AZERBAIJAN: PUBLIC REACTION TO RECENT PRICE

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000089

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/19/2017
TAGS: ECON AMGT EAID EFIN ETRD EPET ENRG AFIN AJ
SUBJECT: AZERBAIJAN: PUBLIC REACTION TO RECENT PRICE
INCREASES MUTED DESPITE GOVERNMENT'S FAILURE TO WIN THE
PUBLIC RELATIONS BATTLE

REF: BAKU 39

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


1. (C) SUMMARY: The social and economic effects of the
recent surprise increases for fuel prices and utilities
tariffs (ref) continue to resonate throughout Azerbaijan.
Despite calls for public protests by opposition political
parties and local newspapers, there have been no organized
demonstrations (due in part because the GOAJ has denied
several parties' requests for demonstrations). Anecdotal
information gleaned from conversations with Azerbaijani
citizens hints that while most people are very unhappy with
the recent price increases and the topic is a subject of
daily conversation and grumbling, most are resigned that
nothing can be done. Azerbaijanis are also speculating why
this major decision was taken while President Aliyev was out
of the country on holiday. The real brunt of the utility
price increases, however, has yet to hit local residents. As
the local utilities start to bill customers for electricity,
water and sewage consumption, the attitudes of Azerbaijanis
could shift. The price increase has long been a pending IMF
and IFI policy prescription. The GOAJ, however, has failed
to implement several key policy initiatives, including
improving institutional governance to ensure the additional
revenue is not lost or wasted and preparing the macroeconomic
environment for increased inflationary pressure, before
realizing the decision. Azerbaijan political and economic
circles are abuzz with speculation about the price increases.
Some observers believe that President Aliyev was not
informed of the decision to raise prices and will revoke some
of the increases upon his return to Baku. Energy Minister
Natiq Aliyev had this fall told the Ambassador the President
had decided to take steps on subsidies, however. A key
consequence of the price increase will be the effect on
people living on a fixed income and others living below the
poverty line. END SUMMARY.

OVERALL REACTION MUTED
--------------


2. (SBU) Two weeks after price increases for gasoline,
diesel, natural gas, electricity, water, and sewage surprised
Azerbaijani citizens, the overall reaction has been muted
(REFTEL). Despite numerous calls for public protests by
opposition politicians, there have been no organized
demonstrations to protest the price increases. (The GOAJ
turned down Umid party's request for a January 13 rally and
has not yet ruled on applications from ANIP and Musavat for
rallies on January 20 and 26, respectively. Following the
violent break-up of a sanctioned opposition rally in November
2005, no opposition parties have tried to hold unauthorized
protests.) One youth activist, who attempted to organize an
on-line protest, was briefly detained and access to his
website, www.susmayaq.biz, remains blocked (septel).


3. (SBU) While the local press continues to denounce the
price increases (with some articles calling the day it was
implemented "Black Monday"),the general public appears to
have sullenly accepted the price increase, focused more on
coping with its impact. Days after the price increase, local
merchants, stores, and taxis had already raised prices on a
wide variety of goods. The fuel and utility price increase
may have acted as the trigger for other economic actors to
increase their prices.


4. (SBU) Anecdotal information gleaned from conversations
with Azerbaijani citizens hints that while most people are
very unhappy with the recent price increases and the topic is
a subject of daily conversation, most are resigned that
nothing can be done. In local newspapers, most people
interviewed complained that Azerbaijanis are already living
under difficult conditions and that the price increases have
exacerbated living conditions. Turan News Agency estimated
that the price increases will result in an additional USD
70-80 in monthly expenses for the average Azerbaijani family,
a significant burden in a country where average monthly
incomes hover around USD 100. The real brunt of the utility
price increases, however, has yet not hit local residents.
As the local utilities start to bill customers for
electricity, water and sewage consumption, the attitudes of
Azerbaijanis could shift drastically. Anecdotal information
also indicates that Baku traffic has not decreased due to the
gasoline and diesel price increases.

