C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001085

SIPDIS

SIPDIS

FOR EUR/CARC

E.O. 12958: DECL: 08/20/2017
TAGS: AJ ECON EFIN ETRD KCOR PGOV PREL
SUBJECT: EEB A/S SULLIVAN DISCUSSES AZERBAIJAN'S ECONOMIC
SITUATION, EITI, CORRUPTION

REF: BAKU 000949

Classified By: AMB. ANNE 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 with the American
Chamber of Commerce Board of Directors, President of the
State Oil Fund Movsumov, Minister of Economic Development
Babayev, Minister of Finance Sharifov (septel), and local
international financial institutions and NGOs. While Movsumov
and Babayev detailed steps the GOAJ is taking to counter
growing inflation, they also expressed a view - seemingly
widely shared within the GOAJ - that the economy can handle
the current 15-20 percent inflation and that this is a period
Azerbaijan must just "get through." Babayev reaffirmed GOAJ
support for WTO accession and said the Ministry of Economic
Development (MED) had prepared a presidential decree to
accelerate the process; he also noted that certain sectors
remained opposed to WTO accession. Local international
financial institutions and NGOs gave a readout of the
business operating environment in Azerbaijan and corruption.
The American Chamber of Commerce highlighted sectors in the
Azerbaijani economy where the GOAJ has said it hopes to
attract involvement by U.S. companies. End Summary.


2. (C) During his August 15-16 visit to Baku, A/S Sullivan
met with Minister of Economic Development Babayev, President
of the State Oil Fund Movsumov, Minister of Finance Sharifov
(septel), the American Chamber of Commerce Board of
Directors, and local representatives of international
financial institutions and NGOs. Other USG officials at the
meetings included Ambassador Derse, EEB's Rob Garverick,
USTDA's General Counsel James Wilderotter, DOE's analyst
Tyler Tiller, and Pol/Econ officers (notetaker). A/S
Sullivan's energy discussions are reported septel.

Breakfast with the American Chamber of Comme

rce
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3. (SBU) During a breakfast with the American Chamber of
Commerce Board of Directors (AmCham Board), A/S Sullivan
discussed with the Board the potential for increasing U.S.
companies' representation in the Azerbaijani market. The
AmCham Board said that the GOAJ had made clear to them in
recent meetings that it would welcome U.S. participation in
major new development initiatives and projects in the
following sectors: Electricity, Municipal Housing,
Water/Sanitation, and Franchising. The AmCham Board said
that it seeks USG support in finding and attracting quality
U.S. companies to participate in a major trade mission to
Azerbaijan that it would like to sponsor to take advantage of
these opportunities.


4. (SBU) A/S Sullivan offered to connect AmCham with various
U.S. Chamber of Commerce and Department of Commerce
representatives that could serve as a conduit for bringing
AmCham together with interested U.S. companies. A/S Sullivan
and AmCham also discussed the idea of a "Business
Entrepreneurial Council" to engage in regular dialogue with
President Aliyev about the business climate, comprised of
representatives of leading business associations with AmCham
leading the effort and serving in the Secretariat of the
Council. A/S Sullivan noted that he had encouraged President
Aliyev to consider the idea he and the AmCham Board agreed
that it was important to follow-up with the Presidential
Apparatus and President Aliyev to discuss the Council.
(NOTE: In an August 23 meeting with the AmCham Board of
Directors, Presidential Economic Advisor Vahid Akhundov
agreed that there was a need to establish regular
communications between the GOAJ and the business community.
Akhundov said that he would brief President Aliyev on
AmCham's vision of a revitalized Business Entrepreneurial
Council, and would recommend that President Aliyev meet the
AmCham "in the near future" to further discuss the issue).

SOFAZ President Movsumov
--------------


5. (C) State Oil Fund (SOFAZ) President Movsumov gave a
brief history of the Fund and said that the Fund currently
holds roughly $2 billion, an amount he expects to grow by
another $5 billion in 2008 and by another $9 billion in 2009.
Movsumov complimented the role that USTDA played in setting
up the Fund and commented that the Fund's institutional
capacity is inching forward. Movsumov said that the Fund is
carrying out its mission to manage wealth constructively and

BAKU 00001085 002 OF 004


channel the funds into projects in the "social and
development" areas that will have long-term dividends for the
GOAJ. In response to a Sullivan query about the kinds of
projects that the Fund participates in, Movsumov said that
the Fund helped finance the BTC pipeline, will help finance
the Baku-Tbilisi-Kars railroad, will finance a local
irrigation project, the start-up of an Azerbaijani investment
company in which SOFAZ plays a role on the supervisory board,
will support the transition of the pension system from
partially-funded to fully-funded, and the GOAJ's new program
to send students abroad to study.


