PRESIDENT'S STATE OF THE UNION SPEECH: ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001330

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/07/2017
TAGS: ECON PGOV EAID PREL KCOR EFIN AJ
SUBJECT: PRESIDENT'S STATE OF THE UNION SPEECH: ECONOMIC
SUCCESSES, MILITARY BUILDUP, AND CRITICISM OF MONOPOLISTS
AND ELITES

Classified By: AMBASSADOR ANNE E. DERSE PER REASONS 1.4 (B,D)


1. (C) SUMMARY: In an October 23 cabinet meeting, President
Aliyev detailed the social and economic successes of the
first nine months of 2007. In a prepared statement, Aliyev
commended the Government of Azerbaijan's (GOAJ) efforts to
create jobs, develop the rural areas and improve the living
standards and incomes of citizens. He commented on the
growing international presence of the State Oil Company and
the negative effects of Barmek, a Turkish electricity
distribution company accused of fraud. Aliyev stated proudly
that Azerbaijan is seriously engaged in military expansion
and in 2008 the military budget will increase to USD 1.3
billion. Aliyev warned unnamed monopolists that he was
monitoring closely price increases and scolded the Interior
Minister for being soft on "hooligans," not obeying traffic
rules and for tinting their automobile windows. Aliyev's
populist speech appears timed to appeal to the general public
in the early run-up to the 2008 presidential elections. END
SUMMARY.

ECONOMIC SUCCESSES
--------------


2. (SBU) On October 23 President Aliyev held a cabinet
meeting at which he reviewed the socio-economic results of
the first nine months of 2007. The ministers of Energy and
Industry, Taxation, Transportation and Environment and
Ecology also spoke at the meeting. President Aliyev read a
prepared statement to begin the meeting, followed by the
three ministers' presentations and then President Aliyev
closed the meeting with additional prepared statements.


3. (SBU) In his upbeat assessment of the country's
development, President Aliyev stated that both economic and
industrial production growth have increased 27 percent.
Aliyev highlighted his concerns with increasing inflationary
pressures, citing the current CPI rate of 16 percent and
stated that "it very much disturbs us, and we shall try to
lower the rate of inflation as much as possible." Aliyev
continued that "there are subjective reasons which are
necessary to eliminate, in particular, monopolism, unhealthy
competition and, as a result of this, increases in prices."


4. (SBU) In a possible warning to unknown economic operators,
the President stated that monopolists "have to be punished
very seriously." He said that "I regret to see monopolistic
trends ruling in some sectors of import and local production
activities. We have to fight against these trends, which
will help curbing inflation and keeping it at a single-digit
level." President Aliyev also reiterated later in his speech
his concern about inflationary pressures, stating that "I am
concerned about the recent increase of inflation at 15-16
percent. I reiterate it again, there are some natural and
artificial reasons for that. We have to take administrative
measures and apply sanctions against companies causing these
problems." The President also dispelled rumors about
possible utility price increases in 2008.

RISING INCOMES
--------------


5. (SBU) The President highlighted that GDP per capita at the
end of 2007 should reach USD 3,500 and "as a result of
additional economic reforms in 2008," should total USD 4,500
by 2009. Aliyev attributed this increase in per capita
income to Azerbaijan's national oil strategy, economic
reforms, creation of new industrial fields, and strengthening
of economic potential.


6. (SBU) The President stated that incomes of Azerbaijanis
have increased by 40 percent, with real incomes increasing by
22 percent. He characterized income growth as the "rise of
welfare of the Azerbaijani people" and said that the increase
is proof that GOAJ economic reforms are yielding results.
Aliyev stated that Azerbaijan's currency reserves currently
total USD 6.3 billion, further enabling the GOAJ "to carry
out the economic reforms more efficiently." Stating that in
the coming years the country's resources will grow, President
Aliyev attributed the positive results to the "successful
performance of Heydar Aliyev's oil strategy," which will be
an important factor to strengthen the economy.


7. (SBU) Turning to the 2008 state budget, Aliyev recognized
that the budget has increased significantly over the past
several years. Aliyev said that the budget expenses of 2008
will total USD 10 billion, calling this amount a "a great

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achievement, a great figure." He compared the current budget
total to the 2003 state budget amount of USD 1.5 billion.
Aliyev again attributed this increase in budgets to a
"successful oil strategy, and a result of deepening economic
reforms and financial discipline," concluding that as a
"whole, it is a sign of economic development." Aliyev noted
that Azerbaijan had the opportunity to utilize foreign
financing, adding that even if Azerbaijan does not choose
this step Azerbaijan
"will not suffer from this."

