THE FUTURE OF TAJIK COTTON - ANYTHING BUT LIGHT AND FLUFFY

UNCLAS SECTION 01 OF 05 DUSHANBE 002247

SIPDIS

SIPDIS

STATE FOR SCA/CEN;
AMEMBASSY ANKARA FOR AGCOUNSELOR

E.O. 12958: N/A
TAGS: EAGR ECON EAID ELAB PGOV PHUM TI
SUBJECT: THE FUTURE OF TAJIK COTTON - ANYTHING BUT LIGHT AND FLUFFY

REF: A: DUSHANBE 1667; B: DUSHANBE 1740; C: DUSHANBE 1749

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1. (U) Summary: Despite the ailing cotton sector's debt-ridden
farms and declining harvest, cotton remains Tajikistan's most
important export and biggest crop. International donors have
joined forces, backing major projects to reinvigorate the
sector. The Government of Tajikistan, the National Bank of
Tajikistan, lending companies and international financial
institutions are actively seeking cotton sector and land reform,
united by an independent commission on cotton reform. The World
Bank and Asian Development Bank December 13 sent a draft "Road
Map" to the government to resolve the cotton debt through a
series of reforms and technical assistance. U.S. assistance
efforts complement the Road Map by focusing more broadly on the
agricultural sector: promoting land reform will help build a
viable land market, and developing the non-cotton agricultural
sector will boost farmers' freedom to grow alternative products.
While national attention is on cotton, the massive influx of
income from foreign remittances to rural areas has softened the
crisis by making the rural economy less dependent on cotton.
End Summary.


Cotton Production
--------------


2. (U) Intense informal government pressure on farmers to
increase output has failed to increase Tajik cotton production.
As of November 20, farmers harvested 437,900 tons of raw cotton,
about 80.1 percent of this year's national target of 547,000
tons.


3. Tajik Cotton Production, 2002-2006 (as of Dec 1; State
Statistical Committee)


2002 2003 2004
2005 2006

Area cropped (ha) 269,200 284,300 285,000
288,000 250,000

Target (raw) 515,000 610,000 610,000
610,000 547,000

Production (raw) 515,500 537,400 558,000
547,000 440,000



4. (U) In 2006, the Government of Tajikistan allocated 250,000
hectares for cotton production out of 901,100 hectares of
potential agricultural land. This cotton land target is 33,000
hectares lower than 2005, and actual land-use for cotton
cultivation was likely lower than official statistics. In fact,
annual "targets" were officially done away with several years
ago, but district governments set Soviet-style unofficial local
quotas, reporting progress almost daily during harvest season.
Cotton cultivation reached its peak in 1991, before the collapse
of the Soviet Union, when 298,800 of 821,000 hectares were used
for cotton. From 1995-2006, Tajikistan ranked 14 in global
cotton production, growing 0.6 percent of the world's cotton.


5. (U) According to the State Statistical Committee, exports of
cotton fiber accounted for 9.5 percent of Tajikistan's exports
from January-July 2006. Tajikistan exported 69,000 tons of
cotton fiber for a total amount of USD 74.1 million over the
first seven months of this year, which is 3,800 tons or USD 3.7
million less compared to the same period of 2005.


6. (U) The main trading partners for Tajik cotton-fiber exports
are: Latvia - 23.8 percent; Iran - 20.8 percent; Kazakhstan -
19.3 percent; Uzbekistan - 12.4 percent; Ukraine - 3.6 percent;
Turkey - 1.9 percent; Switzerland - 1.8 percent; and Slovakia -
1.4 percent.


7. (U) Downstream industries have suffered as well.
Tajikistan's largest cotton oil production factory, located in
the northern city of Kanibadam, formerly processed 125,000 tons

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of cotton seeds each year but now sits idle. Despite limited
successes in the textile industry, most Tajik cotton is exported
in its raw form. Only 12-14 percent of cotton production goes
to the domestic textile industry (Reftels A, C).


