VZCZCXRO6389
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #1464/01 3621332
ZNR UUUUU ZZH
R 281332Z DEC 09
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 1091
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHBUL/AMEMBASSY KABUL 0359
RUEHIL/AMEMBASSY ISLAMABAD 0217
RUEHNE/AMEMBASSY NEW DELHI 0169
RUEHBJ/AMEMBASSY BEIJING 0128
RUEHDBU/AMEMBASSY DUSHANBE 2307

UNCLAS SECTION 01 OF 03 DUSHANBE 001464 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR EFIN EAID KCOR TI
SUBJECT: COTTON IS DESPOT 
 
REF: DUSHANBE 570 
 
DUSHANBE 00001464  001.2 OF 003 
 
 
¶1. (SBU) Summary:  The past year has been a break point in 
Tajikistan's dysfunctional relationship with cotton.  After 
losing money on cotton cultivation for years, no lender was 
prepared to front a single penny to finance cotton.  The 
government responded by financing planting from the budget via 
domestic commercial banks, undermining the country's fragile 
banking system, already hard hit by falling foreign remittances. 
 Meanwhile, the audit of the National Bank and report of an 
outside expert on cotton debt made clear the extent to which 
cotton was impoverishing the country, and cotton 'finance' 
simply channeled large sums of money to a well-connected elite. 
But with $600 million of debt not repaid, the game was up. 
Senior government personnel, including, or perhaps especially, 
those who benefited from the old system, appear willing to make 
real changes in agricultural policy.  What is not clear is 
whether this will go beyond a shift in crops to real 
agricultural development.  The previous system was more about 
'harvesting' agricultural loans than about harvesting cotton. 
With financing for cotton cut off, Tajik official interest in 
acceding to donor pressure to diversify agriculture may be 
motivated more by the desire to restart the flow of credit, 
which initially will come mainly from donors, than by genuine 
interest in making farming work for farmers.  A key challenge 
for donors is ensuring funds to support agricultural 
diversification advance that goal and are not captured by the 
elite.  End Summary. 
 
 
 
Cotton Loses Money 
 
 
 
¶2.  (SBU) The past year has been a break point in Tajikistan's 
dysfunctional relationship with its main agricultural crop, 
cotton.  Long touted as the backbone of Tajikistan's 
agriculture, a major employer, and hard currency earner, two 
outside reports made it clear that cotton has been a 
money-losing proposition for Tajikistan.  The audit of the 
National Bank (reftel) could not account for a large chunk of 
the $1.42 billion borrowed to finance cotton cultivation, and 
nearly $600 million was not paid back.  As far as can be 
discerned from piecing together the available records, a 
considerable portion of the money was diverted to other purposes 
by so-called "cotton investors," a dozen domestic firms that 
received the bulk of the loans. Where these firms could document 
spending on cotton cultivation, the amount was generally roughly 
equal to the revenue they earned from exporting cotton, with no 
visible margin to cover overhead or interest, much less profit. 
But if investors broke even on their cotton business, their 
creditors and farms did not.  Investors overcharged them for 
seed, fertilizer and other inputs they provided, while 
underpaying the farms for the cotton and leaving them more 
indebted each year.  The investors were not bothered by slim or 
even negative margins on cotton farming, however, as another 
portion of the money they received from the National Bank, or 
with the Bank's guarantees, went to other, often unrecorded, but 
presumably more profitable, activities.  Since a large portion 
of the loans were not repaid, every dollar diverted was in a 
sense pure profit. 
 
 
 
¶3. (SBU) At the government's request, the World Bank brought in 
an expert to look at how to deal with outstanding unpaid cotton 
debt weighing on farms.  He found that about a quarter of cotton 
production lost money, half broke even, and only the final 
quarter made a profit -- but only when cotton prices were good. 
With the fall in global cotton prices, along with other 
commodities, in 2008, every other alternative crop was more 
profitable than cotton.  His figures clearly showed that though 
cotton could be profitably cultivated on a small percentage of 
the land, most acreage would be more usefully devoted to other 
purposes. 
 
 
 
¶4. (SBU) As the cotton finance crisis unrolled over the last 
three years, the government retreated from claiming that cotton 
made a major contribution to the Tajik economy to defending it 
on social terms -- as a major employer to those in the 
countryside otherwise without occupation or income.  Given that 
many who work in the cotton fields are not paid in cash but only 
with cotton stalks for winter fuel, cotton seed oil, and seed 
residue for animal feed, and that local governments must often 
coerce students and others into the fields to pick cotton, the 
 
DUSHANBE 00001464  002.2 OF 003 
 
 
social argument does not bear much weight.  While cotton 
products for fuel, food or fodder have some value given chronic 
energy and food shortages, it fails to balance the costs of 
growing cotton. 
 
 
 
¶5. (SBU) When unpaid loans reached critical mass in 2008, the 
credit was abruptly shut off.  Government officials were frantic 
to get funds flowing again, but this proved impossible, and the 
government offered up budget funds for crop financing, thus 
ultimately sending taxpayer money into the same pockets as 
before.  But with the budget falling seriously short, and 
domestic banks already pushed to the edge, that was only an 
interim solution.  Under the circumstances, restarting 
commercial credit would be impossible.  Only international 
donors could provide significant funds to finance agriculture, 
but they weren't willing to do so without reform.  After years 
of foot dragging, senior government officials, led by Deputy 
Prime Minister Alimardon, a stalwart protector and participant 
in the cotton investor club, discovered new merit in donor 
demands to diversify agriculture. 
 
