U.S. DEPARTMENT OF COMMERCE

OFFICE OF THE COUNSELOR

U.S.-Azerbaijan Commercial Relations:

Issues and Prospects

Remarks by

Jan H. Kalicki

Counselor to the U.S. Department of Commerce

and

U.S. Ombudsman for Energy and Commercial Cooperation

with the New Independent States

before the

The Fourth Annual Conference of the U.S.-Azerbaijan Chamber of Commerce

Washington, DC

September 12, 2000

Mr. President. Mr. Ambassador. Distinguished Ministers. Esteemed Colleagues.

Good morning and thank you. It is an honor for me to join again in a forum with President Aliyev, who has done so much for his country and for U.S.-Azerbaijan relations. And it is a great pleasure to address again this group. The U.S.-Azerbaijan Chamber of Commerce along with the AmCham in Baku make for one of the most effective business association tandems with whom I have had the pleasure to work. I congratulate you on your efforts to build a strong public-private sector partnership and on the organization of another excellent conference and wish Dick Matzke, Galib Mammad and his staff, and the member companies all the best in your new business offices and the trade and cultural center in Georgetown.

In my brief remarks this morning, I would like to continue a theme I began last year and one which will be discussed in detail during this morning's session: our mutual interest in seeing Azerbaijan develop a strong, diversified economy and the consequent opportunities for increased bilateral and regional trade and investment.

The Energy Sector

We recognize, of course, that the energy sector will be the main engine for economic development in Azerbaijan for the foreseeable future. Energy projects have brought to Azerbaijan many of our finest American companies, and in fact, later this morning on Capitol Hill, President Aliyev will take the next step in commercial cooperation to develop Azerbaijan's energy resources when he witnesses the signing of a new Production Sharing Agreement with Moncrief Oil International.

While these are the kinds of deals that naturally make headlines, I have another headline for you this morning that has not received public attention. Last year for the first time our official trade statistics picked up Azerbaijani oil imports to the U.S. in the order of $20 million. This fact also deserves due recognition as an indicator of how far Azerbaijan's development and our bilateral commercial relationship have come.

Azerbaijan's energy future also depends on energy pipelines and transportation. Yesterday Ambassador Wolf provided an overview of all our Administration is doing to promote our shared energy interests in the region. I would only like to add here that pipeline development itself also represents additional commercial opportunities and that, simply put, it is our intention to help ensure that U.S. companies remain deeply involved in this process. Deepening our mutual partnership in energy at every level remains a key goal for all of us.

Diversification and Commercial Environment

That said, our concern about neither wasting nor over-relying on petroleum resources is very real and based on international experience. Venezuela, and particularly Nigeria and Angola, are examples of oil-rich countries where the majority of the population lives in extreme poverty. Last month the New York Times chronicled in several articles the dangers in these countries of oil "asphyxiat[ing] the rest of the economy and leading [citizens] to believe that if they are not rich, it is because someone has stolen what belongs to them."

The fundamental key to non-oil sector economic growth, over which the Azerbaijani government has control, is the country's commercial environment. Companies, especially new to market firms, must be confident that they will be treated fairly and that there will be stable, predictable conditions for business. In this regard, Azerbaijan's progress since we gathered here in Washington last year offers some good news, but to be honest, since we are among friends, some not so good news.

On the one hand, the government -- to its credit -- has maintained macroeconomic stability, created new market and pro-investment institutions, and taken steps to address specific company cases. More generally, it is our sense that reliable rules of the game are emerging for doing business in Azerbaijan. In the future, Azerbaijan's new oil fund can help to catalyze economic diversification and new investment.

On the other hand, we are still concerned that these rules are not sufficiently transparent to encourage potential new business development. In short, rules of the game need to be consistent with rule of law -- including upholding contracts and shareholder rights. We should therefore not be surprised that foreign investment, even counting for the cyclical nature of energy investment, is running only a half of what it was in 1999 through the first seven months of this year, and U.S. exports to Azerbaijan continue to lag.