Explaining the Drop in Production
-------------- ---


8. (U) The halving of world cotton prices between 1995 and 2005
drastically reduced the profitability of the cotton sector in
Tajikistan. Tajikistan's cotton farmers are the poorest in the
world, taking home less than 25 percent of the market value of
their product, while saddled with enormous debts from middlemen
lending companies. The extremely uneven distribution of cotton
profits, which benefits intermediary investors and exporters,
undermines production incentives.


9. (U) Despite several international micro-lending projects to
help small farmers, Tajik farmers still lack investment capital.
The cotton sector suffers from old equipment, ill-defined
land-use rights, and up to USD 300 million of controversial debt
to "futurist" lending companies. With most farms facing
crushing debt, Tajik banks provide loans only to sustain the
production cycle, not for capital investment. According to the
State Statistical Committee, 19,947 tractors operate in the
agricultural sector. However, these tractors average 30 years
in age and many have not been used for years. Based on capital
depreciation of previously reported assets, we estimate upwards
of 70 percent of these tractors are actually scrap-iron.


10. (U) Despite President Rahmonov's direct plea to foreign
companies to invest in the cotton processing sector, outside
investors struggle with corruption at every level of bureaucracy
(Reftel A). A U.S. cotton processing company attempted to enter
the Tajik market in 2000 but could not get through the layers of
local government bribery. However, a successful U.S.-based
cotton processing company, Well Brothers, has well-developed
contacts with Tajik partners in the "Rahsh" exporting company, a
politically connected firm.


11. (U) Many cotton producing areas suffer from marked salinity
due to poorly maintained irrigation and farm drainage systems.
Despite the relatively high price farmers pay for farm inputs
and seeds, the quality of these inputs is very low. Under Tajik
law, no new seeds have been allowed in since 1992. Because the
best cotton seeds go to oil, the seed stock gets worse each
year. The state controls seed regulation, and no private or
foreign companies are involved in cotton seed imports.


Two Major Problems: Land Reform and Cotton Debt
-------------- --------------
--------------


12. (U) The incomplete structural and legal reform of the
Soviet collective "kolkhoz" farms and state-owned "sovkhoz"
farms continues to reduce the profitability of land. Following
the signing of the "Law on Dekhan Farms" in March 1992 and the
revision in April 2003, most kolkhozes and sovkhozes were simply
renamed collective "dekhan" farms with no restructuring or
distribution of ownership. Dekhan farms operate as either
mini-cooperatives - worked and managed by a group of people; or
as small privately-owned farms. In 1996, the land reform
process was accelerated (but not in quality terms) by the
introduction of Presidential Decree 522, which mandated all
lands converted to dekhan holdings by 2005. According to the
State Land Committee, 850 state farms existed before the land
reforms, multiplying to 28,452 dekhan farms after the reforms,
with 170 state farms left alone for the purposes of seed and
livestock breeding. In June 2006, Decree 522 was cancelled and
replaced by Decree 1775 "On additional measures on
reorganization and reforming of agricultural organization,"
which did very little to further reorganize or reform farms.


13. (U) Sovkhozes and kolkhozes were separated into smaller
dekhan farms but under strict and direct control of district

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Hukumats (local authorities). In addition, these new farms
inherited the debts of previous entities in direct proportion to
the land they received. The so-called reforms created even
heavier small farmer dependence on local authorities and
futurist companies. Local farmers cannot easily switch from
cotton to other crops due to the heavy financial debt burden and
direct control by local authorities.


The Debt Cycle
--------------


14. (U) The cotton production model is very simple. The
President announces the cotton plan, the National Bank regulates
and provides appropriate credit to commercial banks:
CreditInvest Bank (with the largest debt owner structure),and
futurist companies (acting as operators for cotton finance and
sales operations). Local Hukumats act as a local police force
enforcing decrees on the dependent farmers. Although, de jure,
farmers have freedom of choice of what to grow on their land, de
facto, local Hukumats dictate how many hectares of land should
be used for cotton. Farmers privately indicate they have
freedom on only 20 - 30 percent of their land.


