" working with the U.S.
companies. The GOAJ partners successfully with many of the
world's leading energy corporations, and wants to have the
same degree of partnership in the non-energy sectors.

Containing Iran
--------------


13. (C) Sullivan briefed Aliyev on U.S. efforts to address
Iranian nuclear weapons programs via diplomacy and economic
sanctions. In addition to the UNSC sanctions, the U.S. has
been talking to major European companies, especially in the
energy sector, to discourage involvement in Iran. There has
been increasing cooperation from financial capitals to shut
off Iranian financial transactions, and most European
countries have dramatically decreased their export credits to
Iran. This diplomacy is working, Sullivan said, and the
Iranian economy is feeling the effects. Iran's nuclear
programs are not an issue between the U.S. and Iran; they are
an issue between Iran and the international community.
Noting the USG's previous discussions with Aliyev on Iran
(reftels),Sullivan said he hoped that Aliyev would keep this
in mind during Iranian President Ahmadinejad's August 21-22
visit to Baku.


14. (C) Commenting that "only a unified approach can force
change in Iran's nuclear policy," Aliyev said that the U.S.
diplomatic achievements with respect to Iranian business
activity were very important. Iran is not isolated, Aliyev
continued, and has close cooperation with major U.S. allies.
"We are very concerned about Iran's activities and ambitions
in the region," Aliyev said. Iran is trying to impose its
values everywhere, Aliyev continued, but this did not happen
in Azerbaijan. Iran is "always a difficult issue for us,"
Aliyev said. There is "no big economic relationship" between
Iran and Azerbaijan; the only real trade ties are the
transport links and energy swaps between Nakhchivan and Iran,
trade that Aliyev pointedly noted would cease with a
resolution of the Nagorno-Karabakh conflict. "We don't have
investment in Iran and we don't allow it here," Aliyev
stated. On the other hand, Aliyev noted that the GOAJ is
investing heavily in education and social infrastructure in
its southern areas bordering Iran, to counter persistent
Iranian attempts to influence political and social trends
there. Aliyev added that the GOAJ has taken "serious
measures" to against Iranian-sponsored intelligence agents.
Aliyev assured Sullivan that Ahmadinejad's visit "will be
short, without significant political statements." He added
that Azerbaijan simply could not postpone this visit any

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longer.


15. (C) Aliyev concluded that for Azerbaijan and the region,
an Iran with nuclear weapons would be a disaster. He said
that he hoped international efforts to change Iran's nuclear
policy would prove successful. Aliyev commented that, in the
past, Iran had portrayed itself as the protector of Islamic
countries. However, Iranian policy toward Armenia -- which
Aliyev pointedly noted "cleansed 700,000 ethnic Azeri Muslims
and occupies 20 percent of Azerbaijan's territory" -- reveals
the hypocrisy of Iran's claims.


16. (U) A/S Sullivan cleared this message.
DERSE