VZCZCXRO0859
OO RUEHDBU
DE RUEHKB #0370/01 0661402
ZNY CCCCC ZZH
O 071402Z MAR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9819
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHAK/AMEMBASSY ANKARA IMMEDIATE 1527
RHEBAAA/DEPT OF ENERGY WASHDC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000370 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/CARC AND EB/ESC 
DEPT OF ENERGY FOR FE - SWIFT AND OS - WILLIAMSON 
 
E.O. 12958: DECL: 03/07/2016 
TAGS: ENRG ECON AJ TR
SUBJECT: BARMEK'S TROUBLES PAINT GRIM PICTURE FOR POWER 
SECTOR REFORM IN AZERBAIJAN 
 
Classified By: DCM Jason Hyland, reasons 1.5 (b), (d) and (e). 
 
¶1. (C) SUMMARY:  The truce between Azerbaijan state 
electricity company AzerEnergy and Turkish power company 
Barmek, which buys electricity from AzerEnergy for 
distribution to consumers, has broken down.  President Aliyev 
lent support to AzerEnergy chief Pirverdiyev's public attack 
on the company and the International Bank of Azerbaijan has 
cut off its line of credit.  Barmek has also been hit with 
criminal charges alleging corruption, embezzlement, misuse of 
state property, and links to deposed former Economic 
Development Minister Farhad Aliyev.  There is open 
speculation that Barmek will pull out of Azerbaijan. 
Although Barmek may well have engaged in corrupt activities, 
the friction with AzerEnergy stems also from Barmek's 
deduction of the cost of unpaid GOAJ bills from its payments 
to AzerEnergy, which it is apparently entitled to do under 
its contract.  This, coupled with AzerEnergy's rejection of 
an EBRD loan (which would have required certain reforms) and 
the GOAJ's decision not to establish an indepe 
ndent energy regulator all indicate a bleak outlook for power 
sector reform in Azerbaijan.  END SUMMARY. 
 
¶2. (SBU) Barmek is the Turkish power-distribution company 
operating in Baku.  It buys electricity from AzerEnergy, the 
state power company, and distributes this electricity to 
consumers.  Barmek was brought into Azerbaijan by the late 
President Heydar Aliyev, who envisioned a large-scale 
restructuring of the power sector along market principles. 
Following his death, this process slowed.  Currently, many of 
Barmek's customers, especially large government entities, are 
not paying their bills.  About two years ago, Barmek began 
deducting the cost of these unpaid bills from the amount it 
pays to AzerEnergy, which it is allowed to do under its 
contract. 
 
¶3. (C) The GOAJ, led by AzerEnergy and supported by the Tax 
and Finance Ministries, began a serious assault on Barmek 
over this issue in the summer and fall of 2005, including 
harassment and public criticism.  The GOAJ backed off for a 
while, apparently due to the intervention of President Aliyev 
and perhaps due to a request from high levels in the Turkish 
Government.  On February 27, however, AzerEnergy President 
Etibar Pirverdiyev had a public audience with President 
Aliyev which observers have characterized as a staged 
performance.  Pirverdiyev attacked Barmek as responsible for 
recent power outages in the country and accused Barmek of not 
paying its bills to AzerEnergy.  President Aliyev, in an 
angry response, instructed AzerEnergy and the Cabinet of 
Ministers to take the situation "seriously" and to take 
"drastic measures" to deal with Barmek's alleged failures. 
 
¶4. (C) USAID contractors working on power sector issues (PA 
Consulting) interpreted the public audience as the beginning 
of a new GOAJ campaign against Barmek.  Indeed, on February 
28, Barmek chief Huseyn Atabul encountered some harassment at 
the airport at the start of a planned journey to Ankara. 
That same day, the International Bank of Azerbaijan (IBA) 
rescinded Barmek's line of credit, which the company uses to 
make its payments to AzerEnergy.  Thus, Barmek was unable to 
make its January payments and therefore is technically in 
breach of contract. 
 
¶5.  (C) On March 6, the Prosecutor General brought criminal 
charges against Barmek for corruption, misuse of state 
property and embezzlement.  The Prosecutor General also 
alleged a connection between Atabul and former Minister of 
Economic Development Farhad Aliyev, who was detained in 
October 2005 on charges of plotting a coup.  Specifically, 
Barmek is accused of transferring large sums of money to a 
British company linked to Farhad Aliyev for "unfulfilled 
services."  Atabul's plans are unknown, but many consider it 
likely that Barmek will pull out of Azerbaijan.  Earlier, 
Barmek survived only because of President Aliyev's 
intervention.  Now, as a Turkish Embassy official put it, 
"President Aliyev is clearly in AzerEnergy's camp." 
 
¶6. (C) At the same time that he denounced Barmek, Pirverdiyev 
announced that AzerEnergy was no longer in negotiations with 
the EBRD for a loan to rehabilitate some of its facilities. 
A feasibility study was done by PA Consulting but AzerEnergy 
was uncomfortable with the conditionalities EBRD wanted to 
impose on the loan (NOTE: This is not the first time a 
state-owned company has  refused lending from an IFI at the 
last moment.  In most cases, the lending conditions prove too 
stringent or the conditions of the financing do not meet the 
 
BAKU 00000370  002 OF 002 
 
 
government's satisfaction).  They may deal with a Russian 
company instead. RAO UES is rumored to be interested in 
Azerbaijan's market, and RAO UES executive Anatoly Chubais 
visited Azerbaijan to explore such opportunities last year. 
 
¶7. (C) COMMENT: Some in the international energy community in 
Baku are unsympathetic to Barmek's plight.  These observers 
believe that Barmek secured its original entry into the 
market back in 2000 via a corrupt deal with Farhad Aliyev and 
others.  How else, they ask rhetorically, would an obscure 
Turkish company manage to beat out international giant 
Siemens for the tender, and to secure operating conditions 
far more generous than the German company had been promised? 
But regardless of how Barmek got into Azerbaijan and where it 
goes from here, its experience, coupled with AzerEnergy's 
rejecting the EBRD's loan and with the GOAJ's decision not to 
go ahead with the creation of an independent energy 
regulatory agency, paints a grim picture for the future of 
power sector reform in Azerbaijan.  In addition, the 
government's harassment of Barmek and its possible departure 
send the wrong signal to international investors looking to 
do business in Azerbaijan.  END COMMENT 
HARNISH