PRESIDENT ALIYEV, COMMERCE DEPUTY SECRETARY

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001068

SIPDIS

PLEASE PASS COMMERCE DEPARTMENT - DANICA STARKS

E.O. 12958: DECL: 11/06/2018
TAGS: ECON ETRD EINV ENRG PREL PGOV AJ
SUBJECT: PRESIDENT ALIYEV, COMMERCE DEPUTY SECRETARY
DISCUSS ECONOMIC, ENERGY COOPERATION

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


1. (C) Summary: President Aliyev told Commerce Deputy
Secretary Sullivan October 28 that economic reform and
diversification would be among his top priorities in a second
term. The GOAJ, while facing lower oil prices and declining
revenues, will continue to promote the Azerbaijan Investment
Company as a leading vehicle for public investment,
particularly in infrastructure and agriculture, and press
forward with its ambitious State Investment Program. Foreign
investment, the President said, is welcome. The USG
recognizes this, Sullivan said, and will re-open an FCS
office in Baku. President Aliyev recognized WTO accession as
a vehicle for further economic diversification. On energy,
Aliyev reaffirmed Azerbaijan's commitment to supply Georgia
with natural gas, "even at a loss." Azerbaijan does not use
energy resources as a political tool, he said. Aliyev
complained of Turkey's intransigence on purchase, pricing and
transit issues, and said that Europe remains "passive." The
November 13-14 Baku Energy Summit must be about more than
Odessa-Brody. End Summary


2. (C) Deputy Secretary of Commerce John Sullivan met with
President Ilham Aliyev October 28 to discuss economic
cooperation, energy and Azerbaijan's business environment.
President Aliyev, whose second inauguration had just taken
place following the October 15 presidential election,
provided an overview of his administration's second term
priorities in terms of economic and social development.

Azerbaijan Investment Company to Lead Development
--------------


3. (C) President Aliyev stated that, aside from resolution of
Nagorno-Karabakh and regional security issues resulting from
the Russia-Georgia conflict, economic reform would be the top
priority in his second term. Azerbaijan's goal, he said,
would be to reduce dependency on oil and gas revenues by
developing non-energy sectors of the economy. To this end,
the Azerbaijan Investment Company will continue to be tapped
to accelerate development, and would be expected to out-spend
domestic and foreign investors. Nonetheless, the President
said, foreign investment would be welcomed, as Azerbaijan's
economy depends on technology transfer.


4. (C) President Aliyev expects expenditures of the
Azerbaijan Investment Fund in fiscal 2009 to reach USD 6
billion. Declines in oil prices, which have led to lower
than expected revenues, may cause the GOAJ to scale back
investment plans somewhat, "but not by much." Azerbaijan
needs roads, bridges, hospitals, sanitary services, schools,
irrigation, etc., the President reported. Azerbaijan's
financial sector, the President said, is underdeveloped, but
has great potential. Previous investments are already paying
off, he said. Sustainable development in non-energy sectors
is the goal, and U.S. companies are welcome to invest in
Azerbaijan.

FCS to Re-Open in Baku
--------------


5. (C) Deputy Secretary Sullivan told President Aliyev that
the U.S. Department of Commerce has committed to re-opening
its Foreign Commercial Service office in Baku. This step, he
said, is an indication of U.S. business interest in
Azerbaijan, as well as U.S. Government expectations of
continued economic growth in the country. Sullivan
simultaneously encouraged President Aliyev to develop a
Business Advisory Council, similar to the President's Export
Council in the United States, to advance economic reform and
stimulate further development. Aliyev noted that he had
considered such a formal group in Baku, but had not worked
out the proper structure. Aliyev said that his ongoing work
with the private sector had already yielded positive results,
including some improvements to the business climate that were
highlighted in the World Bank's Doing Business report.
Sullivan also praised the American Chamber of Commerce's
"White Paper" on economic reform, which embassy officers,
with AmCham's consent, passed to the GOAJ.


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WTO a Vehicle for Economic Diversification
--------------


6. (C) The Deputy Secretary noted Azerbaijan's recent
progress on WTO accession, which will be discussed with USTR
in Washington following the November 17 meeting of the
Economic Partnership Commission. President Aliyev said that
WTO membership is important, and would serve as a mechanism
to diversify the economy. The President said that his
advisors are studying economic models -- particularly those
related to resource-rich countries -- looking for successful
schemes, and also aiming to avoid mistakes. He noted
Azerbaijan's participation in EITI, calling the State Oil
Fund (SOFAZ) "a reflection of our successful policies." Some
neighboring countries, he said, have stability funds, but
transparency does not exist. In Russia, the parliament does
not provide adequate oversight and serious reports are not
published. In Kazakhstan and Turkmenistan, he said, matters
are worse.

