Ambassador's Remarks

The U.S.-Azerbaijan Economic Relationship: Challenges and Opportunities

AmCham Monthly Luncheon

March 30, 2006

I.

Ladies and Gentleman, thank you and good afternoon. It is indeed a pleasure to address you today. No doubt many of you have heard that I have accepted a new position at the State Department in Washington and will be leaving Azerbaijan on April 24. In Washington I will serve as the Principal Deputy Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs. As I reflect fondly on my tenure here, I also look forward with optimism at the opportunities for Azerbaijan to secure a better future through the blessings of its oil wealth. In that spirit, it is fitting that today I stand before the representatives of dozens of businesses, many American, to discuss the challenges, and yes opportunities for our relationship with Azerbaijan. None of us in the room today would be here if we did not believe that this country's hoped-for development stands to benefit us just as it benefits the Azerbaijani people. We all expect great things from Azerbaijan, and have already seen the emergence of two mighty pipelines that will bring oil and gas to the world. These pipelines are a starting point for a new U.S. policy initiative to support further energy diversification. The international community and U.S. are bullish on Baku as an energy hub. Yet, we all understand, from our vantage point as outsiders on the inside of Azerbaijan, that much more remains to be done. These two pipelines could be just the beginning of a democratic, developed, and dependable partner for the United States and the world. The opportunities are incredible; the challenges posed by a rapidly expanding economy are real. The U.S. has made significant investment of our resources and goodwill in Azerbaijan with the aim of benefiting Azerbaijan's people. The Azerbaijani poet Nizami had it right when he said that, "The good that one did returns to him who began a good work." I want to share with you today my vision of the deepening U.S.-Azerbaijan economic relationship, and the challenges and opportunities the coming years will bring for Azerbaijanis, as well as for those of us committed to helping secure a better future for Azerbaijan.
While I will focus my remarks largely on the economic relationship, I first would like to say a few words on the overall political picture in Azerbaijan. Azerbaijan is a strategic partner for the U.S. Our excellent cooperation on security and counter-terrorism has expanded strongly over the last three years. Since my arrival in 2003, Azerbaijan has also made some progress in developing a more democratic society and respecting human rights. Perhaps this progress has not met the expectations of some, but the Azerbaijan of today is a different, and improved place, from that in which I first began working. Continuing progress on democracy will be essential for managing the stress and shocks that burgeoning oil wealth are already beginning to bring. The U.S. government is proud of our record in support of democracy in Azerbaijan, and will continue our broad spectrum of assistance aimed at helping Azerbaijanis find their voice in the political process. Finally, the energy cutoffs experienced this January by Ukraine and Georgia have served to awaken U.S. and European Union interest in Energy Diversification. Suddenly, interest has reviewed in the role Azerbaijan could play as a transit route for Energy from Kazakhstan and Turkmenistan.

II.

Azerbaijan has an opportunity to turn its projected oil revenue of $42 billion by 2010 into an engine to transform a once cash-poor developing nation into an economically confident regional leader. This transformation, however, will require reform. There is some concern that the twin pressures of a tsunami of oil revenue and the temptation of massive increases in government spending threaten macroeconomic stability. The looming specter of Dutch Disease remains a real possibility for Azerbaijan and should be confronted head-on very soon. President Aliyev and his government have taken some important initial steps, but more needs to be done. Improvements to the government's economic decision making and planning are critical short-term priorities, as is renewed dedication to anti-inflationary measures. In the medium term, banking reform, WTO accession, and development of non-oil sectors such as agriculture should be government priorities. At the same time, corruption is a rampant problem and its choking tendrils fundamentally threatens the emergence of a robust and healthy economy. They must be trimmed and eventually excised from Azerbaijan's economic and social life. Along the way, Azerbaijan needs to fundamentally change its business climate to make it conducive to foreign investment and development in non-oil sectors. The American people are helping this process through taxpayer funded technical assistance, such as PA Consulting's work in the energy sector, Pragma's work in food processing, and our support for a WTO accession advisor in the Ministry of Economic Development. The Azerbaijanis themselves must do the heavy lifting. Let me now expand on these six points: Budget Process reform, Financial Sector reform, WTO accession, improved agriculture sector, the burden of corruption and an improved business climate. Before I close, I will outline some sectors where I see commercial opportunities, as I did when I spoke last November at the Department of Commerce in Washington.
Since I arrived in Azerbaijan, the U.S. government has pursued targeted assistance to the Azerbaijan government on budget formulation through an advisor from the U.S. Treasury Department, expenditure planning through a USAID sponsored program on public infrastructure, and economic policy. Unfortunately, Azerbaijan's efforts at a coordinated economic policy have not always been successful. Various ministries work independently or at cross-purposes. Medium and long-term planning continues to be a serious weakness. We are looking forward to holding a seminar in April with Ministers and the International Financial Institutions to discuss implementing Azerbaijan's excellent budget law.

