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Coordinator for U.S. Assistance to Europe and Eurasia

By Ross Wilson, U.S. Ambassador to the Azerbaijan Republic

Ambassador's Roundtable
Business Opportunities in the Republic of Azerbaijan
Ronald Reagan Building and International Trade Center
Washington, DC
May 1, 2002

Ladies and Gentlemen,

It is a pleasure to appear here today before an audience intent and so much determined on doing business in Azerbaijan. And my sincere thanks to our friends at BISNIS, who are doing such a tremendous job at establishing closer economic links between our countries.

Where We Started

Since restoring its independence Azerbaijan has aimed for both western-style democracy and also for implementing transition towards the market economy. Back in 1992-1993, while the main issue was the survival of Azerbaijan as a sovereign nation we at the same time have done our best to overcome crisis and stabilize the economic situation. At that time this work was challenged by the disruption of traditional economic ties and division of labor which existed in the former Soviet Union, by lack of internal stability in my country, as well as by the ongoing Armenian aggression, and plight of refugees and displaced. It was at the end of that period that the rate of inflation reached its absolute high at 1600%, as did unemployment. Production plummeted in both industry and agriculture.

This was the reality when we started our efforts to transform our economy.

Oil as a Tool

I would remind you that in contrast with the image of Azerbaijan as an energy-producing country in 1993-1994 we actually imported energy. By that time it has been well understood in Azerbaijan, that without Western technology and investments it would be impossible to develop new oil-fields in the Caspian Sea.

Overcoming internal and external obstacles Azerbaijan managed to sign its first contract in 1994 and to create consortium of 12 companies representing 8 countries. Today Azerbaijan International Operating Company - the AIOC, accomplished the so-called "early oil" stage of the development and is producing now more than expected, about 130.000 barrels per day. The first contract proved that the chosen legislative background, the format of PSA created the best possible conditions for foreign investors. The energy strategy of the President and the Government aimed at restructuring the economy was thus put into action. Flow of major foreign investments started.

Real Transformation

The foundation laid in the initial years enabled us to proceed with the transformation proper since 1995-1996. In these two years Azerbaijan started its privatization programs, the most obvious precondition of moving to the market economy from the centralized, directive-driven economy of the Soviet time. Land privatization can be a very positive example here. Having completed privatizing land (with over 95% of land, privatized and farmers emerging as a social group), we now have achieved production growth of certain food articles by up to 45% in the last 5 years, and with the share of food products declining steadily in Azerbaijan's imports, from 42% in 1995 to just 16% last year. Where are the roots of this breakthrough? The August 1996 Land Reform Law has created momentum for the revival of the sector. This legislation paved the way for transfer of land ownership from State to private enterprises and established the rights to sell, lease, inherit, and mortgage the land. For future development of Azerbaijan's agriculture and rural entrepreneurship my country will need foreign credits and additional investments, since the internal reform resources are mostly exhausted.

After the privatization of the small and medium state-owned businesses (close to 100% privatized), we are now successfully proceeding with the privatization of larger enterprises. Altogether, 24, 000 small and over 1,500 medium and large enterprises have been privatized.

It was at that time that we began capitalizing on the growing attention to my country's geographical location, which makes it the regional and international hub. Azerbaijan is closely working with the EU, EBRD and other institutions over projects like TRACECA (European Commission's Transport Corridor Europe-Caucasus-Asia program), restoration of the ancient Silk Road etc. To show the dynamics of progress, let me give you some figures. 4,7 mln t of goods were transported within the framework of the TRACECA program in 1999, with this figure growing constantly and reaching 5,2 mln t in 2000 and 8,7 mln t in 2001.

GUUAM, the group of five post-Soviet states, has also become instrumental in promoting the cooperation by fully utilizing the geostrategic location. The general strategy of those Governments is to remove all sorts of obstacles on the path of multilateral economic cooperation, as documented by the October 2001 meeting of the high-level representatives of the national Chambers of Commerce of the five in Baku.

In these years Azerbaijan also started its program of creating a new legal basis for the economy transformation, updating, and on many cases adopting brand-new pieces of legislation. Our ultimate goal here is to create similar level of trust among foreign investors in the non-energy sector, as we did for the oil companies through the PSAs. Now we can proudly refer to the new Civil, Tax, Customs Codes, as well as a number of lesser acts, which were passed in these years, including the Law on Trade Marks and Service Marks, Law on Protection of Foreign Investments, Budget Systems Law, Public Procurement Law, and recently adopted Law on the Chamber of Accounts.

Along the Path of Reforms: Energy Sector and Beyond.

As a result of the abovementioned, the stagnation tendency has been reversed, and the economy started growing steadily (9,9% GDP growth in 2001, equaling $500 million). Overall GDP growth since 1996 is 55%, averaging over 9% a year. There also was in considerable growth of total investment as Azerbaijan has been looking more and more promising to foreign investors, with total foreign investments in the economy exceeding $7 billion in the last six years, including $3 billion in the non-oil sector. It is well-known that from 1994 to 2000, Azerbaijan received more foreign direct investment, per capita, than any other of the NIS countries (in 1996-1999 FDIs in Azerbaijani economy comprised 15% of all NIS FDI portfolio).