INFRASTRUCTURE SPENDING AND REGULATION
--------------


8. (SBU) Aliyev stated that the amount of investments in the
2008 state budget exceeded USD 3 billion, noting that
Azerbaijan "can successfully realize any industrial,
economic, infrastructure project." Aliyev recognized that
Azerbaijan required extensive modernization and that the
country's entire infrastructure system should be updated and
brought to an advanced level. He concluded that the 2008
budget is "the budget both of social and investment
orientation." Later in his speech, Aliyev stated that the
Azerbaijan Investment Company (AIC) needed to work "more
effectively" in order to realize concrete non-energy sector
projects between AIC and foreign partners.


9. (SBU) Later in the meeting, Aliyev commented on the
booming construction sector and the impact of a building
collapse in September. He stated that state control over the
construction sector shall be "even stronger." He recognized
that "there are a lot of problems in this area" that the GOAJ
was "unhappy about many issues" and that the "tragedy
triggered a serious investigation in the sector" leading to
the discovery of many irregularities. He acknowledged that
unlicensed buildings are being constructed and that more
attention need to be paid to this issue in order to stop
abuses and illegal actions. Aliyev concluded that "all
violators will be punished seriously."


10. (SBU) Turning to social issues, Aliyev said that the GOAJ
has taken important steps to resolve social questions,
stating that monthly average wages in Azerbaijan had reached
USD 230 and that the average pension totaled almost USD 70.
Aliyev said that 294,000 citizens receive social allowances
and that each family receives social assistance of
approximately USD 100 per month. He said that the number of
people living in poverty was likely to decline in 2008 and
that the government planned to raise the minimum salary and
pensions next year.

ECONOMIC DEVELOPMENT OF REGIONS AND NON-ENERGY SECTOR
-------------- --------------


11. (SBU) Aliyev stated that the government's program for
development of the regions "is being successfully carried
out," noting that "the class of businessmen is becoming
stronger, new factories and plants are opening,
infrastructure projects are being carried out, and power
stations are being built." He said that as a result of the
GOAJ's economic reforms and the successful regional program,
610,000 jobs have been created in the past four years,
including 430,000 permanent jobs. Aliyev stated that his
promise of 2003 to create more employment "has become a
reality" and that the problem of unemployment will be
"solved." Aliyev stated that all the new jobs had been
created in the non-energy sector.


12. (SBU) Later in the cabinet meeting, President Aliyev
stated that in 2004 it was impossible to calculate all the
issues that need to be solved in the government's regional
development program. He said that he instructed the
government to plan ahead, allocate financial resources and
include all the work to be done into the regional development
program. He highlighted the need for executive bodies and
responsible agencies to be clearly identified, which will
"ensure development of the non-oil sector."


13. (SBU) Aliyev also trumpeted the government's success in
reforming the education system, including the construction of
1,200 schools and the reforms carried out in higher
educational institutions, construction of public health
structures, improvement of health care, creation and
restoration of now scientific research centers. In addition,
he said that the government had built 13 sports complexes and
restored many cultural and historical sites. He said that
the GOAJ was implementing "ecological programs," especially

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on the Absheron Peninsula, that will alleviate the polluted
areas and create improved conditions. Calling the protection
of environment a priority, Aliyev said that the government
had already allocated funding in the budget and President's
Fund to implement the clean-up effort.

BUILDING OF DEFENSE INDUSTRY
--------------


14. (SBU) Aliyev stated proudly that Azerbaijan is "seriously
engaged in military expansion and that each year the military
budget increases." In the current year, according to Aliyev,
the military budget has increased to USD 1 billion and next
year will increase to USD 1.2-1.3 billion. Aliyev stated
that Azerbaijan "lives in a condition of war, our lands are
under occupation, insincere behavior of the aggressor, the
tightening of the process of negotiations and the creation of
artificial obstacles, certainly, compel us to give more
attention to military issues."


15. (SBU) Aliyev stated that Azerbaijan "shall do it
(increase military spending),and nobody can reverse us from
this path," adding that "it is our sovereign right, and
Azerbaijan should be ready to release the lands from
occupational forces by any means -- for this purpose, the
powerful economy and strong army are necessary." Aliyev also
noted the creation of a domestic military industrial complex,
stated that in the near future Azerbaijan shall see the
production of its first military hardware.

