VZCZCXRO0880
RR RUEHDBU
DE RUEHKB #0412/01 0751157
ZNY CCCCC ZZH
R 161157Z MAR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 9872
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1542
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000412 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 03/20/2016 
TAGS: ECON ENRG EPET EFIN PREL PGOV AJ
SUBJECT: EUR A/S FRIED DISCUSSES ECONOMIC AND FINANCIAL 
REFORMS WITH AZERBAIJANI ECONOMIC DEVELOPMENT MINISTER 
 
Classified By: Ambassador Reno L. Harnish III, Reasons 1.4(b,d). 
 
¶1. (C) SUMMARY: EUR A/S Dan Fried and Ambassador Harnish 
discussed the importance of strengthening Azerbaijan,s 
economic and financial development with Economic Development 
Minister Heydar Babayev on March 14.  Babayev told Fried that 
his job is to make Azerbaijan stronger economically and that 
he is ready to use his influence to achieve this goal.  Fried 
warned Babayev that the GOAJ needed to act quickly to 
strengthen the economic, banking, and financial services base 
in order to manage the increasing oil revenues.  Babayev 
discussed with Fried the 2007 budget and the need for an 
improved system of budgetary planning.  In addition, Babayev 
touched upon diversifying the economy and energy issues.  END 
SUMMARY. 
 
¶2. (C) In a March 14 meeting with Minister of Economic 
Development Heydar Babayev, EUR A/S Dan Fried and Ambassador 
Harnish stressed the critical importance of continuing 
economic and financial reforms in the face of growing oil 
revenues.  Minister Babayev told Fried that he wanted to help 
strengthen bilateral relations and cooperation, noting that 
he wanted Fried to leave with a good impression of 
Azerbaijan.  Babayev told Fried that Azerbaijan,s GDP was 
growing at 26.4 percent and industrial growth totaled 
approximately 30 percent.  Fried warned Babayev that the GOAJ 
needed to act quickly to strengthen the economic, banking, 
and financial services base in order to control the 
increasing oil revenues.  Babayev said that Azerbaijan,s 
main economic objective was to use properly its oil revenue. 
Babayev added that he would use his personal relations and 
exploit the inherent weakness of corrupt bureaucrats to fight 
corruption in the GOAJ. 
 
FUTURE OIL REVENUE 
------------------ 
 
¶3. (C) Fried asked Babayev to explain the GOAJ,s plans to 
use its future oil revenues to strengthen the country. 
Babayev responded that the government was aware of the 
economic dangers that increasing oil revenue could pose, 
specifically higher inflation and corruption.  He noted that 
the GOAJ would use its oil revenue to develop the country,s 
infrastructure, solve social problems and assist refugees and 
IDPs.  Babayev noted that the GOAJ has implemented poverty 
reduction and regional economic development programs. 
 
¶4. (C) Babayev noted to Fried that the GOAJ needed to improve 
and strengthen its procurement procedures.  He lamented that 
current procurement practices are haphazard with different 
ministries and agencies each procuring different items that 
might not be compatible within the government (i.e. computer 
software programs).  Babayev added that the GOAJ needs to 
systemize the procedures for announcing tenders and bids for 
government contracts.  He said that the Ministry of Economic 
Development should be more active in these areas in order to 
improve overall government coordination.  Babayev noted that 
individual agencies, budgets, such as AZAL, Caspar and 
SOCAR, were a headache and the GOAJ needed to create an 
effective system of budgetary control. 
 
BUDGET PLANNING 
--------------- 
 
¶5. (C) Turning to the growth of state budget expenditures, 
Babayev predicted that the GOAJ,s 2007 budget would increase 
an additional 50 percent over the 2006 budget.  He said that 
he did not see a problem with such large budgetary increases 
since the budget was smaller during the 1990s.  Babayev 
agreed with Ambassador Harnish on the need to organize and 
coordinate macroeconomic and budgetary goals among all the 
ministries.  (NOTE: The Ministry of Economic Development, the 
Ministry of Finance and the U.S. Embassy plan to organize a 
macroeconomic and budgetary planning seminar for senior GOAJ 
decision-makers in early April.) 
 
¶6. (C) Babayev noted that President Aliyev needed to push 
budgetary coordination within the government in order to 
create a new treasury spending system for improved budget 
formulation.  Babayev told Fried that he was not going to 
"fight" with the Ministry of Finance or others in the 
President,s office regarding the coordination of the budget. 
 He said he would raise the issue with the President, noting 
that the GOAJ needed an effective system to control and 
coordinate expenditures. 
 
