C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000098

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DEPT FOR EUR/CARC; PLEASE PASS TO USTR

E.O. 12958: DECL: 01/19/2017
TAGS: PGOV PREL ECON ETRD ENRG EPET AJ
SUBJECT: AZERBAJAIN'S FOREIGN MINISTER DISCUSSES ECONOMIC
PARTNERSHIP COMMISSION AND ENERGY ISSUES

REF: BAKU 1721

Classified By: Ambassador Anne E. Derse for reasons 1.4 (b, d)


1. (C) This contains an action request; see paras 17 and 18.


2. (C) Summary: Foreign Minister Mammadyarov underscored to
the Ambassador on January 18 GOAJ interest in a formal
memorandum launching the February 7 Economic Partnership
Commission (EPC), echoing Finance Minister Sharifov's request
to the Ambassador last week. The Ambassador and Mammadyarov
discussed the results that can be advanced by the EPC,
including possible follow-on working groups on Azerbaijan's
long-term development strategy, managing Azerbaijan's energy
revenues, telecommunications, and agriculture. Mammadyarov
said Azerbaijan should pursue WTO accession, noting that,
importantly, Economic Development Minister Heydar Babayev is
fully supportive of WTO membership and will soon make a
presentation to the President and Cabinet on this matter.
Mammadyarov requested a new bilateral energy security
dialogue, also formalized through an MOU at the EPC, and to
be led by the Department and the MFA. (We strongly support
this request, and believe an energy MOU signing during the
EPC could advance our southern corridor goals.) Mammadyarov
also urged the USG to approach Turkish Energy Minister Hilmi
Guler and Turkish Prime Minister Tayyip Erdogan to encourage
progress on a gas transit agreement, and asked the USG to
support the GOAJ's efforts to launch trilateral political
security consultations among Azerbaijan, Georgia, and Turkey.
Recalling the USG's proposal to launch a discussion on the
responsible use of energy wealth for economic and social
development at the UNGA last fall and Azerbaijan's positive
record under the Extractive Industries Transparency
Initiative (EITI), Mammadyarov proposed a joint

USG-Azerbaijan effort, through a UN resolution, to initiate
an ongoing discussion on this matter under UN auspices with
other energy-rich developing states. End Summary.


3. (C) The Ambassador met with Foreign Minister Eldar
Mammadyarov January 18 to discuss several aspects of the
bilateral relationship. This cable reports their
conversation about the February 7 Economic Partnership
Commission (EPC) and bilateral energy dialogue. Other topics
covered including Iraq, Afghanistan/NATO, pol-mil
consultations, human rights and the New Embassy Compound will
be reported septels.

Legal Status of the EPC
--------------


4. (C) Mammadyarov said the GOAJ seeks to have a formal
memorandum launching the EPC in the context of the broader
strategic partnership between the USG and the GOAJ. Finance
Minister Sharifov had made the same request of the Ambassador
last week, pointing to the 2000 Memorandum concluded between
the Department and the GOAJ to launch the Joint Economic Task
Force (JETF). Sharifov said the GOAJ wants to update that
agreement to reflect the elevation of the assistance-focused
JETF to the EPC. Sharifov indicated the GOAJ would accept
the text the USG proposes, which could be a simple addendum
to the existing MOU, if that is easiest. Mammadyarov said he
has tasked Deputy Foreign Minister Khalaf Khalafov to
investigate options. The Ambassador said the USG will
further examine this issue, noting Sharifov's suggestion that
that the original 2000 agreement creating the US-Azerbaijan
Joint Economic Task Force (which covered assistance issues
and reform) could be revised or an addendum made to elevate
the body and broaden its focus to reflect the new economic
dialogue.

EPC Deliverables
--------------


5. (C) The Ambassador and Mammadyarov agreed that the EPC
must have concrete deliverables. The Ambassador observed
that the EPC should conclude with a joint statement to
reflect the launch of the EPC, its goals and next steps, and
concrete results of the first meeting. The statement would
be accompanied by the signing of several memorandums of
understanding, and be presented by the two co-chairs at a
press conference. Mammadyarov agreed. Mammadyarov said that
the GOAJ needs a list of USG participants so the GOAJ can
decide who should represent the GOAJ on particular issues.
(Note: Embassy has sent this list to the MFA.) The

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Ambassador stated the USG is still waiting to hear from
Finance Minister Samir Sharifov regarding the key issues that
the GOAJ would like to include in the EPC agenda. (Sharifov
told the Ambassador on January 20 that he has asked his
colleagues to provide their ideas and will share them with us
this week.)