On equal pace we have been dealing with the internal problems of development, bringing the level of inflation down to 1,4% in 2001, and cutting budget deficit to 0,4%. Tax collection has grown considerably, in yet another reflection of Azerbaijani leadership's attention to creating favorable economic climate in the country.

Still, we obviously have to overcome passive approach by many foreign companies outside energy sector, who have continued to fence-sit, first waiting for the legal groundwork to be completed, and later to see how the infrastructure developed.

I would like to say a few words on the role of multilateral credit institutions in Azerbaijan's transition to a new economic model. Those lenders support institution building while also providing financing for new projects. The multis, as they are sometimes called, active in my country, include the International Monetary Fund, the World Bank, Asian Development Bank, European Bank for Reconstruction and Development, and others. The IMF, with its highly-developed system of economic leverage, has become a prominent force in Azerbaijan's development. It has become an arbiter of the development, using the economic criteria it had set for aid disbursement. As an example, Azerbaijan has met and even exceeded all the criteria set by the IMF for its 2001 - approved $100 million poverty reduction and growth facility, including real GDP growth, amount of net foreign reserves of the Central Bank etc.

The Government has to take into account social situation in the country while pursuing the strategy of economic transition. This is imperative and inevitable. Here we managed to achieve full understanding with the World Bank, despite the latter's urgings, for example, that we raise the energy tariffs on the domestic market, which would lead to burdening individual consumers.

Under the leadership of President Heydar Aliyev Azerbaijan has progressed along the path of re-structuring the economy, using the energy sector as both driving force behind those changes and the core of the newly-established market economy.

Privatization and creation of an investor-friendly climate being inseparable pillars of Azerbaijan's economic reforms, continued attention, paid by my Government to economic re-structuring is bearing fruit. Major structural reforms, macroeconomic transformation have been pursued to create modern structure of economy. The results are obvious, with growth in key sectors far exceeding the overall industry growth figures. For example, with average figure here being only 5,1% in 2001, growth in engineering was over 25%, and in construction materials production - almost 85%.

The April 25 meeting of Azerbaijan's President with the nation's business people has become yet another crucial point documenting my Government's dedication to promoting business development. The President pledged his full support to entrepreneurs, wowing to remove the remaining bureaucratic obstacles to their activity. We have a similar meeting scheduled with foreign businesses in Azerbaijan early this month. Government of Azerbaijan is going to revise existing regulations and rules, paying special attention to the licensing process, with the number of areas of entrepreneurship requiring licensing from the Government to be reduced from over 250 to 70, with further reductions upcoming.

Yet another of the recent developments was the April 24-26 Interfood, the Eighth Azerbaijan International Exhibition for Food and Drink, Packaging and Food Technology, which focused on bringing my nation's still restructuring agriculture closer to the world. Despite history of being the main exporter of fresh, as well as canned, fruits and vegetables to all the former republics of the USSR, as I have already mentioned, we turned into an importer, largely because of the outdated equipment we inherited after the Soviet Union's collapse. Now Azerbaijan seems to be making a comeback in agriculture.

Let me once again emphasize the energy projects, which play significant role in shaping the geopolitical image of the whole region. It is obvious that Azerbaijan's oil and gas development is not merely an issue of energy production and delivery. Azerbaijan has developed and persistently implemented its own oil strategy with a major goal of strengthening its independence and integrating with the international community. Now, with numerous PSAs signed on oil- and gas-fields, we see the multi-billion investments changing Azerbaijan's future.

In a relatively short period of time we were able to put in operation two pipelines (Novorossiysk and Supsa). Again, the decision and implementation were not easy. Now we are facing construction of the Main Export Pipeline, which will lead from Baku through Tbilisi to the Turkish Mediterranean port of Ceyhan. The MEP will become one of the components of an extensive infrastructure to foster the economic development of Azerbaijan and the entire region, becoming one of the key elements of the regional cooperation, as well as an instrument of ever-growing integration with the West.

The efforts of the Government of Azerbaijan are aimed at utilizing the petrodollars, via the recently-established Oil Fund (created in January 2001), to change the balance in favor of the non-oil economy, despite the fact that, as they say, "oil rules".

Azerbaijan will be a big gas, as well as oil, producer. In terms of gas, we are both exporters and a transit country. By the year 2003 production rate will be 4 billion cubic meters/year for export, and this amount will grow another 5-6 billion a year, until the volume reaches 20 billion cubic meters.

This year is a very significant one for my country, because in 2002 several projects are becoming reality. First and most important, the Azeri-Chirag-Guneshli oilfield project. Phase one of its development, a $3,4 billion project, will take Azerbaijan beyond the "early oil" stage. In early 2005 we expect the first "big" oil to flow. Also this summer we expect the MEP detailed-engineering stage to be completed, marking start of physical construction of the pipeline, for it to be ready in time to carry the increased volumes. Parallel to this, the Shah Deniz gas field will be developed. And we already have the trilateral agreement with Turkey and Georgia to build Baku-Tbilisi-Erzerum pipe to carry Azerbaijan's gas to the ever-growing Turkish market. The idea of further expanding my country's gas supplies to include Greece and other European nations has been explored recently during the visit of an official Greek delegation to Baku. And we'll be able to sell up to 1,5 billion cubic meters of gas to Greece by the year 2007.