ENERGY
--------------


16. (SBU) In the energy area, Aliyev stated that Azerbaijan
continues to participate in numerous energy projects and has
become a huge gas exporting country. He added that "the
factor of gas for energy security in the world currently has
a more important position than the oil factor." He said that
according to latest estimations, the reserves of natural gas
in Azerbaijan total approximately 2 trillion cubic meters,
which he said "is enough for us at least about 150 years."
Aliyev quickly added that Azerbaijan will "provide gas export
to other countries," noting that Azeri gas goes to markets in
Georgia and Turkey, and in "future will be delivered to the
markets of other countries." Aliyev stated that Azerbaijan's
gas strategy "opens for us extra economic opportunities, will
notably strengthen regional cooperation, and will raise the
political weight of Azerbaijan."


17. (SBU) Later in his speech, President Aliyev recognized
that Azerbaijan has been very successful in the oil sector,
noting that it has "accomplished all the tasks" planned. He
said that the GOAJ had ensured the country's energy security,
and was going to participate in solving energy security
issues of the neighboring states and the Europe. He said
that the government's "thoughtful policy, transparency of the
oil sector, and just distribution of revenues" were
responsible for poverty reduction.


18. (SBU) Later in the meeting, the President recognized the
State Oil Company's (SOCAR) improving credit rating, enabling
SOCAR to attract international financing for domestic and
international projects. Aliyev said that SOCAR's role "will
definitely expand our economic opportunities and Azerbaijan
will act as a foreign investor in other countries,"
reiterating that the GOAJ would do its best to attract
foreign investors to Azerbaijan. The President highlighted
SOCAR's investments in Georgia, Turkey and Eastern Europe.


19. (SBU) President Aliyev also made comments on the Barmek
electricity distributor case later in his remarks. He noted
that Barmek was in Azerbaijan "to steal from the Azerbaijani
population" and that it made no capital investments. He
believed that since the GOAJ assumed control, Azerbaijan had
received "great results." According to Aliyev, the GOAJ is
building new power stations to ensure regular electricity
supplies for its
citizens.


20. (SBU) Aliyev stressed that Azerbaijan's successful
foreign policy and acceptance of its national economic,
political, energy and transport initiatives will strengthen
the country and transform it into a regional center. He
reiterated that any "project cannot be realized in region
without participation of Azerbaijan." Aliyev stated that the
Baku-Tbilisi-Kars railway construction will start soon,
calling it "our largest, historical achievement."

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ANTI-CORRUPTION EFFORTS?
--------------


21. (SBU) At the end of the cabinet meeting, President Aliyev
made uncharacteristic comments on the conduct of government
officials and the general public. Aliyev stated that the
"law should be equal for everyone. No one should have
special status. No one in my family does." Aliyev continued
that he does not like "the events of an unexplained nature,
that are not in line with our national character and
traditions." He urged all public officials to be "sensitive
to ethics and norms" and not to engage in activities that can
damage the morale and image of the government, adding that
public officials and people on TV should be modest and live
in accordance with the national spirit.


22. (SBU) Aliyev also questioned how certain citizens were
considered "untouchable" for traffic crimes while others are
being punished for even minor violations. Remarking "I don't
accept this," Aliyev said that he would instruct the Ministry
of Internal Affairs to take care of the disparity, calling
the law breakers "hooligans."


23. (SBU) Turning to more ordinary issues, Aliyev said he has
repeatedly ordered the removal of automobile window tinting.
He said that the owners of these cars are "officials, MPs,
their relatives or big businesses." Aliyev continued that
"why do they hide behind the tinting? Are they afraid of
someone?" He said that before he became president he did not
travel in vehicles with tinted windows and "would stop for
every red light." Aliyev stated that "these people are not
paying fines, ignore rules. I will punish the people they
rely on." The following day, local Baku police could be seen
throughout the city stopping all cars with tinted windows and
removing window tinting.


24. (C) COMMENT: As in previous cabinet speeches, much of
President Aliyev's speech touched on the economic successes
of the past nine months without providing extensive details,
especially regarding the number of jobs created - a major
2003 presidential campaign promise. Aliyev's positive spin
on the state of economic growth comes as Azerbaijan is just
beginning to reap the economic and financial benefits of its
growing energy resources. His ominous words against unnamed
monopolists are uncharacteristic and interesting given his
and many of his officials' close connections to many of the
large domestic companies operating in Azerbaijan. The
President appeared to hint at undefined economic measures,
possibly price controls, to moderate increases in consumer
prices. President Aliyev may be taking a more populist
approach by attacking higher prices, monopolies, and
"hooligan" officials to appeal the general public in the
early run-up to the 2008 presidential elections.
DERSE