BAKU 00000412  002 OF 003 
 
 
 
¶7. (C) Babayev hinted that the Tariff Council plans to raise 
the price of gasoline.  (NOTE: In January, the Tariff Council 
doubled the price of diesel.)  Babayev noted that the process 
of economic development was slow and gradual.  He added that 
Azerbaijan had only experienced sustainable economic growth 
over the past five years. 
 
DIVERSIFYING THE ECONOMY 
------------------------ 
 
¶8. (C) Fried asked Babayev about the GOAJ,s efforts to 
diversify the economy, including the idea of offering 
companies tax and other investment incentives.  Babayev 
agreed that the GOAJ was reviewing different investment 
options, including providing duty free zones.  Ambassador 
Harnish raised U.S. firm J. Ray McDermott,s desire to base 
its oil platform/rig construction operations in Azerbaijan 
and Babayev agreed to meet with the company to develop 
possible ideas.  Babayev explained that the Parliament and 
President,s office were drafting a revised investment law. 
He told Fried that the previous version of the law was based 
on Russian investment code.  Fried noted, and Babayev agreed, 
that international companies would invest in Azerbaijan if 
the GOAJ created a stable business environment. 
 
¶9. (C) Fried raised the issue of Azerbaijan,s small banking 
sector, probing Babayev on the best manner to strengthen the 
sector.  Babayev noted that the National Bank of Azerbaijan 
is responsible for promoting as well as regulating the 
banking sector.  He added that the GOAJ needed to adjust the 
NBA,s mandate and transfer banking sector promotion efforts 
into a new "financial services authority."  Fried raised the 
example of Kazakhstan,s strong and robust banking sector, 
which Babayev agreed was a good model for Azerbaijan. 
Babayev stated that the GOAJ needed to support all financial 
services in order to strengthen the financial sector,s base. 
 
WORLD BANK AND IMF RELATIONS 
---------------------------- 
 
¶10. (C) Babayev told Fried that the World Bank acted as the 
GOAJ,s best international economic and financial advisor. 
He derided the role of the IMF, noting that it had "killed 
the financial sector."  Babayev added that he believed the 
Bank and IMF were playing "good cop-bad cop" roles in their 
dealings with the government.  (NOTE: This is not the first 
time that Babayev has criticized the IMF while praising the 
efforts of the World Bank to help Azerbaijan.) 
 
NAGORNO-KARABAKH CONFLICT 
------------------------- 
 
¶11. (C) Turning to political issues, Babayev said that the 
GOAJ should not focus on Nagorno-Karabakh for the next five 
years, and instead, focus on economic and military 
development.  He continued to say that after five years, the 
military budget will be larger than Armenia,s and better 
prepared for any hostilities.  Babayev quickly noted that 
Armenia would be the first to attack and provoke war with 
Azerbaijan.  Fried warned Babayev that a war with Armenia 
would kill the economy and ruin all the work the GOAJ had 
done to build a working economy. 
 
ENERGY RELATIONS 
---------------- 
 
¶12. (C) Babayev remarked to Fried that Russia will continue 
to use its energy monopoly to blackmail the West.  He noted 
that Azerbaijan buys natural gas from Russia at high prices 
since it was cheaper than domestic gas sources.  Babayev told 
Fried that Azerbaijan currently has a three-month supply (1 
bcm) stored in several facilities around the country. 
Babayev said that Azerbaijan was supplying Georgia with gas 
and electricity free of charge.  Babayev claimed that the 
electricity blackout in Baku and northern sections of 
Azerbaijan in mid-January was exacerbated by a cut in Russian 
energy supplies, something that Babayev characterized as a 
"punishment" of the GOAJ for unspecified reasons. 
 
¶13. (C) Turning to BP,s gas and oil operations, Babayev 
noted that the GOAJ needed to discuss with BP its contracts. 
Babayev alluded that the GOAJ should investigate the 
quantities of oil and gas the international companies are 
taking from the country since, in his view, the GOAJ needed 
 
BAKU 00000412  003 OF 003 
 
 
to retain some of the oil and gas for itself.  Babayev also 
noted that Azerbaijan should renegotiate the pricing scheme 
for natural gas sold to Turkey, noting that the originally 
agreed upon price was too low.  Finally, he speculated that 
the price of oil could reach USD 100 a barrel by the end of 
the year thus increasing the country,s oil revenues. 
(COMMENT: Babayev's remarks on energy issues were light on 
details and not always in line with what GOAJ energy 
officials say.  However, the general tone of his remarks is 
in line with Azerbaijan's recently increased assertiveness in 
dealing with international energy companies.  END COMMENT). 
 
¶14. (U) A/S Fried did not have the opportunity to clear this 
message prior to departing post. 
HARNISH