Identifier
Created
Classification
Origin
08BAKU627
2008-07-02 12:03:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Baku
Cable title:  

BUSINESS LEADERS EXPERIENCE ONGOING CHALLENGES IN

Tags:  ECON ETRD EINV KCOR PREL AJ 
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DE RUEHKB #0627/01 1841203
ZNR UUUUU ZZH
R 021203Z JUL 08
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 5623
INFO RUEHAK/AMEMBASSY ANKARA 2896
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS BAKU 000627 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV KCOR PREL AJ
SUBJECT: BUSINESS LEADERS EXPERIENCE ONGOING CHALLENGES IN
AZERBAIJAN'S INVESTMENT CLIMATE

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION.

UNCLAS BAKU 000627

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV KCOR PREL AJ
SUBJECT: BUSINESS LEADERS EXPERIENCE ONGOING CHALLENGES IN
AZERBAIJAN'S INVESTMENT CLIMATE

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: Business and IFI leaders gave visiting
Special Representative for Economic and Business Affairs
Frank Mermoud an overview of increasing problems in
Azerbaijan's business climate, stating that in some
instances, corruption and monopolistic practices were on the
rise. They agreed that a new Presidential Business Council
(PBC) could open a dialogue between the President of
Azerbaijan and business leaders and lay a foundation for
improved transparency, a stronger economy, and increased
opportunities for American business. We have been discussing
this idea with Azerbaijani Government and business leaders,
and recommend the Department include this on the agenda for
our next Economic Partnership Commission meeting. End
summary.


2. (U) During a June 26-27 visit to Baku, Special
Representative for Economic and Business Affairs Frank
Mermoud met with representatives of several businesses,
business associations, and international inancial
institutions, including Coca-Cola Country Finance Director
Okan Gursan and Supply Chain Manager Rana Mammadova,
International Bank of Azerbaijan Chairman Jahangir Hajiyev,
World Bank Senior Operations Officer Saida Bagirli,
International Finance Corporation Country Officer Aliya
Azimova, EBRD Head Of Office Francis Delaey, AmCham President
Maksoud Mirzoyev, British Business Group (BBG) Treasurer Rod
Fraser. Most of these officials outlined ongoing problems in
Azerbaijan's business environment as well as possible
solutions.

--------------
COCA-COLA'S PROBLEMS
--------------


3. (SBU) Coca-Cola representatives provided the most
sobering picture of the business climate in Azerbaijan,
citing weak infrastructure, product counterfeiting,
institutional corruption, and monopolistic competition as the
greatest difficulties. Finance Director Okan Gursan said
that when Coca-Cola applied for a permit to expand its plant,
the Baku Architecture and Town Building Head Office
accepted payment of their 8,500 AZN permit fee but refused to
give a permit unless Coca-Cola paid a bribe of USD 100,000.
Gursan said Coca-Cola refused to pay the bribe and instead

continued to build without this permit. In May, Coca-Cola
wrote to Presidential Chief of Staff Remiz Mehdiyev to
complain, and in response received a refund of the 8,500 AZN
permit fee. Gursan said that when Coca-Cola representatives
asked about this, they were presented two back-dated letters
from the Architecture and Town-Building Head Office that
cited alleged construction plan flaws, and Gursan said that
was the first time Coca-Cola had heard of these alleged flaws.


4. (SBU) Gursan and Mammadova also cited difficulties in
bottle production. They said Coca-Cola had been importing
resin from South Korea for bottle production, but that these
imports were stopped by the State Customs Committee, and
shortly after, a man appeared offering to sell resin for what
he promised would be a lower price. Mammadova invited this
unnamed man to submit an offer letter, but the offer letter
he submitted made no mention of price. Mammadova said she
suspected this man planned to monopolize imports of resin and
resell them at a higher price to the Azerbaijani market. She
said Coca-Cola held firm and refused to purchase his resin at
his unnamed price, and after 28 days, their resin was
released from Customs, but they were forced to pay
approximately 2000 to 3000 AZN per day in handling charges.
Gursan said that although police had halted a counterfeit
cola operation in Ganja that was putting counterfeit product
into re-used Coca-Cola bottles, they suspected the problem
would reappear elsewhere.

