DEPARTMENT OF COMMERCE DAS DYCK VISITS U.S.

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000963

SIPDIS

FOR U.S. DEPARTMENT OF COMMERCE - DAS PAUL DYCK

E.O. 12958: DECL: 10/09/2018
TAGS: ECON ETRD EINV EFIN EAGR ECIN BBSR BEXP BMGT
AJ
SUBJECT: DEPARTMENT OF COMMERCE DAS DYCK VISITS U.S.
COMPANIES IN AZERBAIJAN AND ANNOUNCES RE-OPENING OF FCS
OFFICE

REF: A. A. BAKU 863

B. B. BAKU 649

C. C. 593

BAKU 00000963 001.2 OF 004


Classified By: Ambassador Anne E. Derse for reasons 1.4 (b,d).


1. (U) SUMMARY: In his September 25-28 visit to
Azerbaijan, Department of Commerce DAS Paul Dyck met with
GOAJ officials and representatives of several U.S.-based
companies, and toured business facilities in Azerbaijan.
Business leaders complained of corruption and inefficiencies,
despite gains Azerbaijan made in the World Bank's "Doing
Business 2009" report. GOAJ officials highlighted rapid
economic growth and reforms, and pointed to key non-energy
sectors of growth, including telecommunications and
environmental remediation. To highlight the USG's commitment
to strengthening commercial relations with Azerbaijan and
reflect the growing economic relationship between the U.S.
and Azerbaijan, he officially announced the re-opening of the
Foreign Commercial Service office in Baku at a luncheon with
the American Chamber of Commerce. The move was widely
praised by business representatives and GOAJ officials alike.
See Action Request in para 14. End Summary.


2. (U) Department of Commerce DAS Paul Dyck began his
September 25-28 visit to Azerbaijan by having separate
roundtable discussions with U.S.-based IT and telecoms
companies, International Financial Institutions (IFIs),and
U.S. based non-energy companies to discuss the overall
business environment in Azerbaijan. He also met privately
with representatives of U.S. based companies, including Gagaj
Corporation, a consumer products manufacturing firm, and
Cisco, an internet network services firm, to discuss on-going
issues with the GOAJ which have impeded their progress. DAS
Dyck met with GOAJ officials from the Ministries of Industry
and Energy, Communications and Information Technology,
Finance, and Economic Development as well as the State Oil
Company of the Azerbaijan Republic (SOCAR).

Private Industry Meetings
--------------


3. (U) During a frank discussion of the effect of recent
reform initiatives and rankings, such as those highlighted in
the recent World Bank "Doing Business 2009" report (Ref A),
at luncheon meeting with representatives from IFIs, DAS Dyck
noted the increased value of commercial relations and stated
that much had changed since his last visit in 2007.
Participants included World Bank Country Manager Gregory
Jedrzejczak, IMF Resident Representative Kobe Gvetenadze,
EBRD Head of Office Francis Delaey, and IFC's Country Officer
Aliya Azimova.


4. (C) Jedrzejczak opined that while diversification from
oil and gas was desirable, it would not make a big difference
in the structure of Azerbaijan's overall GDP. He also noted
that the current international market turmoil provided a good
opportunity for Azerbaijan to acquire diversifying assets on
the cheap, but that more maturity was needed in planning how
to spend the money and planning the economy for the future.
Gvetenadze recommended the best way for the GOAJ to continue
its progress on economic reforms would be to close its
Customs Service, reflecting the "Trading Across Borders"
criterion of the "Doing Business" Report in which Azerbaijan
scored 174 out of 181 economies, in marked contrast to its
great progress in other areas. Other topics of discussion
included the hope that the "Doing Business" report would spur
on other sectors, such as the Customs Service, to begin to
implement reforms and concern that Azerbaijan could "miss its
chance" to become a developed vice developing country if it
did not act quickly to implement policies to create an
investment climate which is "predictable" with regulations
which are "enforceable" and support a "level playing field."
The group noted with surprise that the Customs Committee, in
the embarrassing wake of the Doing Business report, has
already issued a statement that it, too, will implement a
"one window" concept for customs clearance (USAID is
following up).


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IFC and World Bank reps reported that Azerbaijan had taken a
focused and "intelligent" approach to improving its Doing
Business rating, seeking their advice on what lay behind the
methodology of the ranking and pinpointing the reforms that
needed to be made to improve it. The result was spectacularly
successful. They added that some GOAJ officials had already
approached them with questions about how to take the same
approach with the Transparency International rating.


