VZCZCXRO6894
RR RUEHLN RUEHVK RUEHYG
DE RUEHDBU #0516/01 1050752
ZNR UUUUU ZZH
R 140752Z APR 08 ZDK
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0393
INFO RUCNCIS/CIS COLLECTIVE
RUEHBUL/AMEMBASSY KABUL 0127
RUEHIL/AMEMBASSY ISLAMABAD 0100
RUEHBJ/AMEMBASSY BEIJING 0065
RUEHNE/AMEMBASSY NEW DELHI 0073

UNCLAS SECTION 01 OF 02 DUSHANBE 000516 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: PREL PGOV ETRD EINV ECON TI
SUBJECT: TAJIKISTAN - BACK IN THE USSR AT TALCO 
 
DUSHANBE 00000516  001.2 OF 002 
 
 
¶1. (U) Summary: TALCO, Tajikistan's state-owned aluminum company, 
which accounts for perhaps one third of the country's gross domestic 
product, faces a number of challenges.  During a recent visit to the 
plant, EmbOffs observed that the Soviet-style company remains 
dependent on electricity at below-market rates, and on cheap labor. 
Two thirds of its staff is devoted to non-core activities; 
maintenance and repair, and social support services.  TALCO risks a 
brain drain of engineers and attrition of its labor force to 
neighboring countries, particularly Russia.  More generally, the 
plant serves as the president's cash cow, and keeping it running for 
this purpose undermines the Tajik economy.  End Summary. 
 
A Major Source of Income - But At a Cost 
---------------------------------------- 
 
¶2. (U) TALCO is the Tajik government's largest source of revenues. 
It generates 33% of the country's gross domestic product, 48% of its 
export revenues, and 75.3% of its foreign currency reserves.  TALCO 
produced 421,000 tons of aluminum in 2007, and company 
representatives expect production to increase by 6,000 tons in 2008. 
 TALCO imports raw materials from India, Azerbaijan, Kazakhstan, 
Venezuela, and Russia.  TALCO's leadership has announced its 
intention of mining for raw material inputs in Tajikistan.  However, 
the capital required for investment makes major mining operations an 
unlikely prospect anytime soon. 
 
¶3. (U) TALCO consumes 8 billion kilowatt hours of electricity per 
year - nearly half of Tajikistan's 2007 electricity production. 
Barki Tojik, the country's electricity monopoly, sells electricity 
to TALCO for $.01/kilowatt hour.  Barki Tojik plans to increase the 
price to $.025/kilowatt hour by 2010, which TALCO's operating 
management claims could still allow profit once the company 
implements planned modernizations.  USAID estimates the "commercial 
rate" at which Barki Tojik could maintain and repair its current 
operation is $.045/kilowatt hour.  [Comment: USAID-funded studies 
suggest that income from Tajik electricity at commercial rates 
exported to Afghanistan, or Pakistan would exceed the income from 
TALCO.]  TALCO has recently made moves to be more directly involved 
in the energy sector.  The company recently purchased a $15 million 
heating station project near Dushanbe and a $25 million power 
station in Turkmenistan.  [Comment: Such activity by the largest 
State-owned company serves as another indication that the government 
continues to cling to a Soviet-style, centrally run economy.] 
 
 
¶4. (U) The government must devote considerable political resources 
to keeping TALCO going.  During the recent winter power crisis, the 
government allowed TALCO to operate at near full capacity for 
several weeks, while the rest of the country suffered from severe 
shortages.  President Rahmon negotiated with Turkmenistan to secure 
a supply of power and Uzbekistan provided assistance during the 
crises by repairing the high voltage line connecting Turkmenistan 
and Uzbekistan to Tajikistan, which had been out of commission since 
¶2001. 
 
Management - Back in the USSR 
----------------------------- 
 
¶5. (U) While TALCO remains Tajikistan's premier industrial entity, 
it continues to face severe management difficulties.  Nine major 
lawsuits resulting from mismanagement and corruption have cost the 
company over $60 million in court fees.  TALCO has not substantially 
updated its facilities or equipment since it was founded in 1975 and 
Qupdated its facilities or equipment since it was founded in 1975 and 
it has not significantly increased production capacity throughout 
its 33 year existence.  Of 12,600 employees, only 4500 actually work 
on aluminum production.  The company devotes an even greater number 
of employees (4600) to equipment maintenance and repair.  The 
remaining 3600 employees provide administrative and social support. 
TALCO houses about a third of its workforce in company-owned 
apartments, and builds 45 new apartment units every year.  It also 
runs schools, hospitals, and other services for its staff. 
 
