Identifier
Created
Classification
Origin
09BAKU25
2009-01-14 10:26:00
CONFIDENTIAL
Embassy Baku
Cable title:  

IFIS COMMENT ON INVESTMENT CLIMATE IN AZERBAIJAN

Tags:  ECON EFIN ETRD EXIM EINV AJ 
pdf how-to read a cable
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PP RUEHWEB

DE RUEHKB #0025/01 0141026
ZNY CCCCC ZZH
P 141026Z JAN 09
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0605
INFO RUCNCIS/CIS COLLECTIVE
RUEHMZ/EUROPEAN POLITICAL COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 3211
RUEAIIA/CIA WASHINGTON DC
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEKDIA/DIA WASHDC
RUEKJCS/JOINT STAFF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L BAKU 000025 

SIPDIS

EEB/IFD/OIA
EEB/EPPD
EUR/ERA FOR BENJAMIN ROCKWELL
TREASURY FOR JEFF BAKER

E.O. 12958: DECL: 01/12/2019
TAGS: ECON EFIN ETRD EXIM EINV AJ
SUBJECT: IFIS COMMENT ON INVESTMENT CLIMATE IN AZERBAIJAN

REF: A. BAKU 23

B. 08 BAKU 863

Classified By: Political-Economic Counselor Rob Garverick, Reasons 1.4
(b and d).

C O N F I D E N T I A L BAKU 000025

SIPDIS

EEB/IFD/OIA
EEB/EPPD
EUR/ERA FOR BENJAMIN ROCKWELL
TREASURY FOR JEFF BAKER

E.O. 12958: DECL: 01/12/2019
TAGS: ECON EFIN ETRD EXIM EINV AJ
SUBJECT: IFIS COMMENT ON INVESTMENT CLIMATE IN AZERBAIJAN

REF: A. BAKU 23

B. 08 BAKU 863

Classified By: Political-Economic Counselor Rob Garverick, Reasons 1.4
(b and d).


1. (C) Summary: In early December, EconOffs met
individually with representatives of the EBRD, IFC, IMF, and
World Bank in Azerbaijan to discuss financial developments,
business conditions and the investment climate. The
financial experts noted the effects of the global financial
crisis on the Azerbaijan economy (Ref A) and highlighted
Azerbaijan,s improvement in the World Bank,s most recent
Doing Business Report (Ref B) as developments that could
prompt the GOAJ to pursue further economic reforms that would
support growth in the non-oil sector. They cautioned,
however, that despite Azerbaijan,s progress in some Doing
Business indicators, Azerbaijan,s investment climate
"particularly for foreign businesses" continued to be clouded
by its poor performance on measures such as trade across
borders and taxes. Corruption at all levels also contiues
to be a significant problem. End Summary.
EBRD
--------------


2. (C) EconOffs met with EBRD Senor Banker and Head of
Office Francis Delaey on Dcember 4 to discuss banking and
business conditios in Azerbaijan. He acceded that the GOAJ
had iproved on the "easier" aspects of the World Bank's
Doing Business indicators but still considered the reforms to
be encouraging and an important development. He pointed out
that the GOAJ is planning to set up a one-stop-shop for taxes
and is looking to do the same for permitting and licensing.
Delaey suggested that the positive results achieved through
the Doing Business report might encourage GOAJ to keep up
reforms. By following through on WTO membership provisions
and pursuing customs reform, Azerbaijan might be able to stay
in the survey's top 10 next year. However, he said that
there was still a question about whether these reform efforts
focused solely on report criteria would actually address the
underlying problems in the business environment and suggested

that GOAJ really needs to try to improve their performance in
Transparency International's corruption survey. He also
noted that the customs department is one area where there is
much room for improvement and suggested that reforms to
achieve WTO accession could be a lever to institute some of
these needed improvements.