5. (C) In a roundtable with business leaders, DAS Dyck was
told that "monopolistic groups" have divided the economy
amongst themselves and colluded with government actors to
make things difficult for new entrants to the market. As an
example, the local American International Group (AIG)
manager, Viladi Maniyev explained that each of these groups
has its own insurance company and therefore AIG is only able
to profitably engage in the reinsurance market. An American
lawyer with ten years' experience in Azerbaijan said that
when one of his clients complained that he was being asked
for a $20,000 bribe during an audit of his company, even
though his company had complied with all tax laws, the
auditor said "We know you've paid all your taxes - that's why
we're only asking you for $20,000!" Others spoke of the
frequency with which the GOAJ still awards contracts without
an open tender process, such as a recent passport production
contract that was awarded to a French firm without any tender
announcement cited by 3M.


6. (C) When asked their thoughts on WTO accession for
Azerbaijan, all the business leaders agreed it would be
important. Oguz Aldemir, director of the local Coca-Cola
bottler, said that "transparency would come" if Azerbaijan
had to abide by WTO regulations, but added that the growth of
the Azerbaijani market was still too good to resist: "the
consumer market here has doubled in three years' time . . .
you don't get growth like this anywhere (else) in the world."

STATE PROPERTY COMMITTEE
--------------


7. (C) In a meeting with the State Property Committee (SPC),
DAS Dyck brought up the land dispute the Committee has with
Gagaj Corporation. Gagaj purchased a factory through a state
privatization program in 1998 but was not given the
underlying land. Recently, Gagaj has been warned that unless
it purchases the land, which it has been trying to acquire
the rights to since 2003, the land could be sold to another
party, thus putting Gagaj in a perilous legal situation.
Gagaj says they were told that the SPC would refuse to sell
this land at the official, nominal price unless they were
paid a large bribe. In response to his inquiry, SPC
representatives informed DAS Dyck that the Committee had
submitted new zoning rules to the Cabinet of Ministers, and
that once those new rules were approved, "Gagaj would not
face any problem."
SOCAR
--------------


8. (U) In a meeting with State Oil Company of the Azerbaijan
Republic (SOCAR) Vice President for Environmental Issues
Muhkhtar Babayev, DAS Dyck discussed the company's efforts to
reduce its environmental impact and to rehabilitate
contaminated production sites. Babayev noted that 30,000
hectares of land need to be rehabilitated and that vast
amounts of outdated infrastructure need to be upgraded to
meet international standards. He explained that his
division, created in response to a government mandate in
December 2007, has received World Bank assistance to develop
a plan to clean up its land-based and offshore operations.
Babayev noted that key challenges remain, including a culture
of environmental negligence, as well as a lack of training
programs, expertise and the equipment necessary to achieve
the goals of the World Bank plan. In response, DAS Dyck
informed Babayev that the new FCS office planned for Baku
would be able to facilitate links between SOCAR and U.S.
firms which have the necessary expertise. Until that office
is opened, he suggested that Babayev coordinate with the FCS
office in Kazakhstan.


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Ministry of Industry and Energy
--------------


9. (SBU) During his meeting with DAS Dyck, Deputy Minister
of Industry and Energy Gulmammad Javadov, expressed the
GOAJ's gratitude for USG assistance in constructing the BTC
pipeline, aiding Azerbaijan's efforts to become economically
independent from Russia. Javadov noted the desire for closer
cooperation with the USG and with U.S. companies,
specifically in the fields of renewable energy sources, soil
cleanup, light industry, machinery making, chemical
production, and environmental remediation. He said that U.S.
companies have an excellent reputation for quality in
Azerbaijan, but that other countries, namely South Korea and
Belarus, are more effective salespersons. DAS Dyck informed
him that FCS office, planned to re-open in Baku within 6
months, would provide the opportunity for a more effective
commercial relationship. In the interim, the Embassy
Economic section promised Javadov that it would further
research opportunities for economic partnership.