Azerbaijan to Supply Georgia with Natural Gas
--------------


7. (C) Deputy Secretary Sullivan thanked President Aliyev for
Azerbaijan's immediate assistance to Georgia in the aftermath
of the August conflict with Russia. President Aliyev noted
that discussions were underway to provide Tbilisi with
natural gas during the winter season. Azerbaijan, he said,
had made a strategic decision to supply Georgia with gas,
even though the gas price for Georgia "is less than half the
world price." Azerbaijan realizes, however, that sharply
higher prices would "bankrupt Georgia," and therefore
Azerbaijan will continue "to lose money" in Georgia.
"Azerbaijan does not use energy resources as a political
tool," the President said. Regional energy philosophy,
Aliyev said, must encompass "balance between producers and
consumers; energy should never be an instrument of
aggression."

Turkey Still Intransigent on Energy Issues
--------------


8. (C) Continuing on energy, Aliyev said that Azerbaijan had
not experienced any further progress in negotiations with
Turkey. Ankara no longer wants to buy and re-sell
Azerbaijan's gas, he said, but the Turks still insist on
buying excessive volumes of Shah Deniz II gas. Moreover, a
transit agreement to facilitate exports to Europe remains
unsettled. Meanwhile, a pricing dispute over existing sales
of Shah Deniz I gas continues; six months have passed since
the April 15 deadline. Turkey currently pays $110/thousand
cubic meters and has offered an increase to $144/tcm. "This
is not worth discussing," the President said. At this point,
Azerbaijan has only two options: continue "worthless"
negotiations or seek arbitration.


9. (C) Aliyev said that he had met recently with BP
executives to discuss longer term options on natural gas
development and sales. Turkey is a common concern. "If
Ankara remains intransigent," the President said, "then
Russia has made an offer." Moscow asks, he said, why
Azerbaijan should "mess around with Turkey" and transit
issues when Russia is ready to pay market prices. The
President noted that he plans to travel to Turkey in early
November, and said he would engage his Turkish counterparts
directly on a solution. .


10. (C) President Aliyev said that relations with
Turkmenistan are improving. While in Ankara, he will
continue to press the Turks to purchase Turkmenistan's
natural gas at its Caspian border. Azerbaijan could then
begin efforts to connect production and transport points
offshore. Full-scale demarcation of the Caspian Sea, he
said, remains much more difficult. The Kyapaz-Serdar
offshore field is still in dispute, with Ashgabat demanding
100 percent ownership. Azerbaijan, meanwhile, is ready to
share, perhaps through a joint venture in which it would have
the minority stake. Overall, the President said, the K-S
field looks to be medium size, and therefore the larger
picture is not worth sacrificing by setting a hasty

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precedent. Azerbaijan would consider, though, a three-way
discussion with Turkmenistan and Turkey on natural gas sales.

Baku Energy Summit
--------------


11. (C) President Aliyev wants a broad energy discussion at
the November 13-14 Baku Energy Summit, with participation of
Nabucco partners and others in Europe. "We cannot just talk
about a tiny little project with an unclear future like
Odessa-Brody," the President said, referring to the ill-fated
Ukrainian pipeline. Europe has sent an unclear message on
energy cooperation, and remains passive. Some countries
within the EU are working simultaneously on Nabucco and South
Stream, he complained. Deputy Secretary Sullivan noted that
Azerbaijan continues to show important leadership on these
issues, and praised Azerbaijan for continuing to work with
Kazakhstan on oil transit. As oil production in the North
Caspian increases, Aliyev said, "it is natural for Kazakhstan
to look in this direction." For that reason, Azerbaijan and
Kazakhstan are investing rapidly in ports, terminals and
other facilities.


12. (C) Comment: Deputy Secretary Sullivan's meeting with
President Aliyev came ahead of the reappointment of
Azerbaijan's Prime Minister and Cabinet. In following days,
Minister of Economic Development Heydar Babayev, who many saw
as a leader of reform, was replaced by a senior Ministry of
Taxation technocrat, who is largely seen as an ally of the
omnipresent Minister of Emergency Situations and former
Customs chief, Kamaladin Heydarov. President Aliyev said
repeatedly to Deputy Secretary Sullivan that reform will be a
top priority in his second administration. The shake-up at
the Ministry of Economic Development may have implications on
that front. Ministry of Finance Samir Sharifov should be
able to shed additional light on Azerbaijan's reform efforts
in Washington at the November 17 Economic Partnership
Commission.


13. (U) Commerce Deputy Secretary Sullivan did not have a
chance to review this cable before departing Baku.
DERSE