Crucial Remittances to Tajikistan Will Slow; But How Much?

UNCLAS SECTION 01 OF 03 DUSHANBE 001518 SENSITIVE SIPDIS DEPARTMENT FOR SCA/CEN E.O. 12958: N/A TAGS: EFIN ECON ETRD PGOV ELAB TI SUBJECT: Crucial Remittances to Tajikistan Will Slow; But How Much? Ref A: Dushanbe 1502 ¶1. (SBU) Summary: Remittances from relatives working abroad, particularly in Russia, form a crucial source of income for many families in Tajikistan, which in turn helps maintain economic and political stability in this poor and historically fractious country. Many here are worried about whether the world financial crisis will result in layoffs of Tajik workers and reduced remittances. A key factor will be what happens in the Russian construction sector, where the majority of Tajik expatriates work. The International Monetary Fund (IMF) predicts remittance flows in 2009 will remain at this year's record level of $2.5 billion. Other analysts question the IMF's projections, pointing out that remittances are already dropping off. The Russian government's recent decision to halve the quota on foreign labor may not have as serious an effect as some fear. End summary. IMF, National Bank Predict Record Remittances in 2009... ¶2. (U) Representatives of international financial institutions and government officials alike recognize that remittances from Tajiks working abroad represent a crucial source of income for Tajikistan. Indeed, several experts have said that during last winter's disastrous food and energy crisis, remittances, primarily from Tajik workers in Russia, were the lifeline that kept many families alive. Others point to the importance of remittances in maintaining the stability of Tajikistan's currency; bringing foreign reserves into the country; paying for imports, mainly food; and reducing strains on the state budget. For these reasons, the effect of the world financial crisis on remittance flows is a pressing concern for financial analysts, donors, and government officials in Dushanbe. ¶3. (U) At a recent briefing for the international donor community in Dushanbe, IMF Mission Chief for Tajikistan Axel Schimmelpfennig provided good news: he projected that remittances to Tajikistan from citizens working abroad would remain steady at $2.5 billion in 2009, matching this year's record figure. The figure, a 50% increase over 2007 remittance levels, equals over half of Tajikistan's estimated $4.8 billion GDP for 2008. While Schimmelpfennig cautioned that some of the reported increase in 2008 likely was due to improved financial reporting rather than an actual growth in the amount of money flowing across the border, the IMF was confident that remittances were growing steeply in real terms. In a subsequent discussion with Econoff, IMF Resident Representative Luc Moers clarified that the $2.5 billion figure actually included both flows into Tajikistan -- $2.3 billion -- and out of it -- $200 million. Minister of Finance Shavkat Sahibov told Econoff that remittance levels may be even lower, because the $2.5 billion figure includes not just transfers from Tajiks working abroad but also some income from traders who send profits home as remittances in order to avoid paying taxes. ¶4. (SBU) Schimmelpfennig said that in making its projection, the IMF took into account expected slowdowns as a result of the world financial crisis in the Russian construction sector and other areas where Tajik guest workers are concentrated. In response to some doubts raised by members of his audience, Schimmelpfennig agreed Qdoubts raised by members of his audience, Schimmelpfennig agreed that the estimate might have to be revised downwards, but that some studies the IMF has conducted indicate that, in general, remittances tend to be driven more by labor supply than demand, and are thus surprisingly resilient in the face of financial shocks. The implication is that Tajiks who lose work in Russia's construction sector, for instance, will seek employment in other sectors or even other countries in order to continue to send money home. ¶5. (SBU) Deputy Director of the National Bank of Tajikistan Jamshed Yusupov agreed that the world financial crisis was not likely to have a major impact on remittances. In addition to the reasons outlined by Schimmelpfennig, he noted that many Tajiks are employed abroad in non-construction sectors, such as agriculture, that are less volatile. Even in construction, he said, the situation might not be so dire: while Moscow and St. Petersburg may see slowdowns, other areas of Russia, such as the Urals, continue to be dynamic, and Tajiks would move as necessary to find work. Yusupov added that Tajikistan's banking sector remained isolated from the economic crisis, since only 1% of deposits in Tajik banks were held in foreign currencies. Foreign investment in Tajikistan's banks totaled only 32%, and the somoni continued to trade in a very stable range against the dollar and other major currencies. ... But Others See Cause for Alarm DUSHANBE 00001518 002 OF 003 ¶6. (SBU) Several attendees at the IMF briefing expressed surprise at the IMF's robust projection for 2009 remittances. Charlotte Adriaen of the European Commission, for example, said the financial crisis had already had a profound effect on the construction sector in Russia. She had heard anecdotal reports from Tajik workers that entire construction projects had halted, forcing foreign laborers to return home. Rudolph Schoch, of the Swiss Agency for Development and Cooperation, was equally skeptical of the IMF's numbers, noting to Econoff that statistics had already begun