VZCZCXRO0219
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #0475/01 1051030
ZNR UUUUU ZZH
R 151030Z APR 09
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0233
INFO RUEHDBU/AMEMBASSY DUSHANBE 0439
RUCNCIS/CIS COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 0049
RUEHBUL/AMEMBASSY KABUL 0081
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 04 DUSHANBE 000475 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR DAUSTR LILIENFELD 
STATE FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PGOV TI
SUBJECT: TAJIKISTAN SCENESETTER FOR DAUSTR CLAUDIO LILIENFELD'S APRIL 
21-22 VISIT 
 
REF: DUSHANBE 458 
 
DUSHANBE 00000475  001.2 OF 004 
 
 
¶1. (SBU) Embassy Dushanbe welcomes the upcoming visit of Deputy 
Assistant United States Trade Representative Claudio Lilienfeld. 
 Following is an overview of key economic and trade issues in 
Tajikistan. 
 
Overview 
-------- 
 
¶2. (SBU) The poorest former Soviet republic, Tajikistan is 
critically important to our efforts to stabilize Afghanistan and 
the region.  The country faces serious challenges, however: the 
legacy of its civil war, poverty, isolation, massive labor 
migration, corruption, lack of government capacity, poor 
infrastructure, and low levels of investment, to name just a 
few.  Furthermore, the global financial crisis has hit the 
country hard, resulting in a devalued national currency, 
declining remittances from Tajiks working abroad, and lower 
prices for Tajikistan's main exports, aluminum and cotton. 
 
Economic Snapshot 
----------------- 
 
¶3. (SBU) U.S. trade with Tajikistan remains minimal, due to 
several factors: the small size of the Tajik market, its 
distance from seaports and the United States, a general lack of 
transparency in business affairs, and government corruption and 
inefficiency.  Despite this, Tajikistan has economic potential 
in a number of areas.  On the production side, it possesses a 
wealth of relatively unexploited mineral deposits, a sizeable 
agricultural sector, and hydrocarbon resources, particularly gas 
and coal.  On the market side, due precisely to the difficulties 
noted above, few firms are actively engaged in selling western 
products here.  Despite Tajikistan's poverty, there is a real 
demand for such products.  For Tajikistan to develop as an 
active trading partner for the United States and other 
countries, however, significant strides must be taken to ensure 
a more transparent business climate. 
 
¶4. (SBU) Tajikistan's top leaders view foreign investment 
through the prism of their Soviet experience, and tend to favor 
large state-led investment projects.  While acknowledging the 
need to attract private investment, the government has done 
little to stem the corruption and bureaucratic barriers that 
make Tajikistan an inhospitable environment for business.  To 
some extent the government has not confronted these problems 
since it has been able to attract state-led investment from 
China, Iran, and Russia, among others, to develop its road and 
energy infrastructure, while leaving much of the population to 
survive on remittances from Tajiks working in Russia.  With the 
contraction of foreign investment as a result of the global 
financial crisis and the decline of the Russian economy, 
however, this may change. 
 
¶5. (SBU) Tajikistan's largest industry is aluminum production, 
represented by a single firm, the Tajik Aluminum Company 
(Talco).  Although it is state-owned, its profits flow to an 
offshore company said to be controlled by high-level Tajik 
government leaders.  The state budget thus sees little of 
Talco's revenue.  Steep declines in world aluminum prices since 
last July have even further reduced government income.  Similar 
declines in world cotton prices have harmed Tajikistan's other 
main export sector.  Government efforts to diversify agriculture 
have so far largely been rhetorical: farmers are still forced to 
grow cotton, and the government continues to support the sector 
with risky loans.  According to media reports, only one-third of 
the $41 million in loans made in 2008 have been repaid, and 
investors are seeking to restructure their debt.  The government 
nevertheless intends to make almost $50 million available this 
year to cotton sector investors.  Many of these investors are 
politically connected. 
 
