bne:Invest in Tajikistan - July 2014

Content: 1 Top Stories 2 Feature 4 Sector 6 Corporate statement 8 News in brief

July, 2014 www.bne.eu

bne:Invest in Tajikistan

Top story

Tajikistan push for Turkmen-Afghan rail line sign of deepening ties

Turkmen President Gurbanguly Berdymukhammedov visited his Tajik counterpart President Emomali Rah-mon on May 5-6, the latest sign of what's becoming one of the closest bilateral relationships in Central Asia.

The two presidents discussed a wide range of issues of mutual investment, including a new natural gas pipeline from Turkmenistan to China that will run through Tajikistan. Another key item on the agenda was the Turkmen-Afghan-Tajik railway, which Tajikistan in particular is keenly interested in seeing built.

The problem with Central Asian transportation initiatives is the always fractious Uzbekistan, which is forever putting up obstacles to regional projects. The other countries in the region are trying to find ways of moving goods around inside Central Asia as well as getting them out to trade partners in Russia and China.

Currently, all the rail routes to Tajikistan pass through Uzbekistan. There is an existing railway (Mashhad-Serakhs-Tejen) line built in the mid-1990s between Iran and Turkmenistan, which lies several hundred kilometres west of the new line. But this is subject to numerous delays and is stymieing the growing trade relationship between Tajikistan and Iran. Iran is trying to supply its contractor in Tajikistan, which has been commissioned to build a massive new hydropower plant, among other things. A railway route through Turkmenistan would allow Tajikistan to bypass Uzbekistan.

At the same time China is also interested in the new railway line. China is engaged in a Great Game with Russia for influence in Central Asia and has been investing heavily into infrastructure projects throughout the region.

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Rogun dosh remains a problem, says World Bank

Tajikistan is the poorest of the former Soviet states – a situation the autocratic government of President Emomali Rahmon hopes to remedy by building the world's tallest dam. A World Bank draft report on the Rogun dam gives the Tajik government grounds for optimism, but another report raises more cause for concern.

Ahead of the World Bank's July 14-18 consultations over the dam, the Washington-based lender published drafts of feasibility studies on the construction of Rogun. To the delight of President Rakhmon, the bank's assessment appears to favour the largest version of the dam being built, which would stand at 335 metres tall with an installed capacity of 3,600 megawatts (MW).

The bank's economic analysis considers nine possible Rogun design options, comprising three different dam heights (335, 300 and 265 metres), with three installed capacities for each height (starting from 2,000 MW for the smallest dam to a maximum of 3,600 MW for the tallest). The analysis also takes into account variables such as

demand for electricity, fuel costs, total investment costs and the capacity of power interconnectors with neighbouring countries.

The analysis show that all the Rogun design options would have an overall beneficial impact on the Tajik electricity system: $69m for the smallest Rogun option to over $2.5bn for the highest in a period until 2050 (the study assumes the dam is built in 2013 and calculations are based on the 2013 US dollar rate). "The highest dam option generally shows the greatest benefit across all sensitivities, except in the Low Demand growth case when the lower need for capacity makes the smaller dam options more appropriate," the World Bank says.

This is music to the ears of the self-important president, who wants Rogun to be the tallest and have the largest capacity. However, the investment cost of building the dam would be huge relative to the size of the economy, "on the order of 50% of 2013 GDP", and "would present macroeconomic challenges even if it is part of the least-cost solution to meeting Tajik energy demand", the analysis warns. According to the World Bank, Tajikistan's GDP totalled $8.5bn last year.

Money problemsThe analysis also discusses financing options for the dam, though here there is less good news for the Tajik government. Almost all of the funding options are regarded as impossible due to Tajikistan's inability to fund it on its own, or because of problems with attracting outside funding in the current atmosphere of hostility to the project from downstream countries, especially Uzbekistan. For the project to be sustainable from a macroeconomic point of view with entirely foreign-funded public sector borrowing on commercial terms, it should be financed at an interest rate of less than 10%. "This scenario

Feature

July, 2014


remains hypothetical since the availability of such large commercial financing is unlikely irrespective of the interest rate," the analysis says.

