AZERBAIJAN

	FY 1998 Actual	FY 1999 Estimate	FY 2000 Request
FREEDOM Support Act	$34,291,000	$23,840,000	$33,500,000

Introduction.

The emergence of Azerbaijan as a prosperous free-market democracy will advance U.S. national security as well as political, commercial and humanitarian interests. Azerbaijan is a potential alternative source of oil to meet Western energy needs, a key link in the trans-Caspian energy export system, and a promising market for American goods and services. At the same time, a government committed to rule of law and upholding human rights and other norms characteristic of democratic states would serve as a force for stability in the strategically important and historically volatile Caucasus region.

Section 907 of the Foreign Assistance Act restricts direct assistance to the Government of Azerbaijan, preventing the U.S. Government from working with Azeri officials on a range of issues critical to establishing a market-oriented democracy. Assistance has been directed to non-governmental areas. As a result of new exemptions to Section 907 granted by Congress in annual appropriations legislation, program activities have been and continue to be expanded in humanitarian assistance and democracy-building,

The Development Challenge.

In the wake of the dissolution of the Soviet Union, Azerbaijan experienced a precipitous economic decline that was exacerbated by the country's territorial conflict with Armenia over the largely Armenian ethnic enclave of Nagorno-Karabakh. More than four years after a negotiated ceasefire, Azerbaijan still must contend with more than 700,000 refugees and internally displaced persons (IDPs), many of whom continue to live in deplorable conditions.

Despite the beginnings of what is expected to be a financial windfall derived from development of projected huge, off-shore oil reserves in the Caspian Sea, Azerbaijan has made only limited progress in the transition to a market-based economy and democratic polity. Headway on privatization and economic restructuring has lagged even though Azerbaijan has attracted substantial oil-related foreign investment that has turned the capital of Baku into a boomtown. Despite some encouraging developments on privatizing state-owned firms and strengthening banking oversight, failure to tackle endemic corruption and to implement effectively, long-postponed structural reforms is likely to reduce Azerbaijan's attractiveness to would-be investors.

In the political sphere, an authoritarian, highly-centralized regime has blunted democratic reform. Recent presidential elections were judged to be flawed by the international community and domestic observers. The subsequent crackdown on political opponents has reinforced already-strong doubts about President Aliyev's regime's stated commitment to democracy.

Still, the Government of Azerbaijan (GOAz) has achieved a degree of macro-economic stability and growth, and a nascent small business sector concentrated in the capital is taking shape. The foundation for future political change also is being put in place with the emergence of civil society. Opposition political forces are organizing, and an increasing number of citizens are participating in various types of political and social-service-delivery non-governmental organizations (NGOs). These steps, however, do not include comprehensive economic or judicial reforms, laws and policies needed to create a fully democratic, market-based economy.

From the outset, the vast proportion of U.S. assistance to Azerbaijan has been for humanitarian relief to refugees and internally displaced persons (IDPs). Those programs have been administered largely by NGOs and international organizations (e.g., the U.N.) and involve distribution of food, clothing and medicines; provision of basic medical services; construction of shelters; and rehabilitation of water-supply and sanitation systems. Emergency relief has reduced the level of human suffering but cannot substitute for longer-term development assistance efforts. This continues to be the case even after the introduction of small-scale income generation projects which have helped vulnerable populations acquire the means to lessen their dependence on foreign aid.

Because Azerbaijan is such a vital link in the Transcaspian energy export system, it is essential that the GOAz develop a market-oriented, transparent and corruption-free economic, legal and regulatory system. However, Section 907 still limits the U.S. Government's ability to promote these specific economic restructuring goals with the Government of Azerbaijan and no other donor can substitute for the United States' experience and leadership in this area. With the development of its large oil reserves, Azerbaijan will have the resources necessary to consolidate the transition to a market-based economic system and to meet the needs of the most vulnerable segments of the population. However, the present government's reluctance to introduce admittedly painful structural economic reforms, its poor record in addressing the plight of refugees and IDPs, and its questionable commitment to democratic institutions and practices make the prospects for economic and democratic stability very uncertain.

Other Donors.

Major bilateral donors (France, Germany, Japan and the Netherlands) and multilateral lending institutions (the IMF and World Bank) have approved tens of millions of dollars in credits to support critical reforms geared to restructuring the economy and stimulating small business development, as well as loans for rehabilitation of Baku's main power plant and water-supply system. Under an IMF Systematic Transformation Facility, the GOAz is committed to a comprehensive program of economic stabilization and structural reform. The UN High Commissioner for Refugees (UNHCR) plays a prominent role in coordinating humanitarian assistance. Direct humanitarian aid in large quantities and dollar amounts is provided by several UN agencies (UNDP, UNICEF, World Food Program, World Health Organization) and by numerous other international organizations, including the International Federation of the Red Cross (IFRC) and the International Rescue Committee (IRC).

