SCENESETTER FOR CODEL TIERNEY'S VISIT TO

UNCLAS SECTION 01 OF 03 BAKU 000822 SIPDIS SENSITIVE SIPDIS H PLEASE PASS TO REP. TIERNEY'S STAFF E.O. 12958: N/A TAGS: PREL PGOV ECON ENRG PBTS IR RU AJ SUBJECT: SCENESETTER FOR CODEL TIERNEY'S VISIT TO AZERBAIJAN, JULY 2-4 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. ¶1. (SBU) President Aliyev's April 28, 2006 meeting with President Bush laid the foundation for advancing U.S. interests through a strengthened bilateral relationship. Azerbaijan is a key partner to the U.S. because of its geopolitical situation, its status as a secular, democratizing, Muslim country, and its key role in ensuring alternative energy supplies. We hope that your visit will build on the momentum of President Aliyev's visit in the three key areas of our cooperation: security, energy, and promoting democracy through political and economic reform. REGIONAL ISSUES -------------- ¶2. (SBU) Azerbaijan's primary foreign policy goal is to preserve its sovereignty and independence. To help achieve this goal, the GOAJ since the mid-1990s has pursued a policy of integration with Euro-Atlantic structures. Azerbaijan is a member of NATO's Partnership for Peace Program, and is actively pursuing an Individual Partnership Action Plan (IPAP) that will increase Azerbaijan's NATO interoperability. Azerbaijan and the U.S. have robust cooperation in border control and counter-proliferation programs, including the Cooperative Threat Reduction Program. Since 2002, Azerbaijan has been a Member of the Council of Europe, and in October 2006 signed a far-reaching Action Plan as part of the EU's New Neighborhood Policy. Resolution of the Nagorno-Karabakh conflict figures prominently in Azerbaijan's foreign policy agenda, and the US continues to be actively involved in the OSCE Minsk Group's quest for a peaceful, negotiated settlement. ¶3. (SBU) Azerbaijan keeps a wary eye on its two powerful neighbors, Russia and Iran. Sparked in part by Russia's heavy-handed gas politics, Azerbaijan has recently veered from its traditional practice of not publicly acknowledging tensions in the bilateral relationship. President Aliyev and other GOAJ officials have publicly criticized Russia's behavior in gas negotiations and questioned the viability of the Commonwealth of Independent States as an organization. Azerbaijan declined to purchase Russian gas, at great expense; arrested and sentenced a Ministry of Defense employee for spying for Russia; protested a Russian law clamping down on foreigner involvement in Russian retail markets; and decided to halt Russian television broadcast as of July - all of which have increased tensions. Public tensions with Russia have eased considerably since the winter gas stand-off, and senior Azerbaijani officials have said that they welcome Russia's proposal to bring the Gabala radar station into a global missile defense system. ¶4. (SBU) Azerbaijan pursues a decidedly more low-key approach to its relations with Iran, balancing its pragmatic, daily needs (including trade, energy, and access to Azerbaijan's isolated Nakhchivan exclave) with its real differences with the Iranian government. Although Azerbaijan is careful not to criticize Iran publicly, it worries about Iran's claims to oil fields in the Caspian and efforts to export terrorism and its brand of political Islam throughout the world, including in Azerbaijan. The Iranian Government continues to send Azerbaijanis to Iran for religious studies, and Iran is widely believed to provide support for small, underground religious groups in Azerbaijan, support that is of concern to Azerbaijan's decidedly secular government. In line with its careful relationship with Iran, the Azerbaijani Government has declared its support for Iran's right to develop peaceful nuclear programs but has also pledged to implement UN Security Council Resolutions 1737 and 1747. Iran's large ethnic Azeri population -- estimated to be nearly one-quarter of Iran's total population -- further complicates relations between the two countries; both the Iranian and Azerbaijani governments are careful not to endorse any actions that could be seen as advocating "unification" of "northern" and "southern" Azerbaijan. Some Iranian-Azeri nationalist groups maintain offices in Baku. SECURITY: COOPERATION STRONG -------------- ¶5. (U) Azerbaijan is a strong partner in the Global War on Terror. In Iraq, 151 Azerbaijani (Muslim) infantry troops stand alongside U.S. Marines guarding the Haditha Dam. Azerbaijan is also contributing troops in Afghanistan - and has pledged to double its contingent - and peacekeepers in Kosovo. Azerbaijan provides blanket overflight rights for BAKU 00000822 002 OF 003 U.S. aircraft, which allows the U.S. to sustain critical strategic access to sustain our operations in OIF/OEF. Azerbaijan also provides strong information sharing and law enforcement cooperation in fighting terror. ¶6. (SBU) In May 2005, Azerbaijan agreed to an Individual Partnership Action Plan (IPAP) with NATO that has promoted good cooperation in a number of areas. The USG and NATO partners support Azerbaijan's efforts to advance IPAP implementation. In support of Azerbaijan's IPAP goal, the U.S. is working with the Ministry of Defense to make a military airfield "NATO compatible," which potentially could be used by NATO aircraft as a "gas and go" location for operations in Afghanistan. ENERGY: MOVING BEYOND BTC -------------- ¶7. (SBU) The Baku-Tbilisi-Ceyhan (BTC) First Oil ceremonies in Turkey in July 2006 highlighted the outstanding level of U.S.