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