VZCZCXRO4654
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHKB #0147/01 0321030
ZNR UUUUU ZZH
R 011030Z FEB 07
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 2322
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1976
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BAKU 000147 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EB A/S SULLIVAN 
 
E.O. 12958: N/A 
TAGS: ECON PREL PGOV EFIN EPET ENRG AJ
SUBJECT: ECONOMIC PARTNERSHIP COMMISSION SCENESETTER FOR EB 
A/S SULLIVAN'S VISIT TO AZERBAIJAN 
 
REF: (A) 06 BAKU 1721 (B) BAKU 131 (C) BAKU 89 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION - 
HANDLE ACCORDINGLY 
 
¶1. (SBU) The inaugural Economic Partnership Commission comes 
at a critical time as we look to elevate the U.S.-Azerbaijan 
bilateral economic dialogue.  Azerbaijan's rapid economic 
growth, the fastest in the world, and its expected USD 250 
billion in energy revenues over the next decade, highlight 
the need for continued U.S. engagement to ensure Azerbaijan's 
successful sustainable economic development. The Government 
of Azerbaijan (GOAJ), led by President Aliyev and his 
economic team of Finance Minister Sharifov, Economic 
Development Minister Babayev, National Bank Chairman 
Rustamov, and Oil Fund Executive Director Movsumov, is keen 
to secure the correct path for sustainable long-term economic 
development. 
 
¶2. (SBU) Drawing upon the President Aliyev's long-term vision 
for sustainable development and sound use of Azerbaijan's 
energy revenue (ref a), the EPC could be a useful tool to 
help shape Azerbaijan's transition from a struggling 
post-Soviet state to a democratic, market-oriented regional 
leader that is a strong partner in Euro-Atlantic 
institutions.  Key objectives for the EPC include instilling 
with the GOAJ the need for a stable macroeconomic 
environment, stressing the importance of an open business 
environment, highlighting the positives of World Trade 
Organization membership, and encouraging more GOAJ 
co-financing of U.S. assistance projects.  In all of these 
areas, we would like to achieve concrete results and agree 
with the GOAJ on strategic objectives for the coming year. 
 
ECONOMIC CHALLENGES 
------------------- 
 
¶3. (SBU) The GOAJ faces many economic and political 
challenges as it attempts to utilize and manage efficiently 
its energy wealth.  With the fastest growing economy in the 
world, Azerbaijan stands ready to receive more than USD 250 
billion in oil and natural gas revenues over the next decade 
and a half.  The "Tsunami of money" begins in 2009 when the 
GOAJ should receive approximately USD 20 billion in energy 
revenues.  The GOAJ's ability to absorb and appropriately 
manage this massive influx of money is limited by a fractured 
economic decision-making process, wide-spread corruption in 
all sectors, an opaque and monopolized business climate, weak 
rule of law, and a lack human capacity.  While the GOAJ has 
taken some initiative to improve the economic situation, 
other areas, such as its efforts to combat corruption and 
implement rule of law, have fallen well short. 
 
MACROECONOMIC ENVIRONMENT 
------------------------- 
 
¶4. (SBU) In 2005 and 2006 Azerbaijan experienced rapid 
economic growth, with GDP growth exceeding more than 30 
percent in both years.  Local economic and financial experts 
expect GDP growth to exceed 30 percent again in 2007.  The 
main engine behind the GDP growth remains the vibrant energy 
sector (energy scenesetter septel).  Inflation remains 
relatively tame, although the recent fuel price and utility 
tariff increases in January (ref b and c) likely will raise 
inflation levels close to 20 percent for 2007.  In 2006, the 
GOAJ tightly controlled the appreciation of the Azerbaijani 
manat, holding down prices at the expense of higher 
inflation.  It is likely that the National Bank will resume 
its anti-inflation strategy in 2007, however, and allow the 
national currency to appreciate against the U.S. dollar. 
 
