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