THE NEVER-ENDING STORY OF THE BAKU NEC

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000604

SIPDIS

DEPT FOR OBO, EUR DAS BRYZA, EUR/CARC, EUR-IO/EX

E.O. 12958: DECL: 07/31/2019
TAGS: ABLD AJ AMGT
SUBJECT: THE NEVER-ENDING STORY OF THE BAKU NEC

Classified By: Charge Donald Lu for reasons 1.4 (b, d).


1. (C) SUMMARY: The history of Embassy and OBO efforts to
secure property for a New Embassy Compound (NEC) reads like a
Greek tragedy. It is a story complete with unfilled
promises, betrayal within families, and political intrigues.
Over the course of the past nine years, we have many times
been close to a breakthrough. We may again be at one of
those periods, with President Ilham Aliyev's personal
intervention on June 1 to suggest new formulas for breaking
the longstanding logjam on lease payments. Embassy Baku
thanks OBO for its patience and determination in managing
this long saga. More will be required. In the short-term,
we recommend that OBO prepare a property acquisition/legal
team to hold face-to-face negotiations with the Azerbaijanis
to work through the President's new suggestions on lease
payment details. END SUMMARY.

Where are We Now?
--------------


2. (U) On March 7, 2008, the Baku City Mayor and Ambassador
Derse signed a lease for 198 years at the rate of one dollar
per annum. Unfortunately, the lease can only come into force
with the delivery of a diplomatic note indicating that the
lease has received the required bureaucratic approvals
(Parliamentary endorsement and Presidential confirmation).


3. (C) So why can't they get the approvals? The President
decided subsequently that he will not take the lease to the
Parliament. We believe that this is partially motivated by
difficult land negotiations with other countries, including
Iran from which they are reclaiming the land currently used
by the Iranian cultural center. Instead, the government now
insists the USG try to find a way to comply with existing
laws requiring the payment of a minimum lease rate as
established annually by the Cabinet of Ministers. We have
repeatedly explained that because of the Anti-deficiency Act,
we cannot commit to the payment of a unbounded variable lease
rate. Although the existing 1999 Bilateral Agreement on
Diplomatic and Consular Property Issues between the U.S. and
Azerbaijan allows a lump sum payment, the Azerbaijani
government now refuses to implement the terms of the
agreement, reiterating the desire to have the NEC lease
comply as closely as possible with local law.

4. (C) On June 1, President Aliyev told visiting Special
Envoy Richard Morningstar that he was committed to concluding
the last details related to the transfer of land for the NEC.
Without apparent consultation with his advisors, he proposed
that we consider an arrangement whereby we pay the current
year's lease rate for ten years then the rate for the next
ten years would be adjusted based upon a specified index, for
example the inflation rate. Clearly not understanding the
concept of the time value of money, the President said he was
keen to have a solution which would make the up front payment
seem less "ridiculous" in a few years. Although the
President's suggestion also clearly runs afoul of Azerbaijani
law, so far no one on his staff is going to challenge a
suggestion made by the President himself. When asked whether
the President's suggestion could also include a maximum rate
of increase or cap, Presidential Advisor Ali Asadov replied
that this would be technically possible, but would require
experts to work to conform this to Azerbaijani law. While
this could be viewed as further stalling tactics, the
invitation for experts from both sides to meet and negotiate
a solution is encouraging.

What's Going On Behind the Scenes?
--------------


5. (C) The abrupt changes in Azerbaijani "legal
interpretation" are clearly influenced by political dynamics
that have nothing to do with the NEC discussion. The
original lease was signed on March 7 with assurances that all
paperwork would be completed within two weeks. On March 13,
the U.S. voted against a key Azerbaijani resolution at the UN
which resulted in not only a failure to secure the
appropriate approvals, but a refusal to take our calls for
three months. The Foreign Minister and the head of the
President's legal department have told us that if not for
this UN vote, we would have long ago had possession of the
property. With the deterioration of our bilateral
relationship in the spring and summer of 2008, the
President,s willingness to seek Parliamentary approval for
the special terms of the lease disappeared.


