VZCZCXRO5061
PP RUEHLN RUEHVK RUEHYG
DE RUEHDBU #2247/01 3561436
ZNR UUUUU ZZH
P R 221436Z DEC 06
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC PRIORITY 9272
RUCPDOC/USDOC WASHDC PRIORITY 0108
INFO RUEHBS/USEU BRUSSELS 1145
RUEAIIA/CIA WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHDBU/AMEMBASSY DUSHANBE 0790
RUEHIL/AMEMBASSY ISLAMABAD 1957
RUEHBUL/AMEMBASSY KABUL 1919
RUEHNE/AMEMBASSY NEW DELHI 1948
RHEHAAA/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 1586
RUEHVEN/USMISSION USOSCE 1871
RUEHAK/AMEMBASSY ANKARA 1909
RUEHBJ/AMEMBASSY BEIJING 1885
RUEHML/AMEMBASSY MANILA 0111

UNCLAS SECTION 01 OF 05 DUSHANBE 002247 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/CEN; 
AMEMBASSY ANKARA FOR AGCOUNSELOR 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EAID ELAB PGOV PHUM TI
SUBJECT: THE FUTURE OF TAJIK COTTON - ANYTHING BUT LIGHT AND FLUFFY 
 
REF: A: DUSHANBE 1667; B: DUSHANBE 1740; C: DUSHANBE 1749 
 
DUSHANBE 00002247  001.4 OF 005 
 
 
¶1.  (U) Summary:  Despite the ailing cotton sector's debt-ridden 
farms and declining harvest, cotton remains Tajikistan's most 
important export and biggest crop.  International donors have 
joined forces, backing major projects to reinvigorate the 
sector.  The Government of Tajikistan, the National Bank of 
Tajikistan, lending companies and international financial 
institutions are actively seeking cotton sector and land reform, 
united by an independent commission on cotton reform.  The World 
Bank and Asian Development Bank December 13 sent a draft "Road 
Map" to the government to resolve the cotton debt through a 
series of reforms and technical assistance.  U.S. assistance 
efforts complement the Road Map by focusing more broadly on the 
agricultural sector: promoting land reform will help build a 
viable land market, and developing the non-cotton agricultural 
sector will boost farmers' freedom to grow alternative products. 
 While national attention is on cotton, the massive influx of 
income from foreign remittances to rural areas has softened the 
crisis by making the rural economy less dependent on cotton. 
End Summary. 
 
 
Cotton Production 
-------------------------- 
 
¶2.  (U) Intense informal government pressure on farmers to 
increase output has failed to increase Tajik cotton production. 
As of November 20, farmers harvested 437,900 tons of raw cotton, 
about 80.1 percent of this year's national target of 547,000 
tons. 
 
¶3.  Tajik Cotton Production, 2002-2006 (as of Dec 1; State 
Statistical Committee) 
 
 
                        2002          2003         2004 
2005         2006 
 
Area cropped (ha)      269,200     284,300     285,000 
288,000     250,000 
 
Target (raw)               515,000     610,000     610,000 
610,000     547,000 
 
Production (raw)                515,500     537,400     558,000 
547,000     440,000 
 
 
¶4.  (U) In 2006, the Government of Tajikistan allocated 250,000 
hectares for cotton production out of 901,100 hectares of 
potential agricultural land.  This cotton land target is 33,000 
hectares lower than 2005, and actual land-use for cotton 
cultivation was likely lower than official statistics.  In fact, 
annual "targets" were officially done away with several years 
ago, but district governments set Soviet-style unofficial local 
quotas, reporting progress almost daily during harvest season. 
Cotton cultivation reached its peak in 1991, before the collapse 
of the Soviet Union, when 298,800 of 821,000 hectares were used 
for cotton.  From 1995-2006, Tajikistan ranked 14 in global 
cotton production, growing 0.6 percent of the world's cotton. 
 
¶5.  (U) According to the State Statistical Committee, exports of 
cotton fiber accounted for 9.5 percent of Tajikistan's exports 
from January-July 2006.  Tajikistan exported 69,000 tons of 
cotton fiber for a total amount of USD 74.1 million over the 
first seven months of this year, which is 3,800 tons or USD 3.7 
million less compared to the same period of 2005. 
 
¶6.  (U) The main trading partners for Tajik cotton-fiber exports 
are: Latvia - 23.8 percent; Iran - 20.8 percent; Kazakhstan - 
19.3 percent; Uzbekistan - 12.4 percent; Ukraine - 3.6 percent; 
Turkey - 1.9 percent; Switzerland - 1.8 percent; and Slovakia - 
1.4 percent. 
 