Azerbaijan's aspiration to fully liberalize trade can be well-served by our bid to join the World Trade Organization. We hope to see, with the assistance of the TDA, which as recently as in March awarded my country a $1 million grant to assist with WTO accession.

Availing myself of the opportunity to talk in front of the gathered US Agencies' representatives, I would like to express how appreciative we in Azerbaijan are of their assistance, including OPIC, TDA, Ex-Im Bank, as well as that of USAID. Despite limitations of Section 907 of Freedom Support Act, which existed until recently, these agencies have managed to provide considerable assistance, including help with micro-lending ventures and also seed capital.

The last but not least is the contribution of the US-Azerbaijan Chamber of Commerce, which, for a number of years since its inauguration in 1996, pursued its objective of developing closer business ties between the two nations. If you only take a look at the topics of their yearly conferences, you will see how much they have done in familiarizing the US business community and public with Azerbaijan. The Chamber has full support of the President of Azerbaijan, who a couple of times himself has been a speaker at those conferences.

In general, wrapping up my remarks, I would like to say that I am fully confident: in my country's case, its economic performance will be one of the pillars supporting its revival. We have done our utmost to achieve that, and, in my opinion, succeeded in the most crucial task - to make the economic transition irreversible. As for the rest, including specifics of development, I don't know, who could have done better, especially considering the realities in the region for the most of this time. And now I invite you to play your role in Azerbaijan's further economic re-emergence.

U.S. Assistance to Azerbaijan Post September 11, 2001
Ambassador Bill Taylor
Coordinator for U.S. Assistance to Europe and Eurasia
US Azerbaijan Chamber of Commerce
Washington, DC
February 7, 2002

On February 7, 2002, Ambassador Bill Taylor, Coordinator for U.S. Assistance to Europe and Eurasia, addressed the United States-Azerbaijan Chamber of Commerce (USACC). The following is a summary of his remarks.

In the wake of September 11 terrorist attacks, the world entered a new era. Azerbaijan has been cooperative in fight against terrorism, which in turn led to further requests to work with the Azerbaijani government. However, Section 907 was an obstacle for the U.S. in deepening its cooperation with Azerbaijan and hence imposed serious challenges to U.S. national security interests. On January 25, 2002, President Bush waived Section 907 of the FREEDOM Support Act for 2002, thereby lifting restrictions on United States government assistance to the Government of Azerbaijan. The language of the waiver is important in that it allows us to work with, among others, law enforcement, judiciary and security agencies in Azerbaijan. The waiver created many new opportunities in terms of what the U.S. can do with the Treasury and customs. We still have to consult with Congress and plan to do that.

Two years ago the governments of United States and Azerbaijan formed the "US- Azerbaijan bilateral Task Force on Economic Reform, Market Assistance and Cooperation", co-chaired by Azerbaijan's Finance Minister Abas Alekberov and me. The Task Force meets approximately every six months; the most recent meeting took place in Baku in January 2002. One of the main issues discussed was the state oil fund. Azerbaijan is a pioneer in putting together a well-managed and responsible state oil fund. Azerbaijan created this fund, which currently holds a half a billion dollars, in order to avoid the adverse political and economic outcomes arising from sudden influx of cash associated with oil revenues. There are two fundamental questions for Azerbaijan: What kind of investment is Azerbaijan going to make with this oil fund? How is the fund going to be managed? It can either be used for long-term investment projects (such as investment in infrastructure,people and education) that are otherwise difficult to fund in order to spread the benefits to the next generation, or it can be used for managing macroeconomic imbalances in the economy. Transparency of this fund is especially crucial. Historical evidence such in the case of Nigeria shows that oil funds are unsuccessful in corrupt regimes. In case of Azerbaijan, the state oil fund is separate from the annual budget and is managed by a council elected by the Ministry of Finance and the President. Investing in projects co-funded by the EBRD or World Bank is another way of ensuring transparency, as these politically neutral forces would make decisions on investment projects. Azerbaijan is working in consultation with the World Bank and the IMF.The other issue discussed in the last meeting of the Task Force is the establishment of an "Investors Council" which is an opportunity for the public and private sectors to get together, identify problems and take them to the President. The Task Force also discussed prepaid taxes, an issue which is not unique to Azerbaijan but raised by many U.S. investors.

The Task Force also discussed issues surrounding Azerbajian's relations with the IMF and World Bank and accession to the WTO. Overall, the Task Force meetings aim to improve the investment climate. The next meeting of the Task Force is going to take place in September 2002. Regarding U.S. assistance, the overall request for the region in FY2003 was reduced, while that for Azerbaijan increased. The Administration tries to submit an honest budget. The country's ability to absorb resources is taken into consideration. The decision has to be a responsible one. The Administration is emphasizing security programs ans support for NGOs and students scholarships.

GUUAM has good potential and is developing ideas for cooperation.