BUSINESS OPERATING ENVIRONMENT 
------------------------------ 
 
¶5. (SBU) Operating a legitimate business in Azerbaijan -- 
outside the transparent legal framework of the energy 
sector's Production Sharing Agreements -- is a challenging 
endeavor within a system stacked in favor of illegal 
operations.  Many legal businesses in the non-energy sectors 
face official bureaucracy, lack of capacity, rule of law 
problems, and corruption that cloud the investment climate 
and create a difficult environment in which to do business. 
Days before your visit to Baku, the GOAJ plans to announce 
new measures in order to improve Azerbaijan's World Bank/IFC 
"Doing Business" rating.  This first positive step needs to 
 
BAKU 00000147  002 OF 002 
 
 
be followed by a series of measures that ensure the effective 
development of Azerbaijan's non-oil sector, including 
agriculture. 
 
¶6. (SBU) The agricultural sector continues to contract as 
more arable land remains untilled and rural agricultural 
workers come to the capital Baku looking for work.  While the 
GOAJ, in coordination with the international donor community, 
has attempted to spur economic growth in the rural areas, 
positive development has been limited.  In the long-term, the 
agricultural sector will be key to Azerbaijan's economic and 
political stability.  Unlike its Caspian Sea neighbor 
Kazakhstan, Azerbaijan's proven energy resources will most 
likely be depleted shortly after 2030 and the country 
urgently needs to develop the non-oil sector to ensure future 
growth. 
 
¶7. (SBU) A fractured system of economic decision-making 
further hinders Azerbaijan's ability to manage the current 
transition.  The GOAJ's budgetary, fiscal and monetary policy 
decision-making has not always included all branches of the 
government.  Finance Minister Sharifov (appointed in April 
2006) appears to be making a concerted effort to organize 
economic policy to ensure efficient management of the 
country's resources.  The U.S. needs to support GOAJ efforts 
to reform the economic decision-making processes and 
transform Azerbaijan into an economically stable democracy. 
 
¶8. (SBU) Sharifov, along with Economic Development Minister 
Babayev, the State Oil Fund Executive Director and the 
National Bank Chairman, has been active in utilizing the 
recently implemented macroeconomic modeling unit set up at 
the Oil Fund to run macroeconomic scenarios based upon 
government spending and inflation.  President Aliyev's 
economic team, however, faces an economy controlled by large 
state-owned enterprises and monopolies, effectively 
suffocating entrepreneurial growth.  The banking sector, for 
example, is vibrant and dynamic but its long-term growth is 
stunted by the two large state-owned banks (International 
Bank of Azerbaijan and Kapital Bank) which control more than 
50 percent of the retail and commercial banking sectors. 
 
GOAJ COMMITTED BUT NEEDS U.S. ADVICE 
------------------------------------ 
 
¶9. (SBU) Azerbaijan is interested in hearing U.S. advice on 
how best to manage its transition and long-term sustainable 
development.  The EPC is a forum to present USG expertise and 
technical knowledge that will resonate with senior GOAJ 
officials.  As in many post-Soviet countries, Azerbaijan 
lacks the experience necessary to manage its energy wealth 
and rapid growth.  The USG, within the EPC framework, will 
have the opportunity to offer its collective thoughts and 
counsel on managing the macroeconomic environment, how to 
improve the business operating environment to spur more 
foreign direct investment and stress the importance of 
combating corruption. 
 
¶10. (SBU) In addition, with falling U.S. assistance funds, 
the U.S. and GOAJ will need to implement a co-financing plan 
which enables continued U.S. technical assistance over the 
long term.  While some of the U.S. messages may not resonate 
immediately within in the GOAJ, it is in the long-term U.S. 
interest that Azerbaijan take the stable and successful path 
towards economic, social and political reform.  The robust 
U.S. assistance strategy with Azerbaijan remains an important 
part of the U.S.-Azerbaijan bilateral relationship. 
 
¶11. (U) The participation of a broad USG interagency 
delegation in the inaugural EPC signals to Azerbaijan the 
seriousness of U.S. economic commitment to successful 
development and provides an excellent opportunity to advance 
the critical reform agenda needed for a stable Azerbaijan. 
Embassy Baku looks forward to ensuring the EPC is a success. 
DERSE