FY 2000 Program.

USAID's program in Azerbaijan has three central objectives: (1) alleviate human suffering in a post-emergency situation while helping to reduce dependence on humanitarian assistance, in part by strengthening the capacity of indigenous NGOs and community groups; (2) support more responsive, transparent, and accountable democratic governance through increased participation of informed citizens in the country's economic and political life; and (3) stimulate the nascent private sector, focusing on small and medium enterprise and agribusiness development, training, and related areas. A new activity to promote the rule of law and commercial law reform is scheduled to start in FY 1999. Other activities will support preparations for municipal elections, NGO development, independent media and political party training. The USG will continue to implement activities to assist victims of the Nagorno-Karabakh conflict. In the event of a peace settlement, USAID will continue to provide humanitarian and rehabilitation assistance while expanding overall support for economic restructuring and growth objectives. Cross-cutting and special initiatives will include a variety of training programs designed to bolster the capacity of selected Azerbaijani citizens, groups, and institutions to advance the reform process. Increasingly, training will be focused on economics/business development and related leadership fields. USAID-funded training will continue to be U.S.-based or conducted in-country by U.S. implementors, although some third-country training is being promoted. A modest amount of funding also is likely to be dedicated to preliminary efforts at de-mining, resettlement and rehabilitation in some of the areas previously occupied by Armenian military forces. All of these initiatives will be carried out in accordance with Section 907 restrictions.

AZERBAIJAN

FY 2000 PROGRAM SUMMARY*
(in Thousands of Dollars)

USAID Mission Director: Michael Farbman

Strategic Objectives	Economic Restructuring	Democratic Transition	Social Stabilization	Cross-cutting / Special Initiatives	Total
Privatization	--	--	--	--	--
Fiscal Reform	--	--	--	--	--
Private Enterprise	6,500	--	--	--	6,500
Financial Reform	--	--	--	--	--
Energy	--	--	--	--	--
Environmental Management	--	--	--	--	--
Citizens' Participation	--	5,350	--	--	5,350
Legal Systems	--	600	--	--	600
Local Government	--	--	--	--	--
Crises	--	--	7,500	--	7,500
Social Benefits	--	--	--	--	--
Environmental Health	--	--	--	--	--
Cross-cutting / Special Initiatives	--	--	--	13,550	13,550
TOTAL	6,500	5,950	7,500	13,550	33,500
*FREEDOM Support Act (FSA) funds

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ACTIVITY DATA SHEET

PROGRAM: AZERBAIJAN
TITLE: Accelerated Development and Growth of Private Enterprises, 110-S001.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $ 6,500,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1997; ESTIMATED COMPLETION DATE: FY 2002

Summary: This Strategic Objective will foster the growth and development of private enterprises, with a special emphasis on expanding the role of small and medium-sized enterprises in the economy. During this past year, USAID initiated some Section 907-compliant programs to stimulate the nascent private sector, focusing on small and medium enterprise and agribusiness development, training, and related areas. The underlying rationale for pursuing this objective in the Azerbaijani environment is twofold. First, the growth of small and medium enterprises (SMEs) will help create a constituency for macroeconomic reform. Second, the development of SMEs will build support for resolution of the Nagorno-Karabakh dispute because those same businesses stand to benefit from the economic potential of peace. Activities are being designed to speed the transition from emergency humanitarian assistance to sustainable development programs. The direct beneficiaries of this objective are primarily farmers and owners of small agriculture-related businesses which have acquired privatized land, and other private businesses. To the extent that some of the activities can be linked with ongoing income generation projects for IDPs, segments of that population also will benefit.

Key Results: At present, USAID-funded activities focus on three intermediate results: (1) increased number of SMEs operating successfully in the economy; (2) increased availability of market-based loans for enterprises; and (3) improved policy environment for private sector development.

Performance and Prospects: The Caucasus Small Enterprise Finance Program (through ShoreBank Advisory Services (Shore Bank) and Foundation for International Community Assistance (FINCA)) is now mobilized in Azerbaijan. Their efforts are directed at filling the credit gap in Azerbaijan in the $1,000 to $10,000 range. ShoreBank has completed banker/loan officer training for four private Azerbaijani banks with which it is working and has initiated its credit program. FINCA has begun the development of a village banking system which will be providing direct loans to small businesses. This credit program complements other technical assistance and the training efforts of short-term resident-volunteers and technical experts who are advising small and medium-sized retail and wholesale businesses.