6. (C) The Ambassador remarked that President Ilham Aliyev
has told us that he wants the EPC to have practical results
and not be a mere talk shop. The Ambassador said the USG is
working to follow up on Aliyev's request (ref) that the EPC
should create "a permanent working group," focused on
Azerbaijan's long-term development strategy and management of
Azerbaijan's energy revenue. The Ambassador and Mammadyarov
discussed the possibility for other EPC working groups
focused on implementing our new agreement on cooperation on
telecommunications, signed last fall, and exploring deeper
cooperation on agriculture.


7. (C) Pointing to the recent visit of the Agriculture
Counselor and her recent discussion with USDA in Washington,
the Ambassador said agriculture is a sector that should be
included within the EPC, given the importance of the sector
to the development of Azerbaijan's non-energy economy,
possibly through the launch of a working group to explore how
we can intensify cooperation. The USG would like to work
more closely with the GOAJ in the agricultural sector,
although there will be declining USG assistance funding for
this and other sectors. She noted that US assistance
increasingly will move toward a co-financing model,
particularly given Azerbaijan's large energy revenues. The
Ambassador added that the USG has expertise to share and can
develop concrete assistance projects if the GOAJ can help
finance them. Mammadyarov said he understood the USG's move
toward a cost-sharing assistance model.


8. (C) The Ambassador said that the USG wants to help the
GOAJ on WTO accession, but noted that it appears the GOAJ
remains internally divided about whether Azerbaijan should
pursue WTO membership. Mammadyarov acknowledged that some
within the GOAJ do not support WTO accession, but said
membership is "very important" and "we should join."
Mammadyarov also stated that it is in Azerbaijan's interest
to join the WTO before Russia and Ukraine.


9. (C) Mammadyarov said Economic Development Minister Heydar
Babayev is the GOAJ "focal point" for WTO issues, and it is
very important that Babayev is now fully "on board" in
support of Azerbaijan's WTO accession. Babayev's
predecessor, Farhad Aliyev, had been against WTO accession,
but Babayev is "more advanced in his vision," according to
Mammadyarov. (Head of the State Oil Fund Shamar Movsumov
also told the Ambassador that Babayev had been convinced of
the value of WTO accession after a presentation Movsumov
made, with the help of the macro-economic modeling unit
funded by BP, that showed that liberalization of the economy
would help relieve inflation stemming from high levels of
public investment needed to spur Azerbaijan's non-energy
sector development.) The Foreign Minister stated that
Babayev currently is working on a WTO presentation that will
soon be delivered to President Aliyev and the Cabinet of
Ministers. Mammadyarov said that Finance Minister Sharifov
also should be a key USG interlocutor concerning WTO issues
because Babayev and Sharifov are the major players on the
Azerbaijani budget. The Ambassador said that an EPC final
statement should contain language noting the GOAJ's
commitment to complete its legislative action plan for moving
forward with its WTO bid. The Ambassador said the USG
potentially could provide technical assistance on a
co-financing basis. Mammadyarov welcomed this assistance,
noted the GOAJ's willingness to co-finance a well-targeted
draft plan for aiding the GOAJ's WTO accession.

EITI Proposal
--------------


10. (C) Mammadyarov broached the idea of the USG and GOAJ
partnering to create discussion in the UN, through an UNGA
resolution, of the responsible use of energy revenues for
economic and social development through the Extractive
Industries Transparency Initiative (EITI). Mammadyarov said
such a resolution and effort could highlight Azerbaijan's
positive experience and example in EITI and develop a forum
to share it with other oil rich states. He recalled the

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GOAJ's support last fall for a USG effort to launch a
dialogue on responsible use of oil wealth for economic and
social development through a roundtable chaired by President
Bush on the margins of UNGA, and remarked that the
resolution's theme could be the "responsible management of
energy revenues for long-term development." Mammadyarov
added that the GOAJ is discussing this idea with other EITI
board members, noting that such an effort in the UN would not
be lost on Russia. The Ambassador agreed that Azerbaijan,s
positive performance on EITI provides an excellent example
but also noted questions about how much money is flowing into
the State Oil Company of Azerbaijan, as SOCAR's revenue is
not part of Azerbaijan,s EITI obligations.

Energy Dialogue
--------------


11. (C) Mammadyarov suggested the USG and GOAJ broaden their
energy dialogue and engage in joint efforts on the politics
and diplomacy of "energy security," in addition to
cooperation on technical issues and "energy supply" issues
covered under our 1997 energy dialogue MOU between the
Department of Energy and Ministry of Energy. With respect to
the latter, Mammadyarov noted Azerbaijan's interest in
intensified discussion of renewable energy. A new bilateral
"energy security" dialogue should focus on the political
dynamics of energy security, and be led by the MFA and
Department of State, Mammadyarov said. The Ambassador said
Assistant Secretary of State Dan Sullivan, working with
State's PDAS for South and Central Asia Steven Mann and
European Bureau DAS Matthew Bryza are key USG interlocutors
for "energy security" in the region.