Further, the government of Azerbaijan would do well to move quickly to reform its economic decision-making. One clear way to accomplish this goal is to adopt a formalized economic advisory body to advise President Aliyev on important economic policy issues. Such a body would encompass the Ministers of Economic Development and Finance, along with the Chairman of the National Bank. Others could be added as needed, but the core of the President's economic team should remain fixed, with direct access to the final authority on the government's economic policy. This body should retain the authority to shape government planning efforts into a more cohesive whole, and should take urgent measures to ensure the upcoming wave of petrodollars does not leave the Azerbaijani economy an inflationary swamp.

Another step that Azerbaijan can take to absorb the oil revenue influx is renewed efforts at banking and financial sector reform. The U.S. is already working with the National Bank to increase banking sector supervision; however, the government of Azerbaijan could take steps to increase the National Bank's role in regulating the banking system. Large state-owned banks hold a dominant position in the market, casting a long shadow over many well-managed medium sized banks in Azerbaijan. As oil wealth increases, a robust financial sector - banks, insurance, and stock and bond markets - will be a crucial tool to manage pressure on the economy. Healthy private banks take savings and convert them into profitable, productive companies that raise employment and promote economic growth. Without reforms monopolization in the banking sector will have a braking effect (or… "cast a dark cloud over") on the country's own financial future.

As Azerbaijan continues to reform its economy, an important tool to achieve this end is the World Trade Organization accession process. Azerbaijan has made some notable progress, particularly within the last two years. However, with many of its major trade partners, such as Russia, already at the cusp of WTO accession, the time for a serious push by Azerbaijan is now. Waiting too long puts Azerbaijan's non-oil sectors at a competitive disadvantage in the world market. If Azerbaijan moves too slowly, agriculture and light manufacturing - perhaps the most important sectors in combating poverty -will be stuck on the outside looking in. Joining the WTO means harmonizing Azerbaijan's trading regime with the best international standards and loosening the extent of government control of the economy. For the past three years, the U.S. government has supported Azerbaijan's efforts at accession through technical assistance to the Ministry of Economic Development. We look to Azerbaijan to capitalize fully on this assistance and move quickly to join the WTO.

As Azerbaijan focuses on poverty reduction, it would do well to move boldly to improve the agricultural sector. Agriculture is Azerbaijan's second largest sector after oil and gas, and is the best hope to bring true development to Azerbaijan's regions. We must not forget that the soaring new buildings and upscale shops of Baku do not reflect the reality in the regions. Farmers are burdened with an unwieldy bureaucracy and the legacy of land privatization that ensured few of them received enough land to become commercially viable. Azerbaijan needs agricultural policies aimed at smart development of value-added agriculture. This means more modern and efficient farming techniques, as well as investment in infrastructure in areas like irrigation. It also means support for the growing number of agro-processors, which will bring higher quality goods to Azerbaijani consumers and lucrative export markets.

