2009 INVESTMENT CLIMATE STATEMENT -- TAJIKISTAN

UNCLAS SECTION 01 OF 10 DUSHANBE 000064

SENSITIVE
SIPDIS

DEPARTMENT FOR EB/IFD/OIA, SCA/CEN

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB OPIC PGOV USTR TI

SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT -- TAJIKISTAN

Ref: 08 State 123907


1. Tajikistan presents selected opportunities for savvy investors
who are willing to put significant research and effort into market
development. Tajikistan, which lags behind most of its neighbors
economically, remains not only the poorest of the former Soviet
republics but one of the poorest countries in the world. The Tajik
Government relies largely on foreign state-led investment and loans
from international financial institutions for major infrastructure
projects. The Government has shown interest in attracting broader
foreign investment but seems unwilling or uncertain how to implement
much needed economic reforms, including the incorporation of the
country's considerable gray economy, streamlining the business
registration process, rationalizing the country's tax codes, and
dealing with Tajikistan's endemic corruption. Even where the legal
structure is favorable to attracting investment, the actual practice
of the authorities discourages investors. Until Tajikistan
addresses these and other impediments to investment, it will not
attract or support significant growth in foreign direct investment.

Openness to Foreign Investment


2. Although the Government of Tajikistan is hungry for foreign
investments, private investment from abroad has been minimal. The
principal investors in recent years have been governments with
geopolitical interests in the area, especially Russia, China, and
Iran. Those three countries were responsible for $317 million in
investments in between January and October 2008. Foreign direct
investment from other sources totaled $145 million during the same
period.


3. President Rahmon has made numerous public and private statements
calling for increased foreign investment, particularly in the
hydropower sector. However, his administration has yet to implement
the key reforms and regulations necessary to create an attractive
business climate. Tajikistan's authorities focus their efforts on
courting state-led investments from the country's perceived
geopolitical friends rather than making conditions favorable to
private investors from the West, the EU, or other countries. The
Tajik Government burdens the private sector with unnecessary costs
and creates substantial uncertainty and risk through non-transparent
practices and unjustified barriers to competition.


4. Major opportunities for investment exist in the hydropower, food
processing, construction, textile, and consumer goods sectors, as
well as natural resource extraction.

A new Investment Law was signed in May 2007.


5. According to the law, foreign investments can be made by:

- Owning a share in existing companies, either jointly with other
Tajik companies or Tajik citizens;
- Creating fully foreign-owned companies under the laws of
Tajikistan;
- Acquiring assets, including shares and other securities;
- Acquiring the right for use of land and other mineral resources,
as well as exercising other property rights either independently or
shared with other Tajik companies and citizens of Tajikistan;
- Concluding agreements with legal entities and citizens of
Tajikistan providing for other forms of foreign investment
activity.
Qactivity.


6. The judicial system recognizes sanctity of contracts in
principal; however contract enforcement is poor, due in part to
generally inadequate legal awareness and the court system's lack of
independence. While Tajikistan is party to a number of arbitration
agreements and conventions, it does not have its own internationally
recognized arbitration system. The courts do not always respect or
uphold international arbitration rulings.


7. The Tajik Government's Economic Development Strategy for
2005-2015 emphasizes economic and industrial growth. The Strategy
has no discriminatory effects on foreign-owned investors. According
to the Civil Code (Article 1) there is no legal discrimination
against foreign companies and entities. Practically all of
Tajikistan's international agreements have a provision for most
favored nation status.


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8. Foreign investors can acquire up to 50-year land-use rights,
although all land belongs to the state. There are no legal
limitations on foreign ownership or control of other property.


9. Tajikistan's Committee on Investments and State Property, which
was created in December 2006 with the aim of assisting investors,
has so far done little to fulfill its mission. Plans to create a
"one-stop shop" for business registration as well as a website for
foreign investors seeking information on opportunities in Tajikistan
have not gotten off the ground yet.


10. There are no established criteria for screening investment
proposals. Instead of working with a delegated investment promotion
agency, a potential investor has to go through a lengthy screening
process by all (potentially) concerned government agencies. In
practice, a proposed statement of foreign investments forwarded to
the Government of Tajikistan is circulated among the relevant
government offices and ministries with instruction to review and
express a formal no-objection statement. If an office objects to
the proposed investment activity statement it forwards an official
note to the attention of the Government. In principle, screening
includes a background check on the company and its representatives
as well as identification of a financial source to comply with anti
money-laundering regulations.


