U.S. COTTON GIN IS A RARE SEMI-SUCCESS STORY

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 001648 SIPDIS SIPDIS DEPT FOR SCA/CEN E.O. 12958: DECL: 09/17/2017 TAGS: ECON EINV ETRD ICAC UZ SUBJECT: U.S. COTTON GIN IS A RARE SEMI-SUCCESS STORY Classified By: CLASSIFIED BY ECON OFF B. OLSEN FOR REASONS 1.4 (B, D). ¶1. (SBU) Summary: On September 7, econoff visited the Central Asia Seed Company (CASC),a modern, fully U.S.-owned cotton gin located in Syrdarya, about two hours southwest of Tashkent. With over ten years experience in Uzbekistan, CASC is valued by the provincial government for its social and economic contributions to the local community. CASC buys cotton from the farmers for five percent over the government rate, exports cotton fiber to Europe, and sells seed on the local economy. Its contributions have protected CASC from any government-led harassment. However, the Government of Uzbekistan (GOU) has an outstanding debt of three million dollars to CASC. End summary. The Facts -------------- ¶2. (SBU) CASC is a completely computerized ginning operation that uses U.S.-built machines. (Note: CASC Amcit owner commented that the poor quality of Uzbek education makes it difficult to hire laborers capable of operating and repairing the machinery. End note.) The gin can process up to 360 tons of cotton a day, and CASC expects to process 30,000 tons in 2007. The high quality processing of the raw cotton yields 35 percent long fiber (a very good result) and 52 percent seed, with the remainder going to animal feed. The seed is acid-delinted and packaged for sale on the local market into 50 pound bags emblazoned with the American flag. The seed, colored to identify it as CASC's, is of a much higher quality than GOU-produced seed. CASC's gin is the only one in Uzbekistan that acid-delints seed, resulting in disease-free seed. CASC Amcit told econoff the GOU is interested in processing its own acid-delinted seed, but has not taken concrete action. Cotton Buyers -------------- ¶3. (C) CASC packages its fiber and ships it directly to Europe via railroad. Its major buyers are Italy, Bulgaria, France and Germany. CASC Amcit owner told econoff the Uzbeks refuse to sell to the Europeans due to the political rift over human rights and sanctions, which resulted from the events in Andijon. According to the Amcit, this has given CASC a de facto monopoly on the sale of Uzbek cotton to Europe. (Note: In previous years, the GOU exported cotton to Europe, traditionally via Riga. End note.) As it only sells to A-rated European countries, he said CASC can insure its product; the GOU cannot insure its product as it sells mostly to low-rated countries, such as China. Why is CASC successful? -------------- ¶4. (SBU) CASC was established in 1998, a time of thawing, if not yet entirely warm relations between Uzbekistan and the U.S. CASC received a 99-year lease on its property and a contract valid through 2015. The contract allows CASC to operate as a completely private foreign business. (Note: Under current conditions, it is very difficult for foreign businesses to establish themselves without an Uzbek partner; it is even more difficult to do so in strategic sectors, such as energy and cotton. End note.) ¶5. (SBU) CASC buys directly from the farmers for five percent over the government price. Farmers sign contracts with CASC; this allows them to transport their cotton from other provinces, something Uzbek farmers otherwise have difficulty doing. CASC Amcit owner said the local hokim (governor of region) supports his business because it employs 66 locals, pays a fair price for cotton, pays on time, and donates to community events. CASC paid USD 574,000 in taxes to the provincial government in 2006 and expects to pay over USD 840,000 in 2007. Outstanding Debts -------------- ¶6. (SBU) CASC entered into the Uzbek market under a World Bank program in 1998. The Uzbek Government received a loan for USD 66 million, of which 8.3 went to CASC through the GOU. According to CASC, the Ministry of Finance owes CASC three million USD from cotton it seized in 2005 without remunerating CASC. The GOU owes the World Bank another three million from the original loan amount. CASC's owner told us he has contacted both the Ministry of Finance and the World TASHKENT 00001648 002 OF 002 Bank's Country Director, but has been rebuffed by both. He just started judicial proceedings to force the GOU to repay the outstanding debt. ¶7. (C) CASC is one of a handful of wholly U.S.-owned investments in Uzbekistan. CASC's contribution to the local economy has insulated it from the difficulties faced by many international firms. Post will stay in touch with Amcit regarding this commercial dispute and seek ways to assist, if needed. NORLAND