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PP RUEHDBU
DE RUEHKB #0531/01 0961035
ZNY CCCCC ZZH
P 061035Z APR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0076
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1576
RHMFISS/CDR USEUCOM VAIHINGEN GE
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000531 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 03/31/2016 
TAGS: PREL PGOV ECON ETRD BEXP KFLU AJ
SUBJECT: AZERBAIJAN: ECONOMIC DEVELOPMENT OF THE EXCLAVE OF 
NAKHCHIVAN 
 
REF: BAKU 502 
 
Classified By: DCM Jason Hyland per 1.4 (b,d). 
 
¶1.  (C) Summary:  During a March 28-29 trip to Nakhchivan, 
local officials provided a glowing review of economic growth 
and investment opportunities in the isolated exclave. 
According to Nakhchivan Ministry of Economic Development 
statistics, GDP grew by 27 percent in 2005, with a 57 percent 
increase in agricultural investment.  Several new businesses 
have opened in Nakhchivan in recent years, including a new 
mining venture that has 49 percent U.S. ownership.  Despite 
Nakhchivan's rosy economic forecast, which is driven largely 
by massive transfer payments from the central GOAJ budget and 
remittances from abroad, Nakhchivan remains a difficult place 
to do business.  Foreign investment opportunities still seem 
to be limited mainly to companies with ties to Nakhchivan's 
powerful clans.  Local officials also reported that 
Nakhchivan had not yet suffered avian influenza outbreaks. 
End summary. 
 
¶2.  (U)  On March 28 and 29, emboffs traveled to Azerbaijan's 
exclave of Nakhchivan -- which is separated from the bulk of 
Azerbaijan by Armenian territory -- to explore Nakhchivan's 
economy, as well as its trade relations with Iran and Turkey 
(reftel).  Emboffs met with the Nakhchivan Minister of 
Economic Development (MED), the Deputy Minister for the MED, 
the MED Head of the Apparat, the MED Director of Economic 
Policy and Planning Department and the MED Head of the 
Protocol Department, as well as the Turkish Consul General. 
 
Background on Nakhchivan 
------------------------ 
 
¶3.   (SBU)  The exclave of Nakhchivan is approximately 5,500 
square kilometers with an estimated population of 350,000. 
Local residents believe the actual population is around 
175,000, as fully half of the exclave's population is 
believed to be working outside Nakhchivan.  Its largest 
border -- 221 km with Armenia -- has been closed since the 
outbreak of the Nagorno-Karabakh conflict.  Nakhchivan 
depends on borders with Iran (179 km) and Turkey (9 km) for 
access to the rest of the world.  As part of its legacy as a 
former Soviet autonomous republic, Nakhchivan has its own 
government and constitution, though the exclave is heavily 
dependent on transfers from the GOAJ and remittances for its 
survival.  According to the Nakhchivan MED and Embassy 
research, the central government in Baku transfers between 
USD 115-150 million to the Nakhchivan government each year, 
or nearly USD 430 for each person officially listed as living 
in the exclave.  The Turkish and Iranian consulates are the 
only diplomatic representation in Nakhchivan.  In general, 
Nakhchivan is a very isolated place, with its own culture and 
power structure.  Former President Heydar Aliyev made his 
political comeback in Nakhchivan, and the Aliyev family's 
connections there run deep. 
 
Economic Indicators 
------------------- 
 
¶4.  (SBU)  According to Nakchivan's Minster of Economic 
Development, Famil Husseynov, Nakhchivan's infrastructuQ is 
expanding, and its local production continues to increase. 
He reported that over 70 percent of the population lives in 
suburban regions and there is a high demand for construction 
materials.  As the government does not want the people within 
the exclave of Nakhchivan to feel separate or abandoned by 
Azerbaijan, the Government of Nakhchivan strives to meet 
Nakchivanis' demands locally, without the aid of foreign 
assistance.  Currently 70 to 80 percent of Nakhchivan's 
construction materials are produced locally, but Nakhchivan 
does import equipment from the outside.  Nakhchivan has 16 
production facilities, ranging from spaghetti, sausages and 
sugar to fruit and mineral water.  Huseynov reported that in 
2005, Nakhchivan experienced 27 percent GDP growth, general 
economic growth of 56 percent and a GDP per capita increase 
of 12.5 percent.  Huseynov said that agricultural products 
investment grew by 57 percent, retail sales by  14 percent, 
financial services by 12 percent and foreign trade by 47 
percent. 
 
