AZERBAIJAN: FINANCE MINISTER TALKS CIS, G20, NO

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000323

SIPDIS

E.O. 12958: DECL: 04/20/2019
TAGS: ECON ETRD EFIN AJ
SUBJECT: AZERBAIJAN: FINANCE MINISTER TALKS CIS, G20, NO
DEVALUATION

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


1. SUMMARY: In an April 7 meeting, Azerbaijan's Finance
Minister, Samir Sharifov, defended his ministry's policy of
supporting the manat (currency) and indicated that the policy
would not likely be changed any time soon. He also described
deliberations at the March 30 meeting of CIS Finance
Ministers in Moscow, at which President Medvedev briefed on
the upcoming London G-20 Summit and the GOR offered its
analysis of the crisis and next steps. Sharifov commented at
length on key issues to be considered in revamping the global
financial structure and the institutions that support it.
CIS Finance Ministers would like more information on how the
budget and financing mechanisms work in reserve currency
issuing countries, he said. Pointing to Russia's efforts to
shape the regional discussion on the crisis through the CIS
Finance Ministers forum, Sharifov requested more regular
dialogue with the USG on U.S. financial policies and
developments and suggested that the USG consider sending an
expert to the region to brief on USG responses to the crisis.
End Summary.

RUSSIANS COORDINATING CIS ECONOMIC RESPONSE
--------------


2. Finance Minister Sharifov invited the Ambassador and
USAID Country Coordinator to his offices on April 7 to sign a
$45 million MOU under which the USG and GOAJ will co-finance
a number of important USAID economic and community
development technical assistance programs. The MOU is the
first of its kind for USAID, and the result of discussions
launched under the bilateral Economic Partnership Commission
in February 2007. Minister Sharifov took the opportunity to
offer his views about the global economic crisis and GOAJ
monetary policy. He told the Ambassador that at the March 30
CIS Finance Ministers meeting in Moscow, which he had
attended two days before the G20, the CIS Ministers, led by
Russian Minister of Finance Aleksey Kudrin, had come to the
same overall conclusion as the G20, that stimulus and
international coordination were the keys to overcoming the
global financial crisis.


3. Sharifov informed the Ambassador that Russia was trying
to set itself up as the representative of the CIS countries
at the G20, but cautioned that their ideas were not always
coincident. He noted that reform of the Bretton Woods system
would negate the need for outside assistance, such as that
offered by Russia. He also suggested that some countries
which act as reserve currency issuers (namely the United
States) have irresponsibly reaped the benefits of their
position and that global financial reform should require them
to be more transparent and responsible in their financial
dealings. He pointed out that if the U.S. dollar has
problems, then so does the Azeri manat, which has been pegged
de facto to the U.S. dollar and is the international currency
for oil contracts.


4. The Minister noted that at the CIS Finance Ministers'
meeting there was some concern that increasing liquidity
could trigger a "new" bubble. He believes the best way to
fix the current problems is to restore confidence, stressing
that a liquidity crunch and immobility of money markets
requires a liquidity injection. Sharifov said that the
consensus at the CIS Finance Ministers meeting was a call for
immediate steps to strengthen the global regulatory
environment. He also noted that the CIS Finance Ministers
would like more information on how the budgets and financing
mechanisms work in reserve currency issuing countries. He
requested more dialogue with the USG on U.S. financial
policies and developments and suggested the USG send an
expert to the region to explain USG views on responses to the
crisis in depth.

ROLE OF IFIs IN THE NEW WORLD ORDER
--------------


5. Sharifov spoke at length about the role of IFIs in the
Bretton Woods system, specifically the IMF, and how it could
perform a greater function in the global financial system.
He noted the IMF's inability to adequately respond to or
predict the recent global financial crisis, stating that "it
simply follows events." The Minister is in favor of
strengthening and recapitalizing the IMF and said that he
believes it should be more proactive. He also commented that

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Russia would soon ask for a higher profile in the IMF,
highlighting that Azerbaijan "has no such ambitions."


6. The Minister then revealed his ideas on ways to improve
the global financial system by expanding the role and
authority of IFIs in general. He believes that they should
have greater responsibility for supervision, as well as
additional authority to monitor hedge funds and derivative
transactions. Sharifov expressed interest in more
regulations in general and greater interaction between
national regulators at the highest levels. When asked to
elaborate on his idea of a "global financial board," he
explained that he was more concerned in creating an
organization that would serve a more consultative function
rather than as a guiding or regulating body.

IN DEFENSE OF THE MANAT - NO DEVALUATION ON THE HORIZON
--------------


7. When asked how and why the GOAJ was continuing to prop up
the manat, despite serious downward pressure and similar
actions within the region, Sharifov claimed that there was
"no rush" to devalue the manat. He acknowledged that here
had been a brief "splash for cash" after the devaluation
spree in neighboring countries, especially Kazakhstan, but
maintained that the situation had stabilized. He reminisced
that the financial crisis of '99 was much worse when the
devaluation of the Russian ruble led to a flood of cheap
imports which crowded out local business and prompted the
GOAJ at that time to devalue the Azeri manat.


8. Sharifov contended that an "unhealthy mental environment"
sparked the speculations but, unlike during the previous
rush, the Central Bank situation is healthier overall this
time. He noted that the GOAJ balance of payments structure
is healthy and the Central Bank,s discount rate is three
percent. He believes that Azerbaijan, despite a very strong
currency, is still competitive because decreased global
demand decreases demand for imports in Azerbaijan creating a
demand for import substitutions. Sharifov is convinced that
there is no need to depreciate the manat, because "the
negative effects would be more detrimental than the cost to
support the currency." He also noted that there was no
current pressure on the manat, as speculative debt
instruments largely do not exist in Azerbaijan. The GOAJ
nonetheless would continue to support and monitor the
situation, and complete an ongoing bank stress, test.


9. In conclusion, Sharifov noted that the financial crisis
has foreign roots. It is not a one-year crisis, he said, and
global and regional economies will take time to recover.
Azerbaijan, meanwhile, will promote growth in non-energy
sectors, such as agriculture. The government is also taking
care to promote a sustainable budget. Simultaneously, the
Ministry of Finance, in conjunction with the Central Bank,
will examine the financial sector, extending short-term loans
and refinancing as necessary, and looking to address
deteriorating asset values.


10. COMMENT: The Minister,s detailed description of his
travel to Moscow for the CIS financial summit highlights the
expanding role that Moscow plays in this region, as well as
Central Asia. The meeting came just ahead of the London G20
Summit, and gave CIS financial ministers, who, oher than
Kudrin, did not have a seat at the tabl, an opportunity to
weigh in on international issues. Minister Sharifov said he
expects Russia to continue and develop the CIS Finance
Ministers forum, which has now met twice. In the run up to
the G-20 Summit, Russia, took advantage of an excellent
opportunity to expand its reach in the region. According to
Sharifov, Kudrin said Russia had spent USD 200 billion to
stabilize the currency situation at home, and as a result
hard currency demand has slowed. Russia, meanwhile, was
looking to extend loans to other CIS countries, with perhaps
USD 500 million to Armenia, USD 2 billion to Kyrgyzstan, USD
2 billion to Belarus, and USD 5 billion to Ukraine. We
highlight the Minister,s call for more USG dialogue on
economic and financial issues, and will follow up here. This
issue should be a top agenda item at the next EPC meeting,
tentatively slated for June in Baku. We also see value in
the Minister's suggestion that USG expert make a swing
through the region to brief interested governments on USG
views on the crisis and responses.
DERSE