WORLD BANK TO NAME AZERBAIJAN NUMBER ONE REFORMER

C O N F I D E N T I A L BAKU 000845

SIPDIS

TREASURY PLEASE PASS OPIC, EXIMBANK

E.O. 12958: DECL: 09/09/2018
TAGS: ECON ETRD EINV EFIN EAGR ECIN AJ
SUBJECT: WORLD BANK TO NAME AZERBAIJAN NUMBER ONE REFORMER
WORLDWIDE

Classified By: Deputy Chief of Mission Donald Lu, for reasons 1.4 (b,d)
.


1. (C) SUMMARY: Echoing comments relayed by GOAJ officials
and other observers in Baku, World Bank officials told
Ambassador recently that Russia's real target in Georgia was
Azerbaijan's oil and gas assets. Even outside the energy
sector, the conflict has had a negative impact on
Azerbaijan's economy, and has caused Azerbaijan to
re-evaluate economic policy. Reforms, led by younger
government officials, have gotten a boost. World Bank
Country Manager Gregory Jedrzejczak stated that Azerbaijan,
based on a wide range of areas and sectors evaluated in the
Bank's annual "Doing Business" report, would soon be named
the "number one" economic reformer worldwide, and would jump
fifty places, a feat no country has ever achieved. This
report is due to be released September 10. End Summary.


2. (C) On September 5, 2008, the Ambassador met Christos
Kostopoulos, Senior Country Economist for Azerbaijan at the
World Bank's Washington headquarters, and Gregory
Jedrzejczak, the World Bank's Country Manager for Azerbaijan.
The two officials offered views on regional economic
implications of the Russia-Georgia conflict and a frank
assessment of Azerbaijan and efforts in Baku to reform the
economy. Given that their Azerbaijan-specific comments
alluded to a still-embargoed World Bank report, they asked
that they not be made public until after September 10.

Russia's Real Aim -- Azerbaijan
--------------


3. (C) With regard to the ongoing Russian-Georgian conflict,
Jedrzejczak said that the Russians' major objective is
Azerbaijan's oil and gas, and that transit routes through
Georgia were the main thrust for Moscow's military
intervention. Jedrzejczak said he expected the Russians
would soon return to Baku with another offer to purchase
Azerbaijan's oil and gas. He described the Russian attitude
in this region as being business-oriented in the sense of an
old Hollywood Western: "Nothing personal, I just have to kill
you." He added that "nobody here is being sentimental except
Saakashvili." Jedrzejczak said that he believed the
"technical problems" experienced by the Baku-Tbilisi-Ceyhan
(BTC) pipeline were in fact "the first shots in the war," and
described Russia's recent moves to defend its monopoly
position in energy pipelines as "the first act in the play."

Azerbaijan's Costs of War
--------------


4. (C) Kostopoulos said that, as a result of Russia's
regional assertiveness, there is an increased awareness
throughout the GOAJ of heightened geopolitical risk, and that
this is entering every calculation the GOAJ is making. As a
result, he said, the GOAJ is showing increased interest in
economic reforms. This may be necessary, as Azerbaijan's
business community, even outside the energy sector, has been
affected. In a survey of five merchants at a Baku bazaar,
Kostopoulos saidthat three of them were still bringing their
impots through Georgia, as they had before, one has deided
to permanently change his routing to come through Iran, and a
fifth is experimenting with the Iran route for the next four
to six months. Kostopoulos said that these merchants do not
expect to see any change in demand or retail prices, and they
expect those merchants who route through Iran would have to
absorb the additional (roughly double) transportation costs
themselves. Kostopoulos also said that Armenia suffered far
more than Azerbaijan did with the loss of transport links
through Georgia.

Azerbaijan Number One Reformer
--------------


5. (C) Jedrzejczak said that the World Bank's "Doing
Business Report" was still embargoed, but that Azerbaijan
scored surprisingly well. He said that Azerbaijan showed
reforms in seven of the ten areas mentioned, and he added
that because the World Bank looks at how many areas are
reformed, Azerbaijan would be ranked as the "number one
reformer worldwide." He said that there was improvement in
investor protections, property rights, and taxation, but that
"trading across borders," a category that includes customs,
did not see reform. He added that reforms on construction
licensing were well-prepared by the GOAJ but had languished
for over a year and have still not received President

Aliyev's signature.


6. (C) Jedrzejczak suggested that the GOAJ focused on the
World Bank's scoring and targeted those areas in which it
could make the greatest improvement. For example, he said
that the process of registering a business had shown great
improvement. Still, he noted, opening a business in
Azerbaijan remains difficult because of difficulties in
obtaining construction permits. He said that when the GOAJ
"really wants to do something it can, but on construction
permit reforms, it's probably lip service."


7. (C) Jedrzejczak said that inflation remains high. The
final year-end number will "run around thirty percent," he
said, but added this would depend on the implementation of
the budget. He said that prices of construction imports were
rising even faster than inflation, and that the GOAJ budget,
which will go to Parliament September 15, was being revised
to reflect these new costs.

Generational Change Drives Reform
--------------


8. (C) Kostopoulos described the reform occurring throughout
the GOAJ as being a generational change. He said that "young
technocrats," generally aged 35-40 and well-educated, were
re-examining the ways of the older ex-Soviet bureaucrats. He
added that three strong voices were supporting the
institution-building process: the Ministry of Economic
Development, the State Oil Fund, and the National Bank.
Kostopoulos said the GOAJ is recognizing that "public
investments need to pay off" and "they need to constantly
focus on reforms" so that ordinary citizens can see the
benefits of Azerbaijan's oil wealth.


9. (C) COMMENT: For Azerbaijan to show progress in the
World Bank's "Doing Business" report is not surprising given
the attention the GOAJ has paid to this process. Still, for
Azerbaijan to be ranked the "number one reformer worldwide"
will indeed be a surprise to many. The World Bank report may
well bear out the view that quiet economic reforms happening
below the radar are indeed significant. Embassy Baku will
carefully examine this report once it is published and
provide additional analysis. End comment.
DERSE