15. (U) One farmer's story illustrates the general plight. A
farmer from Djilikul District near Qurghon-Teppa acquired 25
hectares of land to start a dekhan farm in 2006. This land came
with cotton debts of USD 1,300 per hectare, owed to the futurist
company "TAMER", and the farmer must pay 20 percent per year on
this debt. At the beginning of the season, TAMER provides the
farmer all inputs: including seeds, diesel, and fertilizer; and
pre-pays his taxes. The farmer does not know how much he is
paying for these goods until the end of the year, and TAMER does
not provide him a written contract. These goods inevitably cost
the farmer more than market rates. At the end of the year, the
farmer must provide all his cotton harvest to TAMER, which
determines the cotton price only after the harvest.


16. (U) From 1992 to 1997, the Government of Tajikistan used
AgroInvestBank (AIB),(under the direct control of the current
chairman of the National Bank of Tajikistan Murodali Alimardonov
and "Pakhtai Tojik," the government agency in charge of cotton),
to finance the cotton sector. Due to an internal budget crisis
in 1997, the government entered into partnership with the Swiss
cotton trading company P. Reinhart, which provided USD 70
million for the cotton sector. In 2004, AIB passed about 80
percent of their financing and "debt" portfolio to the
non-banking organization "Kredit Invest" (under Alimardonov's
control). For the last five years, a number of financiers
entered the market with funds sourced outside of the
Reihard/AIB/Kredit Invest scheme, many from Russian cotton
traders, banks and textile concerns. Futurist companies now
face serious problems financing the future harvest. In 2005,
Alimardonov managed to attract Kazakh banks and investment funds
to help finance the Tajik cotton sector.


What the International Community is Doing About It
-------------- --------------
--------------


17. (U) The Asian Development Bank announced on December 4 a
USD 12 million loan and grant package to help restore
productivity and profitability to the Tajik cotton industry.
The project will help resolve the cotton debt through
farm-by-farm analysis and policy reform measures. The project
will implement the nation-wide adoption of the internationally
recognized standards regime for cotton, the Universal Cotton
Grade Standards, which will raise the value of Tajik-produced
cotton.


18. (U) The World Bank is planning a USD 15 million "Cotton
Sector Recovery and Poverty Reduction" loan project to help
develop the cotton industry, with an emphasis on the processing
sector. Per Rahmonov's personal request, the World Bank will
provide a presidential advisor on cotton. The project will
improve information flow up the supply chain, support

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rehabilitation of irrigation, storehouses, and acquisition of
farm machinery. In addition, the World Bank will provide
political risk insurance to international investors through its
Multilateral Investment Guarantee Agency as an enticement to
invest in the cotton processing sector.


19. (U) Other donors are providing support as well. A Swedish
development project will reform seed regulation and improve seed
breeding. A British project will establish an arbitration
system to support the debt resolution process. Canada provided
some debt reform analysis.


20. (U) USAID is taking a broader approach to the agricultural
sector. The USAID agricultural program targets both cotton and
non-cotton food processing in order to provide farmers a viable
alternative to growing cotton. By promoting the non-cotton
sector, the U.S. has taken the advice of experts such as the
International Crisis Group who warn about the dangers of the
Central Asian "cotton monoculture." USAID's vital land reform
project - which is developing legislation reform to enable an
effective land market - targets both agricultural and
non-agricultural land.


Debt Relief and Cotton Reform on Divergent Paths
-------------- --------------
--------------


21. (U) Farm debt resolution remains an intransigent problem
despite both Government of Tajikistan and international donor
efforts to address the issue. The Asian Development Bank and
World Bank are each conducting studies to determine the actual
size and makeup of the debt. The World Bank study covered only
14 farms and took over one year to complete, yet yielded little
useful data; banks, futurist companies, and farmers have kept
inconsistent and incomplete records of the debt histories. The
ADB study should be complete early next year. Both institutions
claim that the amount of actual debt is likely half of the USD
300 million claimed by the banks and futurist companies.
Meanwhile, the government is waiting for the international
community to come up with its "real" number for the debt and
"resolve" it through donor debt forgiveness.


