VZCZCXRO7388
RR RUEHLN RUEHVK RUEHYG
DE RUEHDBU #0490/01 1000753
ZNR UUUUU ZZH
R 090753Z APR 08 ZDK
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0371
INFO RUCNCIS/CIS COLLECTIVE
RUEHBUL/AMEMBASSY KABUL 0114
RUEHIL/AMEMBASSY ISLAMABAD 0087
RUEHBJ/AMEMBASSY BEIJING 0052

UNCLAS SECTION 01 OF 03 DUSHANBE 000490 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR SCA/CEN 
 
E.O. 12958:  N/A 
TAGS: EAGR EINV ECON PGOVTI
SUBJECT: TAJIKISTAN COTTON SECTOR HEADING FOR MORE TROUBLE, AS IS 
BANKING SECTOR 
 
DUSHANBE 00000490  001.2 OF 003 
 
 
¶1. Summary: Visits to cotton growing regions and conversations with 
contacts in the Government of Tajikistan and in the development 
community show that the Government, despite declarations of "freedom 
to farm," is continuing its usual practice of coercing farmers to 
grow cotton.  The "profitability" of the cotton sector relies on 
paying farmers below-market prices for their cotton, pushing them 
further into debt while enriching politically-connected middlemen -- 
the cotton investors or "futurists."  The system is unsustainable; 
it discourages modernization of cotton cultivation and 
diversification into other crops, and helps push rural Tajiks to 
migrate for employment abroad, creating labor shortages in a sector 
which relies on manual labor.  Food insecurity in Tajikistan will 
likely worsen in the coming season, and cotton production will fall, 
because of the lateness of planting caused by the harsh winter, 
March drought, and government mismanagement.  End Summary. 
 
¶2. EmbOffs received a snapshot of the troubled cotton sector during 
a recent visit to HIMA (Hayoev Ismatullo Murodali Alimardon), a 
cotton investment company 40 kilometers south of Dushanbe, partially 
owned by former Central Bank Chairman and current Deputy Prime 
Minister Alimardon.  The other four major Tajik cotton investment 
companies also have close connections to the political elite, and 
are "profitable" by overcharging farmers for inputs such as seeds 
and fuel, while buying raw cotton from farmers at artificially low 
prices.  Cotton farmers have told USAID contractors that investors 
pressure farmers into agreements without stating the price of cotton 
upfront and without explaining payment procedures.  Investors almost 
always delay payments to farmers, particularly for those who have 
debts.  Some farmers do not receive their payments until March and 
April of the next year. 
 
Posing as a Cotton Investor, Acting Like a Feudal Lord 
----------------------------------------- 
 
¶3. HIMA has operated in the Yovon district, 40 kilometers southeast 
of Dushanbe, for the past 12 years.  HIMA owns a ginnery to process 
raw cotton.  The ginnery was built by the Ministry of Agriculture in 
1996 with used equipment 20 to 30 years old, then sold to HIMA in 
¶1997.  HIMA is now paying an Italian company to build a yarn factory 
in Yovon.  The $18 million project will be complete in late 2008, 
and will produce yarn for export.  HIMA plans to employ 120 local 
women (preferred over men as they don't smoke as much and work 
harder), and a few men to manage them.  The projected yearly 
production capacity of the factory will be 4000 tons of cotton yarn. 
 Other Tajik cotton investment companies are building or have 
announced plans to build a half-dozen similar yarn factories 
elsewhere in Tajikistan. 
 
¶4. Ismatullo Hayoev, HIMA's General Director, explained to us that 
HIMA has a competitive advantage over European yarn factories 
because of the low cost of Tajik labor and because of very 
inexpensive electricity.  While the people of Yovon do not receive 
electricity at home during the fall, winter, or spring seasons, 
HIMA's ginnery and new yarn factory have a guaranteed power supply 
from the Nurek Hydroelectric station and the Yovon heating station. 
Hayoev said that HIMA pays three cents ($.03) per kilowatt hour, a 
small fraction of European electricity prices or the actual 
production costs in Tajikistan. 
 
¶5. Mr. Hayoev, like Alimardon, has close ties to the President.  He 
Q5. Mr. Hayoev, like Alimardon, has close ties to the President.  He 
was one of the founders of the Tajik Sodirot Bank, is the son of 
former Prime Minister during the late 1980s, Izatullo Hayoev, and 
played an important role in President Rahmon's 1994 nomination. 
 