¶7.  (U) Downstream industries have suffered as well. 
Tajikistan's largest cotton oil production factory, located in 
the northern city of Kanibadam, formerly processed 125,000 tons 
 
DUSHANBE 00002247  002.4 OF 005 
 
 
of cotton seeds each year but now sits idle.  Despite limited 
successes in the textile industry, most Tajik cotton is exported 
in its raw form.  Only 12-14 percent of cotton production goes 
to the domestic textile industry (Reftels A, C). 
 
 
Explaining the Drop in Production 
--------------------------------------------- --- 
 
¶8.  (U) The halving of world cotton prices between 1995 and 2005 
drastically reduced the profitability of the cotton sector in 
Tajikistan.  Tajikistan's cotton farmers are the poorest in the 
world, taking home less than 25 percent of the market value of 
their product, while saddled with enormous debts from middlemen 
lending companies.  The extremely uneven distribution of cotton 
profits, which benefits intermediary investors and exporters, 
undermines production incentives. 
 
¶9.  (U) Despite several international micro-lending projects to 
help small farmers, Tajik farmers still lack investment capital. 
 The cotton sector suffers from old equipment, ill-defined 
land-use rights, and up to USD 300 million of controversial debt 
to "futurist" lending companies.  With most farms facing 
crushing debt, Tajik banks provide loans only to sustain the 
production cycle, not for capital investment.  According to the 
State Statistical Committee, 19,947 tractors operate in the 
agricultural sector.  However, these tractors average 30 years 
in age and many have not been used for years.  Based on capital 
depreciation of previously reported assets, we estimate upwards 
of 70 percent of these tractors are actually scrap-iron. 
 
¶10.  (U) Despite President Rahmonov's direct plea to foreign 
companies to invest in the cotton processing sector, outside 
investors struggle with corruption at every level of bureaucracy 
(Reftel A).  A U.S. cotton processing company attempted to enter 
the Tajik market in 2000 but could not get through the layers of 
local government bribery.  However, a successful U.S.-based 
cotton processing company, Well Brothers, has well-developed 
contacts with Tajik partners in the "Rahsh" exporting company, a 
politically connected firm. 
 
¶11.  (U) Many cotton producing areas suffer from marked salinity 
due to poorly maintained irrigation and farm drainage systems. 
Despite the relatively high price farmers pay for farm inputs 
and seeds, the quality of these inputs is very low.  Under Tajik 
law, no new seeds have been allowed in since 1992.  Because the 
best cotton seeds go to oil, the seed stock gets worse each 
year.  The state controls seed regulation, and no private or 
foreign companies are involved in cotton seed imports. 
 
 
Two Major Problems: Land Reform and Cotton Debt 
--------------------------------------------- -------------- 
--------------- 
 
¶12.  (U) The incomplete structural and legal reform of the 
Soviet collective "kolkhoz" farms and state-owned "sovkhoz" 
farms continues to reduce the profitability of land.  Following 
the signing of the "Law on Dekhan Farms" in March 1992 and the 
revision in April 2003, most kolkhozes and sovkhozes were simply 
renamed collective "dekhan" farms with no restructuring or 
distribution of ownership.  Dekhan farms operate as either 
mini-cooperatives - worked and managed by a group of people; or 
as small privately-owned farms.  In 1996, the land reform 
process was accelerated (but not in quality terms) by the 
introduction of Presidential Decree 522, which mandated all 
lands converted to dekhan holdings by 2005.  According to the 
State Land Committee, 850 state farms existed before the land 
reforms, multiplying to 28,452 dekhan farms after the reforms, 
with 170 state farms left alone for the purposes of seed and 
livestock breeding.  In June 2006, Decree 522 was cancelled and 
replaced by Decree 1775 "On additional measures on 
reorganization and reforming of agricultural organization," 
which did very little to further reorganize or reform farms. 
 
¶13.  (U) Sovkhozes and kolkhozes were separated into smaller 
dekhan farms but under strict and direct control of district 
 
DUSHANBE 00002247  003.4 OF 005 
 
 
Hukumats (local authorities).  In addition, these new farms 
inherited the debts of previous entities in direct proportion to 
the land they received.  The so-called reforms created even 
heavier small farmer dependence on local authorities and 
futurist companies.  Local farmers cannot easily switch from 
cotton to other crops due to the heavy financial debt burden and 
direct control by local authorities. 
 