In addition, USAID started a Commercial Bankers Training program in Azerbaijan during this past year, offering courses in bank management, risk management, basic international accounting standards, supervision, and reporting. USAID expects to expand this program in FY 1999.

Finally, as a result of USAID's Bureau for Humanitarian Response funding, a number of individual agribusinesses have become successful (e.g., kiwi and mushroom production and export) with technical assistance and training from ACDI/VOCA. In late FY 1998, ACDI/VOCA began a demonstration program for experimental projects to support the work of the volunteer-farmers from the U.S. and established a domestic Azerbaijani farmer-to-farmer technical assistance program.

Possible Adjustments to Plans: USAID considers all of the activities under this SO to be on target and meeting expectations. No new projects are planned at this time. USAID will prepare a new program strategy for assistance to Azerbaijan in Summer 1999.

Other Donor Programs: The World Bank has identified agriculture as a priority sector and they are supporting programs in farm restructuring/privatization, infrastructure rehabilitation (e.g., irrigation systems) and credit. The European Union is concentrating on banking and marketing in the grain and bread industries. Also, the International Islamic Relief Organization, the International Rescue Committee, OXFAM, and the International Federation of Red Cross and Red Crescent Societies are funding income-generation projects, mostly agribusiness-based, and primarily targeted for IDPs and refugees.

Principal Contractors, Grantees, or Agencies: USAID-sponsored activities are implemented by ShoreBank; FINCA; the Eurasia Foundation; ACDI/VOCA.

Selected Performance Measures: *

	Baseline	Target
Number of loans made to small and micro enterprises	288 (1997)	1800 (2000)
Number of strengthened local financial institutions servicing SMEs	3 (1997)	9 (2000)
* This remains a relatively underdeveloped strategic objective. The following indicators are will be refined during strategy development in Summer 1999.

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ACTIVITY DATA SHEET

PROGRAM: AZERBAIJAN
TITLE: Increased, Better-Informed Citizens' Participation in Political and Economic Decision-Making, 110-S002.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $ 5,350,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1996; ESTIMATED COMPLETION DATE: FY 2002

Summary: This strategic objective supports increased, better-informed citizens' participation in political and economic decision-making. Azerbaijan's early post-independence progress toward democratic governance was slowed by domestic instability and the consolidation of power by the authoritarian regime headed by President Aliyev, a former Communist Party boss. The conflict in Nagorno-Karabakh further impeded the development of democratic and legal reforms. Limited press freedom, a nominally independent judiciary and legislature, and a weak civil society are an ineffective counter-weight to a powerful executive branch. USAID-funded activities are primarily targeted at citizens' and citizens' groups that can benefit from the training and expertise provided by international private voluntary organizations. These include, but are not limited to: journalists, ecological and social NGOs, political parties, scholars, human rights and women's advocacy groups. USAID also funds technical assistance to the Central Election Commission (CEC), as well as training and voter education.

Key Results: At present, USAID-funded activities focus on three intermediate results: (1) increased public confidence in the political process; (2) better independent news coverage; and (3) citizens and NGOs successfully advocating on behalf of citizens' rights.

Performance and Prospects: The October 1998 presidential election represented a milestone in Azerbaijan's democratic development. Despite the flawed outcome, the presence of U.S.-funded organizations ensured that the public was well informed about the electoral process, that election officials received training in implementing the new election law, and that political party observers were trained in election monitoring. The International Foundation for Election Systems (IFES) provided technical assistance and training to the CEC, as well as a voter education campaign, while the National Democratic Institute (NDI) provided training for local election observers and political party representatives. NDI advisors also worked closely with the GOAz to amend the election law passed in April 1998. Among the key amendments to the flawed law was the inclusion of opposition political party representatives as members of the CEC. Similar activities will be conducted in preparation for the municipal elections that are tentatively planned for 1999, with additional activities to be conducted by the International Republican Institute (IRI).

Despite a highly restrictive environment for the development of independent media, USAID-funded Internews made some headway with independent television (the medium of choice) in Azerbaijan. Through their efforts, Azerbaijan's independent television stations participate in a successful Transcaucasus program-sharing effort. This past year, Internews also conducted seven in-country seminars with an average of 15 participants each. In addition, through the Academy for Educational Development (AED), 15 reporters received U.S. training. Internews helped two independent TV stations to register and obtain broadcast licenses, despite complicated and changing government regulations. USAID-funded advisors also translated a manual on how to conduct media coverage of an election, which was distributed to electronic media representatives.

