Identifier
Created
Classification
Origin
07BAKU1389
2007-11-16 13:04:00
CONFIDENTIAL
Embassy Baku
Cable title:  

WESTERN AZERBAIJAN: REGIONAL NON-OIL SECTOR

Tags:  ECON EAGR EAID USDA AJ 
pdf how-to read a cable
VZCZCXRO8381
PP RUEHDBU
DE RUEHKB #1389/01 3201304
ZNY CCCCC ZZH
P 161304Z NOV 07
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 4285
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 2469
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001389 

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DEPT PLEASE PASS TO DEPT OF AGRICULTURE WASHDC
ANKARA PLEASE PASS TO FAS GIFFORD

E.O. 12958: DECL: 09/10/2017
TAGS: ECON EAGR EAID USDA AJ
SUBJECT: WESTERN AZERBAIJAN: REGIONAL NON-OIL SECTOR
DEVELOPMENT


Classified By: DCM DONALD LU; REASONS 1.4 (B,D)

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001389

SIPDIS

SIPDIS

DEPT PLEASE PASS TO DEPT OF AGRICULTURE WASHDC
ANKARA PLEASE PASS TO FAS GIFFORD

E.O. 12958: DECL: 09/10/2017
TAGS: ECON EAGR EAID USDA AJ
SUBJECT: WESTERN AZERBAIJAN: REGIONAL NON-OIL SECTOR
DEVELOPMENT


Classified By: DCM DONALD LU; REASONS 1.4 (B,D)


1. (SBU) SUMMARY: Econoffs visited a range of private and
primarily agricultural companies in western Azerbaijan around
Azerbaijan's second largest city, Ganja, to discuss regional
development in the non-oil sector. The team met with Ganja's
regional governor, visited the newly opened regional airport,
met with the rector of Azerbaijan's sole Agricultural
University, and visited a range of agricultural processors
and growers, as well as a mid-size mining company. While
there were signs of increased construction, some new
equipment and some increased economic activity in the region,
Econoffs also saw unproductive and underutilized fields even
in the part of the country most famous for producing grapes
and pomegranates, two of Azerbaijan's biggest agricultural
production inputs. END SUMMARY.

Food Processing Plants: Pomegranates and Juice
-------------- --


2. (SBU) Econoffs visited two small/medium-size juice
processing factories (Gizil Ahmet andInterPak) of the
handful that exist in the regio, each employing between
20-60 employees. Due t the increased demand for pomegranate
juice and concentrate in the past few years, both factories'
primary product is pomegranate juice, with other exotic fruit
juices making up less than 15 percent of production and
sales. Small and medium size enterprises (SMEs) cannot
afford to produce the more valuable pomegranate concentrate
because equipment is expensive and requires large capital
inputs. Many SMEs lack access to credits and financing to
modernize or expand operations. While conditions are basic
at small processing plants, with old Soviet-era equipment and
facilities, a processing company that worked with USAID is
expanding and becoming a year-round operation, increasing the
number of employees, investing in modern, locally-produced
equipment, and diversifying into new export markets.


3. (SBU) Many of the juice processing SMEs do not sell on the
local market where prices are low, but instead export to

countries of the former Soviet Union where prices are higher.
Most must import production inputs like bottles, caps and
labels, but use local produce for juices. The companies
identified their two biggest challenges as: limited capital
due to the high cost of credit and the bureaucratic process,
especially working with customs officials for importing
inputs and exporting juice products. For many small
companies the cost of doing business often includes bribing
local government officials (taxes, customs). For InterPak,
the company that worked with USAID, the biggest benefit it
received from the project was knowing and understanding the
regulations that allowed them to combat some small-scale
corruption, avoiding unofficial fees for non-compliance with
complicated rules.


4. (SBU) Econoffs also visited two large-scale juice and
concentrate producers, Gilan and MPro. Both companies employ
several hundred employees, operate year-round production,
have imported top-of-the-line equipment from Europe, and have
plans to expand production. Both companies pay attention to
sanitation and quality standards, claiming to have the best
in Azerbaijan. (Note: Interpak's owners confirmed that their
product could not compete with Gilan or MPro's quality.)
Both have plans to expand pomegranate concentrate production
for export by finding new international buyers. Both
producers have alternate production lines which they plan to
expand (one produces jams while the other produces long-term
milk and various milk products). Both companies acknowledge
that their equipment is not used to full capacity at current
production levels. Both Gilan and MPro are also increasing
various juice productions, some of which are sold on the
local market, and introducing new products and leather
production. The majority of their products are exported to
the former Soviet Union, but also include other markets like
the United States.


5. (SBU) There is a lack of modern, large-scale agricultural
production in Azerbaijan. Gilan and MPro told Econoffs that
they plan on establishing farming enterprises in the future
to avoid produce shortages. The lack of proper irrigation is
the biggest challenge to agriculture and agribusiness in
Azerbaijan, Gilan's General Manager said, adding that Gilan
imports some of it's produce for juice processing. MPro said
bureaucratic challenges and linkages to increase demand for
it's products so it could increase production and use
equipment to full capacity, are the two biggest problems it
faces. Both companies have rumored ties to high-level GOAJ

BAKU 00001389 002 OF 003


officials.

Cognac and Wine
--------------


6. (SBU) Econoffs visited two large-scale cognac and wine
producers (Tovuz Baltiya and Ganja II Winery),each with
several hundred employees, imported inputs like bottles, caps
and labels, modern equipment, and plans to expand production.
Tovuz Baltiya has strong ties to the Baltic countries and
exports 80 percent of the cognac and wines it produces to
countries like Russia, Ukraine, Japan and Europe. It sells
only 20 percent of its production in Azerbaijan.