¶6. (U) Tajikistan's declining education system and economic 
conditions means that the company has difficulty both in finding and 
retaining skilled workers.  A deteriorating economic situation has 
led to a brain drain.  In December 2007, twelve TALCO engineers left 
to work for the Pavlodar aluminum smelter in Kazakhstan, lured by 
higher salaries, better benefits, and bigger apartments.  TALCO's 
Production Department Director Uktam Haidarov expressed his concern 
that more of TALCO's less skilled employees will flee to Russia in 
search of higher paying jobs over the coming years.  He named this 
as the number one problem the company faced.  [Comment: we would 
argue that it's number two, behind the non-commercial basis of the 
whole enterprise.] 
 
¶7. (U) The management at the plant is removed from the financial and 
 
DUSHANBE 00000516  002 OF 002 
 
 
trade aspects of the business.  They merely process production 
orders received from TALCO's central headquarters located an hour's 
drive away in Dushanbe, and receive inputs of raw alumina and 
electricity in return.  TALCO relies on a tolling system in which 
the company receives a fixed pre-negotiated fee for the processing 
of alumina.  As a result, the company is losing out on potentially 
hundreds of millions of dollars to offshore tolling companies (see 
next paragraph).  In April of 2007 the IMF reported that TALCO is 
receiving less than a quarter of the international benchmark price 
for its aluminum.  The World Bank has publicly criticized the 
management for "very limited" international accounting standards, 
inappropriate selection of auditors, and firing auditors after 
conflicts over their reports.  TALCO's management claims that the 
company pays a large part of the government budget, but avoids 
revealing specific figures. 
 
Follow the Money 
---------------- 
 
¶8. (SBU) Although TALCO has been under President Rahmon's de facto 
authority since 1994, TALCO officially came under direct control of 
President Rahmon's family in 2004.  The company is not governed by a 
board of directors or any other type of executive committee.  The 
President's brother-in-law, Hasan Sadullozoda, does not hold a title 
at TALCO, but has close ties with the company's management and makes 
or endorses all major decisions.  A recent Asia Times article 
reported that cash from major tolling arrangements flows through an 
intermediary company called TALCO Management Ltd (TML), registered 
in the British Virgin Islands.  The Tajik government owns 70% of the 
TML and the rest is owned by wealthy Tajik individuals, presumably 
including members of the Rahmon family.  The difference between 
TALCO's smelter receipts and the declared value of the exported 
aluminum, which runs in the hundreds of millions of dollars, may 
provide some indication of the amount of money going through TML. 
 
¶9. (U) The Tajik Government has strongly resisted privatization of 
TALCO, arguing that as the sole money maker for Tajikistan's 
industrial sector, TALCO should be under the direct supervision of 
the government.  In a public speech in 2006, President Rahmon 
formally stated that the Government would not privatize TALCO. 
 
Comment 
------- 
 
¶10. (SBU) Comment: TALCO's aluminum factory is an impressive sight, 
but like many of the country's assets, President Rahmon sees it as a 
means of generating income for himself, his family members, and his 
inner circle.  Although it is a state asset, decisions about the 
company are not made in the best interests of the country.  Partial 
or full privatization would provide the basis for investment in the 
company, more efficient production, and a stronger financial base 
for the country.  This, however, is unlikely, given President 
Rahmon's personal interest in the company. 
 
¶11. (SBU) Comment Continued: As with other industries, TALCO's 
revenue does not contribute to development of the country; rather 
much of it disappears for off-budget activities and projects, such 
as palaces and lavish state entertainments.  The people of 
Tajikistan effectively subsidize TALCO, by living without adequate 
health services, education, or electricity.  Hundreds of millions or 
even billions of dollars have disappeared from the company since 
1992, and the huge subsidies TALCO receives in the form of cheap 
electricity are draining enormous resources from the Tajik economy. 
Qelectricity are draining enormous resources from the Tajik economy. 
End Comment. 
 
JACOBSON