An average of one dozen dailies, located in the capital, constitute the print market in Azerbaijan. Printing is monopolized by the state publishing house, and newspapers are officially "reviewed" prior to publication. With USAID support, Yeni Nasil, an indigenous press association, has been actively working with the Azerbaijani Parliament in an effort to amend the Law on Media, which is vague, limits investigative reporting, and allows arbitrary censorship.

USAID-funded assistance for the development of the NGO sector has made limited progress due to the authoritarian political and restrictive legal environments. ISAR provides extensive training, small grants and information/outreach to fledgling NGOs. To date, 72 groups throughout the country have received grants to implement programs in areas such as environmental reform, services for the disabled, children's rights, and media reform. A small corps of NGOs that have gone through ISAR's management training have developed organizational, strategic planning, and fund-raising capabilities. Nevertheless, the enabling environment for NGO growth and development remains a major barrier, in the absence of laws to facilitate NGO registration or address NGO taxation issues.

Possible Adjustments to Plans: Despite the many difficulties of working in Azerbaijan, USAID believes it is essential to remain engaged in supporting the development of democracy there. Since Section 907 exempts democracy-related assistance to the GOAz, more attention will be given to promoting an improved legal and regulatory environment for NGOs and independent media. USAID will be preparing a new program strategy for assistance to Azerbaijan during Spring 1999.

Other Donor Programs: Complementary efforts to promote steps towards democratic progress are being closely coordinated with the United Nations, Organization for Security and Cooperation in Europe, and the European Union.

Principal Contractors, Grantees, or Agencies: USAID-sponsored activities are implemented by NGOs such as Internews, NDI, IRI, ISAR, IFES, and the Eurasia Foundation. The U.S. Information Agency provides democracy-related training and exchange programs.

Selected Performance Measures:

	Baseline	Target
Law enacted protecting independent electronic media	No (1998)	Yes (2000)
Percentage of polling places covered by election monitors	20% (1996)	80% (2000)
NGOs more effective advocating for public policy issues (using NGO sustainability index with 1 highest and 7 lowest)	7 (1996)	5.5 (2000)

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ACTIVITY DATA SHEET

PROGRAM: AZERBAIJAN
TITLE: Legal Systems That Better Support Democratic Processes and Market Reform, SO02.2
STATUS: New Start
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $600,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1999; ESTIMATED COMPLETION DATE: FY 2002

Summary: This is a new-start for USAID. Specific activities have not been defined in detail, pending the American Bar Association (ABA) assessment that will take place in mid-1999. The broad categories of potential ABA activities are: legal profession reform; judicial reform; legal education reform; and the provision of legal assessments for proposed laws. The GOAz and the business community have expressed support for commercial law reform, as it will enhance the country's investment profile. Thus, commercial law will constitute a major focus of the aforementioned legal reform activities. Success with commercial law reform also should build support for Azerbaijani reformers to move forward with judicial reform.

Key Results: USAID-funded activities will focus on two intermediate results: (1) increased citizen respect for legal systems; and (2) increased capacity and independence of the judicial branch.

Performance and Prospects: The success of the activities will depend on the maintenance of economic and political stability in the country and the commitment of the Government of Azberbaijan, the business community, and NGOs to move forward on legal reform initiatives.

Possible Adjustments to Plans: Adjustments will be made as the activities are defined and implemented. In FY 1999, USAID will develop a new program strategy for assistance to Azerbaijan, including design of this new strategic objective.

Other Donor Programs: TBD

Principal Contractors, Grantees, or Agencies: USAID-sponsored activities will be implemented by the American Bar Association’s Central and East European Law Initiative (ABA/CEELI).

Selected Performance Measures: *

	Baseline	Target
Major legal reform laws enacted	No (1998)	Yes (2000)
Proportion of population understanding civil and economic rights	TBD (1999)	TBD (2000)
* This is a new strategic objective; performance measures with baseline and targets will be developed as part of strategy development during Summer, 1999.

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ACTIVITY DATA SHEET

PROGRAM: AZERBAIJAN
TITLE: Human Suffering and Crisis Impact Reduced, 110-S003.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $7,500,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1993; ESTIMATED COMPLETION DATE: FY 2002

Summary: This strategic objective helps reduce human suffering and the impact of crises. Over 700,000 refugees and internally displaced persons (IDPs) remain in Azerbaijan under difficult conditions, as a result of the continued dispute over Nagorno-Karabakh (NK). As a matter of policy, the Government of Azerbaijan (GOAz) has not provided support for these people. The Azerbaijani NGO sector is weak and limited in its ability to respond to this humanitarian situation. As a result, the international donor community, in which USAID is a major player, will have to continue to support this vulnerable group for the foreseeable future. Priority beneficiaries of humanitarian assistance continue to be the approximately 700,000 refugees and IDPs residing throughout the country. Increasingly, assistance is oriented to helping the vulnerable populations acquire the means to lessen their dependence on foreign aid, through such activities as small-scale income generation projects.