reflecting the slowdown in Russia. Whereas remittances over the first nine months of 2008 were 70% higher than the equivalent period of 2007, for the month of October -- the latest for which figures were available -- growth had slowed dramatically to only 18% compared to the same month last year. ¶7. (SBU) Chiara Bronchi, the World Bank's Country Manager for Tajikistan, agreed that the IMF's predictions were too high. She said there was simply no way that the Russian construction sector would not significantly contract. Although hard data would be slow to emerge, she said the World Bank's own anecdotal observations confirmed those of Adriaen. Flights into Dushanbe not only from Russia, but also from cities such as Istanbul, were completely full; some two-thirds of the travelers were said to be Tajik workers returning home. (She added that she was considering asking Tajik Air to provide a precise breakdown of its passengers so she could look at this question more closely.) In addition, many Tajiks informally surveyed by World Bank staff reported that their salaries in Russia had been delayed or not delivered at all. Considering all of the evidence, Bronchi said the world financial crisis would have a profound effect on Tajikistan (ref A). ¶8. (SBU) Even IMF Resident Representative for Tajikistan Luc Moers acknowledged to Econoff that he personally found the official IMF remittance projection for next year a little unlikely. He said, however, that skeptics should be cautious about dismissing the projections out of hand. IMF's Moscow office was predicting that despite the worldwide financial crisis Russia would see growth in 2009 of 3.5%. Although a decline was predicted in the construction sector, it would be a relatively small one: the Russian government would use its enormous stabilization fund to ensure that major construction projects continued. Thus Russia's appetite for Central Asian labor in the construction sector, while it might cool somewhat, would not evaporate. ¶9. (SBU) Moers acknowledged that growth in remittances had slowed recently, but pointed out that 18% growth was still impressive growth -- and only seemed weak when compared to the astronomical 70% for the first nine months of the year. Moers said his own informal sense was that most Tajiks thought that, as difficult as conditions were in Russia, they were still better than in Tajikistan, and Tajiks working abroad would continue to search for and find opportunities to make and send home money. He thus cautioned against expecting a major repatriation of Tajik workers. Cut in Russian Guest Worker Quotas May not Matter ¶10. (U) In his recent "direct address to the Russian people," Q10. (U) In his recent "direct address to the Russian people," Russian Prime Minister Vladimir Putin announced that in view of the financial crisis the Russian quota on foreign guest workers should be halved to preserve more employment opportunities for Russians. The Ministry of Health and Social Development (Minzdrav) has prepared an order to cut the number of "permissions" granted to foreign workers from 4 million (a figure Putin signed into law on November 7) to 2 million. An article in the Russian newspaper Kommersant noted that the reduction would mean that the annual quota would be filled early in the year, forcing Russian employers to turn foreign workers away as the year progressed. ¶11. (U) While this announcement has led to some concern here in Dushanbe, there are indications that its effects may be more rhetorical than substantive. In announcing the cut, Minzdrav used language that preserved the ability to add more permissions if conditions warranted. Shortly afterword, Putin specified that the cut was "temporary." Beyond this, however, it is not clear how important the quotas are in the first place for Central Asians. CIS citizens do not require a visa to enter Russia, and it is reportedly fairly easy to obtain work without an official work permit. It is widely believed that the majority of foreigners working in Russia are doing so illegally -- 10 or 11 million according to some estimates. DUSHANBE 00001518 003 OF 003 ¶12. (U) Although Russian quotas on foreign labor have fluctuated dramatically due to various political concerns, on balance Russian labor policy has favored making it easy for CIS citizens to fill menial and low-paid jobs. In 2007 the quota was 6,000,000; according to some experts, it was not even filled. Then in 2008 it was reduced to just 1.8 million. Once it became clear that this was inadequate, however, it was later expanded to 3.4 million. (Note: these are the quotas on "permissions to work for foreigners not requiring a visa" -- i.e., CIS citizens. There is a separate, much smaller, quota on "invitations to work" for non-CIS citizens. By all accounts these workers -- many of them from China, North Korean, and Southeast Asia -- are in much higher demand because of their skills and experience, and this quota is said to fill rapidly. End note.) ¶13. (SBU) Comment: The IMF "supply-side" theory of remittances strikes most analysts here as dubious. While Luc Moers' observation -- that as bad as things are in Russia, they are still better than in Tajikistan -- will remain true for many Tajiks, it does not mean that opportunities and salaries in Russia will remain at current levels. While most here agree that Tajikistan is relatively insulated from the world economic crisis (ref A),a reduction in remittances could have a very serious effect on Tajikistan's economy, and on the ability of individual households to get through the winter.