¶6. (SBU) With few business opportunities in Tajikistan and 
deteriorating education and public services, much of the 
population relies on remittances from Tajiks abroad. 
Remittances in 2008 equaled over half of GDP -- the highest 
ratio in the world.  In recent years, a million or more Tajiks 
(out of a total population of less than 7 million) went to work 
abroad, mostly in Russia.  Migrant numbers had been increasing 
before the onset of the global recession, including boys of ever 
younger ages and, for the first time, significant numbers of 
women.  Now, as a result of the global financial crisis, 
remittances have declined dramatically for the first time in six 
 
DUSHANBE 00000475  002.2 OF 004 
 
 
years.  At the same time, returning unemployed migrant workers 
strain domestic services, already reduced due to 
lower-than-anticipated budget revenue. 
 
¶7. (SBU) Tajikistan depends on its neighbors for the vast 
majority of its basic commodities.  The situation became 
particularly dire in winter 2007-08, when brutal cold destroyed 
crops, seed stocks, fuel supplies, and livestock, making it more 
difficult for the rural poor to produce or afford food.  Summer 
drought and locusts compounded the problem.  The USG provided 
$3.5 million in emergency assistance and delivered $10.7 million 
in relief supplies donated by private firms.  While this year's 
winter was much milder, the financial crisis means that many 
Tajiks face serious difficulties making ends meet.  The USG has 
distributed $6.3 million in emergency assistance this winter, 
and will deliver $13 million of privately donated medical 
supplies in 2009.  Unfortunately, our multi-year $8.5 million 
Food-for-Peace program is ending, however, in part due to strong 
DOD support, we secured a one-time $5.8 million 
Food-for-Peace-funded food delivery for this spring. 
 
¶8. (SBU) Efforts to provide financial assistance to the 
government of Tajikistan have been hampered by a lack of 
transparency.  The most notorious recent example was the 
National Bank of Tajikistan's (NBT) admission in December of 
2007 that it had misreported its balance sheet to the IMF.  As a 
condition for future assistance, the IMF required the NBT to 
immediately repay $47 million in loans and submit to an audit. 
The key findings of this audit, by Ernst & Young, have just been 
released.  While acknowledging some improvements, including the 
appointment of a new chairman of the bank, the audit describes a 
number of alarming problems, including inaccurate accounting, a 
lack of controls, and even efforts to mislead the auditors.  It 
also reveals fundamental flaws in how the cotton industry is 
financed, and suggests that the bank cease direct lending to 
cotton financiers. 
 
Key Goals for Your Visit 
------------------------ 
 
¶9. (SBU) Your visit supports a number of our policy goals by: 
 
-- Expressing our interest in adding substance to the Trade and 
Investment Framework Agreement (TIFA) and working to ensure that 
it is mutually beneficial.  Note that Washington intends to host. 
 
-- Urging that political interference in the business affairs of 
U.S. firm Comsup Commodities and in the Grace Sun Min Church 
property dispute cease. 
 
-- Encouraging the government to simplify and reform customs 
procedures. 
 
-- Urging reform of the tax system, including reducing the 
number of taxes and the frequency of tax payments. 
 
Background 
---------- 
 
¶10. (SBU) Last year's TIFA action plan, developed during 
September meetings in Dushanbe, focused on improving investment, 
overcoming practical barriers, creating a single-window business 
registration process, and improving access to business 
information.  So far, little concrete progress has been made in 
any of these areas.  Investment has not noticeably increased, 
both as a result of the crisis but also because impediments have 
not been removed.  While work has been done on the single-window 
system, no concrete steps have been made.  See reftel for more 
on post's thoughts about where we may go with TIFA. 
 
¶11. (SBU) At the moment the only U.S. firm with significant 
investment interests in Tajikistan is the mining firm Comsup 
Commodities.  Comsup's experience may be more of a cautionary 
tale than a positive example for other potential investors.  In 
2004 Comsup opened a joint venture with the Tajik Ministry of 
Industry to mine antimony; two years later, at the Ministry's 
request, Comsup bought out the Ministry and became the sole 
owner of the operation.  At about the same time, Kholnazar 
Kholiqov, the former director of a mine subsequently bought by 
Comsup, began pressuring Comsup to sell its production at 
below-market prices to his new company, Salosa, LLC, which would 
then serve as a middleman in selling antimony overseas.  Salosa 
has received powerful support from the Prime Minister's office, 
 
