MINISTER SHARIFOV DISCUSSES EPC, BUDGET AND ECONOMY

C O N F I D E N T I A L BAKU 001083


EEB FOR A/S DANIEL S. SULLIVAN
EEB/CBA FOR FRANK MERMOUD, TIM GILMAN

E.O. 12958: DECL: 11/11/2018
TAGS: ECON EFIN EINV EIND PGOV AJ
SUBJECT: MINISTER SHARIFOV DISCUSSES EPC, BUDGET AND ECONOMY

Classified By: Political-Economic Counselor Robert Garverick,
Reasons 1.4.(b) (d)


1. (C) Summary: Azerbaijan Minister of Finance Sharifov
heads to Washington next week for EPC meetings and WTO
discussions with views on the international financial crisis
-- and lower oil prices -- formed in part by Russian Minister
of Finance Kudrin, who recently hosted a CIS financial
summit. Sharifov this week is focused on budget discussions
at parliament, which is reviewing the GOAJ's proposed 2009
revenue and expenditure forecasts. Azerbaijan's State Oil
Fund, while no longer receiving the windfall inflows of
summer, will still directly transfer USD 7 billion to the
federal government next year. Azerbaijan does not have large
exposure to foreign currency-denominated debt, but worries
that revenues (from oil sales) and state reserves are dollar
denominated. The Minister was downbeat on economic prospects
for Turkey, Ukraine, Central Europe and Kazakhstan. End
Summary


2. (C) Embassy Officers met November 8 with Azerbaijan
Minister of Finance Samir Sharifov to discuss preparations
for the November 17 meeting in Washington of the Economic
Partnership Commission (EPC),and subsequent meetings on WTO
accession at the Office of the U.S Trade Representative.
Azerbaijan's Finance Minister outlined current thoughts on
the country's macroeconomic situation and FY2009 budget
process, with constant reference to the ongoing international
financial crisis. The Minister noted repeatedly a strong
interest, within the scope of EPC or otherwise, in receiving
an overview of U.S. Treasury plans to address the global
credit crunch, and to receive a read-out of President Bush's
November 15 G-20 Summit.

2009 Federal Budget under Discussion
-------------- -

3. (C) Minister Sharifov expected to spend the entire week
before EPC in front of Parliament discussing the government's
proposals for the 2009 federal budget. The GOAJ is
estimating 2009 government revenues at 12.177 billion AZN
(USD 15 billion),or 28 percent of projected GDP. This
forecast represents an increase of 16 percent over 2008
revenues. The draft government budget calculates 2009
expenditures at 12.355 billion AZN (USD 15.253 billion),
leaving a deficit of approximately USD 250 million.
Government expenditures, Sharifov said, would thus increase
11.7 percent over 2008 levels. According to press reports,
the State Oil Fund (SOFAZ) will transfer 5.676 billion AZN
(USD 7 billion) to the federal budget in 2009.

Lower Oil Price, Financial Crisis Have Impact
-------------- --------------

4. (C) The Minister stated emphatically that lower oil prices
do not threaten budget revenues, as the government will
continue to set a benchmark of USD 70 per barrel, and assumes
that the value of the U.S. dollar vis-a-vis a market basket
of currencies will be stable. (Note: during the banner days
of summer, the GOAJ considered raising this estimate to USD
80 per barrel, as oil reached USD 140-145 per barrel in
global markets. That proposal was rolled back this fall,
without being implemented. End Note) Declining revenue from
oil sales, Sharifov said, rather has an impact on transfers
to the State Oil Fund, which received windfall inflows
earlier this year. (Note: SOFAZ transfer a proportion of its
revenues directly to the federal government; excess amounts
are managed within the framework of Azerbaijan's Extractive
Industries Transparency Initiative undertakings. End Note)


5. (C) Minister Sharifov reported that Azerbaijan's total
government reserves, including funds held by SOFAZ, now
exceed USD 18 billion. Total foreign debt held by the GOAJ
or Azerbaijani entities, meanwhile, totals USD 7.5 billion.
Thus, he said, Azerbaijan's macroeconomic situation is strong
and its currency is stable. Moreover, Azerbaijan's budget is
mostly funded internally, and is not dependent on foreign
loans, "as in Hungary or Turkey."


6. (C) Azerbaijan's banks have limited exposure to
international financial markets. Many banks are capitalized
internally, although several have reached out to foreign
markets for funding to broaden their resource base and
leverage financing. In total, Azerbaijan's banks owe USD 2
billion in foreign currency-denominated debt. This is less,
the Minister said, than the total proposed increase in
spending in the 2009 federal budget.

Minister in Moscow for Financial Summit
-------------- --------------

7. (C) Sharifov noted that he had recently traveled to Moscow
for a CIS financial summit. There, Russian Finance Minister
Kudrin had presented Russia's views on the international
financial crisis -- views that mainly hold the U.S. to blame.
Sharifov said that the USG has a responsibility to lead
efforts to restore confidence in markets, bolster its
banking/financial sector and protect the value of the U.S.
dollar (in which oil contracts are concluded). (Note:
Sharifov said that in a side conversation, Russian Finance
Minister Kudrin had told him that the biggest economic
mistake that Russia had made was its decision to agree to
sell oil and gas in dollar-denominated contracts. End Note)


8. (C) Sharifov, meanwhile, was extremely negative about
Ukraine and Kazakhstan, alleging that the later, despite
large oil revenues, was suffering from heavy exposure to
foreign currency-denominated debt and a lack of transparency
in its state oil fund. Ukraine, Sharifov said, had made an
error in deciding to refund the savings that citizens lost
during the bank failures at the time of the demise of the
USSR. Azerbaijan would not agree to do this, as the
Government of Ukraine's decision had led to a confidence
crisis and "bank run."


9. (C) Comment: In Washington, Sharifov will be a good
interlocutor at the EPC. He is knowledgeable and well spoken
and, coming directly from parliamentary hearings on the 2009
federal budget, will be up to date on macroeconomic activity.
At the same time, he is likely to convey points from the CIS
financial summit, and call for the USG to take concrete steps
to preserve the value of the dollar and steady global equity
and bonds markets. A high-level outbrief on the November 15
G-20 Summit would likely do much to assuage Azerbaijan's
fears of financial instability and let Baku feel that it has
a seat at the table for important talks in Washington, as
well as Moscow.

DERSE