 
The Debt Cycle 
---------------------- 
 
¶14.  (U) The cotton production model is very simple.  The 
President announces the cotton plan, the National Bank regulates 
and provides appropriate credit to commercial banks: 
CreditInvest Bank (with the largest debt owner structure), and 
futurist companies (acting as operators for cotton finance and 
sales operations).  Local Hukumats act as a local police force 
enforcing decrees on the dependent farmers.  Although, de jure, 
farmers have freedom of choice of what to grow on their land, de 
facto, local Hukumats dictate how many hectares of land should 
be used for cotton.  Farmers privately indicate they have 
freedom on only 20 - 30 percent of their land. 
 
¶15.  (U) One farmer's story illustrates the general plight.  A 
farmer from Djilikul District near Qurghon-Teppa acquired 25 
hectares of land to start a dekhan farm in 2006.  This land came 
with cotton debts of USD 1,300 per hectare, owed to the futurist 
company "TAMER", and the farmer must pay 20 percent per year on 
this debt.  At the beginning of the season, TAMER provides the 
farmer all inputs: including seeds, diesel, and fertilizer; and 
pre-pays his taxes.  The farmer does not know how much he is 
paying for these goods until the end of the year, and TAMER does 
not provide him a written contract.  These goods inevitably cost 
the farmer more than market rates.  At the end of the year, the 
farmer must provide all his cotton harvest to TAMER, which 
determines the cotton price only after the harvest. 
 
¶16.  (U) From 1992 to 1997, the Government of Tajikistan used 
AgroInvestBank (AIB), (under the direct control of the current 
chairman of the National Bank of Tajikistan Murodali Alimardonov 
and "Pakhtai Tojik," the government agency in charge of cotton), 
to finance the cotton sector.  Due to an internal budget crisis 
in 1997, the government entered into partnership with the Swiss 
cotton trading company P. Reinhart, which provided USD 70 
million for the cotton sector.  In 2004, AIB passed about 80 
percent of their financing and "debt" portfolio to the 
non-banking organization "Kredit Invest" (under Alimardonov's 
control).  For the last five years, a number of financiers 
entered the market with funds sourced outside of the 
Reihard/AIB/Kredit Invest scheme, many from Russian cotton 
traders, banks and textile concerns.  Futurist companies now 
face serious problems financing the future harvest.  In 2005, 
Alimardonov managed to attract Kazakh banks and investment funds 
to help finance the Tajik cotton sector. 
 
 
What the International Community is Doing About It 
--------------------------------------------- -------------- 
--------------- 
 
¶17.  (U) The Asian Development Bank announced on December 4 a 
USD 12 million loan and grant package to help restore 
productivity and profitability to the Tajik cotton industry. 
The project will help resolve the cotton debt through 
farm-by-farm analysis and policy reform measures.  The project 
will implement the nation-wide adoption of the internationally 
recognized standards regime for cotton, the Universal Cotton 
Grade Standards, which will raise the value of Tajik-produced 
cotton. 
 
¶18.  (U) The World Bank is planning a USD 15 million "Cotton 
Sector Recovery and Poverty Reduction" loan project to help 
develop the cotton industry, with an emphasis on the processing 
sector.  Per Rahmonov's personal request, the World Bank will 
provide a presidential advisor on cotton.  The project will 
improve information flow up the supply chain, support 
 
DUSHANBE 00002247  004.4 OF 005 
 
 
rehabilitation of irrigation, storehouses, and acquisition of 
farm machinery.  In addition, the World Bank will provide 
political risk insurance to international investors through its 
Multilateral Investment Guarantee Agency as an enticement to 
invest in the cotton processing sector. 
 
¶19.  (U) Other donors are providing support as well.  A Swedish 
development project will reform seed regulation and improve seed 
breeding.  A British project will establish an arbitration 
system to support the debt resolution process.  Canada provided 
some debt reform analysis. 
 
¶20.  (U) USAID is taking a broader approach to the agricultural 
sector.  The USAID agricultural program targets both cotton and 
non-cotton food processing in order to provide farmers a viable 
alternative to growing cotton.  By promoting the non-cotton 
sector, the U.S. has taken the advice of experts such as the 
International Crisis Group who warn about the dangers of the 
Central Asian "cotton monoculture."  USAID's vital land reform 
project - which is developing legislation reform to enable an 
effective land market - targets both agricultural and 
non-agricultural land. 
 
 
Debt Relief and Cotton Reform on Divergent Paths 
--------------------------------------------- -------------- 
------------- 
 
¶21.  (U) Farm debt resolution remains an intransigent problem 
despite both Government of Tajikistan and international donor 
efforts to address the issue.  The Asian Development Bank and 
World Bank are each conducting studies to determine the actual 
size and makeup of the debt.  The World Bank study covered only 
14 farms and took over one year to complete, yet yielded little 
useful data; banks, futurist companies, and farmers have kept 
inconsistent and incomplete records of the debt histories.  The 
ADB study should be complete early next year.  Both institutions 
claim that the amount of actual debt is likely half of the USD 
300 million claimed by the banks and futurist companies. 
Meanwhile, the government is waiting for the international 
community to come up with its "real" number for the debt and 
"resolve" it through donor debt forgiveness. 
 