6. (C) A/S Sullivan also discussed the Extractive Industries
Transparency Initiative (EITI) pointing out the "free rider"
problem and stating that many countries belong to the EITI
and receive the praise for doing so, but have yet to truly
implement EITI-mandated provisions for transparency.
Movsumov said that he and the EITI have similar concerns,
adding that he raised this issue with the Board of Directors
and other members of the EITI, and that the Board was
planning to vote on this issue at the next Board meeting in
Oslo. Movsumov said that the GOAJ is currently trying to
move the UN forward on a resolution endorsing EITI and is
encouraging Norway to consider becoming an EITI member and
implement EITI provisions to counter a spreading mindset
among less-developed countries that the EITI is something
imposed on them by richer countries. Movsumov hopes that,
one day, EITI will lead to worldwide implementation of its
provisions and, perhaps, the U.S. may join.


7. (C) Movsumov also commented that the Fund is working to
alleviate Azerbaijan's inflation problem. Movsumov said that
is an on-going debate within the GOAJ about whether to spend
more of the oil money now on much needed roads and
construction, which fuels inflation, or to save more and
invest in long-term projects. Movsumov said that, right now,
inflation in the economy is manageable because real
disposable income is rising to compensate for the rise in
prices. Nevertheless, Movsumov said that the GOAJ is working
with experts to find ways to counter the problem, including
working with the BP-provided economic model that shows the
tradeoffs of funding different, non-oil sector projects and
their effect on the economy.

MED Babayev
--------------


8. (C) During his August 15 meeting with Minister of
Economic Development (MED) Heydar Babayev, A/S Sullivan
outlined his visit to Turkmenistan and told Babayev that he
had mentioned to Turkmen officials that Azerbaijan was a
better economic model for Turkmenistan,s new leadership than
the former Soviet Union. Babayev said the GOAJ is receiving
a positive message from the Turkmen leadership and has a
bright future as a transit country. The Kazakhs have now
seen that Russia is an unreliable partner and are supporting
a Trans-Caspian pipeline, he said. Babayev added that
Kazakhstan and the GOAJ have created a foundation to finance
important regional projects. Noting that the GOAJ has signed
an energy MOU with Greece, Babayev said that transit
negotiations are underway with Turkey and the GOAJ expects to
reach a new agreement once the new Turkish government is
formed. Babayev told Sullivan that Azerbaijan provides 70
percent of Georgia,s gas demand and there will be a similar
statistic for Turkey soon. Separately, he said the GOAJ
would discuss a pipeline project with the Israeli Deputy
Prime Minister during his visit to Azerbaijan. If Jordan
remains positive about it, Babayev said there was a potential
for regional cooperation.


9. (C) Babayev told Sullivan the GOAJ,s WTO accession
efforts are ongoing, but that he is unhappy with the slow
pace. He said that four of the required legislative changes
have been implemented, and that in June 2007 during the last
meeting of Azerbaijan,s WTO Commission, it was unanimously
decided to ask the President to enlarge and expand the role
and responsibilities of the Commission. The MED also has
presented a nine-step WTO accession roadmap to the President
for approval, Babayev said (reftel). Some bilateral
agreements have been reached with Georgia, Moldova, Oman and
the UAE, while others are ongoing. Babayev pointed out that
some recent developments, e.g. in Kyrgyzstan, had negatively
impacted the image of the WTO, but that the GOAJ is past
questioning whether to join and is fully committed to
accession. The GOAJ is definitely examining the benefits and
costs of accession with a view to addressing the costs.

