BUSINESS LEADERS EXPERIENCE ONGOING CHALLENGES IN

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