11. The government has embarked on an on-again, off-again process of
privatizing state-owned companies. Privatization of small and
medium enterprises is mostly complete. Because the privatization
process began during the civil war (1992-1997),few international
investors showed much interest. Privatization of state property,
particularly larger concerns, still continues; although there are no
limitations on foreign participation, in many circumstances
non-transparent decisions are made that favor investors with
connections to the existing power structure. Some of the largest
enterprises, belonging to Tajikistan's transportation,
infrastructure and electricity distribution and maintenance sectors,
are still government-owned but are slated for restructuring.


12. There is no legally-sanctioned discrimination against foreign
investors at the time of the initial investment or after the
investment is made. Current investment law and tax code provide for
a number of incentives, including a waiver on taxation on initial
investment and VAT-free importation of industrial equipment.
Companies may have a difficult time actually realizing these
benefits, however, due to poor implementation of taxation
regulations and/or corrupt tax authorities. In practice the onus of
proving that an investment qualifies for the benefits is on the
investor, and Tajik authorities are often skeptical. In addition,
President Rahmon pushes his government to increase tax revenue by
unfairly taxing profitable companies. Legally, companies with
foreign investments are treated the same as domestic companies in
obtaining licenses, approvals and procurements. They may find,
however, that Tajik authorities demand higher official and
unofficial payments from them.


13. There are no laws or regulations specifically authorizing
Q13. There are no laws or regulations specifically authorizing
private firms to adopt articles of incorporation or association that
limit or prohibit foreign investment, participation, or control.
There are no other practices by private firms to restrict foreign
investment, participation in, or control of domestic enterprises.


14. Although the Tajik economy began growing rapidly at 8-10% per
annum in 2000, economic indicators remain below the benchmarks of
1991, when Tajikistan gained its independence. The government has
increased revenue collection for its social expenditures, but
investments in health and education remain extremely low. In
addition, as a result of non-transparent administration and
corruption in tax agencies, the tax burden is placed on private
sector companies that have a greater degree of compliance with
regulations, resulting in distorted competition. According to some
sources, even well-meaning companies are forced to breach some tax
legislation, since internal contradictions and draconian rules make
it impossible to abide by all existing rules.



15. Partly as a result of the global financial crisis, there has
been some nervousness among depositors, and bank deposits (legal
entities and personal) decreased by 27% from December 2007 to
November 2008 (from $676 million to $494 million). The informal

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economy is still quite substantial; according to some estimates, it
may be as high as $2 billion, over one-third the size of official
GDP. The global financial crisis that began in late 2008 may
continue to have a chilling effect on Tajikistan's nascent banking
sector.

Conversion and Transfer Policies


16. Tajikistan does not actively restrict conversion or transfer of
funds, although the National Bank has been preparing a package of
new regulations on this topic for three years. However,
underdeveloped banking infrastructure, with strict government
controls and limited capital, presents obstacles for investors in
finding local sources of financing. Although legal, it is often
difficult in practice to conduct large currency transactions, due to
the limited amount of foreign currency available in the domestic
financial market. Investors are free to import currency.


17. The minimum regulatory capital for commercials banks is $5
million. All banking institutions (11 commercial banks and one
branch of Iranian Tijorat bank) meet this requirement.

Expropriation and Compensation


18. The Law on Foreign Investments details the types of actions that
can be taken with regard to expropriation of property. There have
been no known cases where foreign commercial entities have had their
property seized, but there have been several recent cases of
potential or actual state expropriation of other privately-owned
property under dubious circumstances. In one case, that of a
foreign-owned church, the rationale appears to be political. In
another case involving the nationalization of a privately owned
warehouse for storing natural gas, the reasons may have been more
economic. While the Law states that investors are to be reimbursed
for expropriated property, actual compensation has been minimal in
the cases noted above. The sectors most likely to face
expropriation are monopolies where the state controls almost all of
the market.

Dispute Settlement


19. In official pronouncements, the Tajik government recognizes the
value of the rule of law; in practice, however, it has not
demonstrated a clear understanding of its importance to investors.
The international community, including the United States, has
encouraged Tajikistan to improve its legal system, with mixed
results. Many well-written laws have been passed, but
implementation and consistent interpretation lag behind. Few
people, especially small business owners, are aware of their rights
and responsibilities. Further compounding the problem is a weak
judiciary that is ill equipped to defend the interests of
investors.


