VZCZCXRO3142
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #0046/01 0091142
ZNR UUUUU ZZH
R 091142Z JAN 09
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 1322
INFO RUCNCIS/CIS COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 0278
RUEHBUL/AMEMBASSY KABUL 0386
RUEHNE/AMEMBASSY NEW DELHI 0217
RUEHBJ/AMEMBASSY BEIJING 0249
RUEAIIA/CIA WASHDC 0268
RUCPDOC/DEPARTMENT OF COMMERCE WASHINGTON DC 0102
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNS/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 05 DUSHANBE 000046 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON ETRD PGOV TI
SUBJECT: Financial Crisis Could Make Bad Situation Worse 
 
Ref A: 08 State 134905 
Ref B: 08 Dushanbe 1348 
Ref C: 08 Dushanbe 1470 
Ref D: 08 Dushanbe 1256 
Ref E: 08 Dushanbe 1502 
Ref F: 08 Dushanbe 1518 
Ref G: 08 Dushanbe 1572 
Ref H: 09 Dushanbe 21 
 
¶1. (SBU) Summary: This cable responds to ref A, seeking information 
on the effects of the world financial crisis.  The crisis is likely 
to affect Tajikistan via three routes: falling prices for its two 
largest exports, cotton and aluminum; declining remittances from 
Tajik migrant workers in Russia; and a slackening in domestic 
sectors, such as construction and services, that depend on revenue 
from the first two areas.  The isolation of Tajikistan's banking 
system and the primitiveness of its financial sector will insulate 
it from some direct effects.  The government response has been 
mixed; some officials acknowledge the potential severity of the 
crisis while others say the country's isolation will protect it. 
Much assistance to Tajikistan, including ours, is currently focused 
on helping the country recover from the effects of last year's 
terrible winter.  Donors agree that difficulties arising from the 
financial crisis, particularly falling remittances, could be 
devastating for the country.  End summary. 
 
¶2. (U) This cable is organized as follows: 
 
-- For the effects of the financial crisis on the Tajik economy, see 
paragraphs 3-14. 
-- For the government's response and impact on the budget, see 
paragraphs 15-17. 
-- For the response of international financial institutions and 
other donors, see paragraphs 18-19. 
-- For the impact on USG assistance, see paragraphs 20-24. 
 
Tajikistan's Poverty Means Few Direct Effects... 
 
¶3. (U) While the world financial crisis is likely to have a 
significant bearing on Tajikistan's economy, most of its effects 
will be indirect (ref B).  According to Luc Moers, the resident 
representative of the International Monetary Fund in Dushanbe, as a 
result of the isolation of Tajikistan's banking system and the 
primitiveness of its financial sector the crisis will have few 
"first-order" effects here.  Jamshed Yusupov, deputy director of the 
National Bank of Tajikistan, concurred, noting that the low level of 
investment and savings in Tajikistan's banks mean that few people 
would be affected even if there was turmoil in the banking sector. 
Furthermore, 99% of existing deposits are in somoni-denominated 
accounts, insulating account-holders somewhat from currency 
fluctuations or speculation resulting from financial market turmoil. 
 The banking system itself is relatively safe too, he said, since 
foreign ownership in Tajikistan's dozen private banks amounts to 
only some 37%, which is rather low by international standards. 
 
¶4. (U) Tajikistan's poverty "saves" it in another way: since it has 
only two major exports, cotton and aluminum, its economy is more 
insulated from falling world commodity prices.  And falling aluminum 
prices -- which have tumbled to well under half their high-water 
mark this summer -- will have very little direct effect (refs C and 
E).  The Talco aluminum company, Tajikistan's largest industrial 
concern, operates under a tolling arrangement according to which it 
is paid a fixed price to process aluminum; profits and losses, are 
absorbed by an offshore company based in the British Virgin Islands. 
Qabsorbed by an offshore company based in the British Virgin Islands. 
 For the most part this arrangement has been criticized, not only 
for the opacity of the offshore company's finances -- the profits of 
which purportedly end up in the pockets of the country's political 
leadership -- but also because Tajikistan's state budget receives 
very little from taxation of Talco's operations.  Although Talco has 
announced a 10% cut in output and tons of aluminum are rumored to be 
warehoused for want of buyers, this will have limited effect on the 
Tajik economy.  As one government official said, "We can't be hurt 
from the loss of something we never had." 
 