Ministry of Communications and IT
--------------


10. (U) Minster of Communications and IT Ali Abbasov opened
his meeting with the DAS by expressing his pleasure with the
proposed re-opening of an FCS office in Baku and inquired
about its future role and involvement with the American
Chamber of Commerce. He went on to explain the expanding
role of the IT sector in the Azerbaijan economy, noting that
some recent estimates show the sector growing by 35 percent.
Abbasov acknowledged room for growth in the privatization of
the telecoms sector, which is still 90 percent stated-owned.
He emphasized President Ilham Aliyev's concern for the
Azerbaijan economy after 2012, when oil and gas production is
slated to decline, and said that Aliyev was focusing on the
Communications and IT sectors for economic diversification.


11. (SBU) Abbasov enthused about Azerbaijan-initiated plans
to create an information super highway extending from the
west coast of the Black Sea to China, which would include a
fiber optic connection between Azerbaijan and Turkmenistan.
Plans for the super highway infrastructure are slated to be
discussed by stakeholder countries at the November 11-14
BakuTel Conference. Abbasov also informed DAS Dyck that the
GOAJ plans to include a contract signing ceremony for the
Orbital Sciences satellite project in the first day of the
conference.

Ministry of Finance
--------------


12. (U) In his meeting with Minister of Finance Samir
Sharifov, DAS Dyck commended the Minister on Azerbaijan's
impressive rankings in the recent World Bank "Doing Business
2009" report, cautioning that further reforms were still
needed. Sharifov agreed and revealed GOAJ plans to extend
streamlining reforms, such as the one-stop shop implemented
for registering a new business, to customs, the tax
administration and the property registration processes.


13. (C) In discussing the specific issues related to U.S.
companies Bechtel, General Electric (GE) and Cargill,
Sharifov was candid about the GOAJ position, if not
completely clear on all of the issues. Sharifov seemed
confused about the funding issues for the Bechtel project
(Ref B),and Commerce agreed to pull together data to clarify
the financing information. With respect to GE, Sharifov
renewed his long-standing request that EXIM consider
retroactive financing for GE turbines it purchased with a
commercial loan. (After purchasing GE turbines with "bridge"
financing, the GOAJ find themselves 350-400 million USD in
the hole to complete the project, and over a year ago asked
if EXIM bank would consider retroactive financing for the GE
turbines. (NOTE: Embassy will again explore this option with
EXIM Director Kian when he next visits Baku October 13-17.
End note.) Regarding Cargill (Ref C),Sharifov explained
that he was not convinced that the GOAJ was legally liable,
as the dispute originated between partners of Cargill and a

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"limited liability" corporation, in which GOAJ was merely an
investor, and therefore had limited liability. He confirmed,
however, that if it is shown that Azerbaijan in fact has a
legal obligation to Cargill, "we will honor it."


14. (C) COMMENT/ACTION: U.S. Department of Commerce (USDOC)
states that Cargill has not yet filed an advocacy case with
them. We had earlier been told by Washington that the
necessary papers had been filed. Embassy requests that USDOC
follow up with Cargill asap to address the issue of liability
and that State (EEB/CBA) and USDOC determine what further USG
advocacy is appropriate, and advise. Cargill has expressed
concern with lack of USG advocacy. If Cargill has a
legitimate case for further USG action, we want to follow up
expeditiously. End comment.

Ministry of Economic Development
--------------


15. (U) DAS Dyck's meeting with Minister of Economic
Development Heydar Babayev was cordial and constructive with
Babayev echoing many of the sentiments of Minister Sharifov,
especially concerning the World Bank "Doing Business" report,
the re-opening of the FCS office in Baku, and issues related
to Cargill and Bechtel. With regard to Cargill, Babayev
added that GOAJ has the reserves to pay, but would not do so
unless it is shown that the GOAJ in fact has a legal
liability to Cargill. He also commented that while
President Aliyev was still very interested in the Bechtel
project, he felt the U.S. side was "not very active," and
urged that Bechtel renew its efforts.


16. (C) COMMENT: DAS Dyck's meetings with U.S. company
representatives and GOAJ officials were direct and
informative. There are obvious areas for improvement and
increased cooperation, but the dialogue remains open and
honest. Continued GOAJ focus on further reforms in the wake
of its "Doing Business" ranking will enable expanded economic
relations. USDOC's decision to re-open the FCS office in Baku
was very positively received by GOAJ and business
representatives alike as an important signal of USG support
and commitment to build commercial relations, especially in
the wake of recent regional tensions. End Comment.
DERSE