VZCZCXRO8381
PP RUEHDBU
DE RUEHKB #1389/01 3201304
ZNY CCCCC ZZH
P 161304Z NOV 07
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 4285
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 2469
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001389 
 
SIPDIS 
 
SIPDIS 
 
DEPT PLEASE PASS TO DEPT OF AGRICULTURE WASHDC 
ANKARA PLEASE PASS TO FAS GIFFORD 
 
E.O. 12958: DECL: 09/10/2017 
TAGS: ECON EAGR EAID USDA AJ
SUBJECT: WESTERN AZERBAIJAN: REGIONAL NON-OIL SECTOR 
DEVELOPMENT 
 
 
Classified By: DCM DONALD LU; REASONS 1.4 (B,D) 
 
¶1. (SBU) SUMMARY: Econoffs visited a range of private and 
primarily agricultural companies in western Azerbaijan around 
Azerbaijan's second largest city, Ganja, to discuss regional 
development in the non-oil sector.  The team met with Ganja's 
regional governor, visited the newly opened regional airport, 
met with the rector of Azerbaijan's sole Agricultural 
University, and visited a range of agricultural processors 
and growers, as well as a mid-size mining company.  While 
there were signs of increased construction, some new 
equipment and some increased economic activity in the region, 
Econoffs also saw unproductive and underutilized fields even 
in the part of the country most famous for producing grapes 
and pomegranates, two of Azerbaijan's biggest agricultural 
production inputs.  END SUMMARY. 
 
Food Processing Plants: Pomegranates and Juice 
--------------------------------------------- -- 
 
¶2. (SBU) Econoffs visited two small/medium-size juice 
processing factories (Gizil Ahmet andInterPak) of the 
handful that exist in the regio, each employing between 
20-60 employees.  Due t the increased demand for pomegranate 
juice and concentrate in the past few years, both factories' 
primary product is pomegranate juice, with other exotic fruit 
juices making up less than 15 percent of production and 
sales.  Small and medium size enterprises (SMEs) cannot 
afford to produce the more valuable pomegranate concentrate 
because equipment is expensive and requires large capital 
inputs.  Many SMEs lack access to credits and financing to 
modernize or expand operations.  While conditions are basic 
at small processing plants, with old Soviet-era equipment and 
facilities, a processing company that worked with USAID is 
expanding and becoming a year-round operation, increasing the 
number of employees, investing in modern, locally-produced 
equipment, and diversifying into new export markets. 
 
¶3. (SBU) Many of the juice processing SMEs do not sell on the 
local market where prices are low, but instead export to 
countries of the former Soviet Union where prices are higher. 
 Most must import production inputs like bottles, caps and 
labels, but use local produce for juices.  The companies 
identified their two biggest challenges as: limited capital 
due to the high cost of credit and the bureaucratic process, 
especially working with customs officials for importing 
inputs and exporting juice products.  For many small 
companies the cost of doing business often includes bribing 
local government officials (taxes, customs).  For InterPak, 
the company that worked with USAID, the biggest benefit it 
received from the project was knowing and understanding the 
regulations that allowed them to combat some small-scale 
corruption, avoiding unofficial fees for non-compliance with 
complicated rules. 
 
¶4. (SBU) Econoffs also visited two large-scale juice and 
concentrate producers, Gilan and MPro.  Both companies employ 
several hundred employees, operate year-round production, 
have imported top-of-the-line equipment from Europe, and have 
plans to expand production.  Both companies pay attention to 
sanitation and quality standards, claiming to have the best 
in Azerbaijan.  (Note: Interpak's owners confirmed that their 
product could not compete with Gilan or MPro's quality.) 
Both have plans to expand pomegranate concentrate production 
for export by finding new international buyers.  Both 
producers have alternate production lines which they plan to 
expand (one produces jams while the other produces long-term 
milk and various milk products).  Both companies acknowledge 
that their equipment is not used to full capacity at current 
production levels.  Both Gilan and MPro are also increasing 
various juice productions, some of which are sold on the 
local market, and introducing new products and leather 
production.  The majority of their products are exported to 
the former Soviet Union, but also include other markets like 
the United States. 
 
¶5. (SBU) There is a lack of modern, large-scale agricultural 
production in Azerbaijan.  Gilan and MPro told Econoffs that 
they plan on establishing farming enterprises in the future 
to avoid produce shortages.  The lack of proper irrigation is 
the biggest challenge to agriculture and agribusiness in 
Azerbaijan, Gilan's General Manager said, adding that Gilan 
imports some of it's produce for juice processing.  MPro said 
bureaucratic challenges and linkages to increase demand for 
it's products so it could increase production and use 
equipment to full capacity, are the two biggest problems it 
faces.  Both companies have rumored ties to high-level GOAJ 
 
BAKU 00001389  002 OF 003 
 
 
officials. 
 
Cognac and Wine 
--------------- 
 
¶6. (SBU)  Econoffs visited two large-scale cognac and wine 
producers (Tovuz Baltiya and Ganja II Winery), each with 
several hundred employees, imported inputs like bottles, caps 
and labels, modern equipment, and plans to expand production. 
 Tovuz Baltiya has strong ties to the Baltic countries and 
exports 80 percent of the cognac and wines it produces to 
countries like Russia, Ukraine, Japan and Europe.  It sells 
only 20 percent of its production in Azerbaijan. 
 
¶7. (SBU) Tovuz Baltiya is involved in farming enterprises 
(grape cultivation), because, like the juice producers, the 
company has a hard time meeting it's input needs by 
purchasing from local producers.  Currently, Tovuz Balitiya 
buys apples, quince, pomegranates and grapes, and wants to 
establish a credit system for small farmers to increase 
capital in the regions and help strengthen individual and SME 
agricultural production.  Tovuz Baltia representatives asked 
Econoffs if there were any USG project or company that could 
help provide small credit loans to individual farmers in the 
north-western Tovuz region. 
 