...But Cotton Sector not In Cotton 
 
¶5. (U) There are already indications, however, that the 40% drop in 
world cotton prices is having negative effects here.  The State 
Statistics Committee reports that over the first eleven months of 
2008, Tajikistan exported 73,800 tons of cotton fiber, worth $97.4 
million, making it the world's fourth-largest exporter of raw 
 
DUSHANBE 00000046  002 OF 005 
 
 
cotton.  According to official statistics, cotton exports account 
for 3.7% of Tajikistan's total GDP and 12% of its agricultural 
production (in value added).  Recent news reports have stated that 
cotton farmers, who had to borrow money to plant their crops, are 
facing grave difficulties paying back those loans because their 
harvests aren't fetching enough on the world market.  Banks, in 
turn, are now highly reluctant to lend to farmers for future 
operations.  Farmers and cotton investors have been given three more 
months to pay back loans, but donors doubt that world prices will 
increase during that time.  The government's solution for the long 
term, to develop a domestic cotton processing industry that will 
allow it to export value-added finished products, if it ever gets 
off the ground, will do little to aid farmers in the immediate 
term. 
 
¶6. (U) Given the nature of the cotton industry in Tajikistan, the 
financial crisis may make a difficult situation worse.  The sector 
is notoriously corrupt, with reports of government-enforced quotas 
being met by forced labor, all for the benefit of wealthy investors 
tied to the ruling elite (ref D).  Last year the National Bank 
admitted that it had made unauthorized loan guarantees to fund 
cotton production (refs C and E).  Against this backdrop, banks' 
reported reluctance to provide new loans to cotton farmers may not 
mean much.  According to embassy sources, smaller cotton farmers 
never got many loans in the first place, while larger operations 
were issued government-backed loans even when it was proscribed. 
The government of Tajikistan recently announced that would make 180 
million somoni ($52 million) available for general agricultural 
loans in 2009.  Donors have pressed the government to make sure that 
some of this money will fund crops other than cotton. 
 
Lost Remittances and Other "Second-Order" Effects Could Be 
Significant 
 
¶7. (U) While the direct effects of the financial crisis are expected 
to be minimal, Tajikistan may be particularly vulnerably to 
second-order effects.  Without a doubt the biggest of these will be 
the reduction of remittances due to cutbacks in construction and a 
slowing economy in Russia, where as many as a million Tajiks work. 
Over the course of 2008, $2.67 billion was sent back to Tajikistan, 
equal to 50% of the country's GDP, indicating that Tajikistan is 
more dependent on remittances than any other country in the world. 
But the rate of remittance growth has been falling.  Over the first 
nine months of the year, remittances averaged 75% higher than the 
previous year.  The numbers for October through December were still 
higher than 2007, but gains were more modest: 18% in October, 1% in 
November, and 9% in December.  (The numbers have been dropping in 
absolute numbers as well, but this is typical for this time of 
year.)  Despite December's surprising uptick, few here doubt that 
the country faces leaner months ahead (ref F). 
 
¶8. (U) The lower remittance income will, first and foremost, hurt 
Tajik families that depend on them for survival.  According to 
several experts here, it was only through remittances -- or loans 
taken out against prospective remittances -- that many Tajiks made 
it through last year's disastrous winter, with its record low 
Qit through last year's disastrous winter, with its record low 
temperatures and skyrocketing prices for food and fuel.  Not only 
will there be less money, but workers returning from Russia will 
also mean more mouths to feed. 
 
¶9. (SBU) The decline in remittances will have other effects as well. 
 Stocks of foreign currency could decline because of the drop in 
dollars coming from Russia.  There are already signs that dollars 
are harder to come by, although the reasons for this remain unclear. 
 The few ATMs around town, including one in the Embassy, are 
"temporarily" not providing dollars.  The Embassy's cashier said he 
suspected the shortage was not linked to the crisis but that the 
government was tightening the flow of dollars to insure that major 
holiday season purchases were made in somoni.  He said there were 
similar shortages in past years. 
 
