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