¶22.  (U) Instead of debt forgiveness, the Asian Development 
Bank, World Bank and other donors drafted a Road Map to lead the 
sector to profitability to pay the debts itself.  The stated 
goal of the Road Map is: "Resolution of the cotton debt crisis, 
and the establishment of policies and institutions conducive to 
improved economic returns for cotton farmers, processors, and 
financiers," by 2009.  The Road Map connects government reforms 
with donor technical assistance on debt resolution, government 
interference, pricing and taxation, land reform, and rural 
finance.  State Advisor to the President on Economic Policy 
Matlubkhon Davlatov will coordinate the negotiations of the Road 
Map on behalf of the government.  Donors hope to finalize the 
agreement for the President's signature by February 2007. 
 
¶23.  (U) However, a fundamental gap exists between resolving the 
debt and increasing profitability of the sector.  Cotton farmers 
will not be able to overcome their debts without some measure of 
debt relief, but the Road Map will not in itself alleviate the 
cotton debt.  By agreeing to some form of the Road Map and 
pressing the government to implementing needed sector reforms, 
donors will have something concrete to tie to debt relief. 
 
 
Cotton Important, But Remittances Support Rural Economy 
--------------------------------------------- -------------- 
--------------------------- 
 
¶24.  (U) According to the World Bank and the State Statistical 
Committee, the cotton sector supports 75 percent of the rural 
population in Tajikistan.  However, this does not reflect 
current realities.  While up to 550,000 people work in the 
overall agricultural sector in Tajikistan, up to one million 
work abroad as migrant laborers each year.  Of these, roughly 
800,000 come from rural areas.  Remittances entering Tajikistan 
 
DUSHANBE 00002247  005.4 OF 005 
 
 
through the banking sector in 2006 will reach well over USD 1 
billion, of which an estimated USD 800 million will go to rural 
areas.  Meanwhile, cotton production will provide a paltry USD 
150 million, most of which benefits intermediaries and exporters 
- 25 percent going to farmers.  Remittances provide USD 800 
million to the rural economy, and cotton provides USD 40 million. 
 
¶25.  (U) As cotton becomes less profitable for individuals, more 
and more male farmers and seasonal workers migrate to Russia and 
Kazakhstan for better paying jobs, leaving women and children as 
the main workforce in the cotton fields (reftel B).  Non-cotton 
agricultural productivity has jumped as rural families and 
farmers plant alternative crops for their own livelihoods and 
for the domestic and export market.  By supporting farmers' 
freedom to make their own decisions, we will help balance out 
the domestic economy. 
 
 
Future Prospects 
------------------------- 
 
¶26.  (U) For the past 15 years, the government has made little 
progress laying the groundwork for an economically viable and 
transparent cotton sector.  Farmers remain in financial 
servitude to local government and cotton investors, and have 
only vague ideas of how to manage their cotton operations and 
debts.  Under current conditions, cotton production wastes 
water, ruins land, employs children contrary to international 
law, and contributes to rather than alleviates poverty in 
Tajikistan.  The existing cotton model benefits a limited circle 
of political officials and powerful investors.  Meanwhile, 
everyone is waiting for someone to do something about the cotton 
debt. 
 
¶27.  (U) Lack of donor coordination weakened the Road Map even 
before its presentation to the government, with the World Bank 
failing to tie its major loan package to the Road Map.  The 
World Bank also decided to leave out much of the land reform 
component, including a Unified Land Registry which it feels is 
too big a step to include in the Road Map.  Other donors 
disagreed with the World Bank approach and feel that the Road 
Map does not provide sufficient incentive to the government to 
comply with its commitments.  The Government of Tajikistan will 
face major obstacles to reform from local government officials 
who stand to lose control over the sector. 
 
¶28.  (U) The government and international community will likely 
agree to implement some version of the Road Map.  Donor 
technical assistance will be crucial to developing the cotton 
sector and spreading its dividends broadly.  Elites are divided, 
however, which will make reform slow-going.  Farmers do not know 
where financing for the next season will come from, but most 
farmers will stick with cotton despite its low profitability. 
Cotton dominated Tajik agriculture for 80 years, and farmers 
have limited experience with alternative crops.  Tajikistan's 
future may lie with cotton, but that future is far from certain.HUSHEK