KOREAN COMPANIES FACE CHALLENGES IN AZERBAIJAN'S

C O N F I D E N T I A L BAKU 000496

SIPDIS

E.O. 12958: DECL: 06/02/2018
TAGS: ECON KCOR EFIN ETRD AJ
SUBJECT: KOREAN COMPANIES FACE CHALLENGES IN AZERBAIJAN'S
DIFFICULT BUSINESS ENVIRONMENT

Classified By: Pol/Econ Chief Joan Polaschik, Per Reasons 1.4 (B, D).


1. (C) SUMMARY: Although the press has reported that South
Korean companies are winning major construction and
transportation deals, the Baku-based Director of the Korean
Ministry of Construction and Transportation Yong Seog Kim
reports that Korean companies are facing problems in
concluding the deals. According to Kim, the GOAJ's lack of
experience and preference for oral, rather than written
agreements, has made it difficult to move beyond MOUs to
formal written contracts; the Korean companies also have
faced difficulties with their local partners. The recent
visit by the South Korean Prime Minister to Baku resulted in
only two deals: a contract for 1,000 Daewoo buses and a
contract for a new traffic management system. END SUMMARY.


2. (C) In a May 22 meeting, Director of the Ministry of
Construction and Transportation of Korea in Azerbaijan Yong
Seog Kim discussed the recent visit by the South Korean Prime
Minister to Azerbaijan and the multiple press announcements
regarding Korean companies winning construction projects.
Kim has offices at the Korean Embassy and in the Azerbaijani
Ministry of Transportation. He has been here since September
2006, and was assigned to Baku after President Aliyev visited
Seoul. His main priority is to identify infrastructure,
construction and transportation projects for Korean companies.


3. (C) According to Kim, Korean companies have identified the
construction and transport sectors as their key areas of
interest after determining that the oil and gas sector was
completely in the hands of Western companies. Kim stated
that Korean companies are not getting all the construction
deals in Azerbaijan, contrary to press reporting. Korean
companies, according to Kim, are fighting huge problems with
the GOAJ. Overall, Korean companies find doing business in
Azerbaijan much more difficult than in Uzbekistan, Kazakhstan
and Turkmenistan.


4. (C) Most of the press reporting is focused on MOUs signed
with Korean companies. Translating these MOUs into actual
contracts, according to Kim, is the biggest problem and
Korean companies are not always successful. Kim cited the
Alet port project MOU as an example as it has been pending a
contract since 2006. According to Kim, there are 15 major
Korean companies in Baku with offices and staff here ready to
sell projects, make contacts in the GOAJ and sign
MOUs/contracts. From discussions with other contacts, having
a local office in Baku is an important move if companies want
to be in on a deal at the ground floor.


5. (C) Kim said that the South Korean Prime Minister's visit
to Baku was "good" but only resulted in two deals: a contract
for 1,000 Daewoo buses and a contract for a new traffic
management system. Both these deals were hammered out in the
days and hours before the PM visited and the Minister of
Transportation was key to finalizing the deals. AzerSun and
a Korean company have also signed an MOU (not a contract) to
develop a large residential area with a golf course near the
airport. Kim, however, was not sure if the Korean company
will actually get the contract.


6. (C) Kim said that the huge Korean conglomerate GS
Construction had a large office here with many Korean expats
until it had falling-out with Gilan Construction, its primary
partner and reportedly Minister of Emergency Situations
Kamalladin Heydarov's company. Now GS Construction has now
scaled back its office significantly, including sending
Korean expat workers back to Korea. Based on its difficult
relationship with Gilan, GS has determined that it cannot do
much business here. GS Construction has the MOU for the new
port at Alet. Without Gilan's partnership, however, Kim
believes that GS will not sign a contract to build it. During
a separate meeting, a prominent MP and construction company
owner said that the Koreans were not going to build the port
and that local construction companies would get the deals.


7. (C) Kim said that the GOAJ and local companies do not
understand contracts, do not want to do contracts and prefer
to do deals with a handshake. During recent contract
negotiations, the Ministry of Transportation did not bring
any lawyers to the discussions, slowing down the entire
process and surprising the Koreans. According to Kim, Korean
companies want contracts that detail everything. The GOAJ,
in Kim's view, does not appear to understand or care about
this issue. A partner in a major Western law firm that
represents another Korean firm seeking to conclude major
infrastructure deals told us that his client is experiencing
similar difficulties.



8. (C) COMMENT: Since President Aliyev's September 2006 visit
to Seoul, press reporting has indicated that South Korean
companies were making big-ticket deals in sectors ranging
from transportation to powerplants. The Koreans' success was
widely believed to be due to political deals made during
Aliyev's visit and the rumored close links between Minister
of Emergency Situations Kamalladdin Heydarov and various
Korean firms. The difficulties faced by these presumably
well-connected Korean companies are indicative of the
difficulty of doing business outside the legal protection of
the energy sector's Production Sharing Agreements, and are
similar to the experiences of American companies. The Korean
companies have a slight advantage over other companies by
maintaining offices in Baku with employees on the ground
looking to land deals, yet they still face a long and
difficult struggles to conclude contracts. GOAJ officials,
including the Deputy Minister of Economic Development, have
told the Embassy that it is important for American companies
to have local offices in Azerbaijan, talking with ministries
and developing business leads. END COMMENT.
DERSE