EEB A/S SULLIVAN DISCUSSES EPC FOLLOW-UP WITH

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001078 SIPDIS SIPDIS FOR EUR/CARC E.O. 12958: DECL: 08/24/2017 TAGS: ECON EFIN ETRD KCOR PGOV PREL SUBJECT: EEB A/S SULLIVAN DISCUSSES EPC FOLLOW-UP WITH MINISTER OF FINANCE SHARIFOV REF: A. BAKU 01060 ¶B. BAKU 01062 Classified By: AMB. ANNE E. DERSE for reasons 1.4 (b) and (d). ¶1. (C) Summary: During his August 15-16 visit to Baku, EEB A/S Sullivan discussed economic cooperation and reviewed progress and next steps within the framework of the Economic Partnership Commission (EPC) with his EPC Co-Chair Minister of Finance Sharifov. Sharifov reported that the GOAJ planned to present key anti-corruption legislation to Parliament this fall, in keeping with its EPC commitments. He said the GOAJ welcomes U.S. assistance on countering inflation in the country, but judged that Azerbaijan may have to "just live through it." Sharifov also gave a readout of the current status of transit negotiations with Turkey and explained reforms the GOAJ hoped to make in its study abroad program. A/S Sullivan's energy and economic discussions with other government ministries are reported septel. End Summary. GOAJ Progress on EPC -------------- ¶2. (C) On August 16, A/S Sullivan and the Ambassador met with Minister of Finance Sharifov and reviewed with Sharifov the progress that the GOAJ has made in fulfilling its commitments under the Economic Partnership Commission (EPC). Sharifov said that President Aliyev signed a decree "to accelerate our WTO efforts." Sharifov added that the Ministry of Finance had begun budgeting money for fiscal year 2008 to hire experts to assist the GOAJ in this process, including to pay for translation and "experts." He noted, however, that there was still considerable domestic resistance to this process on the part of certain economic sectors, including the banking sector, which required "education." He said, for this reason, the GOAJ would want to build appropriate transition periods into its WTO approach to allow the GOAJ to increase the competitiveness of banks, insurance companies, and other local players. He noted that, for example, the GOAJ had recently chosen to build a "WTO compliant" transition period into its new insurance code. Sharifov said that the GOAJ consulted with the World Bank, the Government of Canada, and international firms, and chose to implement this transition period in lieu of other non-WTO compliant measures. Sharifov said that the new insurance law recently submitted to Parliament lifts restrictions on foreign capital entering the Azerbaijani insurance market that had been in place under previous insurance laws. Sharifov said these provisions of the newly proposed insurance law are representative of an important balance the GOAJ is working toward in implementation of the program where "you don't rock the boat on one side," while continuing to implement the program. ¶3. (C) Sharifov said that the GOAJ would submit a number of laws to the Parliament in the upcoming fall session in accordance with the GOAJ's commitments as part of the Economic Partnership Commission. Specifically, Sharifov said that the Anti-Money Laundering and Anti-Terrorist Financing Law would be submitted to Parliament, and that there will be hearings in the Parliament on the Conflict of Interest for Civil Servants Law. Sharifov reported that President Aliyev had signed the Ethics Law which passed into law this June, and that Parliament passed some amendments to the Criminal Liability for Corporations and Legal Persons Law in April of this year. Sharifov said these efforts illustrate that the GOAJ has done what it promised as part of the EPC. ¶4. (C) Sharifov said that the GOAJ had reviewed the USG's proposal to provide assistance to the State Customs Committee and the Ministry of Finance will coordinate with the Ministry of Foreign Affairs as well as the State Customs Committee in deciding how to respond. The Ambassador noted that the USG viewed this issue as both an economic issue and national security issue and had raised it in bilateral security talks with the GOAJ. A/S Sullivan encouraged Azerbaijan to press ahead with WTO membership, noting that, among other things, accession could help the country address inflationary pressures, increase competition in sectors where just a few firms dominate, spur economic diversification, and enhance macroeconomic stability. In terms of EPC follow-up, Sullivan also highlighted DOE's successful earthquake resistant housing seminar, which was held in Baku, and the visit of senior Department of Commerce officials. Sullivan briefed Sharifov on his visit to Turkmenistan and, looking forward to a subsequent meeting with Foreign Minister Mammadyarov, BAKU 00001078 002 OF 004 suggested that the U.S. and Azerbaijan add the USTDA feasibility study, signed August 16 in Baku, to the EPC agenda. A/S Sullivan also raised agriculture as a