AZERBAIJAN INVESTMENT COMPANY STARTS TO PURSUE ITS

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000474 SIPDIS SIPDIS DEPT FOR EEB SPECIAL REPRESENTATIVE FRANK MERMOUD COMMERCE FOR A/S ISRAEL HERNANDEZ, DAS PAUL DYCK AND DAS DANIEL HARRIS ANKARA FOR FCS JAMES FLUCKER E.O. 12958: DECL: 04/12/2017 TAGS: PREL PGOV ECON EAGR EPET KCOR AJ SUBJECT: AZERBAIJAN INVESTMENT COMPANY STARTS TO PURSUE ITS MISSION Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b,d) ¶1. (C) SUMMARY: Azerbaijan Investment Company (AIC), established by the Government of Azerbaijan (GOAJ) in 2006 to promote the development of Azerbaijan's non-oil sectors, is beginning to identify specific multi-million-dollar domestic and regional investment projects. After a slow start, AIC is planning to invest up to USD 50 million of its USD 100 million capitalization in 2007 in non-energy sector projects. Due to the lack of viable partners in the non-energy sector, AIC is looking to invest with established international companies already operating in Azerbaijan. Development of Azerbaijan's non-energy sectors is vital to its development and stability and it was established to attract and help foreign investors penetrate Azerbaijan's market. AIC is a step in the right direction but, like any other investor, it faces serious challenges in Azerbaijan's difficult business climate. END SUMMARY. BACKGROUND ========== ¶2. (SBU) In March 2006, President Ilham Aliyev signed a decree establishing the Azerbaijan Investment Company (AIC), with the primary purpose of helping to attract foreign investors to develop Azerbaijan's domestic non-energy sectors. Since then, the joint-stock company has been engaged in identifying and researching investment opportunities. The GOAJ used USD 100 million from the State Oil Fund to create AIC's statutory capital from the State Oil Fund. AIC operations began in September 2006 but it did not invest in any projects until March 2007. ¶3. (C) In a March conversation with Embassy Commercial Officer and Commercial Assistant, AIC Executive Director Anar Akhundov said that AIC's activities are supervised by the Observation Council, which is headed by Economic Development Minister Heydar Babayev and includes the Executive Director of the State Oil Fund Shahmar Movsumov. The Ministry of Economic Development (MED) also keeps and manages AIC's state-owned shares. According to Akhundov, AIC's management philosophy is similar to a private equity firm or fund. He said that AIC only invests to become a minority equity shareholder, but one with a blocking vote. ¶4. (C) Akhundov explained that AIC insists that companies in which it invests implement best practices and best technology for the most efficient operations. AIC also wants these companies to apply best corporate governance standards and have audits by one of the big four international audit companies. AIC told EconOff that it had not been more active in the non-energy sectors, such as agriculture, since it was having trouble finding viable partners with which to invest. COOPERATION WITH IFIs ===================== ¶5. (SBU) Akhundov said that in March the International Finance Corporation (IFC) and AIC signed a memorandum of understanding on mutual cooperation for corporate governance in Azerbaijan. IFC will provide consulting and training service in Azerbaijan through the Azerbaijan Corporate Governance Project. A joint methodology will be developed to help assess corporate governance in the companies of interest to AIC. In January, AIC became a member of European Private Equity and Venture Capital Association (EVCA) and of Emerging Markets Private Equity Association (EMPEA). Akhundov said that AIC membership in these organizations will promote integration into the international investment network and help disseminate information about investment opportunities in Azerbaijan's non-energy sectors. AIC is also in contact with Kuwait-based investment companies to research establishing mutual funds. ¶6. (C) The European Bank for Reconstruction and Development has also provided technical assistance to AIC at its establishment in September 2006. Aygen Yayikoglu, current EBRD Head of Office in Baku, told EconOff that EBRD provided guidance and assistance with AIC's charter. Yayikoglu said BAKU 00000474 002 OF 003 that EBRD likes the AIC concept of investing in the non-energy sector but that AIC needs to build up a track record. If AIC remains a transparent fund and if it works properly, AIC can play a key role in the development of the agricultural sector and other