If the government wants to fund the project through public sector domestic financing, it would need to spend an additional 5% of GDP annually on the project for a decade. This might be possible, but would imply a large reduction in disposable income for an already poor population; 36% of Tajiks lived below the poverty line in 2012. And even if the money could be raised from domestic sources – in 2010 the government tried to raise $800m by forcing public-sector workers to buy shares in the project; less than $200m was raised – converting it to foreign currency would cause a large depreciation in the national currency, the World Bank warns. As a result, the combined reduction in income and currency depreciation would reduce private consumption and private investment, forcing a reduction in social spending for several years and increasing poverty further.

The bank suggests that such a large project should involve equity participation by other players, including downstream countries and commercial partners, as broad international support would help improve financing terms. "This would reduce investment, operational, and fiscal risks and strengthen macroeconomic stability," the bank says.

A combination of Tajik government self-financing, foreign equity participation, preferential and multilateral loans, and commercial or export agency loans could generate the most favourable terms and avoid foreign control of the asset, while at the same time providing broad international involvement and reassuring neighbouring countries of compliance with agreed arrangements, the analysis concludes.

And it’s the concerns of Tajikistan's neighbours and other international bodies that could ultimately doom the project, or at least delay it for years.

ConfrontationUzbekistan vehemently opposes damming cross-border rivers because, it fears, this will deprive its cotton fields of water and threaten millions living downstream should an earthquake destroy such dams. During a visit to downstream neighbour Kazakhstan in 2012, Uzbek President Islam Karimov urged the upstream nations of Tajikistan and Kyrgyzstan to take into account international public opinion in planning dams, otherwise it could "lead not only to confrontation but also to war".

To hamper the construction of Rogun, Tashkent has already imposed an effective transport blockade on Tajikistan, preventing the transit of construction materials for the dam.

Another report in June raised depressingly familiar concerns regarding the building of dams in developing nations. Human Rights Watch voices concern in a report about the process that will resettle 42,000 people in the 170-square-kilometre flood zone and villages near the construction site. Already the government has moved about 1,500 families who, the watchdog alleges, have been denied what was promised them. "Loss of land for farming and raising livestock, lack of employment, and poor access to essential services in resettled communities have combined to create significant hardship for resettled families,” the report says. “People who had previously relied on their lands to provide food reported that, after resettlement, they had to purchase most or all of their food at markets, leaving less money for other household needs.”

July, 2014


Search for Tajikistan's oil and gas steps up

Economics and opposition are certainly problems for the giant Rogun dam project that is being championed by President Emomali Rahmon, but they are probably surmountable. Perhaps the greatest threat to the dam project, though, is the discovery of huge oil and gas resources in Tajikistan.

Uzbekistan's frequent suspension of gas supplies to Tajikistan and Kyrgyzstan, especially during winter, might have forced those two countries to turn to hydropower as an alternative source of energy, but has also raised efforts to look for their own sources of oil and gas.

Cash-strapped Tajikistan is looking at a China-led Turkmenistan-Uzbekistan-Tajikistan-Kyrgyzstan-China gas pipeline, known as Line D, as a handy source of funds. The pipe is expected to pump 25bn cm/y of Turkmen gas to China. Kyrgyz authorities believe that the pipeline would raise about $1bn in transit fees and taxes annually; Tajikistan's revenue should match that. But analysts say the gas pipeline is also encouraging oil and gas companies to explore Tajikistan's own promising oil and gas fields.

There are two oil and gas basins in Tajikistan, according to Tethys Petroleum, which is exploring for hydrocarbons there: in the the Fergana basin in the north of the country, while in the south lies the Tajik-Afghan basin, an extension of the prolific Amu Darya basin. "Tajikistan is part of the same geological basin which Turkmenistan and Uzbekistan share, but it hadn't been developed in Soviet times," Tethys Petroleum's executive chairman, David Robson, tells bne in an interview. "Tajikistan, from the geological perspective, is a country where there is a lot of potential for oil and gas."