 
 
Debt Forgiveness 
 
 
 
¶6. (SBU)  Further motivated by the global financial crisis and 
the concomitant drop in remittances that supported the budget, 
the government sought to appease donors and qualify for new 
loans to finance agriculture during a transition to more 
diversified crops.  As the first step, the government agreed to 
a program to forgive farms' debt to cotton investors.  This 
extended to having the National Bank of Tajikistan, domestic 
banks, and direct investors forgive $661 million of the money 
owed them by the cotton investors.  Donors pushed hard to have 
cotton investors repay a portion of what they owed since not all 
the money they received was invested in cotton.  An amount of 
$154 million was settled upon, as it could be demonstrated that 
this sum was diverted to non-cotton activity.  It remains to be 
seen if any is actually repaid.  The National Bank is insolvent, 
although it paid off foreign loans to the extent possible.  That 
left the question of what to do for domestic banks.  In 2008 and 
2009 the government lent money from the budget to domestic banks 
specifically to on-lend to the cotton investors; the banks 
remain responsible for repaying those loans to the government. 
Not surprisingly, repayment to the banks has been poor, and the 
banks have not been able to repay the government.  If forced to 
repay the loans to the government, many banks would quickly 
become decapitalized.  As part of the debt forgiveness the 
government is issuing treasury bills to the banks that they can 
hold as capital to strengthen their balance sheets.  The 
deadlines by which the banks had to repay the government have 
been pushed back several times. 
 
 
 
¶7. (SBU) A second component of reform is the "Freedom to Farm" 
initiative, which until now has enjoyed more lip service than 
implementation.  It is supposed to end pressure on farmers to 
grow cotton.  Until this year, it had only partial and sporadic 
impact, with most farms still reporting they were forced by 
local authorities to plant cotton.  In 2009, while precise 
figures have yet to emerge, reports indicate that at least 20% 
of the acreage formerly under cotton cultivation was planted 
with other crops.  A key problem is agricultural privatization 
was mainly cosmetic; individual farmers or family farms with 
solid land rights and autonomy to make decisions are the 
exception.  Most farms are 'privatized' collective farms with a 
quasi-corporate/cooperative structure.  Each such farm has a 
director who makes all decisions and is often beholden to local 
officials and/or cotton investors for his job.  Other farm 
workers may "own" scattered parcels of the land as their share 
in the venture, but the land is farmed as a single unit under 
the director -- often the same person who managed the farm in 
Soviet days. Local authorities have forced farms to grow cotton 
by threatening to cut off utilities, to increase taxes and 
prosecutor office visits and inspections, to close local 
schools, and force meetings or reports to government offices. 
 
 
 
¶8. (SBU) Most such farms are tied to a cotton investment firm, 
which provided inputs and/or finance, and had the right to all 
production.  The investment firm is the real decision-maker on 
 
DUSHANBE 00001464  003.2 OF 003 
 
 
planting and other issues.  By keeping the firms in their debt, 
the investors ensured that farms couldn't lower costs by seeking 
cheaper inputs from other purveyors, plant other crops, or sell 
output to other traders for better prices.  The data gathered in 
a donor-funded cotton farmer survey showed that farms not tied 
to investors were more likely to grow crops besides cotton and 
to get higher prices for cotton sold.  The difference in prices 
received by farmers from tied investors versus independent 
buyers ranged from 30 to 63%.  In a recent meeting, officials 
indicated that a real "freedom to farm" might well be 
represented by a return to cotton since the global price had 
been on the rise again. 
 
 
 
Harvesting Loans, Not Crops 
 
 
 
¶9. (SBU) Comment:  In some cases that claim may be true, but in 
others it may be an alibi to cover continued unwarranted 
pressure to favor cotton.  To change how agriculture works, it 
will be necessary to break the relationship between the 
'investors' and farms.  Otherwise, even if there is a transition 
to other crops, the underlying pattern that leaves farms 
impoverished and investors fat and powerful will remain.  With 
cotton investors receiving such a large volume of credit, much 
of which was neither invested into cotton nor repaid, it is 
clear that the system made money by harvesting loans, not cotton. 
 
 
 
¶10. (SBU) Comment continued:  With the cotton debt resolution 
proceeding, major progress on land reform, new impetus on the 
Freedom to Farm resolution, and an actual drop of 20% or more in 
the land planted to cotton, the Tajik government is approaching 
a point where it can make a credible argument to international 
donors that funding agricultural finance will be necessary for 
agricultural reform to succeed.  The full plan for this reform 
is expected in late January, and donors will need to be very 
careful about how such financing is provided and implemented. 
Alimardon, now the chief official in charge of agricultural 
reform, was directly responsible for directing $1.4 billion into 
the hands of a few select investors.  We need to be sure that a 
system to finance new crops or agriculture activities does not 
recreate the old pattern.  A transition to new crops is likely 
to be full of bumps and dead ends; significant losses in the 
first years would not be unexpected.  Without close monitoring 
these difficulties could provide an excuse for missing funds and 
non-repayment of loans.  Agriculture reform is desperately 
needed in Tajikistan, but if agriculture finance follows the old 
model and donors provide funds for the elite to divert to their 
pockets, the money will end up wasted, further impoverishing the 
countryside.  With the pack leaders of the old model still 
firmly in charge, that outcome is a real and present danger that 
we can not ignore as we push ahead on reform. End Comment. 
GROSS