--------------
IFIs' VIEWS
--------------


5. (SBU) International financial institutions (IFIs) painted
a similar picture of a business climate hostile to
non-government actors. IFC Country Officer Aliya Azimova
said that the share of non-oil GDP generated by the
government sector increased from 35% in 2004 to 81% in 2007,
and that the non-oil share of private investment fell from
13% to 7%. EBRD Head of Office Francis Delaey said he found
it curious that the Azerbaijani Government wanted to use only
concrete in road construction and not asphalt, and
said he suspected a well-placed concrete oligarch might be
behind this. He added that IFIs are generally seen as an

impediment by the GOAJ because of the standards they impose.
For example, he said the EBRD had been tasked with
re-financing AzerEnergy so as to impose financial discipline,
but that this decision had been made against the will of
AzerEnergy who were refusing to share financial documents
with the EBRD.


6. (SBU) EBRD's Delaey said that large-scale companies not
shielded from bureaucracy by Production-Sharing Agreements
(PSAs) were generally finding Azerbaijan to be a very
difficult business environment. As an example, he said that
LaFarge and Heidelberg Cement had wanted to come to
Azerbaijan but were not given access to quarries. Delaey
also said that large companies in Azerbaijan were forced to
split themselves into smaller sub-companies so as to stay
beneath the radar of the GOAJ. Delaey mentioned a real
estate firm that was managing a large building and had
divided itself into a painting company, an
elevator-maintenance company, and other such sub-companies.

--------------
BUSINESS GROUPS' MIXED VIEW
--------------


7. (SBU) Rod Fraser of the British Business Group and
Maksoud Mirzoyev of AmCham did not dispute that the business
climate in Azerbaijan was challenging, but Mirzoyev described
experiences with customs that were the opposite of
Coca-Cola's. Mirzoyev said that some companies that complain
about difficulties with customs agents were themselves being
dishonest by not showing customs agents full invoices for
goods they imported. Speaking in his capacity as Managing
Director of McDonald's Azerbaijan, Mirzoyev said "I never pay
bribes, I always show a full invoice, and I clear customs in
two hours!"

--------------
THE PRESIDENT'S BUSINESS COUNCIL
--------------


8. (SBU) In order to improve companies' efficiency within
the Azerbaijani business climate, Mermoud suggested that
companies advocate for the creation of a "President's
Business Council" (PBC). A PBC could include American
companies operating in Azerbaijan as well as local companies
and representatives from multinational companies operating
around the world. Mermoud said that, to be effective, the
new PBC should be solutions-based, not problems-based but
nevertheless have some sort of mechanism established to help
resolve issues that arise. Rather than providing a forum for
business leaders to vent grievances,
the PBC could be a forum where the President of Azerbaijan
would meet with business leaders about his vision for the
country and the role business could play in bringing that
vision to life. In time, Mermoud envisioned that such a
Council would slowly allow the President to learn more about
his country's business climate and the changes necessary in
government to allow business to grow. Business leaders such
as Maksoud of AmCham, Fraser of BBG, and Jahangir Hajiyev,
Chairman of the International Bank of Azerbaijan, expressed
keen interest in such a project, but all agreed that for the
PBC concept to be approved by the President, it must be
emphasized that he would have ownership of such a group and
would set its solutions-based agenda.


9. (SBU) Comment: Working with AmCham, we have been
promoting the idea of some sort of business advisory council
to the President or "Presidential Business Council" with
Azerbaijani government and business leaders. The next
session of the bilateral Economic Partnership Commission
(EPC) presents a good opportunity to secure GOAJ agreement to
this concept, and we recommend that the Department include
this idea in our proposed communique and list of deliverables
for the next EPC meeting. We will follow up
with EEB and EUR.


10. (U) Mermoud cleared this message.
DERSE