Fluffy Profits for Investors, Empty Pockets for Farmers 
------------------------------------------- 
 
¶6. The Yovon District was a cotton producer under the Soviet empire. 
 A casual drive through the area shows the glaring poverty of cotton 
farmers.  We passed village after village where residents were 
drawing water from canals.  Electricity is intermittent for houses. 
We watched as young girls picked cotton plants by hand in the 
fields.  Adult male labor is in short supply, because dire economic 
conditions for farmers have caused many men to go abroad for work. 
We spoke with several cotton farmers at a roadside stop arranged by 
Mr. Hayoev.  The farmers said that they expected life to get more 
difficult for them in the next year, because of the shortage of 
labor, and the lateness of the cotton harvest and planting.  The 
late harvest and planting ("we were under orders from the government 
to keep harvesting cotton until December" one farmer told us) were 
due in part to the recent unusually harsh winter, but also due to 
hesitation by cotton investors in providing inputs to farmers, as 
they waited while President Rahmon dithered over a new mortgage law 
for individual farmers.  The legislation would provide farmers more 
independence by allowing them to borrow against their land, but the 
President did not sign it until March 20.  Meanwhile, land usually 
prepared for cotton production in November and December was not 
 
DUSHANBE 00000490  002 OF 003 
 
 
planted until February and March this year. 
 
¶7. When asked whether they could diversify into high value food 
crops, the farmers we met said this was impossible, because they had 
no way to market such products, could only deal with cotton 
investors, and met with official discouragement.  Mr. Hayoev stood 
by during the conversation, seemingly unaware that anything was 
amiss with this state of affairs. 
 
 
¶8. The central government has always required local authorities to 
devote large swaths of land to cotton production.  Farmers have told 
us that local officials have destroyed non-cotton crops that were 
planted against their instructions.  The Government is now 
endangering the banking sector, in order to keep money flowing to 
the cotton investors.  The Government's "new cotton mechanism" 
supplied commercial banks with nearly $30 million and ordered them 
to make low interest loans to cotton farmers.  Commercial banks do 
not have the capacity to manage these loans.  The Asian Development 
Bank estimates that 80-95% of cotton loans will become bad debt. 
These forced and risky loans could result in a banking sector 
meltdown by this summer or fall. 
 
Historic Decline 
---------------- 
 
¶9. Yovon District has grown as much as 35,000 tons of raw cotton per 
year, but in 2007 produced just 23,000 tons.  In 2008 production is 
projected to be only 20,000 tons.  On a national level, Tajikistan 
produced 420,000 tons of raw cotton in 2007, down from 444,000 tons 
in 2006.  Cotton production in 2008 is expected to be 30-40% lower 
than 2007.  According to the Ministry of Agriculture, the total 
annual production of raw cotton since 1991 has not exceeded levels 
of 1963.  Yields per hectare are no higher today than they were in 
the late 1930s. 
 
¶10. There are a number of reasons for declining output.  Higher 
prices in fuel and other inputs (as a result of higher world prices) 
have led to lower production levels.  Mass migration of farmers to 
urban centers, Russia, and Kazakhstan has reduced technical skills, 
which in turn has led to improper use of equipment and fertilizers. 
Farmers are not pursuing hybridization, which is necessary to 
maintain productivity.  Crop rotation enforced during the Soviet 
period no longer takes place, leading to rapid soil depletion.  And 
with the current semi-feudal arrangement of the sector, farmers have 
little incentive to meet higher production targets.  Last year's 
unusually harsh winter forced many farmers faced with mounting debts 
and food shortages to sell livestock and already antiquated 
equipment in order to survive. 
 
Can't Afford to Eat 
------------------- 
 
¶11. Reduced cotton crops result in significant loss of farm income 
for basic necessities including food.  More than half of 
Tajikistan's food needs are imported, and higher world food prices 
combined with lower rural incomes caused widespread rural hunger 
this past winter and spring.  Authorities have talked of price 
controls to address this problem, which in turn has produced real 
food shortages in some locales, as sellers abandoned the market. 
 
Comment - To the Bitter End (Bitter for Some, that is) 
--------------------------------------------- --------- 
 
¶12. HIMA and the Yovon District provide a window into the cotton 
crisis currently plaguing Tajikistan.  A politically-connected 
cotton investor collects large profits at the expense of the 
individual farmers and the national economy, preventing 
diversification and economic development, for the investor's short 
Qdiversification and economic development, for the investor's short 
term gain.  While last year's severe winter and energy supply 
troubles contributed to the cotton crisis, the underlying problem of 
the agricultural sector is the continuation of Soviet-era policies 
that force the country's farmers to produce cotton and discourage 
diversification into food production.  An arrangement that once 
served the interests of a centrally-planned economy now provides 
money to a politically connected "mafia."  This dysfunctional system 
resembles in many ways the mechanism for perpetuating the poppy 
industry in nearby Afghanistan; except here in Tajikistan, the 
policy is enforced explicitly by the government. 
 
¶13.  A confluence of declining cotton production, decreasing farm 
income, rising debt, increased food prices, and overstretched 
financial institutions could lead to an economic and humanitarian 
crisis worse than before.  Unfortunately, government officials and 
their friends in cotton investing are bent on continuing to extract 
what money they can from the system until it collapses; then running 
to international donors for a bailout.  USAID agricultural and land 
 
DUSHANBE 00000490  003 OF 003 
 
 
programs are designed to encourage alternate crops, assist in 
marketing, and help farmers secure land rights.  However, we will 
need to press the government for significant reforms in order for 
these programs to have a real impact.  End Comment. 
 
JACOBSON