6. (C) Similarly, on February 5, Presidential Advisor Asadov
told us that all the problems over the lease payment issue
had been smoothed over and that the President would use his
"executive authority" to approve the lease without

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Parliamentary approval. As we worked out wording for an
amendment to the lease, the Azerbaijanis became increasingly
concerned about the U.S. role in fostering reconciliation
between Turkey and Armenia. As a consequence of these
political problems, Asadov informed us on May 19 that the
deal was off because of legal objections. Again, a rough
patch in our bilateral relationship made the President
reconsider his offer of using his executive authority to
approve the lease.


7. (C) Is it all political? Not all, but most. The
Azerbaijanis view the current lease as a gift to the United
States. It was originally promised to Ambassador Derse in
fall 2006 as a site for "free." This morphed into a dollar a
year, then the minimum lease rate (currently $9,500/year).
The President is not ready to transfer the site to us at a
time of political tensions. At the same time, if the
political conditions are right, there also has to be a
formula that provides the government a fig leaf of an
impression that it is obeying its own laws (or something in
the spirit of the law). Both this political will and the
defensible formula must exist at the same time to move
forward. One without the other will not be sufficient. It
is certainly true that the goalpost for what is "defensible"
has shifted over time. It suggests that the USG should try
to move quickly to close the deal when the opportunity
arises, or risk having the agreed deal fall apart on the
Azeri side.

Where have We Been?
--------------


8. (U) Our search officially began in 2000 with a diplomatic
note declaring our intention to lease land to build a NEC.
Foreigners cannot purchase property in Azerbaijan. From 2003
to 2006, the Embassy worked with OBO to pursue a lease on a
privately-owned property known as Alatava. This was
abandoned in 2006 when the owner demanded $50 million, more
than double the assessed value. During this same period, the
Embassy worked with the State Property Committee to research
appropriate government-owned land. Having identified a
former machine-building plant, the Minister of Economic
Development withdrew the site without explanation.


9. (U) In 2006, again working with the State Property
Committee, an OBO/Embassy team selected a derelict film
studio. During the approval process, the State Property
Committee privatized the land for $200,000. The new owner
offered it to the Embassy for $35 million, again far in
excess of its assessed value.


10. (C) Because of these repeated disasters, Ambassador
Derse in 2007 appealed for help to the President. With the
support of the President's office and the promise of a free
site, the OBO/Embassy team identified the Genetics Institute
as the site of the new Embassy. After significant design
work and lease negotiations, the President withdrew the offer
of this site. It is rumored that the President's uncle
decided he wanted control of this land.


11. (U) Embarrassed by their withdrawal of two offered
sites, President Aliyev promised another parcel of
State-owned land for free. His Advisor Ali Asadov showed OBO
and the Embassy several sites, from which the Trolley Park
site was selected. On May 11, 2007, the USG and the
Azerbaijani Government signed a Protocol of Intent which
spelled out specific terms including a symbolic rent and
comportment with the Bilateral Agreement. These terms were
incorporated into the lease which was signed on March 7,

2008.

What is to Be Done?
--------------


12. (C) Our experience is that windows of opportunity open
and close very quickly on this issue. We must be prepared to
act swiftly to close a deal before the goodwill evaporates.
The February 5 window was barely open for two months. It is
not clear that this June 1 opening is genuine or not. So
far, the President and his advisor Asaodv have welcomed the
proposal for an OBO property acquisition/legal team to visit
Baku to iron out a solution based on the President's
suggestion of indexing the lease rate on a ten-year cycle,
with a defined cap included in the terms.


13. (C) The Embassy has specifically asked Asadov to provide
a window of dates and the composition of the Azerbaijani
negotiating team, in order to plan for these discussions. We
propose that OBO prepare a team and available dates so that
the Embassy can use this information to solicit availability

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and composition of the Azerbaijani team. To make the visit
most productive, we suggest a date after early-September,
since August is the traditional vacation time for Baku (and
Washington). We look forward to your response. The Embassy
greatly appreciates OBO,s continuing support in Baku,s NEC
site acquisition.

LU
LU