VZCZCXYZ0013
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). 
 
¶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