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Babayev told Sullivan that the business climate in Azerbaijan
still requires significant improvement. He said the GOAJ has
engaged with the authors of the World Bank,s Doing Business
Report to agree on what improvements, like on licensing and
registration, should be implemented to improve Azerbaijan,s
score. Babayev said the GOAJ sees the necessity of the
changes, as an important method of improving its ability to
attract additional investment. Sullivan noted that there
would have to be efforts also to educate the public about the
WTO and an open economy.


10. (C) Babayev said that the lack of progress toward
economic liberalization has contributed to Azerbaijan's
double-digit inflation. He noted that inflation is higher
in the food market than in the overall economy and attributed
that to high quality Azerbaijani products commanding higher
prices domestically and in Russia. Azerbaijan,s current
inflation is still acceptable, Babayev asserted, while
acknowledging that his deputies did not agree. Babayev said
the GOAJ cannot be afraid of inflation as it spends money on
essential social infrastructure development. He asserted
that despite inflation, the population has experienced a
17-20 percent increase in real income in 2006. Using
previous U.S. experiences as an example, Sullivan told
Babayev that once double-digit inflation is built in, it
becomes harder to eliminate. He pointed to the
anti-inflationary influence that joining the WTO could have
by increasing competition and reducing the price of imports.


11. (C) American companies bring benefits like increased
training and technology, Sullivan said, and the Ambassador is
looking for ways to increase their participation. The
Ambassador told Babayev she had been invited to speak at the
influential Business Roundtable and that this would be a
great opportunity to promote greater awareness of actions
that the GOAJ had taken to improve the business climate,
assuming that the GOAJ is able to move forward on critical
reforms in the near term. Babayev noted that the ongoing
court case involving Americans that had purchased
privatization vouchers, he hoped would be resolved soon.
Babayev said the Azerbaijan Investment Company (AIC) was a
good creation that protected foreign investors in the non-oil
sector from corruption by making them partners with the GOAJ.
Babayev pointed out that President Aliyev had decided that
local investors could work with the AIC as well, and that in
its second year AIC-domestic partnerships eclipsed the
overall value of foreign investors.

Local IFIs & Economic NGOs
--------------


12. (C) In a lunch meeting hosted by the Ambassador, several
representatives from the international financial institutions
and economic non-government organizations briefed Sullivan on
the current business operating environment. The
international financial institutions and NGOs in attendance
were the World Bank's Resident Representative Gregory
Jedrzejczak, Head of the Azerbaijan Resident Mission of the
Asian Development Bank Faraj Huseynbayov, Director of the
Public Finance Monitoring Center Inqilab Akhmadov, Director
of the Center for Economic Research Qubad Ibadoglu, Chairman
of the network of NGO's for the Fight Against Corruption
Alimammad Nuriyev, the World Trade Organization's Rashad
Aliyev, Head of the EITI Coalition Sabit Bagirov. The
meeting featured a broad-ranging discussion of corruption
issues and the most effective regulatory and institutional
strategies for promoting anti-corruption reform in
Azerbaijan.


13. (C) In response to a question from Sullivan on
corruption, Akhmadov said that one must distinguish between
social corruption and government corruption. Akhmadov said
that social corruption is much harder to control than
government corruption because laws and administrative
guidelines cannot effectively regulate traditional social
norms/practices. Government corruption, however, is more
easily identifiable because there are laws that set specific
rules against corrupt government practices. Akhmadov said
that EITI offers the possibility to tackle both forms because
it can focus on state-owned companies for its anti-corruption
efforts which, he emphasized, can have a trickle down impact
on the workers and change social corruption
incentives/practices. Nuriyev said that the opportunity to
eliminate corruption lies in effective implementation of the
legislation which sets the rules and the
administrative/judicial enforcement stratagem. As an

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example, Nuriyev said that the hiring process for government
positions must change because it is based on nepotistic
practices. Where someone is from, or someone's family ties
to the regime often determines whether the person gets the
job.


14. (C) Sullivan asked the group if they thought it possible
for the GOAJ to pass legislation making it illegal for
government workers to own stocks in an important sector, such
as the oil sector. Jedrzejczak replied that there already is
legislation that prohibits ministers from being involved in
businesses, but it has not been implemented. Bagirov said
that any efforts to correct government structures or remove
corruption from government structures will need to be
accelerated in order to impact on the utilization of the oil
revenues flowing into the GOAJ budgets.
DERSE