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RR RUEHLN RUEHVK RUEHYG
DE RUEHDBU #0894/01 1651427
ZNR UUUUU ZZH
R 141427Z JUN 07
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0457
INFO RHEFDIA/DIA WASHINGTON DC
RUEHDBU/AMEMBASSY DUSHANBE 2202
RUEHIL/AMEMBASSY ISLAMABAD 2162
RUEHBUL/AMEMBASSY KABUL 2141
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RHEHAAA/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHDC
RUEHKO/AMEMBASSY TOKYO 1637
RUEHVEN/USMISSION USOSCE 1979
RUCPDOC/USDOC WASHDC 0168
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHAK/AMEMBASSY ANKARA 2006
RUEHBJ/AMEMBASSY BEIJING 1962
RUEHBS/USEU BRUSSELS 1225
RUEAIIA/CIA WASHDC
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 DUSHANBE 000894 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY PASS TO JEFF BAKER; STATE FOR SCA/CEN; STATE FOR EUR/ACE 
 
E.O. 12958: N/A 
TAGS: EAGR EFIN ECON EAID PGOV TI
SUBJECT: DONOR DISAGREEMENT ON TAJIK COTTON SECTOR 
 
 
DUSHANBE 00000894  001.2 OF 002 
 
 
¶1.  (SBU)  Summary.  Fissures within the donor community 
threaten to derail efforts to resolve Tajikistan's $400 million 
cotton debt.  The Asian Development Bank favors a donor bailout 
of the cotton sector, in order to save industry investors and 
prevent a potentially fatal breakdown of the nascent banking 
system.  The World Bank believes that upwards of 80% of the debt 
should be written off by investors who knew what they were 
getting into, and allow farmers and the government to pay off 
the remainder of the debt following a series of agricultural 
reforms.  The Tajik government is largely beholden to the 
powerful investors (including some close relatives and 
associates of President Rahmon) who control the debt, but donors 
may be able to push the Tajik government into accepting a 
debt-write off by finding ways to fund future harvests.  We 
should not subsidize wealthy local investors who have done 
little to improve the situation and done much to keep 
Tajikistan's farmers in poverty, and who may be inflating their 
debt holdings to squeeze more out of donors.  End Summary. 
 
¶2.  (SBU) Director General Juan Miranda of the Asian Development 
Bank surprised donors at the June 2 Development Forum meeting in 
Dushanbe by backing out of a plan to create an independent Tajik 
mechanism to take on the $400 million cotton debt.  He instead 
proposed to bring in an international accounting firm to handle 
the debt as an authoritative arbiter.  [Comment: Having a 
respected international company handle the debt makes sense 
since the Asian Development Bank is interested in putting 
significant funds into a bailout.  End comment.]  Asian 
Development Bank proposed financing a bailout of up to $100 
million, which they would split with the World Bank.  World Bank 
officials in Dushanbe chafed at this idea, preferring to punish 
powerful Tajik investors, whom they calculate have made $1.2 
billion from Tajik cotton exports over the last 10 years, while 
Tajikistan's farmers grew more impoverished.  The World Bank 
believes the Tajik banking sector can withstand the fallout of 
any investor bankruptcies, despite the fact that many of the top 
cotton investors are intricately involved in Tajikistan's banks. 
 
 
¶3.  (SBU) Both donor banks remain committed to agricultural 
reform, with the World Bank recently agreeing to a $15 million 
agricultural development project, following on the Asian 
Development Bank's $12 million program.  Both projects include 
funds to help create an independent debt resolution mechanism, 
but do not provide loan funds to actually pay off the debt.  All 
donors agree that the farmers' debt should be taken out of the 
hands of investors in order to free farmers from their control. 
 
¶4.  (SBU) Without debt relief for farmers, the roadmap on 
agricultural reforms which the government signed in March will 
not succeed.  The roadmap commits the government to put through 
a series of measures over the next three years, most importantly 
preventing local governments from bullying farmers and allowing 
them to buy inputs independently, plant the crop of their 
choice, and sell to whomever they like.  Additionally, the 
government and donors will enhance seed stock, improve market 
information, build processing capacity, and ease farmers' access 
to credit.  With U.S. technical assistance, the government is 
working on land code reform that would allow buying, selling and 
mortgaging of land use rights.  These reform measures will put 
the agricultural sector - and individual farmers -- on the path 
to profitability. 
 
¶5.  (SBU) Getting farmers access to agricultural credit is vital 
to the roadmap's success.  According to the agricultural policy 
unit at the Ministry of Agriculture, farmers need $80 - $100 
million each year to fund the harvest.  In order to improve 
farmer access to credit, the United States is planning to work 
with local banks to provide credit guarantees for their 
agricultural loans.  The European Bank for Reconstruction and 
Development is also funding agricultural loan projects. 
Increased funding for these programs would allow local banks to 
increase their lending to the sector. 
 
 
DUSHANBE 00000894  002.2 OF 002 
 
 
¶6.  (SBU) Comment: The local consultant for the Asian 
Development Bank believes that the Tajik government will not go 
through with essential agricultural reforms if the donors do not 
bail out the investors.  With tens of millions of donor funds 
conditioned on the government implementing specific reform 
measures spelled out in the roadmap, the government should 
understand that failure to introduce reforms will only hurt the 
Tajik agricultural sector more.  What the government will 
actually do, and how it will balance the clear need for reform 
with the financial interests of powerful investors from Rahmon's 
inner circle, remains unclear. 
 
¶7.  (SBU)  Over the past year, as donors got closer to agreeing 
on a debt resolution program and investors began anticipating a 
big payoff, the size of the cotton debt ballooned from $300 
million to $400 million, according to National Bank figures. 
However, after spending over a year studying the debt on a 
farm-by-farm basis, the World Bank basically gave up trying to 
determine the actual size of the debt, since farmers themselves 
hold scanty documentation of debts and only investors have 
records of what is owed them.  The World Bank feels no need to 
pay off a made-up debt and neither should we.  Reforming the 
agricultural sector and pushing the government to fight off 
powerful investors and write off the debt is the best solution 
for Tajikistan's farmers.  End Comment. 
JACOBSON