12. (C) The Ambassador asked Mammadyarov about President
Aliyev's decision to have Mammadyarov serve as the lead GOAJ
interlocutor on energy issues. Mammadyarov explained that
the MFA is taking the lead on "energy diplomacy" because
President Aliyev and the GOAJ see energy security as a
political and international issue, not solely an economic and
technical matter. Mammadyarov noted that 2007-2008 could be
a crucial period for energy security. Commenting on regional
energy players, Mammadyarov said Kazakhstan "must be brought
in" on a commercial basis, while Turkmenistan needs to take
advantage of the opportunity. Mammadyarov noted that Iran
"is always a factor," and Russia's strategy toward Europe
underscores the political aspect of energy security issues.
Intensified USG and GOAJ cooperation in addressing these
issues will be key to achieving our shared goals in
establishing the southern energy corridor, he underscored.


13. (C) Mammadyarov said the USG and GOAJ should work out an
MOU to establish a new "energy security" dialogue, with the
Department of State and MFA in the lead. Mammadyarov said
the GOAJ considers it "very important" to establish this
dialogue, if possible, at the February EPC. The Ambassador
agreed and said she would raise this issue with Washington.
(Comment: The day after this meeting, Mammadyarov's op-ed on
energy security appeared in the European edition of the Wall
Street Journal, underscoring Azerbaijan's willingness to
publicly tackle sensitive energy security issues.)

Azerbaijan-Turkey Gas Transit Agreement
--------------


14. (C) The Ambassador and Mammadyarov agreed on the need
for Baku and Ankara to reach a gas transit agreement to send
the right signal to European markets. The Ambassador asked
Mammadyarov how the GOAJ seeks to move this process forward,
especially as Turkey's electoral season will start in April.
Mammadyarov said we "can build up a strategy to achieve" a
transit agreement, and can send a "clear message" to the
Ankara that "they must do it." Mammadyarov said a US-GOAJ
Energy Dialogue MOU would send a very strong message to the
Turks, whom he characterized as "very stubborn," encouraging
them to be more receptive to a transit agreement.
Mammadyarov suggested Russia's relations with Turkey are also
slowing plans for an Azerbaijani-Turkey gas transit
agreement. The Ambassador pressed Mammadyarov on whether an
agreement was feasible before April. Mammadyarov said that
he did not think a formal agreement was likely in this
timeframe, but perhaps an "unofficial understanding" could be
reached.


15. (C) In response to the Ambassador's question about how

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the USG can assist in bringing Azerbaijan and Turkey together
toward a transit agreement, Mammadyarov said the USG must
start with Turkish Energy Minister Hilmi Guler. Guler,
however would be a "major obstacle" to a transit agreement
because the Russians have convinced him that Turkey can be a
mini-GAZPROM like energy hub. For this reason, it would be
necessary to raise the matter directly with Turkish Prime
Minister Tayyip Erdogan. Foreign Minister Gul, Mammadyarov
said, would be on board with a transit agreement. (Comment:
We defer to Embassy Ankara on the best means to bring the
Turks on board, but note the need for the USG to reinforce
the message on the importance of a transit agreement directly
to PM Erdogan, over Guler's head, has been a consistent theme
in recent months from our GOAJ interlocutors, including
President Aliyev. End comment.)


16. (C) Mammadyarov also sought USG support for his effort
to establish trilateral political-security consultations
among Azerbaijan, Georgia, and Turkey. These three
countries' strategic projects (BTC, BTE, and the
Kars-Alkhalakhi-Baku railroad) form the natural foundation
for such consultations, said Mammadyarov. He explained that
security consultations should not be military-to-military
discussions, but be conducted at the broader, political
level. Mammadyarov remarked that the Turks are skittish
about his proposal, noting that Russia "hates Georgia" and
will seek to sabotage the establishment of such a forum.

Comment and Action Request
--------------


17. (C) We strongly support Mammadyarov,s request to sign
an MOU on cooperation on Energy Security during the EPC.
Such a document would parallel Azerbaijan's agreement with
the EU and would send a strong public signal of USG support
for the development of the southern corridor. We urge that
Washington prepare a draft we can share with the GOAJ as soon
as possible.


18. (C) We also seek Washington's guidance on Mammadyarov's
proposal that Azerbaijan and the US work together to initiate
a discussion in the UN on the responsible use of energy
wealth for economic and social development. Azerbaijan's
positive experience with EITI is widely recognized as a
model, and we recall that Azerbaijan was fully supportive of
our proposal to hold a roundtable with President Bush on this
issue last fall. We should capitalize on the GOAJ's interest
in showcasing its experience to advance our global goals on
this key issue.
DERSE