¶10. (U) According to the IMF's Moers, an additional second-order 
effect from the financial crisis may be the loss of liquidity in 
some banks connected with the trade credit system.  Tajik traders 
may have difficulty taking out (and repaying) loans from some 
Russian and Kazakh banks that help finance the purchase of goods 
abroad for sale here.  Moers said that although the government has 
expressed some concern about this, a recent IMF survey revealed that 
only some 1% of trading loans were provided by Kazakh and Russian 
banks, indicating that the trading system was relatively safe. 
Nevertheless, a number of banks have recently stopped issuing loans 
 
DUSHANBE 00000046  003 OF 005 
 
 
to ordinary citizens.  A contact at Amonatbank said the main reason 
is the banks' concern that returning labor migrants from Russia, who 
make up the majority of the potential borrowers, simply do not have 
the means to repay the loans.  He said that banks chose to cut off 
lending entirely rather than add to the many existing bad debts (Ref 
G).  According to other sources banks have faced a 25% drop in 
deposits in recent months as customers have pulled their money out. 
Banks have responded by advertising increased rates on deposits. 
 
Third-Order Effects 
 
¶11. (U) The economic fallout from the financial crisis described 
above may lead to further indirect problems.  Lower remittances will 
reduce spending on the local market which will force a contraction 
in domestic enterprises.  Similarly, according to Moers, falling 
aluminum prices will have some effect on the economy because the 
small group of people who profit from Talco will have less income to 
spend domestically.  This will impact the construction sector 
particularly, since wealth is  invested mainly in real estate in 
Tajikistan.  But sectors as diverse as the service industry, food, 
and transport may be affected. 
 
¶12. (U) At the same time that remittance income is falling, the cost 
of living is rising for many Tajik families.  In addition to higher 
food prices, the government has recently increased electricity 
prices by 25% to 1.7 cents per KWh.  Although rates remain well 
below world averages -- and indeed below the recommendations of 
several international financial institutions that are concerned that 
government subsidization of such low prices leads to waste and 
inadequate revenues -- the increase will still be difficult for 
poorer Tajiks to afford.  The government chose not to raise the 
rates for Tajikistan's largest electricity consumer, however.  Talco 
will continue to pay 2008 prices, which will place a larger burden 
of the payments on the general population. 
 
Complicating Factors 
 
¶13. (U) The economic problems associated with the world financial 
crisis may be compounded by Tajikistan's perennial winter power 
difficulties (ref H).  Although the country reportedly possesses 
four percent of the world's potential for hydroelectric power 
generation, its capacity is greatly reduced due to decreased water 
flow during winter.  Longstanding political difficulties with 
Uzbekistan, with which it shares the existing Soviet power grid, 
make it difficult for the Tajik government to import energy. 
Although in principal an agreement exists whereby Tajikistan trades 
its summer surplus for winter imports, in practice the Uzbek 
government routinely has been slow to honor it.  Tajikistan will 
ultimately escape this cyclical problem by building transmission 
lines to its other neighbors and by improving relations with 
Tashkent, but for now, its citizens are short of winter electricity 
for heating, cooking, and conducting normal business (ref G). 
 
¶14. (U) One bright spot has been declining fuel prices.  Over the 
past two months the cost of a liter of gasoline has fallen from 3.80 
somoni ($1.12) to as low as 2 somoni ($0.58).  This will reduce the 
cost of agricultural production.  Regarding the price of other 
inputs, including food, the critical period will come in early 
Qinputs, including food, the critical period will come in early 
spring, when many labor migrants typically return to Russia to look 
for new work.  Tajikistan must import 90% of its food supplies, and 
its large trade deficit is financed by remittances, which fund well 
over half of the imports of food and other primary items.  If jobs 
are unavailable in Russia, it could have a profound effect on 
imports. 
 
The Government Response 
 
¶15. (SBU) Tajikistan's government is ill-equipped to handle a 
full-blown financial crisis if it does emerge.  Apart from the 
country's extreme poverty, small budget, and lack of administrative 
capacity, top bureaucrats generally have proved unwilling to reduce 
corruption or adopt reforms that might curb personal profits to 
benefit the country as a whole.  Without a governmental safety net, 
the population's traditional means of dealing with economic 
difficulties, such as last winter's emergency, has been to send 
family members to work abroad; if the financial crisis strikes at 
this source of income, the population has very little to fall back 
on. 
 