7. (SBU) Tovuz Baltiya is involved in farming enterprises
(grape cultivation),because, like the juice producers, the
company has a hard time meeting it's input needs by
purchasing from local producers. Currently, Tovuz Balitiya
buys apples, quince, pomegranates and grapes, and wants to
establish a credit system for small farmers to increase
capital in the regions and help strengthen individual and SME
agricultural production. Tovuz Baltia representatives asked
Econoffs if there were any USG project or company that could
help provide small credit loans to individual farmers in the
north-western Tovuz region.


8. (SBU) Ganja II Winery produces many of its own grapes, and
has plans to expand its agricultural production over 200
percent in the next three years to meet rising local demand.
Like Tovuz Baltiya, it also purchases grapes from local
farmers after testing the produce. With local wine demand
increasing, Ganja II Winery's General Manager said, he
exports only about 15 percent of his product, selling the
rest of his award-winning product on the local market.

Government Officials, Airports and Education
--------------


9. (SBU) In Azerbaijan's second largest city, Ganja, Econoff
observed more construction, more people and business activity
in the streets, and a few more businesses compared to
previous years. Ganja's regional Governor agreed that the
situation in Ganja is improving: there is more economic
activity, the population has increased 30 percent in one
year, poverty is down, and utility services (gas, water,
electricity) are stable. Rumored to be one of the most
progressive regional governors, Ganja's governor lived up to
his reputation by telling Econoffs that he is trying to
improve the economy by improving infrastructure, creating the
right environment (organizing fairs, conferences and trade
shows),and supporting entrepreneurial growth rather than
trying to direct it. Along with agribusiness, he said there
are waste processing and brick production projects underway.
He also said that tourism could be a growth sector and
pointed out there is a five-star hotel being built and a new,
state-of-the-art airport that recently opened.


10. (SBU) Econoffs visited Ganja International Airport, which
started operating its two runways in October 2006 and now
employs 800 people. Built in less than one year, the
facility seems modern and sparkling clean, with
state-of-the-art equipment. Airport officials said the
airport is staffed to service 300 passengers an hour. The
airport currently services one weekly flight to Turkey, one
daily flight to Russia, and one daily flight to Baku. It
previously also had one daily flight to Azerbaijan's
Nakhchivan Autonomous Republic, but those flights stopped in
August when the plans were re-routed to the Baku-Nakchivan
route to relieve thousands of stranded passengers in
Nakhchivan. Ganja-Nakchivan flights were set to resume in
late October when a French-made airplane would be delivered
and resume the Baku-Ganja-Nakhchivan route, officials said.


11. (SBU) Azerbaijan's Agriculture University is the only
agricultural education institution in Azerbaijan. It has
been under-funded for years and the quality of the education
and enrollment have suffered. Growth in Azerbaijan's
agriculture sector has been steadily declining in the past
few years and is now anemic. Although 40 percent of those
employed in Azerbaijan are in the agriculture sector, most
production is small-scale or subsistence farming. Careers in
agriculture and veterinary services do not attract
Azerbaijan's youth and the lack of demand and prestige is
evidenced at the Agriculture University. In fact, despite
the universities efforts to establish an avian influenza
laboratory and to apply Bologna Process standards to the
veterinary sciences, it attracted only 25 veterinarian

BAKU 00001389 003 OF 003


graduates last year. To combat the decline in agriculture
and animal services, the university's leadership is
cooperating with German agencies to send students to Germany
for academic and internship opportunities. University
officials asked Econoffs if there were possibilities of
establishing educational exchanges and internship training
with U.S. institutions or businesses.

Mining
--------------


12. (SBU) Econoffs met with the management of a mid-size,
government-controlled (51 percent) gold mine with American
partners, Mis Dagh. Like the other businesses in the region,
Mis Dagh's management had plans for expansion and hope to
employ approximately 1000 people by fall 2008 as they expand
from the exploration phase into the excavation and extraction
phases. With the high price of gold and new mining
technology, the management says that the operation which
started in 2005 will likely be profitable in the years to
come.

Comment
--------------


13. (C) While challenges such as working with customs,
creating market linkages to increase demand, and improving
efficiency to make products more competitive abound, many of
the companies Econoffs visited were planning to expand
production and increase production lines. Generally,
agribusinesses preferred to export their products because of
higher prices abroad. While basic business management and
marketing education is helping SMEs, they face bureaucratic
and quality issues when looking to expand into new markets.
The lack of access to capital also limits SMEs. Large-scale
processors have an advantage when it comes to producing a
quality product for export into new markets because they have
invested in modern equipment to increase quality and
production capabilities. However, most businesses are not yet
efficient as staffing levels are too high and modern
equipment is often underutilized at current production
levels.


14. (C) Comment Continued: Many large-scale producers also
complained of the lack of availability of local produce that
they use as inputs fr processing. While there are some
relatively lrge-scale processors in Azerbaijan, it is
unclea how many are profitable and how many remain open
because of rumored government ties. More than half of the
businesses Econoffs visited pointed to local employment and
regional development as their primary goals rather than
profit seeking. MPro, which produces juice, juice
concentrate, milk and milk products, seems to be a profitable
large business which faces many of the same challenges as
SMEs in Azerbaijan, including conflicts with customs
officials. However, despite customs interference and
monopolistic powers, some of the government-linked producer's
(basically any large-scale processor) profits are plagued by
glaring inefficiencies like high import costs, high staffing
levels, and lack of demand in foreign markets which limits
production levels.

DERSE