Robson explains that the Soviet-era discoveries in Central Asia were mainly in shallow layers; the Soviets didn't need to look into deeper layers in Tajikistan because they could easily pump oil and gas from fields in Uzbekistan and Turkmenistan. Tethys, which arrived in Tajikistan in 2007, made the first oil discovery since the country gained independence in 1991 near the Afghan border. "Then, of course, we were heavily involved in bringing partners Total and CNPC [China National Petroleum Corporation], but that prospect just wasn't big enough to excite them," Robson says of his attempts to draw the attention of big players to Tajikistan. "What excites them and us is what's going on in deeper horizons, which have never been drilled in Tajikistan. No well has ever been drilled through the lawyer of salt which keeps the big fields in Turkmenistan."

Robson says Tethys has acquired seismic data that indicate "enormous" reserves of hydrocarbons in Tajikistan – over 3 trillion cm of recoverable gas and around 8bn barrels of oil and gas condensate. "I know Total and CNPC share similar optimism now," he says. "Three of us – Tethys, Total and CNPC – all share a lot of confidence that there is certainly something there which could be enormous in size."

Sector

July, 2014


Robson points out that CNPC's intent to build a pipeline from Turkmenistan to China via Tajikistan is a good sign for oil and gas exploration in the country. "If things work there – and there are still a lot of ifs – there is sufficient gas there in Tajikistan to fuel the current Chinese gas demand for 22 years just on its own," he says, though adds it's risky because reservoirs are at a depth of 7km and under high pressure with gas containing hydrogen sulphide.

In June 2013, Tethys announced the completion of a farm-out agreement with Total and CNPC, with each acquiring a one-third interest in the Bokhtar production sharing agreement in southern Tajikistan. They also set up a consortium, the Bokhtar Operating Company, which they jointly own and manage. Data from the Bokhtar block compares favourably to that from Turkmenistan's supergiant Galkynysh gasfield, as "they look exactly the same," Robson tells bne. "We are confident we will find something, but it's gonna be a deep, expensive process."

Total and CNPC are "carrying" Tethys' costs of drilling the first well to the tune of $80m, but since the company's contract area is "massive" – some 36,000 square km – the parties are now working on obtaining more seismic data to identify the sweet spot for drilling the first well next year. Robson estimates the first well will cost $60m to drill, although Gazprom has spent $120m to drill a well to that depth. Overall investment will run into "several hundred millions" over the next three years, of which a third will have to be covered by Tethys itself.

The discovery of "supergiant" reserves of gas at Bokhtar would not only solve Tajikistan's economic and energy woos, but might also turn the country into a big player on the regional gas market to rival Turkmenistan and Uzbekistan. If so, it may also persuade President Rahmon to abandon the Rogun project.

July, 2014


Tajikistan's first Islamic leasing firm begins operating

Tajikistan's first Islamic leasing company, ASR Leasing, is now ready to start operations and over the next five years hopes to grab a 20-25% share of the growing leasing market.

ASR Leasing, set up in January 2013, has undergone a re-registration process after the Islamic Corporation for the Development of the Private Sector (ICD) became its largest shareholder in April 2013. Having completed the re-registration process in April this year, ASR Leasing held a general meeting of shareholders in June, which adopted programmes for the company's development in the medium and long term. The general meeting also adopted ASR Leasing's development strategy that runs through 2018.

The company's general director, Ibragimzhon Toshev, tells bne that due to the re-registration ASR Leasing hasn't been fully operational yet, but "we've now started work proactively" and already boasts one successful project. Last year it concluded its first Sharia-compliant deal with Shahrom LLP, providing it with finance to the tune of $110,000 for the purchase of four Chinese-

made Howo lorries. "They've been operating them for a year now and they are doing very well," Toshev notes.

During the year that ASR Leasing was solving organisational issues, Tajikistan held a presidential election last autumn, the results of which have brought clarity to the course of the country's development for the next seven years. President Emomali Rahmon was re-elected with 84% of the vote in the November 6 poll, which Toshev says has created "favourable conditions" for investors, including ASR Leasing. "Following the presidential election our country is experiencing an economic boom and investors have started investing money in our economy… We've got a very good pipeline and we've received applications for funding to the tune of more than $14m from our clients," he tells bne. "Unfortunately, due to the re-registration we haven't managed to finance them yet, but we will consider projects submitted by those who've been patient."