20. Despite this, foreign investors have found some relief in
disputes involving Tajik entities. In 2007, a trade dispute
involving a U.S. company and a state-owned enterprise was resolved
by the Tajik government paying off the full amount of the claim. A
Norwegian company successfully settled a suit in foreign
arbitration. So far, though, such cases have been very few.


21. Tajikistan does have well-written commercial and bankruptcy
laws. The country's contract law is modeled on European law. These
laws are regulated under the country's civil code; however, they are
Qlaws are regulated under the country's civil code; however, they are
not always enforced in the court system.


22. Tajikistan is just starting to develop an Institute of
International Arbitration. It has signed bilateral agreements with
several countries on arbitration and investment disputes, but these
agreements are not always enforced or recognized. Tajikistan does
not have a bilateral agreement with the United States.


23. In 1993 Tajikistan became a member of the International
Association on Investment Guarantees as well as the International
Center for the Settlement of Investment Disputes (Washington
Convention). Tajikistan is not a party to the New York Convention
of 1958 on the Recognition and Enforcement of Foreign Arbitral
Awards.

Performance Requirements/Incentives

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24. Current legislation provides the same tax and customs incentives
to local and foreign investors. In practice, however, companies
with close connections to the government get preferential treatment.
The government does not formally impose performance requirements as
formal a condition for establishing, maintaining, or expanding
investment. While there is no requirement to "buy locally," it is
encouraged.


25. The government does not impose geographic restrictions or
conditions, but the topography and poor infrastructure of the
country pose their own de facto restrictions. Roads within Dushanbe
and Khujand are poor even by regional standards, and roads outside
of major population centers are generally unpaved and poorly
maintained. A few major routes, such as that between Dushanbe and
Khujand, are being renovated with foreign financing. Weather also
impacts travel, making overland travel to some parts of the country
(e.g., the Gorno-Badakhshan Autonomous Oblast) impossible for some
of the year. Electric power production is well short of demand,
especially in the winter. For three to six months of the year, most
parts of the country outside of Dushanbe are limited to a few hours
of power each day. Overland import/export requires patience and
ingenuity as customs agents at borders and internal checkpoints
frequently operate on the principle that they constitute an assumed
cost of doing business.

Right to Private Ownership and Establishment


26. The government wants to encourage business development but faces
major obstacles, including its own practices. There is a major gulf
between legislation that is ostensibly business-friendly and actual
practices that are business-stifling. In principle, private
entities may establish and own businesses and engage in almost all
forms of remunerative activity. Foreign entities may establish,
acquire, and dispose of interests in business enterprises. In
practice, however, the old Soviet mentality still prevails. The
average government inspector believes that activities are not
permitted unless they are expressly allowed (or unless he is
remunerated for adopting a more flexible interpretation),and since
laws are neither published nor uniformly applied and interpreted,
businesspeople often find Tajikistan frustrating.


27. There are other unofficial barriers to success. Informal
networks of clan-based, interrelated suppliers often exist, forcing
would-be investors to "buy in" to the system, hindering competition
and sometimes constraining new investors from fully participating.


28. The government faces a daunting task to improve the operating
environment. Any restructuring must be implemented at each
sub-governmental level for each area of reform. While the Tajik
government has begun reviewing these weaknesses and is making some
improvements, the business environment remains difficult.

Protection of Property Rights


29. Undeveloped legal avenues for dispute resolution create a weak
environment for property rights protection in Tajikistan.


30. As noted above, all land belongs to the state, and there are
significant restrictions on using property titles as collateral. A
revised Land Code submitted to the government last year providing
Qrevised Land Code submitted to the government last year providing
for the sale of land-use rights, an equivalent to buying and selling
land, was changed at the last minute by an unknown official, leaving
the issue confused. Efforts are underway by donors to clarify the
language. The government also adopted mortgage legislation in
December 2007 which may allow parties to use property as collateral.
In practice land use continues as before, however, because no legal
mechanisms and procedures were developed to implement these new
laws.


31. When secured interests in property do exist, enforcement remains
an issue. Investors should be aware that establishing title may be
a more involved process than in western countries, since ownership
is often unclear. A system to record, protect and facilitate
acquisition and disposition of property exists but would benefit
from improvement. Most banks have temporarily halted much of their
lending as a result of the financial crisis; in the past mortgage
rates have been very high. Finally, the legal system is not adept
at quickly and efficiently settling disputes.