-Azerbaijani cooperation on energy issues and Azerbaijan's growing role as a regional energy producer and transit country. In June 2006, Azerbaijan and Kazakhstan signed an Intergovernmental Agreement (IGA),which will facilitate the delivery of Kazakh crude to global markets via the BTC pipeline. The completion of the South Caucus Pipeline lays the groundwork for gas exports to and through Turkey. Full development of the Shah Deniz gas field, access to "deep gas" in the ACG field, and a possible new Trans-Caspian Gas pipeline would allow still higher volumes of Caspian gas to reach international energy markets, further enhancing European energy security. On March 22, Secretary Rice and Foreign Minister Mammadyarov signed a Memorandum of Understanding on a Dialogue on Energy Security in the Caspian Region, an important public affirmation of our two countries' commitment to further development of the East-West energy corridor. ¶8. (SBU) At the start of this winter, Gazprom offered Azerbaijan a 2007 gas contract of 1.5 billion cubic meters at USD 235 per thousand cubic meters, vice the 2006 contract of 4.5 billion cubic meters at USD 110 per thousand cubic meters. The GOAJ saw this new offer as Russian pressure to prevent it from helping Georgia with its winter gas supply problems, and also as an effort to stop the export of Azerbaijani gas westward. The GOAJ is proud that it did not submit to what it perceived as Russian political pressure, choosing to supply gas to Georgia from its own reserves and to convert some of its own oil to heavy fuel for use in its electrical power plants, at considerable expense. MANAGING THE OIL BOOM -------------- ¶9. (U) With GDP growth of 36 percent, Azerbaijan has the fastest growing economy in the world, driven nearly entirely by an unprecedented inflow of energy revenue. The government's economic planning, and the country's judicial, regulatory and banking sectors are weak and ill-prepared to manage this enormous influx of revenue. Corruption is pervasive throughout Azerbaijan. Significant institutional reform and capacity-building will be required to manage the stable growth of Azerbaijan's economy and to prevent Azerbaijan from succumbing to the "oil curse" experienced by many other energy producers. The U.S. is providing technical assistance to help Azerbaijan manage this transition, with technical advisors in the Ministries of Tax and Finance, anti-corruption programs, rule of law programs and a program to help strengthen the GOAJ's consolidated budgeting process. The February 7 inaugural session of the U.S.-Azerbaijan Economic Partnership Commission (EPC) elevated the bilateral economic dialogue, and resulted in eight signed Memoranda of Understanding (MOUs) between the GOAJ and the USG in a range of sectors. Moreover, we believe the WTO accession process is the key vehicle through which we can promote GOAJ implementation of successful economic and political reform that will keep Azerbaijan's development on a stable path. REFORM: PROGRESS, SETBACKS AND OBSTACLES -------------- ¶10. (SBU) Parliamentary reform, media freedom, and freedom of assembly are key areas for further democratic reform. We have seen some positive signs that Speaker of Parliament Ogtay Asadov hopes to change the Parliament from a Soviet-era rubber stamp body to a more empowered institution. At the February 7 EPC, the GOAJ signed an MOU with the USG on a BAKU 00000822 003 OF 003 multi-million dollar parliamentary assistance project. This project will provide technical assistance to Parliament over the next few years. Azerbaijan's Members of Parliament (MPs) lack adequate training as well as many of the basic resources vital to their work: adequate office space, computers and Internet access, phone lines, and staff members - although the GOAJ's 2007 budget provides funding for one staff member per MP. Empowering MPs to do their jobs will encourage accountability between the MPs and their constituency, which will be vital to strengthen Parliament as an independent, transparent and democratic institution. ¶11. (U) The past year has seen a decline in media freedom and freedom of assembly in Azerbaijan. There have been three high-profile, physical assaults on opposition newspaper journalists by unidentified assailants. Separately, GOAJ officials have increasingly resorted to civil and criminal libel suits against opposition-affiliated journalists to silence criticism. In November 2006, the GOAJ temporarily suspended broadcast of Azerbaijan's most influential independent media conglomerate, ANS Television. In 2006 the GOAJ did not approve any applications from opposition parties to hold political rallies. In addition, the GOAJ often detained opposition members who attempted to hold unsanctioned rallies - sometimes preemptively. The GOAJ's decision to allow the opposition Musavat party to hold several protests in response to the January utilities price increases was a welcome step, and we continue to press for full restoration of the right to freedom of assembly. ¶12. (U) Your visit next week provides an excellent opportunity to advance the USG's agenda in Azerbaijan. We look forward to welcoming you. LU