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P 161217Z MAY 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0343
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHKO/AMEMBASSY TOKYO PRIORITY 0042
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RHMFISS/CDR USEUCOM VAIHINGEN GE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000720 
 
SIPDIS 
 
SIPDIS 
 
USDOE FOR FE - SWIFT AND OS - WILLIAMSON 
 
E.O. 12958: DECL: 05/16/2016 
TAGS: EPET ENRG PREL ELTN AJ GG TR AM JA
SUBJECT: ITOCHU EXPRESSES INTEREST IN BAKU-TBLISI-KARS 
RAILROAD PROJECT 
 
REF: A. TIMOTHY BETTS E-MAIL OF APRIL 14 
     ¶B. BAKU 704 
 
Classified By: Charge d,Affaires Jason P. Hyland, reasons 1.4 (b), (d) 
and (e). 
 
¶1. (C) SUMMARY.  Japanese multinational Itochu is seriously 
interested in the proposed Baku-Tbilisi-Kars rail link.  Both 
Itochu and SOCAR feel the rail link will be necessary to deal 
with large Caspian oil volumes coming in the future.  BP and 
British Embassy representatives disagree and do not see such 
a rail link as necessary.  Itochu, seeking financial support 
from the Japanese Government for a feasibility study, was 
told the Government of Armenia has requested that Japan not 
assist with the railroad.  According to the Japanese Embassy 
in Baku, the Japanese Government has indicated that it will 
not support the project.  The GOAJ has been seeking support 
for this project from a variety of sources and clearly is 
committed to making it happen one way or another.  END 
SUMMARY. 
 
¶2. (C) Toshihiru Sugiura, head of Itochu's operations in 
Azerbaijan, and Katsumi Kutamoto, from the Itochu head office 
in Tokyo, met with Energy Officer April 28 to discuss 
Itochu's serious interest in the proposed Baku-Tbilisi-Kars 
rail link (sometimes referred to as the 
Baku-Akhalkalakhi-Kars rail link or the 
Baku-Tbilisi-Akhalkalakhi-Kars rail link).  Itochu is a 
partner in both the Azeri-Chirag-Gunashli (ACG) oil field and 
in the Baku-Tblisi-Ceyhan (BTC) pipeline.  Itochu officials 
said they were interested in doing a feasibility study of the 
railroad project and that they had asked Japan's 
international development agency for support.  However, 
Japanese Government officials apparently told Itochu that the 
Armenian Government had approached Tokyo and asked that Japan 
not support the project. 
 
¶3. (C) The Itochu representatives asked about U.S. policy 
towards the railroad project.  Energy Officer drew on talking 
points prepared for EUR A/S Fried's Congressional testimony 
and said that the USG has no plans to support the project. 
Sugiura and Katamoto then asked if the United States might 
support part of the project - for example, the refurbishment 
of the Azerbaijan-Georgia rail link.  They also expressed 
interest as to whether the United States was merely "not 
supporting" the project or was actively against it - for 
example, if the GOAJ were to seek funding from international 
financial institutions, would the United States block it? 
Energy Officer said he did not have instructions on this 
point.  The Itochu representatives argued that this proposed 
rail link would not only transport oil but also dry cargo. 
Sugiura and Katamoto were not aware of pending legislation 
(H.R. 3363 and S2461) that would block U.S. financial support 
for the project. 
 
¶4. (C) Elshad Nasirov, vice president of State Oil Company 
SOCAR, expressed a slightly different view when Energy 
Officer brought up the railroad issue on May 5.  With a 
smile, he said that dry cargo might find its way onto the 
railroad "in twenty or thirty years" - but right now, in 
SOCAR's view, the railroad is overwhelmingly about oil 
transport.  Both SOCAR and Itochu argue that future Caspian 
volumes will be so great that the rail link will be a 
necessity - BTC, the Baku-Supsa pipeline, the 
Baku-Novorossiysk pipeline and the existing rail corridor to 
Batumi will not be enough. 
 
¶5. (C) The view of Itochu and SOCAR contradicts the viewpoint 
expressed by BP Azerbaijan Associate President David Woodward 
and by the British Ambassador, both of whom do not believe 
that the railroad is justifiable on grounds of future 
volumes.  Both have also questioned the ability of Turkish 
transportation infrastructure to move large oil volumes 
onward from Kars, located in an underdeveloped region of 
Turkey.  In their view Turkey would either have to improve 
eastern Turkey's connectivity to world markets, or build a 
network of refineries there, or both, to make Kars a 
reasonable destination for large quantities of Caspian oil. 
 
¶6. (C) On May 11, Energy Officer met with Seisuke Shimizu, 
First Secretary of the Japanese Embassy in Baku.  Shimizu 
said that the Japanese Government does not support the 
 
BAKU 00000720  002 OF 002 
 
 
railway project.  Shimizu said that Japan does not want to 
get involved in disputes between Azerbaijan and Armenia. 
Shimizu admitted that he did not know whether Japan would 
block financing of the project by international financial 
institutions.  Shimizu added that Azerbaijani President 
Aliyev had raised the issue during his March trip to Tokyo, 
and that the GOAJ had insisted on including a reference to 
the railroad in the joint statement issued by President 
Aliyev and Prime Minister Koizumi.  The final language read: 
"The Azerbaijani side stressed that the 
Kars-Akhalkalaki-Tblisi-Baku railway project will contribute 
to the economic development of countries of the region.  The 
Japanese side took note of the importance of the improvement 
of regional transportation networks connecting Azerbaijan and 
neighboring countries." 
 
¶7. (C) COMMENT: Itochu's approach to Embassy Baku paralleled 
its recent approach to Embassy Ankara and its planned 
approach to Embassy Tblisi (Ref A).  Although some have 
dismissed the rail project as nothing more than a poke in 
Armenia's eye, Itochu apparently believes SOCAR's argument 
that the project is necessary for oil transport and sees it 
as a project worthy of investment.  Itochu is clearly feeling 
out the political landscape before going further.  The GOAJ, 
for its part, is actively seeking international backing for 
the project, having raised it with Japan, with the United 
States, and at the Economic Cooperation Organization summit 
in Baku (Ref B).  The GOAJ seems committed to making the 
project happen, and its next step may well be international 
financial institutions. END COMMENT. 
HYLAND