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32. Tajikistan affords few protections for patents, copyrights,
trademarks and other intellectual property. However, with United
States government assistance, legislation addressing intellectual
property rights is being revised. In addition, Tajikistan has taken
significant recent steps to protect intellectual property,
including: an amendment to the Law on Intellectual Property to
protect copyright owners from Internet theft; a new office dealing
with intellectual property violations in the Ministry of Interior;
and a parliamentary agreement to join the Rome Convention for the
protection of intellectual property.

Transparency of the Regulatory System


33. Cronyism, nepotism and corruption all work to create a business
environment that favors those with connections to the government.
Tajikistan's regulatory system lacks transparency and poses a
serious impediment to businesses' operational abilities. Regulators
and officials often apply laws arbitrarily, and are frequently
unable or unwilling to make decisions without a supervisor's
permission, leading to lengthy delays. Transparent executive
documents -- i.e., Presidential decrees, laws, Government orders,
instructions, ministerial memos, and regulations -- are frequently
inaccessible, leaving businesses and investors in the dark about the
rules by which they should be abiding. Furthermore, each Ministry
has its own set of normative acts which are not published and may be
contradictory to law and normative acts of other ministries.


34. Tajikistan's tax code provides for 18 different types of taxes
and numerous ways to calculate them. In addition to the complexity
of the regulations, economic development is further undermined by
inconsistent application that impedes development of small and
medium enterprises. The tax code came into effect January 2005, and
is compliant with WTO standards. Last year the Government of
Tajikistan declared a two-year moratorium on tax inspections, which
government officials had routinely used to extort bribes from
business owners.


35. An inspections law signed in 2006 and promoted extensively by
the International Finance Corporation has begun to reduce the
practice of other government agencies shaking down enterprises for
money, but reports of such incidents are still widespread.
Tajikistan is also working towards international accounting norms;
however, these have yet to be implemented.


36. Tajikstandart is the government agency responsible for
certifying goods and services, calibrating and accrediting testing
laboratories, and supervising compliance with state standards.
Tajikstandart does not publish its fees for licenses and
certificates, nor does it publish the requirements necessary to run
a business. As a result, businesspeople are vulnerable to
individual tax inspectors' interpretations of the requirements and
the prices for them. Suggestions have been mooted to create
"one-stop shops" for certifying businesses in various categories,
but so far no concrete steps have been taken.


37. Structural problems aside, the Tajik government needs to convey
its goals and procedures to the inspectors and other government
employees who interact with businesses daily. As long as government
Qemployees who interact with businesses daily. As long as government
inspectors continue to treat their positions as a license for
rent-seeking -- and as long as the government tolerates such
corruption -- Tajikistan will remain a difficult place for investors
looking for clear rules and practices.

Efficient Capital Markets and Portfolio Investment


38. Tajikistan's nascent banking sector faces numerous challenges:
insufficient capital, limited banking services, mistrust as a result
of banking system crisis in early 1990s, and, more recently, fallout
from the global financial crisis. The banking structure in
Tajikistan is two-tiered: the National Bank of Tajikistan performs
central bank functions, while commercial banks represent the second
level. The national currency, the somoni, was introduced in 1999.


39. The total value of regulatory capital of all commercial banks in
Tajikistan as of October 2008 is $271 million (735,016,513 somoni),
representing a 57% increase since 2007.


40. Estimated net worth of the top three commercial banks is as

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follows:

- Orion Bank: 203 million somoni ($59.7 million)
- TojikSodirot Bank: 131 million somoni ($38.5 million)
- AgroInvest Bank: 111 million somoni ($32.6 million)


41. There are 12 second tier banks in Tajikistan. (The sole
first-tier bank is the National Bank of Tajikistan.) Five banks are
public, open joint stock companies, while five are closed joint
stock companies. The remaining two banks, Tijorat Bank of Iran and
Amonat Bank, are state-owned. Three of the banks are foreign,
including Tijorat, Kazcommercebank of Kazakhstan and First Micro
Finance Bank of Tajikistan, partly owned by the Aga Khan Fund for
Economic Development and the International Finance Corporation.


