VZCZCXYZ0010
RR RUEHWEB

DE RUEHKB #0688/01 1521259
ZNR UUUUU ZZH
R 011259Z JUN 07
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 3153
INFO RUEHAK/AMEMBASSY ANKARA 2166
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS BAKU 000688 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT PLEASE PASS TO COMMERCE DEPUTY SECRETARY DAVID SAMPSON 
 
E.O. 12958: N/A 
TAGS: ECON PREL PGOV EFIN EPET ENRG AJ
SUBJECT: SCENESETTER FOR DEPUTY SECRETARY SAMPSON'S VISIT 
TO AZERBAIJAN 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION - 
HANDLE ACCORDINGLY. 
 
¶1. (SBU) We warmly welcome your upcoming visit to Baku and 
believe it will advance U.S. energy, commercial, and economic 
reform objectives.  Since President Aliyev's successful visit 
to Washington in April 2006, we have been engaged in an 
intensive effort to elevate and strengthen the bilateral 
relationship.  U.S. interests in Azerbaijan center around 
three key areas:  regional security and the War on Terrorism; 
energy security; and promoting democracy through political 
and economic reform.  Stronger commercial relations are key 
to ensure U.S. companies play an active role in Azerbaijan's 
economic development.  Our interests depend on progress in 
all three areas, as our excellent, ongoing cooperation in 
security and energy require the long-term prosperity and 
stability that only democratic, market-oriented institutions 
can deliver.  With its strategic location, enormous energy 
reserves and rapidly expanding economy, Azerbaijan is poised 
to experience an unprecedented market boom gives it 
significant potential as a regional economic leade.  This 
growth also poses many political and economic policy 
challenges, which underscore the need for sustained reform. 
 
ENERGY 
------ 
 
¶2. (SBU) With the opening of the Baku-Tbilisi-Ceyhan oil 
pipeline and the South Caucasus Gas pipeline in 2006, 
Azerbaijan completed the first phase of energy development, 
emerging as a key producer and linchpin of the East-West 
energy corridor.  Azerbaijan is poised to enter the second 
phase of its energy development, with large gas reserves in 
the Shah Deniz and Azeri-Chirag-Gunashli fields that could 
greatly advance energy security objectives for the South 
Caucasus and for Europe.  Azerbaijan is committed to 
providing gas to Europe and is eager to explore prospects for 
new Trans-Caspian agreements that could bring gas from 
Kazakhstan and Turkmenistan into the East-West corridor.  The 
key next step is to secure a gas transit agreement with 
Turkey which will enable Azerbaijan to export gas to Greece. 
Azerbaijan also is exploring possibilities to join the 
Nabucco pipeline, but it is unlikely that Azerbaijan will 
have adequate volumes of gas production to meet current 
Nabucco timelines.  The Caspian Oil and Gas Show will bring 
together key government and private sector officials at a 
very important time in the development of new energy 
projects. 
 
BILATERAL ECONOMIC ISSUES 
------------------------- 
 
¶3. (SBU) Your visit follows on the successful inaugural 
Economic Partnership Commission in February and comes at a 
critical time as we look to elevate the U.S.-Azerbaijan 
bilateral economic dialogue.  Drawing upon the President 
Aliyev's long-term vision for sustainable development and 
sound use of Azerbaijan's energy revenue, continued U.S. 
engagement is an important 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 
your visit include instilling with the GOAJ the need for a 
stable macroeconomic environment, stressing the importance of 
an open business environment, highlighting the benefits of 
World Trade Organization membership, and encouraging the GOAJ 
do more to combat corruption. 
 
¶4. (SBU) 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. 
We believe that continued, high-level engagement by the 
United States is needed to advance our objectives and 
particularly to encourage the reforms that are essential to 
true, long-term stability in this 
strategically important country. 
 
ECONOMIC CHALLENGES 
------------------- 
 
¶5. (SBU) The GOAJ faces many economic and political 
 
challenges as it attempts to utilize and manage efficiently 
its energy wealth.  The major revenue inflows begin in 
earnest 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 
revenue is limited by a very weak economic governance, 
including 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, in other areas, such as its 
efforts to combat corruption and implement rule of law, still 
fall well short. 
 