non-oil sectors. He added that EBRD is ready to co-invest with AIC in appropriate on-energy sector projects. Yayikoglu stressed tat AIC needs to stay focused on investment opporunities in the non-energy sector. Yayikoglu also said that AIC's Supervisory Board has proposed to the Presidential Apparat an amendment to AIC's original Presidential Decree revising AIC's veto clause. This veto clause has hindered AIC's cooperation with international companies. CAPACITY-BUILDING ================= ¶7. (C) Akhundov said AIC's greatest need was capacity-building, and as such he was very interested in partnering with international industry leaders for just this purpose. AIC is the first company of this nature in Azerbaijan, and he said it would need help and support from international partners to develop its managerial and analytical talent. SPECIFIC INVESTMENT PROJECTS ============================ ¶8. (C) Akhundov said that AIC researched more than 50 investment projects in 2006, and is currently conducting feasibility studies with international consulting companies for 14 projects. In February, AIC announced its intention to buy a 20 percent equity in the Garadagh Cement Factory from Holcim (Garadagh's shares currently are 90 percent owned by Holcim and 10 percent by EBRD). In a subsequent meeting with EconOff, Akhundov and AIC Deputy Director Riad Gasimov said that negotiations with Garadagh Cement are not complete. Garadagh Cement and AIC are still discussing the AIC's veto power. ¶9. (C) AIC is also conducting a feasibility study with Lafarge to construct a second cement factory in support of regional development. The proposed factory will use full dry technology, which, although more expensive, is ecologically friendlier. Based on current demand for cement in Azerbaijan's real estate boom, there is enough domestic demand to justify two cement factories in Azerbaijan. AIC also announced its intention to obtain 20 percent ownership in major dairy and juice manufacturer Milk-Pro (currently 25 percent EBRD ownership). Within the project, AIC will co-finance a new dairy plant near Hovsan outside Baku. The plant will produce cheese, butter, milk and yogurt for domestic consumption. AIC also believes there may be export potential to Georgia and Kazakhstan. ¶10. (SBU) Akhundov said that among other projects, AIC is conducting feasibility studies for: - petrochemical production worth USD 1 billion; - insulin production for domestic consumption and potential export to Georgia and Kazakhstan (a joint project with a British company); - greenhouses to export fruits and vegetables to Russia; - vermicomposting farms (California worms); - a shipping company to transport oil in the Mediterranean; - a shipyard in Garadagh (together with South-Korean manufacturers); - an oil terminal in Garadagh (near Baku) to transport Kazakh oil to the West (a project controlled by powerful Azersun Holdings),and - meat processing. ¶11. (C) Regarding AIC's proposed investment with AzerSun in the Garadagh oil terminal project, EBRD Head of Office Yayikoglu said that EBRD in general keeps its distance from AzerSun and its operations, due to ownership and connections to the GOAJ. Yayikoglu said that the oil terminal project would appear to go against the mandate of the AIC. He agreed that this investment most likely did not come from AIC BAKU 00000474 003 OF 003 itself, but rather was proposed by Babayev and the Supervisory Board. (COMMENT: AzerSun does not need AIC money for any proposed investments. It has plenty of financing and can attract other investment funds. AIC, on the other hand, is eager to show positive results and return. Embassy will monitor closely AIC to ensure that its efforts for a positive return do not translate into poorly planned projects, wasting GOAJ resources.) COMMENT ======= ¶12. (C) Development of Azerbaijan's non-energy sectors is vital to its long-term economic health and stability. AIC is a step in the right direction, but the still relatively small size and weakness of Azerbaijan's non-energy sectors already are making it difficult for AIC to find viable projects. The AIC - like any other investor in Azerbaijan - also faces continuing, serious problems in the business climate, including transparency and rule-of-law. Moreover, without a strong and fully enforced Azerbaijani conflict of interest law, there is a danger that senior Azerbaijani officials -- who control AIC's decision-making structure and themselves hold significant business holdings -- could steer AIC funds to their own projects. DERSE