42. Tajikistan's ratio of migrant labor remittances to GDP, standing
at 50%, is the highest in the world. Over the course of 2008, as
many as a million Tajiks working abroad, primarily in Russia, sent
$2.69 billion back to Tajikistan. Although an ever greater share of
remittances flow through the banking system, banks have limited
success luring consumers to deposit their funds into savings
accounts that could be used for economic investment. Intractable
agricultural debts over $500 million hurt the overall confidence in
the banking sector. Last year's scandal in which the National Bank
misreported loans it had underwritten to cotton investors has not
helped, although the International Monetary Fund reports that the
Bank, which has been meeting its scheduled repayments to the IMF,
has dramatically improved its accounting and cooperation. An
increase in deposits over 2007 may be offset by withdrawals in the
face of the financial crisis (see above, under the first heading).
Falling labor remittances may also hurt banks, which rely
significantly on commissions from money transfers.


43. Prior to the global financial crisis that indirectly hit Tajik
banks in November 2008, with inflation running about 14%, local
commercial banks were issuing 12-month loans worth more than
$100,000 at 24% APR, prohibitively expensive for most local
customers to develop a new business. Interest on smaller, shorter
term loans reached 36% APR. In addition, banking officials were
known to ask for kickbacks in amounts up to 10% of the loan they
approved. Due to such high interest rates and low capital, few
investors secure business or personal loans through banks; there are
currently reports that many banks have stopped lending entirely due
to fears of default as a result of the financial crisis. Checking
accounts do exist but are not widely used due to strict requirements
on cash withdrawal procedures.


44. The private sector has access to micro-credit, commercial
credit, and factoring instruments. Some banks provide trade
financing services as well. In an effort to reduce barriers to
competition, the Government of Tajikistan has paved the way for
non-bank financial organizations and commercial microfinance.
However, there is no credit bureau, and much work is needed in
strengthening creditor and shareholder rights. Performance on
micro-credit loans exceeds 90%; business loans also perform well.


45. There is no securities market in Tajikistan; although formally
Q45. There is no securities market in Tajikistan; although formally
there is a department at the Ministry of Finance responsible for
develop this market, it has little capacity to do so. No regulatory
system exists to encourage and to facilitate portfolio investment.


46. There are no known cross-shareholding or stable shareholder
arrangements. Hostile takeovers are rare, although there are no
written protections against them. State authorities are known to
selectively apply laws and regulations to take over or completely
shut down companies.


47. The stock market in Tajikistan was founded in 1994. Since then,
it has foundered due to a lack of new financial instruments. In
2000, the government established a Central Share Registry (CSR)
within the Ministry of Finance. The Registry records, monitors, and
facilitates share purchase and sale for more than 400 stock
companies. The government issues treasury bills to cover budget
deficits, using local banks to cover the loans.

Political Violence


48. Political violence in Tajikistan is minimal. The security
situation has stabilized significantly since the Civil War ended in

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1997. All factions signed a peace agreement, and the government
incorporated members of the opposition into a multi-party system --
although President Rahmon has since steadily removed opposition
figures to consolidate his power. The Tajik government has worked
to minimize the impact of political discord on foreign investors.
With the civil war in recent memory, the people of Tajikistan are
keen to maintain peace, a factor sometimes adduced to explain the
population's acceptance of the government's more egregious
corruption.


49. Tajikistan sometimes serves as a transit country for extremist
terrorist groups. Terrorists may use Tajikistan's uncontrolled
mountainous regions as a safe haven, but evidence suggests they are
no longer politically active in Tajikistan. Narcotics trafficking
from Afghanistan is significant.

Corruption


50. As in previous years, the 2008 Transparency International
Corruption Perceptions Index ranked Tajikistan as very corrupt,
placing it at 151st place on a list of 180 countries surveyed.
Anemic anti-corruption efforts from the Tajik government have proven
ineffective -- indeed, some anti-corruption units are ironically
known to be particularly corrupt. Extremely low official salaries
do not help the situation, since they force many official employees
to look for other means to make ends meet. Buying a government
position is the norm, and people frequently bribe superiors for
promotions. Cultural expectations play a role as well: people are
expected to share their good fortune with superiors and extended
family, and nepotism or other favors for clan-members, extended
family, or superiors are commonplace.