3. (C) Delaey noted that corruption in Azerbaijan is
endemic, and specified that corruption involving tax
officials and artificial monopolies are key factors impeding
FDI. As an example, he explained that when a business
becomes successful enough to draw attention to itself, either
by just being very successful or by becoming (or being poised
to become) real competition to one of the local oligarchs,
there is strong government pressure (coercion) to partner
with a local company controlled by one of those oligarchs.
He observed that almost all the key ministers in Azerbaijan
have their own holding companies which are involved in a
broad range of sectors. The coercion comes in the form of
harassment from tax adminstrators, and endless inspections by
various entities such as emergency services or building code
officials. In order to survive, Delaey said these companies
end up giving up to 50 percent of their business to their
government connected "partner," while receiving nothing real
in return. He enjoined that, if the GOAJ is serious about
attracting investment and developing the non-oil sector, it
needs to address this corruption and level the playing field.
If not, there will be no mechanism to successfully increase
the knowledge base in the country or effectively reduce
prices. In his experience, Azerbaijan is "much more corrupt
than Moldova" which the EBRD considers to be one of the most
difficult environments where it does business.

International Finance Corporation (IFC)
--------------


4. (C) On December 4, EconOffs met with IFC Country Officer


for Azerbaijan Aliya Azimova to discuss IFC initiatives for
the upcoming year. Azimova stated that the IFC has been
working directly with Ministry of Economic Development (MoED)
to improve the business environment, both in the context of
the Doing Business report and on its own. She noted that the
IFC recently signed an MOU with the GOAJ which was ratified
by President Aliyev in August and calls for a 5-year project
"funded by the Swiss" to regularly monitor the Azerbaijani
business climate. This project will conduct regular surveys
of small and medium-sized enterprises (SMEs) to try to
capture local perceptions of the business environment.


5. (C) In 2008 the IFC completed the first SME survey, which
covered all of Azerbaijan, as opposed to the Doing Business
Report which Azimova said covered only Baku. The IFC is
currently analyzing the results and thus far the information
from the survey paints a relatively encouraging picture of
the business climate for Azerbaijan's SMEs. In order to
verify these results, the IFC also conducted follow-up focus
group studies which seemed to corroborate the overall results
of the study. The final conclusions of the survey will not
be flushed out until the full report from the IFC is
released, likely January 2009. Azimova noted that the
release of the report is not contingent on GOAJ approval so
it will be made public, even if its conclusions are not what
local officials would prefer to see. She stated that, based
on findings from this survey, the IFC intends to develop an
action plan for future efforts to improve the business
climate.


6. (C) Azimova informed EconOffs that another key IFC
project for the year is a full, country-wide review of the
permitting process. She acknowledged that this is a very
ambitious project but explained that although the number of
licenses required to run a business has dropped dramatically
in recent years -- from more than 270 to 15 currently -- much
of this administrative burden has simply been shifted to an
opaque and inconsistent system of permit requirements. She
said the number of required permits is on the rise, yet there
is no standardized list of mandatory permits, and regional
inconsistencies as to what permits are required further
complicate the process. The IFC hopes the review of the
permit system will result in a country-wide standardization
and reduction of required permits.


7. (C) Azimova noted that the project would not include the
construction sector, commenting that she believes GOAJ
officials would prefer to focus on zoning and other
regulations without tackling the more difficult (and highly
corrupt) construction sector. She admitted that the Doing
Business report did not fully capture the burden of many of
these permit requirements because the test case used in the
report simply inventoried the steps required to "build a
warehouse". Following the permit review project the IFC
plans to begin a review of the inspection process. The IFC
is also working with USAID on reforms to the bankruptcy law
to improve Azerbaijan,s score on the "closing a business"
indicator in the Doing Business report.


