RUMORS SWIRL OF MINISTER OF ECONOMIC DEVELOPMENT'S

C O N F I D E N T I A L BAKU 000070

SIPDIS

SIPDIS

DEPT FOR EEB, EUR/CARC

E.O. 12958: DECL: 01/28/2018
TAGS: ETDR ECON WTRO PINR PGOV KCOR PREL AJ
SUBJECT: RUMORS SWIRL OF MINISTER OF ECONOMIC DEVELOPMENT'S
LOOMING DOWNFALL

Classified By: AMB ANNE E. DERSE; REASONS 1.4 (b,d).


1. (C) SUMMARY: Since his 2005 appointment as Minister of
Economic Development, Heydar Babayev's political influence
and personal financial wealth have been growing. Many
attribute his appointment to his close personal relationship
with President Ilham Aliyev; the two studied in Kyiv and are
rumored "drinking buddies." After a career in international
banking and finance abroad, Babayev returned to Baku and his
family-owned ABU Holdings, one of Azerbaijan's largest
conglomerates. However, beginning with the closing of two of
Babayev's medical clinics in November 2007, rumors and media
reports have begun to speculate that Babayev is being
punished and sidelined. His absence from a January 11
Cabinet meeting added fuel to the speculations that Babayev
is on the outs and going to be dismissed. The unusual moves
by a GOAJ agency against a powerful minister's holdings may
be indicative of continuing struggles among Azerbaijan's
oligarchs, as the "old guard," associated with Heydar Aliyev,
continues to jostle with Ilham Aliyev's "new guard" of close
personal associates including Babayev. END SUMMARY.

Rumors of Trouble Start with Clinics
--------------


2. (C) The persistent rumors about Babayev's declining
political fortune have been picked up in the international
press, including the Economist's Intelligence Unit, which
reported that a large state-owned enterprise changed its
insurance provider and withdrew its business from Babayev's
ABU Holdings. The report from this well-respected source
raised questions about Babayev from at least one jittery
foreign investor that has regular dealings with Babayev's
Bank Standard, the largest private bank in Azerbaijan.
However, when asked about the report, the American
International Group (AIG) Country Manager said he had not
heard reports of a large corporate shift away from Babayev's
Standard Insurance company. In fact, in late 2007, both
government and opposition press reported that Azerbaijan's
largest cell phone service provider, Azercell, would shift
all its insurance needs to Babayev's Standard Insurance, with
opposition press alleging the company was forced to use
Babayev's company to avoid problems from the Ministry of
Economic Development (MED).


3. (C) A few local political analysts speculate that the
persistent rumors and press reports are a result of a
campaign launched by powerful Minister of Emergency
Situations (MES) Kamalladin Heydarov against Babayev. The
opposition press reported that Heydarov had attempted to
convince President Aliyev that Babayev was responsible for
unpopular price increases; the opposition newspapers also
claimed that President Aliyev had been informed that in 2007,
Babayev met with and sponsored some newspapers of opposition
leader Rasul Guliyev (Babayev's predecessor, jailed
ex-Minister of Economic Development Farhad Aliyev, still
faces coup-plotting charges due to his alleged support for
Guliyev.)


4. (C) Babayev's notable absence from a January 11 Cabinet
meeting, chaired by President Aliyev, further fueled rumors
of his imminent political demise. Embassy contacts report
that Babayev was out-of-town on a long-planned business trip.
Building on the recent spate of media reports about Babayev
having fallen out of favor with President Aliyev, many
political observers in Baku have questioned the timing of his
international trip and absence from the Cabinet meeting,
saying the meeting should have been postponed and/or Babayev
should have returned.

Trouble with Babayev's Clinics
--------------


5. (C) In November 2007, the Ministry of Health (MOH)
investigated and withdrew licenses from two ABU Clinics,
effectively closing them down. The investigation and
closings of the two clinics started rumors that Babayev was
being punished, hinting that the clinic closures were a sign
of bigger problems to come. One newspaper speculated that
Babayev's large 50th birthday celebration had upset President
Aliyev with its lavishness, especially when Babayev referred
to his wife as the one person who helped get him where he is
today. During a Cabinet meeting in late 2007, Aliyev
reportedly decried the lavish lifestyle of some of
Azerbaijan's elite, a comment the media interpreted as a dig
at Babayev. Other media suggested that the clinic closures

were linked to First Lady Mehriban Aliyeva's family since
Health Minister Shiraliyev is distantly related to her.
There are some who think it is a first step on the part of
First Lady Aliyeva's family - the increasingly active
Pashayev family - to take over the health sector. On January
23, one opposition newspaper reported that the ABU Clinics
have already been turned over to the Heydar Aliyev Foundation
controlled by the First Lady.


6. (C) MOH's Head of International Relations Abdullayev said
the temporary closing of the clinics was due to their
inability to meet the MOH's health standards. Abdullayev
said that after a MOH quality assurance inspection, performed
randomly on both public and private clinics, the MOH
discovered that ABU Clinic's doctors were performing
procedures without licenses, did not have work contracts and
permits, and there were biohazard violations at the clinics.
He said the MOH could reinstate the two clinics' licenses
when the clinics could demonstrate health code compliance;
however, as of January 23, the clinics are still closed.