22. (U) Instead of debt forgiveness, the Asian Development
Bank, World Bank and other donors drafted a Road Map to lead the
sector to profitability to pay the debts itself. The stated
goal of the Road Map is: "Resolution of the cotton debt crisis,
and the establishment of policies and institutions conducive to
improved economic returns for cotton farmers, processors, and
financiers," by 2009. The Road Map connects government reforms
with donor technical assistance on debt resolution, government
interference, pricing and taxation, land reform, and rural
finance. State Advisor to the President on Economic Policy
Matlubkhon Davlatov will coordinate the negotiations of the Road
Map on behalf of the government. Donors hope to finalize the
agreement for the President's signature by February 2007.


23. (U) However, a fundamental gap exists between resolving the
debt and increasing profitability of the sector. Cotton farmers
will not be able to overcome their debts without some measure of
debt relief, but the Road Map will not in itself alleviate the
cotton debt. By agreeing to some form of the Road Map and
pressing the government to implementing needed sector reforms,
donors will have something concrete to tie to debt relief.


Cotton Important, But Remittances Support Rural Economy
-------------- --------------
--------------


24. (U) According to the World Bank and the State Statistical
Committee, the cotton sector supports 75 percent of the rural
population in Tajikistan. However, this does not reflect
current realities. While up to 550,000 people work in the
overall agricultural sector in Tajikistan, up to one million
work abroad as migrant laborers each year. Of these, roughly
800,000 come from rural areas. Remittances entering Tajikistan

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through the banking sector in 2006 will reach well over USD 1
billion, of which an estimated USD 800 million will go to rural
areas. Meanwhile, cotton production will provide a paltry USD
150 million, most of which benefits intermediaries and exporters
- 25 percent going to farmers. Remittances provide USD 800
million to the rural economy, and cotton provides USD 40 million.


25. (U) As cotton becomes less profitable for individuals, more
and more male farmers and seasonal workers migrate to Russia and
Kazakhstan for better paying jobs, leaving women and children as
the main workforce in the cotton fields (reftel B). Non-cotton
agricultural productivity has jumped as rural families and
farmers plant alternative crops for their own livelihoods and
for the domestic and export market. By supporting farmers'
freedom to make their own decisions, we will help balance out
the domestic economy.


Future Prospects
--------------


26. (U) For the past 15 years, the government has made little
progress laying the groundwork for an economically viable and
transparent cotton sector. Farmers remain in financial
servitude to local government and cotton investors, and have
only vague ideas of how to manage their cotton operations and
debts. Under current conditions, cotton production wastes
water, ruins land, employs children contrary to international
law, and contributes to rather than alleviates poverty in
Tajikistan. The existing cotton model benefits a limited circle
of political officials and powerful investors. Meanwhile,
everyone is waiting for someone to do something about the cotton
debt.


27. (U) Lack of donor coordination weakened the Road Map even
before its presentation to the government, with the World Bank
failing to tie its major loan package to the Road Map. The
World Bank also decided to leave out much of the land reform
component, including a Unified Land Registry which it feels is
too big a step to include in the Road Map. Other donors
disagreed with the World Bank approach and feel that the Road
Map does not provide sufficient incentive to the government to
comply with its commitments. The Government of Tajikistan will
face major obstacles to reform from local government officials
who stand to lose control over the sector.


28. (U) The government and international community will likely
agree to implement some version of the Road Map. Donor
technical assistance will be crucial to developing the cotton
sector and spreading its dividends broadly. Elites are divided,
however, which will make reform slow-going. Farmers do not know
where financing for the next season will come from, but most
farmers will stick with cotton despite its low profitability.
Cotton dominated Tajik agriculture for 80 years, and farmers
have limited experience with alternative crops. Tajikistan's
future may lie with cotton, but that future is far from certain.HUSHEK