8. (C) The IFC is focusing on the perceptions and
experiences of local SMEs because, according to Azimova, GOAJ
officials do not appear to be very interested in attracting
FDI outside of the oil sector. She noted that at one point
IFC planned to bring private sector participation into
infrastructure projects but got the clear message from the
GOAJ that this was not something it was interested in
pursuing. She commented that the World Bank involvement in
infrastructure projects would hopefully bring some discipline
into project planning and procurement, etc. but suggested
that the dearth of foreign private investors allows
inefficiencies to persist.


9. (C) Regarding new Minister of Economic Development Shahin
Mustafayev, Azimova noted that the heads of three groups -
the anti-monopoly group, the consumer market group, and the
entrepreneurship group - had been removed. She mentioned
that some of these teams had been assigned new heads or
deputy heads, but emphasized that not all posts have been
filled. Azimova has heard that Mustafayev is very demanding

and has even fired some staff for arriving late to work on
Sundays. (NOTE: While it is normal for government offices
to operate on Saturday, Sunday is not a normal work day for
Azerbaijan. End Note.) Mustafayev is reportedly in the
office routinely from 9 a.m. to 11 p.m., and expects the same
of his staff. Azimova speculated that he is detail oriented
and very good with numbers but less policy-focused than his
predecessor, former Minister Babayev. It appears he is in
still in the learning process, having come from the Taxation
Department, as he has raised such questions as: "If grain
prices are falling, why aren't bread prices declining also?"


10. (C) Additionally, Azimova noted that the new head of the

Securities Commission, Rufat Aslanani, was formerly a deputy
at the NBA and seems very ambitious and motivated. He has
reached out to the IFC stating that one of his first
priorities will be to build the capacity of his staff.
Azimova reported that the IFC is working with him on
investment regulations to protect minority shareholders. The
IFC already conducted a pilot program with one firm where
they helped institute a dividend program and established
decision-making rights for minority shareholders. The IFC is
hoping some of these measures will boost interest in the
stock market as potential investors perceive that there are
gains to be had from being a minority shareholder.

World Bank
--------------


11. (C) EconOffs met with World Bank Country Manager Gregory
Jedrzejczak and Senior Operations Officer Saida Bagirli on
December 15 to discuss recent macroeconomic developments and
economic reforms. They said the World Bank plans to continue
working with the GOAJ on business environment projects as
well as a solid waste program. They revealed that World Bank
co-financing arrangements typically call for 10% share to be
covered by Azerbaijan but that this is due to increase.
However, they mentioned that they have recently encountered
some difficulty getting the GOAJ to agree to finance a higher
share of joint projects. (NOTE: Co-financing agreements have
proved difficult for US agencies as well. As of this
writing, Minister of Finance Sharifov has still not signed
the co-financing MOU with USAID which should have been
finalized in late November. End Note.)


12. (C) Jedrzejczak echoed others opinions regarding MoED's
Mustafayev as very detail-oriented and something of a micro
manager. He implied that Mustafayev may be closely linked to
the Minister of Emergency Situations. According to
Jedrzejczak, during Mustafayev's first and so far only
meeting with World Bank staff (November 2008) he stuck to
GOAJ talking points but noted this was "understandable given
that he was so new on the job." World Bank has heard reports
that Mustafayev has been working his staff until 10 PM, 7
days a week and instructing them to go through all the
details of the ministry. They noted that former Minister
Babbayev had been a very hands-off manager. World Bank
believes it is too early to tell if this management change at
MoED is a positive or negative development for the course of
economic reform in Azerbaijan. In addition, they posited
that perhaps the new MoED was appointed specifically to sift
through all the work of the former head, possibly in search
of some incriminating information.

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


13. (C) Despite the noteworthy improvement in business
regulations captured by the World Bank Doing Business report,
it is quite evident from speaking with international experts
that there is still much work to be done for Azerbaijan to
qualify as a "normal" business environment. Corruption
remains one of the highest hurdles for the GOAJ, and the one
it appears least inclined to tackle. It remains to be seen
what effect the new Minister of Economic Development will
have on the playing field.
LU