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RR RUEHDBU
DE RUEHKB #0683/01 1520923
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R 010923Z JUN 07
FM AMEMBASSY BAKU
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INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 2164
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000683 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 06/01/2017 
TAGS: ECON EFIN PREL ENRG AJ
SUBJECT: AZERBAIJAN: FINANCE MINISTER DISCUSSES ECONOMIC 
REFORMS AND PLANS FOR MODERNIZATION 
 
Classified By: AMBASSADOR ANNE E. DERSE PER REASONS 1.4 (B, D). 
 
¶1. (C) SUMMARY:  During a May 29 meeting with Deputy 
Assistant to the Vice President for National Security Affairs 
Joseph Wood and Ambassador Derse, Minister of Finance Samir 
Sharifov stated that Azerbaijan's economy was expanding 
rapidly and that as a result inflationary pressures were 
increasing.  He told Wood that the government was moving 
forward in its efforts to improve the social and physical 
infrastructure of the country, including reforming the health 
care and education sectors.  Sharifov explained to Wood 
Government of Azerbaijan (GOAJ) plans to reform the domestic 
energy sector, improving overall efficiency while providing 
higher quality services to the public.  Sharifov highlighted 
the important connection between the Oil Fund and the state 
budget, noting the looming issue of decreasing tax revenues 
and the growing temptation to draw down Oil Fund assets. 
Regarding corruption, Sharifov said that Azerbaijan was in a 
"difficult situation" and that the lack of knowledge 
regarding correct procedures enabled corruption and bribery 
to thrive.  END SUMMARY. 
 
¶2. (C) In a May 29 meeting with Deputy Assistant to the Vice 
President for National Security Affairs Joseph Wood and 
Ambassador Derse, Finance Minister Sharifov briefed on 
Azerbaijan's efforts to modernize its social and physical 
infrastructure, deregulate the domestic energy market and 
effectively use its energy revenues.  Wood told Sharifov that 
the Vice President appreciates Azerbaijan's strategic choice 
of integration with the West and its regional importance and 
that he was traveling in the region to get the "Azerbaijani 
perspective."  In addition, Wood said that Azerbaijan had 
made an important decision to shift its energy and economic 
policies towards the West. 
 
¶3. (C) Minister Sharifov briefed Wood on Azerbaijan's 
economic situation, highlighting the country's rapid growth 
-- the fastest in the world in 2006.  Sharifov expressed 
concern over possible "overheating" in the economy and 
recognized that inflationary pressures were increasing.  He 
characterized higher inflation as what the GOAJ "expected" 
and a period that the government needed to deal with in the 
short-term in order to expand and diversify the economy. 
 
¶4. (C) Sharifov told Wood that the GOAJ was implementing a 
modernization program to improve social and physical 
infrastructure, including reforming the health care and 
education systems.  He briefed Wood on the GOAJ's efforts to 
rehabilitate schools in Baku and the rural areas, noting that 
many schools were in "bad shape."  Sharifov said that the 
President made improving the education system a priority and 
that the Finance Ministry was studying a project to give 
schools more financial independence. 
 
¶5. (C) Turning to Azerbaijan's efforts to improve its 
health-care system, Sharifov stated that the GOAJ was working 
with the World Bank to implement a pilot program in five 
districts of Baku to improve health-care services.  While 
recognizing that the state could not provide all health-care 
services, Sharifov stated that the GOAJ was studying a 
health-care scheme in which the government paid for some 
services.  He told Wood that there would be a Presidential 
decree in June outlining the new health-care reforms. 
 
¶6. (C) On physical infrastructure projects, Sharifov 
explained to Wood the GOAJ's plans to ensure energy security, 
including crude oil and gas production.  He said that while 
Azerbaijan was ready to purchase supplies to ensure domestic 
needs, the country was not prepared to buy "at any cost" and 
would not be "blackmailed" by any exorbitant demands. 
Sharifov, noting Azerbaijan's difficult geographic location, 
gave as an example Gazprom's unilateral decision to cancel a 
contract with Azerbaijan and then demand a higher price for 
gas in 2006. 
 