Key Results: At present, USAID-funded activities focus on the following intermediate results for the vulnerable groups targeted by this objective: (1) improved living conditions; (2) improved health and nutrition; and (3) improved economic opportunities.

Performance and Prospects: Through USAID-funded programs and contributions to UN agencies, USAID has provided humanitarian assistance since 1992 to the refugees and IDPs in Azerbaijan. USAID grants to NGOs have provided food, clothing, shelter and sanitation, medical assistance, and commodities to more than 650,000 crisis victims. USAID donations to the UN's World Food Program have helped IDPs throughout the country receive food parcels, and contributions to UNICEF have resulted in the immunization of IDPs against diphtheria. Recently, USAID-supported income generation projects have begun to help a number of these economically vulnerable people to become more self-sufficient. Over the past year, there have been no major health epidemics in these camps and shelters, nor have there been any instances of civil unrest or instability. These facts suggest that the conditions in which these refugees and IDPs live have reached some level of acceptability.

USAID's new cooperative agreement with Mercy Corps International has continued to provide subgrants to a variety of U.S. NGOs in Azerbaijan. Relief International has successfully implemented a system of twelve mobile and eight fixed health clinics which has provided primary health care to approximately 300,000 refugees and IDPs in fourteen districts of Azerbaijan. In addition, through Relief International's UNHCR-funded reproductive health program, training has been provided to all USAID-funded physicians and nurses.

The United Methodist Committee on Relief has provided an integrated health care program which provides approximately 140,000 IDPs with primary health care, immunization, micronutrient supplementation and health education services. While it is as yet too early to report on actual health results from this activity, drop-out rates from health education classes have been very low and over 80% of the women (roughly 5,500 individuals) in one target area have attended health training classes.

Among a number of housing subgrants, International Rescue Committee and World Vision have undertaken public building rehabilitation projects and have completed work on over 80 public buildings in Baku and Sumgait which house approximately 33,000 refugees and IDPs. As another example, CARE and the International Rescue Committee have provided materials and guidance which has enabled the construction of housing for over 3,100 IDP families. This housing generally includes latrines and often includes hand pumps for water.

Funding was also provided to UNHCR for the shelter portions of the World Bank Resettlement Program. During the initial stages, it is anticipated that 3,000 IDPs will be resettled back to their home villages.

Possible Adjustments to Plans: As shelters are rehabilitated and the incidence of health epidemics remains low, USAID will turn its efforts increasingly toward supporting self-sufficiency among the vulnerable populations through income generation, improved health care, and community mobilization. This "new era" of assistance was initiated during 1998, through a new umbrella grant awarded to Mercy Corps International. It will also be supported through funding for the Victims of the Nagorno-Karabakh Conflict earmark, which is bringing USAID-funded assistance into a new region in Azerbaijan. This latter activity will address the range of services needed to attract and keep IDPs in their home communities. USAID will be preparing a new program strategy for assistance to Azerbaijan during Summer 1999.

Other Donor Programs: The European Union (EU) and USAID continue to coordinate shipment and delivery of humanitarian assistance to the Caucasus. In addition, the United States, the EU, Japan, and other bilateral donors have provided millions of dollars worth of food, medical and other humanitarian supplies. UNHCR plays a major role in coordinating humanitarian assistance provided by the EU and other bilateral donors.

Principal Contractors, Grantees, or Agencies: The primary U.S. NGOs operating in Azerbaijan are Mercy Corps International, Save the Children, UMCOR, Mercy Corps International, CARE, Adventist Development and Relief Agency, World Vision, International Rescue Committee, Relief International, and the American Red Cross.

Selected Performance Measures: *

	Baseline	Target
Improved living conditions
- Public Building Rehabilitation - Mudbrick Shelters - Shelters in resettlement areas	0 (1992) 0 (1992) 0 (1992)	66 (2000) 1,400 (2000) 2,000 (2000)
Improved health and nutrition * (Continuation of current programs, numbers of beneficiaries)
- Food Distribution - Access to Primary Health Care - Access to immunizations	188,000 328,000 300,000	188,000 328,000 500,000
Improved economic opportunities
- Persons Trained - Number of Loans	0 (1992) 0 (1992)	2,000 (2000) 3,500 (2000)
* Note: Where a baseline is the same as the target, it is because the USAID goal is to continue essential activities for the same target population.

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