¶16. (SBU) So far the government has provided mixed messages about 
the financial crisis.  On the one hand, some officials have stressed 
 
DUSHANBE 00000046  004 OF 005 
 
 
that Tajikistan's relative financial isolation will insulate it from 
the most serious potential problems, such as bank failures and the 
loss of savings.  On the other hand, many officials recognize the 
seriousness of the danger posed by the loss of remittances.  In 
concrete terms the government has done little so far to prepare for 
the crisis.  In December the government distributed to members of 
the Donor Coordination Council an unsigned and vague appeal for 
financial assistance to deal with the crisis.  (Although the 
document was dated November 17, no one had seen the appeal before 
December.)  Some donors had the impression the government was using 
the crisis as an opportunity to fish for funds.  In early December 
the government announced the creation of a commission comprised of 
officials, academics, and representatives of financial institutions 
to study and prepare for the crisis, but as of yet the commission 
has not had any visibility.  Earlier, the Tajik government announced 
the formation of a state agency to help Tajik workers find 
employment abroad, in part by certifying their qualifications; the 
vast majority of Tajiks continue to find work through their own 
contacts, however, in part because most of them are unskilled 
workers for whom credentials are not an issue. 
 
¶17. (SBU) Most of Tajikistan's government revenues come from VAT, 
income taxes, and customs fees.  If trade and the retail sector slow 
as a result of the financial crisis, government revenue could fall. 
To some extent this will be mitigated by the fact that the country's 
economy is largely in the shadows, and few on the state payroll 
actually depend on the government for their wellbeing.  The 
government's ability to make agricultural loans may be affected, 
although it is likely that loans to cotton farmers and investors 
will be the last to be scotched under any financial difficulties. 
Tajikistan's 2009 budget is $1.65 billion (6.1 billion somoni), 
which comes out to approximately $235 per capita. 
 
The International Response 
 
¶18. (SBU) There are no indications that funding for government 
operations from other sources are failing to materialize. 
Tajikistan has issued no government bonds (although there are plans 
to float a bond issue later this year), and according to the IMF the 
government has taken out no commercial loans.  According to 
discussions with international financial institutions here, revenue 
from donors has shown no sign of drying up and may actually increase 
due to the crisis.  As a result of the misreporting scandal at the 
National Bank, the IMF is currently providing no financial 
assistance to Tajikistan (ref E).  Future funding will depend on the 
results of an assessment due in February.  Resident representative 
Luc Moers said that the government's response to the IMF's demands 
in the wake of the scandal had been positive, and he was optimistic 
that Tajikistan would qualify for renewed funding.  He added that 
the IMF would seek to expedite assistance if the financial crisis 
warranted it. 
 
¶19. (SBU) Chiara Bronchi of the World Bank said a team from the Bank 
would come to Dushanbe this month to negotiate with the government 
on future funding.  Assistance from both the Bank and the European 
Community was conditional on a positive response to the IMF 
QCommunity was conditional on a positive response to the IMF 
requirements.  Depending on the IMF's assessment of the 
macroeconomic situation, the Bank might recommend that the 
government apply for fast track assistance that was recently 
approved by the World Bank's board of directors.  This would allow 
the country to frontload some resources to better respond to the 
crisis.  Both Bronchi and Moers emphasized that Tajikistan's extreme 
poverty and the damage done during last year's difficult winter made 
the country very vulnerable to external factors, especially declines 
in remittances.  Bronchi said that until structural reforms are 
completed, particularly the development of the private and financial 
sectors necessary to share risks and resources, Tajikistan would 
remain particularly vulnerable. 
 