Perhaps the single biggest challenge for Azerbaijan in the coming years is the effect of corruption on the economic and social life of the country. We all hear half-whispered stories of corrupt practices and deals, but the fallout from such corruption is quite real. Corruption imposes a terrible burden on the economy. It makes it more difficult for entrepreneurial Azerbaijanis, the engine of development, to start up and grow their businesses. It undermines confidence in judicial mechanisms and makes sanctity of contract a difficult proposition. A growing and modern economy will increasingly demand a more skilled workforce. However, corruption in education saps the strength of Azerbaijan's future workforce. For its part, the U.S. Embassy, through the Department of Justice, USAID, and partner organizations like ABA/CEELI, is providing technical support to the government. The government has taken some small steps to fight against corruption, but much more has to be done. The government's anti-corruption commission should assume a much more active role in ferreting out corruption, particularly within government and public services. The message should be clear: corruption poses a clear and present danger to Azerbaijan's future and cannot be tolerated.

Along with tackling corruption, Azerbaijan should take bold steps to improve its business climate, particularly in the non-oil economy. Unfortunately, several recent cases have sent strong negative signals to international business, as well as Azerbaijan's own business community. The series of investigations aimed at Barmek, culminating in the arrest of Barmek employees, is but one example. Problems experienced by Garadagh Cement are another. The sudden breakup of the AzPetrol group, coming on the heels of the detention of the sitting Minister of Economic Development and his brother, also sent negative signals about the prospects of doing business in Azerbaijan. I am not here to judge the merits of any of these cases; that is for Azerbaijani courts to decide. However, the government should act quickly to conclude these cases in a fair and transparent manner. At the same time, the government should also begin to address several of the barriers to international businesses that were noted in the 2005 AmCham White Paper. Doing so would send a clear message that Azerbaijan takes seriously the need to attract foreign investment and wants to improve its business climate.

III.

Even as we work with our Azerbaijani partners to address many of the issues above, we should not lose sight of the many commercial opportunities here in Azerbaijan. Following completion of the BTC and South Caucasus pipelines, focus will turn to opportunities like Shah Deniz Phase II and trans-Caspian oil and gas shipment. With proper planning, Azerbaijan could become the major hub for Caspian oil and gas shipment, as well as the petroleum industry and shipping infrastructure on the Caspian. The State Oil Fund's management of the Extractive Industries Transparency Initiative is a good example of the transparency that will allow rapid growth in this sector. To further support development in these areas, the government should consider flexible policies, such as establishing a duty free zone for platform and ship construction. The government must also support the restructuring of SOCAR now underway with U.S. TDA assistance to ensure that a modern, competitive energy company will emerge.

Outside of oil and gas, several other sectors present opportunities for U.S. business. President Aliyev has made rural development and agriculture a top priority. This focus will continue to create many opportunities. I am proud to say that U.S. companies are beginning to have some success penetrating the agriculture sector, which offers the possibility of a win-win relationship for U.S. businesses and the Azerbaijani people. Telecommunications is another growth sector in Azerbaijan. Under Minister Abbasov's leadership, the ministry is undergoing fundamental changes, which has begun to create a more open and cooperative attitude in the sector. Azerbaijan's medical sector is poised for significant growth driven largely by government investment in healthcare and increasing incomes brought on by oil revenue and development. Azerbaijan's construction sector is booming, but there is much more room for more U.S. exports. As I speak to you today, Azerbaijan is clearly a market with enormous potential.

IV.

As I reach the end of my tenure in Azerbaijan, I remain optimistic that the Azerbaijani government and people, with support from friends like the United States, will secure the blessings of development for future generations. Azerbaijan has some of the tools necessary for it to become a shining star on the Caspian, a Caucasian tiger if you will. Yet with the titanic influx of oil revenue expected in 2006 and subsequent years, the time for decisive action is now. It will take smart policies, and significant reform, to redeem the hopes and aspirations of the past 15 years and bequeath to the next generation of Azerbaijanis a country remade in a new image. The opportunities are incredible; the challenges posed by a rapidly expanding economy are real. I believe Nizami also had it right when he said, "Toil is the remedy of complaint and beyond every toil there is rest." Azerbaijan indeed has much to do, but this toil will lead to an equitable, developed, and stable economy and society. The United States, and the rest of the international community, stands ready to assist our Azerbaijani friends in their efforts. I am privileged to have been a witness to the progress of a nation, and a part of this process for the three years. Thank you.