The Commercial Ledger

Let us take a closer look at some of the developments of the last year and look ahead to opportunities to advance our commercial relationship in the year ahead.

On the positive side of the ledger, we applaud the continued productive, on-the-ground dialogue between key agencies in the Azerbaijan government and the Amcham and U.S. embassy to address business and investment climate issues. The new tax code (to go into effect on January 1), which is far more rational and business friendly than its predecessor, is a concrete result of this dialogue.

The establishment of a stock exchange and a State Securities Committee under Chairman Babayev further demonstrates Azerbaijan's commitment to build a modern economy. We also strongly support the creation of a one-stop shop for investors in the form of a Foreign Investment Agency, which we know you are contemplating. With all of these new institutions, the real challenge is to make them function effectively. While Section 907 regrettably prevents the U.S. government from providing financial assistance, we look forward to consulting with you on the development of these new institutions and will urge the donor community and private sector to support them with training and other assistance programs.

Now, a few words about some of the problems. Unfortunately, corruption is still a major problem in Azerbaijan as in other countries. We greatly welcome the June 8 Presidential Decree on anti-corruption, but - as we like to say - actions speak louder than words. We understand that combating corruption is not a simple matter, but a lot is at stake. In addition to the moral and social implications, corruption can only harm Azerbaijan's reputation in business circles and jeopardize long-term, sustainable economic growth.

Commercial bribery is the flip side of government corruption and must also be curbed. The U.S. government has made the fight against corruption a top priority in our laws, policies, and work with the international institutions. In this regard, let me renew our Department's offer to work with the Chamber and others to develop guidelines for business codes of ethics, based on a model that we have developed in cooperation with the OECD.

Privatization and Standards

As we look ahead, our focus turns to the long awaited second privatization program of Azerbaijan's blue-chip companies. I am sure that many of you are anxious to hear details of the new program from Minister Aliyev later this morning. With the vouchers having been extended this summer, the stage is set and the time is now. If done correctly, privatization can serve as a catalyst for the entire economy providing capital inflow and management know-how into Azerbaijan's companies. Investors will be scrutinizing the program closely for opportunities and pitfalls. I am confident that the program can be a win-win for investors and Azerbaijan and I urge the government to continue work with the investor community to make privatization a success.

In addition to large enterprise privatization and pipeline and transportation infrastructure projects, we continue to believe that there are commercial opportunities in agribusiness, construction, and tourism. Indeed, I am very pleased to bring to your attention this month's BISNIS bulletin which is devoted to commercial opportunities in the Caucasus and to note TDA's reverse trade missions in agribusiness and construction later this fall. I also want to mention the U.S.-Caucasus Business Development Conference, which is scheduled for the end of this month in Istanbul and has been organized by our embassies in the region. Over a dozen Azerbaijani firms, along with business people from Georgia and Armenia, will come together to meet with U.S. companies operating in Turkey to discuss concrete commercial projects.

In addition, I would like to mention our Standards Dialogue in the Caucasus. The Dialogue, under which our Department will support a regional seminar in Tbilisi later this fall, is intended to promote adoption of international norms and regional harmonization in standards and certification, and I greatly appreciate the support of Presidents Aliyev, Shevardnadze, and Kocharian for this initiative. By improving market access and lowering barriers to trade, the Dialogue will enhance our support for regional markets in the Caucasus and beyond to the Silk Road countries.

Finally, I want to acknowledge Michael Lally, our new Senior Commercial Officer in Baku. Simply put, Michael is one of our best officers, with extensive experience in the former Soviet Union. I am sure that you will find him a great advisor and advocate and encourage all of you, who have not already had the pleasure, to introduce yourself to him.

Conclusion

We are as committed as ever to Azerbaijan and to the development of our bilateral commercial relationship in both the oil and non-oil sectors. We are excited by the new prospects offered by privatization and the further development of Azerbaijan's economy. We also wish you good and fair parliamentary elections in November. While we share your frustration with Section 907 and will continue to urge Congressional repeal, our governments and private sectors have developed a strong bond. Let's keep building together.