51. As noted throughout this report, endemic corruption stifles
business by local and international investors. Officials at any
number of agencies expect payoffs for opening and running a
business. Although a signatory to the OECD Convention on Combating
Bribery and to the United Nations Convention against Corruption,
corrupt practices are deeply embedded in every aspect of commercial
dealings, and calculating the actual cost is difficult. In 2007,
President Rahmon created a new Agency to Fight Corruption and
Economic Crimes, reporting directly to the Presidential
Administration, to monitor fiscal activity of individuals, banks,
and corporations. This agency has still done little to fight
corruption within government ranks, focusing instead on individual
and corporate malfeasance.

Bilateral Investment Agreements and Double Tax Treaties


52. Agreements on avoiding double taxation exist between Tajikistan
and Russia, Belarus, Ukraine, Azerbaijan, Turkey, and some other
countries, but not between Tajikistan and the United States.
Tajikistan is a member of the Eurasec trade organization, which
provides loose regulation of trade among, Russia, Belarus,
Kazakhstan, Kyrgyzstan, and Tajikistan.

OPIC and Other Investment Insurance Programs


53. Tajikistan is open to insurance and financing programs of the
Overseas Private Investments Corporation (OPIC). Thus far, OPIC's
involvement in investments in Tajikistan has been limited to a
beverage bottling project. Assuming the financial crisis does not
Qbeverage bottling project. Assuming the financial crisis does not
cause lasting damage to the nascent financial sector, Tajikistan's
relative macroeconomic stability and a growing economy provide for a
number of opportunities for OPIC insurance and financing.


54. The Export-Import Bank of the U.S. considers projects on a
case-by-case basis, although Tajikistan generally does not qualify
for its programs. Opportunities exist in infrastructure projects,
aircraft export financing, agricultural machinery, and food
processing.

Labor


55. Due to a crumbling and corrupt education system, Tajikistan's
labor force is becoming increasingly less educated and trained, and
is ill-equipped to provide Western standards of customer service and
business. International businesses and NGOs lament the small pool
of qualified office staff for their organizations. Some have
brought in Chinese or Indian laborers for construction projects.

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Corruption in secondary schools and universities means degrees do
not reflect real professional training or competency. Although
education is compulsory, many students must work in order to support
their families. Unemployment among younger Tajiks exceeds 60% in
some rural areas.


56. The official unemployment rate in Tajikistan is under two
percent, but the actual rate may be as high as 40% nationwide, with
some areas reaching 60%. These high rates are offset by the
approximately one million labor migrants who work overseas, mainly
in Russia, although the financial crisis may force many of these
workers to return home. The average salary in Tajikistan has risen
to $78.20 per month, but wages have not kept pace with inflation.
According to the World Bank, 53% of the population lives below the
poverty line and an additional 17% are considered "desperately
poor." Labor emigration leads to shortages in some skills. The
$2.69 billion in official migrant remittances pays for a high
percentage of Tajikistan's growing appetite for imports,
particularly foreign vehicles, construction materials, and food and
consumer goods.


57. Tajikistan's high birth rate means that 50% of the population is
less than 25 years old; if the trend continues, unemployment will
increase.


58. Nepotism and corruption play a large role in the labor market.
Many of the higher prestige or more lucrative jobs require a
"buy-in," as well as continuing payments to supervisors, leading the
job-holder to look for ways to pay back that sum by demand bribes or
engaging in other corrupt activity.


59. The labor market favors employers. Although technically, the
majority of workers are unionized, most are not aware of their
rights and few unions have the will or know-how to effectively
advocate for workers' rights. Unions are tightly controlled by the
government.


60. Tajikistan is a party to 44 international labor conventions. In
June 2005, Tajikistan signed the Worst Forms of Child Labor
Convention, dedicated to eliminating child labor and protecting
children and young people. Despite this there are frequent reports
that children and university students are forced to pick cotton,
providing one of the country's main sources of income, and that
local officials are complicit in this practice. The International
Labor Organization notes that Tajikistan has not submitted reports
required by the Convention.

Foreign Trade Zones/Free Ports


61. Tajikistan is a landlocked country whose neighbors demonstrate
varying abilities and interest in trade. Most of Tajikistan's rail
and road links flow through Uzbekistan, which, as a result of
increasingly sour political relations between Dushanbe and Tashkent,
has made transit of goods through Uzbek territory difficult. For
example, in October 2007 Uzbekistan decreed that traders must pay
the full value of excise goods passing through its territory as a
customs deposit -- a fee that is then difficult to get back. There
are no commercial flights between Uzbekistan and Tajikistan. In
order to overcome its dependence on its neighbor, Tajikistan has
sought to open alternative transit routes to the north, via
Kyrgyzstan and Kazakhstan; the south, via Afghanistan, Pakistan, and
QKyrgyzstan and Kazakhstan; the south, via Afghanistan, Pakistan, and
Iran; and the east, via China.