MACROECONOMIC ENVIRONMENT 
------------------------- 
 
¶6. (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.  Most economic observers expect inflation to reach 20 
percent or more in 2007 as the economy continues to expand 
and the Government's January fuel price and utility tariff 
increases ripple through the economy.  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 
------------------------------ 
 
¶7. (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. 
The Government of Azerbaijan recognizes that corruption is a 
major problem that could jeopardize the country's economic 
growth, as well as its social and political development. 
 
¶8. (SBU) The GOAJ has recently taken some positive steps to 
improve the business environment and increase transparency, 
including the proposal to create a "one-stop-shop" for 
companies to register and operate in Azerbaijan.  The GOAJ 
needs to follow-up on its efforts by implementing a series of 
measures that ensure the effective development of 
Azerbaijan's non-energy sector.  An important step in 
integrating Azerbaijan into the world economy and sending a 
positive signal to investors is accession to the WTO, a goal 
strongly supported by the United States.  Progress in 
Azerbaijan's WTO accession process will signal the country's 
desire to meet international standards and create a fair 
business climate. 
 
¶9. (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.  The 
Government of Azerbaijan recognizes that it must diversify 
its non-energy sectors and recently told visiting Foreign 
Agriculture Service General Sales Manager Kirk Miller that 
the agriculture sector is one of the government's top 
priorities and important for Azerbaijan's diversification, 
increased employment, and resolution of social and economic 
problems. 
 
¶10. (SBU) 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. 
 
POTENTIAL SECTORS FOR U.S. BUSINESSES 
------------------------------------- 
 
¶11. (SBU) Outside of the energy sector, Azerbaijan represents 
a growing and largely untapped market for U.S. companies. 
Telecommunications and information technology are clearly 
 
promising sectors, essential for Azerbaijan to fulfill its 
goal of rapid development of the non-oil sectors of the 
economy.  The GOAJ is preparing to launch Regional Innovation 
Zones in order to foster development of a high technology 
sector.  The GOAJ is also planning to launch "special 
economic zones" where companies can operate duty and tax 
free, further promoting the expansion of the private sector. 
 
¶12. (SBU) Agriculture is another promising sector, 
representing the country's second largest sector after oil 
and gas and its largest employer, accounting for more than 30 
percent of the work force and about 12 percent of GDP.  Rapid 
development of agribusiness is essential to creating 
employment opportunities and increasing family incomes in 
Azerbaijan, and is an excellent vehicle to ensure 
Azerbaijan's regions benefit from its newfound prosperity. 
Currently, small and medium-sized farms, ranging from one or 
two hectares to several hundred hectares produce nuts, 
fruits, vegetables, grain, dairy products, meat, and some 
poultry under labor-intensive conditions.  We hope to build 
on the positive momentum generated by a recent 
U.S.-Azerbaijan Chamber of Commerce Agriculture Trade Mission 
and encourage new U.S. trade in pomegranates and hothouse 
flowers and plants, as well as irrigation exports. 
 
¶13. (SBU) Construction is another promising area for 
increased U.S. exports.  As GDP expands and incomes rise, the 
residential and commercial real estate market is growing 
rapidly.  The medical equipment market also is likely to grow 
in coming years given Azerbaijan's plans to reform the 
health-care sector and modernize its medical infrastructure. 
Following the collapse of the Soviet Union, reforms in the 
Azerbaijani health-care industry led to major restructuring 
in the public and private sectors. 
 
GOAJ COMMITTED BUT NEEDS U.S. ADVICE 
------------------------------------ 
 
¶14. (SBU) Azerbaijan is interested in hearing U.S. advice on 
how best to manage its economic transition and long-term 
sustainable development.  Azerbaijani government officials 
need to hear U.S. advice and counsel on economic issues, 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. 
 As in many post-Soviet countries, Azerbaijan lacks the 
experience necessary to manage its energy wealth and rapid 
growth.  The government's efforts with the Extractive 
Industries Transparency Initiative are a positive step 
forward.  Its transparent management of the funds in the 
State Oil Fund and its leadership in the Extractive 
Industries Transparency Initiative are important steps, a 
model for the world.  The U.S. needs to support GOAJ efforts 
to reform the economic decision-making processes and 
transform Azerbaijan into an economically stable democracy. 
 
¶15. (U) Your visit next week provides an excellent 
opportunity to advance the USG's agenda in Azerbaijan. We 
look forward to welcoming you. 
DERSE