POOR MARKS FOR GOAJ ROLLOUT OF INCREASES
--------------

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5. (C) The announcement of the price increases occurred while
President Ilham Aliyev was out of the country on vacation and
official business, leading many to speculate about whether
the President was aware of the planned increase. Energy
Minister Natiq Aliyev had this fall told the Ambassador the
President had decided to take steps on subsidies, however.
One international economic observer opined that the State
Tariff Council probably deliberated the price increase
decision in complete secret in order to avoid leaks, thus
setting the stage for a surprise announcement and the
subsequent negative public reaction. The various government
officials who have publicly discussed the increases have
added to the general public's overall confusion regarding the
reasons behind the decision. Minister of Economic
Development Babayev, who is also the Tariff Council chairman,
held a press conference shortly after the increase and also
failed to quell criticism over the decision. In a January 17
interview, Babayev argued that prices were higher everywhere
in the world, and Azerbaijanis should not be surprised by the
price increases here. A Ministry of Finance contact
separately said that "people do not like prices increases but
will adjust."

LONG-TERM EFFECTS
--------------


6. (C) There are several different theories regarding the
timing of the price increases. This year there are no major
political events (i.e., elections) unlike in 2006, with
re-run parliamentary elections and 2008, with presidential
elections. The local IMF resident representative said that
he believed the price increase was tied to Azerbaijan's
unsuccessful natural gas negotiations with Gazprom and
Russia. He said that government authorities, after
determining that it would not have enough natural gas for the
entire winter, decided to curb demand and consumption of gas
and electricity by increasing prices. The increase in water
and sewage rates, he believed, was included in the overall
price increase as a secondary priority.


7. (C) The price increase has long been a pending IMF and IFI
policy prescription in order to allow the government to
achieve recovery costs and use the additional revenues for
social development programs. The IMF Res Rep noted, however,
that the GOAJ failed to implement several other key policy
initiatives, including improving institutional governance to
ensure the additional revenue is not lost or wasted and
preparing the macroeconomic environment for increased
inflationary pressure, before realizing the decision.
Without taking the necessary steps before increasing prices,
the GOAJ has risked damaging the economy or losing the fiscal
benefits from higher tariffs.


8. (C) The IMF also believes that the large public
expenditures and loose fiscal policy implemented by the GOAJ
in 2006 are now beginning to hit the economy, also adding to
the inflationary pressures. The IMF representative added
that the government's decision to raise prices has acted as a
"trigger" for other economic actors to raise prices. The
economy is moving along at full steam and the government has
increased the amount of money available to the markets. The
IMF estimates that 2007 inflation will approach 20 percent.
The National Bank continues to play an active role on the
foreign exchange market, restraining the appreciation of the
manat but enabling inflation to push higher.

COMMENT
--------------


9. (C) While some observers speculate that President Aliyev
was not informed of the decision to raise prices and will
revoke some of the increases upon his return to Baku, we find
that theory highly unlikely. Minister Babayev is one of the
President's closest confidants and would probably not risk
his position and take a decision without close consultation
with the President. Speculation regarding the possibility of
the President significantly "reversing" the Tariff Council's
decision would also appear to be unlikely. Despite dropping
the ball on the public relations front, the GOAJ is probably
expecting the whole price increase issue to diminish over
time and the memory of the increase fades.


10. (C) The price increase is likely to have a serious effect
on people living on fixed incomes and others living below the
poverty line. The GOAJ likely is aware of this problem and
may attempt to implement economic and social measures to

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alleviate the harm on these two vulnerable populations. With
revenue from the BTC pipeline flowing and the State Oil Fund
growing, senior GOAJ officials have said they are keenly
aware of people's rising expectations. Yet the GOAJ's
initial handling of the price increase indicates it may not
have the same understanding of the need to respond to and
manage these expectations. It also remains to be seen how
the poor handling of this pocketbook issue may change
Azerbaijanis' generally positive perceptions of their
President.
DERSE