¶8. (SBU) Ganja II Winery produces many of its own grapes, and 
has plans to expand its agricultural production over 200 
percent in the next three years to meet rising local demand. 
Like Tovuz Baltiya, it also purchases grapes from local 
farmers after testing the produce.  With local wine demand 
increasing, Ganja II Winery's General Manager said, he 
exports only about 15 percent of his product, selling the 
rest of his award-winning product on the local market. 
 
Government Officials, Airports and Education 
-------------------------------------------- 
 
¶9. (SBU)  In Azerbaijan's second largest city, Ganja, Econoff 
observed more construction, more people and business activity 
in the streets, and a few more businesses compared to 
previous years. Ganja's regional Governor agreed that the 
situation in Ganja is improving: there is more economic 
activity, the population has increased 30 percent in one 
year, poverty is down, and utility services (gas, water, 
electricity) are stable.  Rumored to be one of the most 
progressive regional governors, Ganja's governor lived up to 
his reputation by telling Econoffs that he is trying to 
improve the economy by improving infrastructure, creating the 
right environment (organizing fairs, conferences and trade 
shows), and supporting entrepreneurial growth rather than 
trying to direct it.  Along with agribusiness, he said there 
are waste processing and brick production projects underway. 
He also said that tourism could be a growth sector and 
pointed out there is a five-star hotel being built and a new, 
state-of-the-art airport that recently opened. 
 
¶10. (SBU) Econoffs visited Ganja International Airport, which 
started operating its two runways in October 2006 and now 
employs 800 people.  Built in less than one year, the 
facility seems modern and sparkling clean, with 
state-of-the-art equipment.  Airport officials said the 
airport is staffed to service 300 passengers an hour. The 
airport currently services one weekly flight to Turkey, one 
daily flight to Russia, and one daily flight to Baku.  It 
previously also had one daily flight to Azerbaijan's 
Nakhchivan Autonomous Republic, but those flights stopped in 
August when the plans were re-routed to the Baku-Nakchivan 
route to relieve thousands of stranded passengers in 
Nakhchivan.  Ganja-Nakchivan flights were set to resume in 
late October when a French-made airplane would be delivered 
and resume the Baku-Ganja-Nakhchivan route, officials said. 
 
¶11. (SBU) Azerbaijan's Agriculture University is the only 
agricultural education institution in Azerbaijan.  It has 
been under-funded for years and the quality of the education 
and enrollment have suffered. Growth in Azerbaijan's 
agriculture sector has been steadily declining in the past 
few years and is now anemic. Although 40 percent of those 
employed in Azerbaijan are in the agriculture sector, most 
production is small-scale or subsistence farming.  Careers in 
agriculture and veterinary services do not attract 
Azerbaijan's youth and the lack of demand and prestige is 
evidenced at the Agriculture University.  In fact, despite 
the universities efforts to establish an avian influenza 
laboratory and to apply Bologna Process standards to the 
veterinary sciences, it attracted only 25 veterinarian 
 
BAKU 00001389  003 OF 003 
 
 
graduates last year.  To combat the decline in agriculture 
and animal services, the university's leadership is 
cooperating with German agencies to send students to Germany 
for academic and internship opportunities.  University 
officials asked Econoffs if there were possibilities of 
establishing educational exchanges and internship training 
with U.S. institutions or businesses. 
 
Mining 
------ 
 
¶12. (SBU) Econoffs met with the management of a mid-size, 
government-controlled (51 percent) gold mine with American 
partners, Mis Dagh.  Like the other businesses in the region, 
Mis Dagh's management had plans for expansion and hope to 
employ approximately 1000 people by fall 2008 as they expand 
from the exploration phase into the excavation and extraction 
phases.  With the high price of gold and new mining 
technology, the management says that the operation which 
started in 2005 will likely be profitable in the years to 
come. 
 
Comment 
------- 
 
¶13. (C) While challenges such as working with customs, 
creating market linkages to increase demand, and improving 
efficiency to make products more competitive abound, many of 
the companies Econoffs visited were planning to expand 
production and increase production lines.  Generally, 
agribusinesses preferred to export their products because of 
higher prices abroad.  While basic business management and 
marketing education is helping SMEs, they face bureaucratic 
and quality issues when looking to expand into new markets. 
The lack of access to capital also limits SMEs.  Large-scale 
processors have an advantage when it comes to producing a 
quality product for export into new markets because they have 
invested in modern equipment to increase quality and 
production capabilities. However, most businesses are not yet 
efficient as staffing levels are too high and modern 
equipment is often underutilized at current production 
levels. 
 
¶14. (C) Comment Continued: Many large-scale producers also 
complained of the lack of availability of local produce that 
they use as inputs fr processing.  While there are some 
relatively lrge-scale processors in Azerbaijan, it is 
unclea how many are profitable and how many remain open 
because of rumored government ties.  More than half of the 
businesses Econoffs visited pointed to local employment and 
regional development as their primary goals rather than 
profit seeking.  MPro, which produces juice, juice 
concentrate, milk and milk products, seems to be a profitable 
large business which faces many of the same challenges as 
SMEs in Azerbaijan, including conflicts with customs 
officials. However, despite customs interference and 
monopolistic powers, some of the government-linked producer's 
(basically any large-scale processor) profits are plagued by 
glaring inefficiencies like high import costs, high staffing 
levels, and lack of demand in foreign markets which limits 
production levels. 
 
DERSE