¶7. (C) Turning to the domestic energy market, Sharifov 
briefed Wood on GOAJ plans to improve the country's electric 
infrastructure and build new power generation capacity. 
Sharifov said that Azerbaijan's fast economic growth and 
improving living standards demanded a reliant and efficient 
domestic energy system.  He said that the GOAJ planned to 
build two new power stations at Sangachal and Alibayramli. 
Sharifov explained that the GOAJ also planned to implement an 
electric usage metering system to improve tariff collection, 
while educating the public on its responsibilities to pay 
utility bills.  Sharifov stated that the government's goal in 
the domestic energy market was to "create a free market 
system of public utilities." 
 
 
BAKU 00000683  002 OF 002 
 
 
¶8. (C) Sharifov recognized the difficulty in changing the 
public's perceptions and culture regarding the role of the 
state.  He explained how the former Soviet system had shaped 
Azerbaijanis to "cheat" the system in order to survive and 
that changing this mentality would take time.  He stated that 
the GOAJ needed to educate the public on the role of the 
state in the public sphere, including in health care. 
Sharifov told Wood that the government would like to find a 
"balance" between government and private interests. 
 
¶9. (C) Comparing Azerbaijan and Georgia's health care reform 
progress, Sharifov noted that Azerbaijan had begun later than 
Georgia and that the former minister of health (now in jail) 
had blocked all possible reforms.  He indicated that there 
were some advantages, as well as disadvantages, to getting a 
late start, adding that reform was "not simple."  Sharifov 
noted that Azerbaijan could learn from other countries' 
mistakes and implement a program designed to meet 
Azerbaijan's needs.  He added that the Ministry of Finance 
was closely involved in reform efforts since they would be 
financed by the government. 
 
¶10. (C) Regarding Azerbaijan's aspirations to accede to the 
World Trade Organization (WTO), Sharifov cautioned that 
Azerbaijan's non-energy economy was not "competitive" and 
could be "adversely affected" by eventual WTO membership.  He 
stated that the economy was not strong enough or diverse 
enough to compete globally, adding that Azerbaijan 
principally exported crude oil and natural gas.  In addition, 
he stated that the GOAJ had not seen the advantages of WTO 
membership.  Despite his concerns, he told Wood that the GOAJ 
was "working on WTO membership" but that it would not be an 
"easy path." 
 
¶11. (C) Sharifov told Wood that the State Oil Fund had won a 
United Nations public service award for all its efforts to 
provide for future generations.  He stated that the Oil Fund 
had selected Thompson Financial to provide it with software 
services to expand the fund's portfolio allocation.  Sharifov 
said that a new law on the Oil Fund had been drafted and 
would be sent to the President for his approval and then to 
Parliament.  The Oil Fund will diversify its portfolio to 
include more long-term securities, while preserving an 
allocation for emergency needs. 
 
¶12. (C) Sharifov highlighted the important connection between 
the Oil Fund and the state budget.  He said that with tax 
revenues decreasing in the coming years due to the profit 
sharing shift, the GOAJ could be tempted to draw down Oil 
Fund assets.  Sharifov cautioned that the government would 
need "to reduce its dependence on the Oil Fund" and find 
other means to finance future budgets, including by reducing 
fiscal spending. 
 
¶13. (C) Despite Azerbaijan's rapid economic growth, Sharifov 
stated that the GOAJ needed to spur non-energy sector growth. 
 He said that the 12 percent growth in the non-energy sector 
in 2006 was "not bad" but that the GOAJ needed to use the 
resources in the Oil Fund to shift the balance within the 
economy in order to strengthen non-energy sectors and make 
them more resistant to shocks.  This shift would also reduce 
Azerbaijan's dependence on its energy revenues. 
 
¶14. (C) Turning to GOAJ efforts to combat corruption, 
Sharifov said that Azerbaijan was in a "difficult situation" 
and that the lack of knowledge regarding correct procedures 
enables corruption and bribery to thrive.  Sharifov agree 
with Wood that transparency was the difference between 
"corruption and transaction costs."  For that reason, 
Sharifov noted, the GOAJ was trying to make the system more 
transparent so the public understood what forms and payments 
were required for different services.  He stated that the 
GOAJ was in the process of creating a "one-stop-shop" for 
businesses to open and register with the government. 
Sharifov recognized that procurement remained a "big issue" 
for the GOAJ and that the planned new law on state 
procurement would help improve government efforts.  Sharifov 
highlighted that the GOAJ was working to minimize problems 
and improve transparency.  In the end, Sharifov felt, the 
government was moving in the right direction. 
 
¶15. (U) This cable was not cleared by Deputy Assistant to the 
Vice President Wood. 
DERSE