Future Economic Plans 
--------------------- 
 
¶5.  (SBU)  Huseynov hopes to maintain this growth in the 
future.  The MED plans to create more jobs, give more 
incentives to small and mid-size businesses, allow for more 
production facilities, ensure consumer rights are protected, 
 
BAKU 00000531  002 OF 002 
 
 
open up more local production facilities and explore modular 
power plants.  According to Huseynov, the MED does not plan 
on exploring wind as a viable alternative energy source. 
(Comment: This position differs significantly from the 
Ministry of Energy and Industry's in Baku, which has pursued 
a USTDA-funded study of wind power for Nakhchivan.) 
 
¶6.  (SBU)  According to Husseynov, in April 2006, Nakhchivan 
plans on opening a fruit drying facility, which will utilize 
German-made equipment. Nakhchivan also will open a food 
processing-juice producing plant, which will utilize 
Italian-made equipment and will use roughly 40 percent of the 
local harvest.  Moreover, Nakhchivan will open a cigarette 
factory using local tobacco production as well as a marble 
production facility.  In the spring of 2006, Politalin 
Company plans to open up a chemical plant which will 
manufacture Politalin.  Lastly, Husseynov claimed that 75 
percent of the furniture in Nakhchivan was produced locally. 
 
Economic Opportunities for US Investment 
---------------------------------------- 
 
¶7.  (SBU)  Husseynov suggested that there were business 
opportunities for foreign investment in exploring 
Nakhchivan's natural resources, such as salt, mining, 
agriculture, livestock, as well as shoe and concrete 
production.  Emboffs visited the Azerbaijan Mining Operating 
Company (AMOC), a company that has 49 percent U.S. ownership 
under a production-sharing agreement.  The gold-mining 
venture opened in August 2005 and employs 105 people (all but 
three of whom are local).  AMOC intends on opening an ore 
producing plant in 2007 that will mine ore for gold, which 
will create an estimated 1,000 new jobs. 
 
Avian Flu 
--------- 
 
¶8.  (SBU) When emboffs queried Husseynov on avian influenza, 
he stated that up until 1993, Nakhchivan had three main 
poultry production facilities.  Following 1993, these 
production facilities closed; now over 70 percent of the 
rural population keeps chicken in their backyards.  According 
to the Turkish Consul General, there was a human avian flu 
death not too far from the Nakhchivan-Turkey border, but 
there have been no confirmed human AI cases in Nakchivan.  He 
added that Turkey would undoubtedly provide assistance in the 
event of an outbreak in Nakhchivan.  (Note: Nakhchivan 
borders the eastern Turkish regions that suffered an avian 
influenza outbreak in January.  Reports from one U.S. NGO, 
the lone international NGO working in Nakhchivan, suggest 
that at least three areas of the exclave may have experienced 
mass bird deaths in January.) 
 
Comment 
------- 
 
¶9.  (C) The touted economic growth in Nakhchivan is likely 
the result of the massive transfer payments from the GOAJ's 
central budget, as well as significant remittances from 
Nakhchivanis working abroad.  Thus, the Nakhchivani 
officials' glowing economic forecast does not mean that there 
are likely to be many investment opportunities for U.S. 
companies.  Unfortunately, Nakhchivan's isolated location and 
authoritarian government reinforce the message that all ills 
that beset mainland Azerbaijan's business climate exist, and 
indeed are magnified, in Nakhchivan.  The exclave remains a 
singularly unattractive place for U.S. firms outside the 
extractive industries to do business, with a small market, 
high corruption, government interference, and limited 
commerce routes with the outside world.  Doing business in 
Nakhchivan still requires extensive ties to the clans that 
dominate Nakhchivan's politics and economy.  As a result, 
U.S. involvement in the AMOC deal is a bit of an anomaly; 
most observers believe the deal came through only because 
other companies with ties to the clan could not provide the 
large amount of investment required. 
HARNISH