topic of mutual concern. ¶5. (C) With regard to the Co-Financing Working Group, Sharifov said that the GOAJ is ready to work to provide co-financing and would provide representatives from the Ministry of Finance and Ministry of Economic Development to the Working Group on Co-Financing Issues. Sharifov said that co-financing ratios need to be discussed, as well as future trade assistance projects. Sharifov said that he is pleased with the signing of the TDA grant during A/S Sullivan's visit and looked forward to the results of the feasibility study on a Trans-Caspian Pipeline. Sharifov said that the pension reform project to be conducted by the Social Protection Fund and the State Oil Fund is a very important project for the GOAJ which it hopes to focus on in the next session of the Co-Financing Working Group. Sharifov said that the GOAJ would like to see the pension fund linked with SOFAZ. Sharifov also commented that he had read Mayflower's feasibility study on economic models for linking the pension fund to the State Oil Fund and concluded that the project is ambitious in scope, but inadequate in funding. Sharifov said that there needs to be a reassessment of project funding given the scope of work recommended by the feasibility study. Sharifov said that the GOAJ is ready to co-finance the project and the GOAJ would like the program to start by 2008, at the latest. Macroeconomic Stability -------------- ¶6. (C) A/S Sullivan stated that the USG would like to involve the US Department of the Treasury in working with the GOAJ to counter rising inflation and ensure macroeconomic stability in Azerbaijan. Sharifov welcomed this offer and commented that the GOAJ was open to discussing this issue with the USG. Sullivan suggested that Sharifov's visit to Washington this fall for the International Monetary Fund/International Bank of Reconstruction and Development meetings would be an excellent opportunity for this exchange of views. Sharifov agreed and noted that he would likely be accompanied to the meetings by Chairman of the National Bank of Azerbaijan Rustamov and President of the State Oil Fund Movsumov. (NOTE: If Sharifov is accompanied by Movsumov and Rustamov, it would provide an excellent opportunity for the USG to engage the GOAJ on macroeconomic issues as these are three of the most competent interlocutors on macroeconomic issues in the GOAJ. END NOTE) ¶7. (C) Sharifov said that the GOAJ has been working with experts on macroeconomic stability issues, highlighting the GOAJ's work with the Oxford Economic Consultancy funded by BP. He said the GOAJ had hired an expert from OEC to assist Azerbaijan. To a certain extent, Sharifov said inflation is "something we will have to live through" because of the intense capital investment expenditures going on in the country. Sharifov said that these investments were not just taking place in Baku, citing GOAJ programs to invest in irrigation, land improvements, and other programs designed to decrease urbanization. ¶8. (C) Sullivan cautioned, however, that recurrent inflation can influence expectations and become a self-fulfilling predicament that can be very difficult to gain control of. Sharifov also mentioned that the GOAJ wants to discuss its interest in approaching the Export-Import Bank in 2008 for capital goods loans. The GOAJ is interested in purchasing equipment and then seeking re-financing from EXIM. He said he would like to discuss with EXIM in the fall when he visits Washington. Road development is also a priority for the GOAJ. The Ambassador mentioned Bechtel's interest in discussing with the MOF financing options, to include EXIM, for the major road project they are discussing with the GOAJ. He said he had received Bechtel's proposal and had studied it, and if the GOAJ can get EXIM financing at good rates he would be interested. Ratios of US and local purchases would need to be discussed. ¶9. (C) Sharifov commented that there were a number of factors outside Azerbaijan that also contributed to inflationary pressures within Azerbaijan, including a general increase in world prices, the doubling of world oil and natural gas prices, and increasing usage of ethanol as an alternative energy resource. Sharifov said that the last BAKU 00001078 003 OF 004 factor highlighted the point that, in some cases, there was good inflation, citing as an example the greater use of ethanol in countries such as the United States that resulted in an increase in the price of wheat which benefited Azerbaijani farmers. Sharifov also mentioned that Azerbaijani farmers have benefited from an increase in the price of fruits and vegetables. All in all, Sharifov said that Azerbaijan was "approaching the optimal level of budget expenditures with respect to population size," and that the GOAJ "does not foresee substantial additional increases in the budget." Inflation, he concluded, is manageable at this time. Transit Negotiations with Turkey -------------- ¶10. (C) A/S Sullivan inquired as to the current state of GOAJ's negotiations with Turkey on gas transit. Sharifov said that it was "high time" to press ahead with a transit agreement. Sharifov said that talks have begun, but they will not progress until technical due diligence is done, and commercial issues are separated from legal issues. Sharifov said that "we need a legal document fully-based on the energy charter" on transit. Sharifov noted that as long as Turkey insisted on BOTAS, a commercial entity, as the primary negotiator, the two sides would be unable to reach a legal agreement, commenting "if we allow commercial issues to overshadow legal issues it is a big risk for the transit agreement negotiations." ¶11. (C) Moreover, Sharifov said that technical issues still have not been decided. For example, Sharifov commented that the GOAJ does not know whether the Turkish grid is even capable of receiving Caspian gas and how it can receive it. Sharifov stated that talks have only focused on a "geographic basis" and that the GOAJ does not know in "concrete practical technical terms" how transit will be conducted. Sharifov also noted that the Greeks do not appear to be as "afraid" as they were about buying from someone other than Russia and that the GOAJ needs to look at Greek and Italian issues also. (NOTE: Further discussion of Sharifov's comments on transit negotiations covered reftels. END NOTE) Changes to the Study Abroad Program -------------- ¶12. (C) Sharifov welcomed U.S. views on potential GOAJ strategies for implementing reforms in the Azerbaijani education system, including technical assistance for the GOAJ's new study abroad program. (NOTE: President Aliyev signed a decree in May 2007 directing the GOAJ to direct loans to deserving students for the purposes of studying abroad at the undergraduate and graduate levels. END NOTE). Sharifov said that the program had not been as productive as the GOAJ had hoped, as students sometimes gain skills abroad for which there is already sufficient supply in the country, such as legal skills. Alternatively, students seek employment abroad after their studies are complete, rather than putting their new skills to use in Azerbaijan. Sharifov said that the GOAJ is looking to reform many of the guidelines governing the study abroad program. Specifically, Sharifov said that the Ministry of Economic Development will take the lead in the reform effort and, with the assistance of the Ministry of Labor and international experts, determine the "target" skills that will be required in the Azerbaijani economy in the near- and long-term. Once these "target" skills are identified, Sharifov said the GOAJ will then use this information to determine the amount of funds to be budgeted for the program. Sharifov said that the GOAJ will then reform its selection process to reflect those skills that will be needed the most and will make a determination of what percentage of Azerbaijani students should be selected to learn these required skills abroad. ¶13. (C) Sharifov said that, once the GOAJ has determined the total cost of sending all of the selected students abroad, it will look to foreign countries for "complementary" funding in which the GOAJ would fund a certain number of students and foreign countries where the students would be studying would fund others. Sharifov said that the State Testing Commission will lead on selection of students while the logistics and administration of the program would be coordinated by the Ministry of Education. As an additional counter to the problem of students not returning to Azerbaijan after their studies are complete, Sharifov noted that the GOAJ is considering implementing a regulation into the study abroad BAKU 00001078 004 OF 004 program that stipulates that loans will be forgiven for students that studied abroad and returned to Azerbaijan to work. Conversely, the regulation would enforce repayment of loans given to students that do not return to Azerbaijan after their studies are complete. ¶14. (C) COMMENT: Sharifov was well prepared for his discussion with Sullivan and demonstrated seriousness with respect to delivering results under the EPC -- perhaps reflecting the fact that President Aliyev personally endorsed the EPC communiqu and MOUs after their conclusion last February. His willingness to engage further with the USG on inflation and macroeconomic issues, and to engage with EXIM on loans for capital goods/equipment, is welcome, and his visit to Washington in October represents a key opportunity to follow up -- especially if he is accompanied by the SOFAZ head and the Central Bank Chairman, who are two of the strongest economic talents in the GOAJ. His confirmation that the GOAJ is budgeting additional funds to support the WTO accession process, including translation and experts, is an important tangible sign of GOAJ support for the accession process. END COMMENT. DERSE