Babayev's Rise in Government
--------------


7. (C) The Ministry of Economic Development is the linchpin
in the GOAJ's development efforts as the primary point of
contact for economic policy, foreign and local investment,
the GOAJ's efforts to accede to the World Trade Organization
(WTO),and business climate and investment issues in the
non-oil sector. Since being promoted from his previous
position as the Head of the State Securities Committee and
appointed MED Minister in 2005, Heydar Babayev's political
influence has been growing. Babayev's increasing power and
access to President Aliyev have resulted in an expansion of
the MED's role, and its involvement in nearly all economic
and business activities throughout the last two years. For
example, with Babayev's arrival, the MED took on a leading
role in agricultural development through its control of
agricultural credits to farmers. The MED also seems to be
moving in on the Ministry of Communications and Information
Technology's long-standing plans to create a Regional
Innovation Zone (RIZ),which Minister Abbasov now says most
likely will be closely tied to the Babayev's efforts to
create Special Economic Zones under the authority of the MED.


8. (C) In spite of a political agenda more closely linked to
his financial future than any political ambitions, over the
past year Babayev has also actively raised his and the MED's
international profile with his participation in sensitive
decisions on Azerbaijan's international future. In energy
policy discussions with Italy and Greece, Babayev
unexpectedly played a role as the President's representative.
While he likely was assigned these duties due to the fact
that his counterparts in Italy and Greece were the GOAJ's
negotiating partners, it is notable that Babayev has taken on
an international role outside the MED's previous sphere of
influence.


9. (C) Using his position and access to President Aliyev,
Babayev appears to have played a key role in Aliyev's
decision to accelerate Azerbaijan's WTO accession process and
to establish an Azerbaijani WTO Commission with Babayev as
Chairman. Babayev's assignment was a break from the past and
removed the Ministry of Foreign Affairs from its previous
role as Azerbaijan's original WTO champion. While Babayev's
appointment represents a key victory, he continues to face
significant resistance from other GOAJ officials who are less
receptive to WTO accession, slowing the GOAJ's progress.


10. (C) Babayev also extended his influence through the
MED-controlled AzPromo, a public-private initiative to
increase foreign investment in Azerbaijan, and Azerbaijan
Investment Company (AIC),a state-owned joint stock company
established in March 2006. In fact, Babayev has told
visiting USG officials in 2007 that AIC would be a good
partner for U.S. businesses as it would "guarantee"
investment. AIC's investment records to-date indicates that
it has steered GOAJ funds to companies in which senior GOAJ
officials are believed to have significant shares, such as
Azersun. Through his chairmanship of these two entities,
Babayev controls large sums of money and linkages with
potential non-oil sector investors. He also travels
extensively abroad for meetings with counterparts, to head
investment conferences, and to support President Aliyev's
travels.

Babayev's Connections
--------------


11. (C) Babayev's rise as Minister of Economic Development
appears to be linked to his close personal relationship with
President Ilham Aliyev. He and Aliyev studied together in
Kyiv (along with Foreign Minister Mammadyarov, Minister of
Finance Sharifov, and Minister of Communications and
Information Technologies Abbasov),and Babayev is rumored to
be one of President Aliyev's closest "drinking buddies."
Having lived, worked, and built close connections in Moscow
and London, Babayev's background in international banking and
finance has led to his reputation as one of Azerbaijan's
leading oligarchs.


12. (C) In Azerbaijan, rising political power equates to
increasing personal financial wealth, as the country's most
powerful ministers and political players also control large,
privately held corporations, often in the same areas they are
responsible for regulating. Like Babayev's MED, his personal
financial holdings are diverse. As owner of family-owned ABU
Holdings, one of Azerbaijan's largest conglomerates, Babayev
is involved in banking, retail petroleum, health care
facilities, insurance and securities, food processing,
construction, entertainment facilities, tobacco and wine,
advertising, shopping malls, and the lottery.

Comment
--------------


13. (C) Rumors of Babayev's political downfall have stemmed
almost exclusively from opposition newspapers, notorious for
their gleeful publication of anything and everything that
could be negative to the ruling party's interests. Given the
massive scope and variety of ABU Holding's business
activities, we believe that the closing of two clinics and
reported loss of one insurance contract, for which the
Azercell insurance contract would have more than compensated,
do not in and of themselves indicate Babayev's imminent
political demise.


14. (C) That said, it is unusual for a GOAJ agency to take
steps against business interests associated with key
political players such as Babayev. Recent moves against ABU
Holdings could be signs of internal struggles for business
control as other powerful elites - notably Kamalladin
Heydarov (ATA Holdings) and the Pashayev (Pasha Holdings)
clan, family of the first lady - muscle their way into new
sectors. Some speculate that Pasha Holdings is taking over
parts of other big businesses, and that businesses like ATA
Holdings are "voluntarily" giving up pieces of the pie;
Babayev may not have voluntarily ceded parts of his business
and received a warning for it. One clinic employee suggested
that that the ABU Clinic closure's had nothing to do with
Babayev's political standing but instead resulted from
another powerful GOAJ official or his family personally
having a bad experience at one of the clinics and demanding
retribution.


15. (C) Since the downfall of Farhad Aliyev and Ali Insanov,
there has been a slow and steady shift in Azerbaijan's power
calculus from the clan politics that dominated Heydar
Aliyev's rule, to a new, Baku-based elite that appears to be
centered around Ilham Aliyev's personal relationships,
including the Pashayev family. Conventional wisdom has held
that the "old guard" associated with Heydar Aliyev, including
heavyweights Ramiz Mehdiyev and Ramil Usubbov, have been
jostling for power and influence with Ilham Aliyev's close
personal associates, including Minister of National Security
Mahmudov and MED Babayev. Given the old guard's use of the
media to attack their rivals, persistent rumors of Babayev's
looming downfall likely are just another example of
Azerbaijan's shifting power politics. In our view, the real
question is where the Pashayev family fits into the equation,
as the family along with MES's Heydarov are emerging as a new
force among the oligarchs. Babayev's relationship with the
Pashayevs remains unclear.
DERSE