62. The opening of the Chinese border at Kulma, in Murghab District,
has helped facilitate increased trade with China, although the
border is open only half the days of each month, and is closed
completely for about half the year due to extreme cold weather.
Passing over the some of the roughest and least developed territory
in Asia, even when it is open, this route remains difficult and
time-consuming, and without major infrastructural improvements, it
will have limited impact on trade. Several international financial
institutions, along with the governments of China and Iran, are
implementing projects to improve the road system. The Central Asia
Regional Economic Cooperation Program has created a road linkages
plan for all the Central Asian countries with funding from the Asian
Development Bank (ADB). Projects underway include the renovation of
the road north to Khujand with Chinese funding, Iranian-financed
construction of the Anzob Tunnel which should allow for year-round
transit on the route, and ADB-financed improvements on the road

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leading northeast from Dushanbe, through Kyrgyzstan, to China.
There is also strong interest to improve links to the south. The
United States Government completed construction of a $39 million
bridge linking Tajikistan and Afghanistan, connected to a new road
financed by the Japanese, which will increase trade and help develop
the economy in the south.


63. Although the Law on Free Trade Zones was enacted in 2004, only
in 2008 has the government made some progress on implementation,
with the establishment -- at least on paper -- of the Soghd Free
Economic Zone in the northern city of Khujand and the Pyanj Free
Economic Zone near the U.S.-funded bridge across the Pyanj River on
Tajik-Afghan border. Two additional zones are under consideration.
The zones are designed to attract foreign capital, investments, and
technology, and to develop Tajikistan's economic potential by
setting favorable conditions for foreign investors, including lower
or no taxes, lower land leasing rates, lower duties on imports and
exports, and special visa rules.


64. WTO accession negotiations were launched in 2004 after intensive
preparatory work conducted by the Tajik government with assistance
from the U.S. and other donors. The last negotiations on
Tajikistan's accession were conducted in Geneva in October 2006. In
January 2008, a group of WTO experts met with President Rahmon in
Dushanbe, who confirmed his intention to lead the country into the
WTO. Some Tajik experts believe that it will take at least five
more years before that goal is realized.

Foreign Direct Investment Statistics


65. According to data from the State Statistical Committee, total
foreign direct investment (FDI) in the first nine months of 2008 was
$462 million. Of this, $282.9 million came from the former Soviet
states (mostly Russia, with investments of $240.8 million),while
$179 million came from other countries. In 2007, total FDI was
$388.4 million. Between 1997 and 2008, total FDI amounted to $1.421
billion.


66. In the first nine months of 2008, the FDI to GDP ratio equaled
9%, down from 10% in 2007.


67. According to Tajikistan's official state statistics, the largest
foreign direct investors for the first nine months in 2008 were:


Russia -- $240.8 million
Cyprus -- $70.2 million
United States -- $17.8 million
Great Britain -- $3.7 million
Switzerland -- $2.6 million
Kazakhstan -- $31.5 million
China -- $60.0 million
UAE -- $1.9 million


68. Foreign direct investment by sector over that period was as
follows:

Energy: $219 million
Communications: $49.4 million
Banking: $59.6 million
Gold mining: $22.4 million
Health: $1.1 million
Oil and Gas: $4.4 million
Agriculture: $0.3 million


69. (The government's definition of investment for the purposes of
these statistics is not always clear. Several major foreign direct
investors from Cyprus and the United States, for example, are
Tajik-held companies registered offshore.)


70. Major Russian investment in the Sangtuda-1 hydroelectric project
is continuing during the first part of 2009, while Iran is
developing the Sangtuda-2 project.


71. In terms of Tajik foreign investment abroad, Tajikistan has
Q71. In terms of Tajik foreign investment abroad, Tajikistan has
signed an agreement with Iran to modernize the Iranian port in
Bandar-Abbas in order to accelerate shipments of aluminum from and
alumina to the Talco plant in Tursunzade, Tajikistan. Due to the
world financial crisis little has been done so far, however.

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