Impact of the Crisis on USG Activities 
 
¶20. (U) The financial crisis has not directly affected most USG 
assistance to Tajikistan, although it has the potential to greatly 
expand the country's needs.  A sizable portion of USAID's activity 
last year was directed at addressing issues affecting or affected by 
last year's difficult winter, including agriculture and trade 
reform.  That last year's winter was not even more disastrous for 
Tajikistan's population was due to record remittance flows from 
relatives working abroad.  This year, declining remittances combined 
with another difficult winter could add up to a true humanitarian 
disaster.  USAID has  programmed about $6.3 million for pre-winter 
 
DUSHANBE 00000046  005 OF 005 
 
 
and winter assistance to help vulnerable Tajiks deal with poor 
harvests and increasing prices.  The assistance includes one-off 
cash transfers, distribution of quality winter wheat seed, and food 
distribution through local and regional procurements.  In addition, 
the mission garnered a $5.8 million Single Year Assistance Program 
through Food for Peace for a one-time food delivery in the spring of 
¶2009.  The multi-year Food for Peace program, which includes 
humanitarian as well as development assistance, had already been 
scheduled to end in 2008, a decision made before last winter's 
crisis.  We have been trying to get the program renewed, but without 
success. 
 
¶21. (SBU) The financial crisis appears to be directly affecting a 
USAID program to attract funding for agricultural loans.  In 
September 2007, USAID signed a Development Credit Authority (DCA) 
with Agroinvest Bank in which the bank would attract $5 million from 
foreign investors for such loans.  The DCA would guarantee $2.5 
million, or 50% of the foreign investment.  Agroinvest was to 
attract the full $5 million by June 2008 and complete loan 
disbursements by December, but it was unable to find any investors. 
USAID amended the DCA agreement to extend the dates of funds 
acquisition to December 2008 and loan disbursement to February 2009. 
 However, the bank was again unable to attract the foreign capital. 
USAID is currently considering terminating the DCA agreement and 
exploring the possibility of a new DCA with another bank.  Given the 
credit crunch around the world, the decline in remittances, and 
Tajikistan's bad reputation stemming from last year's IMF report, it 
is unlikely that this program will be viable in the near future. 
 
¶22. (U) USAID is providing assistance in several other sectors that 
may be affected by the financial crisis.  The Economic Reforms to 
Enhance Competitiveness (EREC) Project is intended to create a 
sustainable foundation for competitive private sector development 
and stimulate investment.  EREC's objective is to strengthen the 
institutional capacity of the Ministry of Finance, Tax Committee, 
and National Bank of Tajikistan, to improve tax policy and tax 
administration practices as well as the preparation and execution of 
the budget, and to strengthen the banking sector.  A strained 
national budget and a financial system burdened by bad loans and 
decreased deposits may make it difficult to make meaningful changes 
in the financial sector. 
 
¶23. (U) One small but cumbersome effect of the financial crisis is 
the increased reporting by microfinance organizations to the 
National Bank.  The USAID-funded Association of Microfinance 
Organizations of Tajikistan reports that reporting that used to be 
quarterly must now be submitted monthly, while what used to be 
monthly reports are now required every ten days.  This places a 
significant burden on the microfinance organizations as the reports 
are large and require significant preparation time.  The National 
Bank changed the reporting cycle to monitor (and possibly control) 
microfinance organizations' liquidity and cash flows. 
 
 
¶24. (U) The financial crisis is not likely to directly impact 
programs administered by other USG agencies.  The country may see a 
rise in property crimes, however, if a large number of displaced or 
Qrise in property crimes, however, if a large number of displaced or 
unemployed workers return home.  Difficult economic conditions could 
lead to increased drug use and related crimes.  These potential 
effects could lead to greater needs for law enforcement and 
anti-narcotics assistance. 
 
Comment 
 
¶25. (SBU) Although the financial crisis is unlikely to affect 
Tajikistan directly through its rudimentary financial sector, most 
observers here expect that its indirect effects will be significant: 
that the Tajik economy will slow, and more households will be more 
vulnerable.  A shrinking economy will add to Tajikistan's perennial 
problems securing adequate and affordable food and power for its 
citizens, which are compounded by its isolation and the endemic 
corruption of its leaders.  While the government has consolidated 
power to the point that large-scale political destabilization is 
unlikely, it cannot be ruled out.  Of immediate concern is ensuring 
that Tajikistan's vulnerable inhabitants -- who number over half the 
population -- receive adequate food this winter.  In this respect 
the country desperately needs all of the assistance it can get.  End 
comment.