DUSHANBE 00000475  003.2 OF 004 
 
 
which has insisted that Comsup sell to Salosa.  A Comsup 
representative recently took the issue up with Matlubkhon 
Davlatov, President Rahmon's Advisor on Economic Policy, 
explaining that Comsup will not make further investments in 
Tajikistan unless the political pressure stops and other 
problems are resolved.  He noted that international financial 
institutions such as the EBRD and ADB -- the only viable sources 
of finance for further investments -- wouldn't touch a project 
that is receiving such political interference.  Davlatov 
suggested that Comsup draft a letter outlining the difficulties 
and send it directly to the President.  Comsup is hesitant to 
take this step, however, fearing unpredictable results.  Indeed, 
the process of farming out the Presidential letter to various 
parts of the Tajik government for action could actually delay 
resolution of Comsup's problems. 
 
¶12. (SBU) Tajikistan's customs procedures are byzantine, 
time-consuming, and, quite frequently, corrupt.  Reform of the 
system is essential to attract more commerce.  Among other 
reforms, customs automation should be improved, including the 
establishment of a single declaration processing system, a 
single administrative document for import and export, and a 
one-stop-shop for processing.  USAID is supporting the Regional 
Trade Liberalization and Customs Program, which assists in the 
automation process and works with the government on preparing 
for WTO accession.  In the future, we are looking to improve the 
transit system, including establishing bonded warehousing. 
 
¶13. (SBU) Another essential area of reform is the tax system. 
There are currently seventeen different kinds of taxes affecting 
all kinds of business activity.  Not only is the system 
complicated, but the different taxes do not effectively 
complement one another.  A local businessman told us earlier 
this year that if a business wanted to work entirely openly in 
Tajikistan, it would have to pay as much as 87% of its income in 
taxes.  To improve its business environment, the government 
should reduce the number of individual taxes and the frequency 
of required tax payments.  This will ease the administrative 
burden on businesses and increase tax revenue for the 
government.  The government should adopt policies to make the 
Free Economic Zones a reality by rationalizing the registration 
process and specifying the preferential conditions for business 
in these zones.  USAID has been assisting Tajikistan through its 
Business Environment Improvement Project, the main goal of which 
is to improve the country's World Bank "Doing Business" scores, 
on criteria such as ease of starting and ending a business, 
paying taxes, getting construction permits, hiring staff, etc. 
Tajikistan ranks near the bottom of the list. 
 
¶14. (SBU) A major impediments to doing business in Tajikistan is 
a lack of transparency on property issues.  Government officials 
use outmoded property codes and a corrupt civil court system to 
deprive many of their rights.  City of Dushanbe officials -- 
under the direct orders of the Mayor -- have been frequent 
practitioners.  One example is the Grace Sun Min Mission Center, 
a church with ties to the U.S. and Korea, which purchased 
property in 1999 and invested an estimated $500,000 in 
renovating the buildings on the lot.  City officials have been 
trying since 2004 to take the property back by filing legal 
actions, but Tajikistan's economic courts consistently ruled in 
favor of the Mission Center.  That changed in 2008, however, 
when the Supreme Economic Court determined that the Mission 
Center must hand over its property to the city, reasoning that 
the city itself never properly privatized the land in the first 
place.  The Court also ruled that the city must compensate the 
Mission Center only for the original 1999 purchase price of just 
over $5,000.  Observers of the proceedings have noted numerous 
irregularities, and have concluded that city officials have 
manipulated the economic courts in order to obtain a favorable 
judgment.  The government has been employing this same strategy 
against other entities that hold property in prime locations 
throughout the city, including a popular market near the 
embassy, a successful gas distribution company, and an 
international organization. 
 
¶15. (SBU) Comment: While the world financial crisis has serious 
consequences for Tajikistan, it could nevertheless ultimately 
yield some positive results.  In particular, it may provide some 
incentives for the authorities to confront longstanding 
impediments to local business development and foreign 
investment.  It is already resulting in increased transparency 
in order to attract loans and other budget support from the IMF 
and World Bank.  The question is whether this tendency will be 
 
DUSHANBE 00000475  004.2 OF 004 
 
 
strengthened and supported to the extent that it improves the 
trade and investment climate in Tajikistan.  End comment. 
JACOBSON