Toshev explains that most applications received involve projects in the construction, agricultural, road construction and mining sectors. $14m is a "good figure" for a leasing company whose paid-in capital stands at $3m, he notes. "But of course this doesn’t mean we will finance all of them, because some of them we have rejected and some of them have withdrawn their applications because they couldn’t wait due to our re-registration."

ASR Leasing will now consider issuing funding for several clients who have requested a combined $4m. Toshev says his company issues Ijara products, which are proving competitive on the Tajik market. One of the distinctions of Ijara products from conventional leasing products is

Corporate statement

July, 2014


that the rental payment starts only when the asset is delivered not when funding is issued. Moreover, the company offers funding for up to three years while most leasing companies do so only for a maximum of one year, and ASR Leasing's clients can elect to pay the money back monthly, quarterly or every six months. "This is our advantage, which is why many clients want to work with us," he says. "We hope to occupy 20-25% of the leasing market over the next five years."

There are eight leasing companies in Tajikistan, of which six have local founders and two are foreign. Only ASR Leasing offers Sharia-compliant products in Tajikistan. However, all of them face one disadvantage in competition against banks, Toshev complains. When a client purchases property or equipment with a bank loan these, deals are not subject to 18% VAT, "but in leasing we have to pay it," he says. "VAT is an additional burden for a leasing company because it doesn’t matter to a client how he purchases what he needs as long as it is cheaper for him."

The average interest rate on loans is 24% a year in Tajikistan, while some leasing companies charge up to 26% or even 30% in interest. The state-run TajAgro Leasing company charges 12% or 13% a year, but it operates only in the agricultural sphere. ASR Leasing is not a conventional financial company and its calculations are made differently, but it translates into an equivalent of 16-17% annual interest, Toshev notes.

The company's general director is upbeat about ASR Leasing's future: according to the development strategy until 2018, endorsed by its shareholders, its charter capital is planned to be increased by $2m to $5m next year, to $9m by the end of 2015 and to $22m by 2018. The number of the company's employees is expected to rise from the current seven to 20 people over the next five years.

It is hard to estimate the value of the leasing market in Tajikistan because, unlike banks, leasing companies do not need to publish their financial reports, Toshev says.

July, 2014


More time needed to resolve Kyrgyz borders with Tajikistan, Uzbekistan

Kyrgyz Deputy Prime Minister Abdyrakhman Mamataliev told Interfax on July 21 that the delimitation and demarcation of Kyrgyzstan's southern borders with Uzbekistan and Tajikistan could still take a long time more to complete.

He said 73% of the 1,378km Kyrgyz-Uzbek border has been delimited, while nearly half of the 970km Kyrgyz-Tajik border remains legally undefined.

The absence of agreed border lines around Uzbek and Tajik exclaves that are surrounded by Kyrgyz territory spark violence between locals and border guards.

Tajikistan and Kyrgyzstan have been locked in a tense border dispute over Vorukh for months. In the latest incident, near Tajikistan's Vorukh exclave on July 10, one Tajik citizen was killed and seven others were injured. Kyrgyz authorities say one Kyrgyz border guard was hospitalized in the incident.

Iranian president expected to visit Tajikistan and KazakhstanIranian President Hassan Rouhani is scheduled to visit Tajikistan and Kazakhstan in September.

Rouhani is expected to visit Tajikistan to hold talks with senior Tajik officials and take part in the upcoming summit of the Shanghai Cooperation Organization (SCO), which will take place in the Tajik capital of Dushanbe on September 12-13, Iran's Mehr news agency reported on July 22.

The Shanghai Cooperation Organisation is a Eurasian political, economic and military organization which was founded in 2001 in Shanghai by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. Iran, along with India, Pakistan and Mongolia has "observer" status in the organization.

Rouhani and his Tajik counterpart, Emomalii Rahmon, are expected to sign several cooperation agreements during their meetings, the news agency said.

Russian social media site said to fall foul of Tajik censorsA popular Russian social networking site, Odnoklassniki.ru, appears to have become the latest target of Tajikistan’s Internet sentinels, reported Eurasia.net on July 21.

The country's communications agency would not comment to Eurasia.net on the issue, even denying it knows of the problem. But a representative of one leading ISP said he had received an oral order to block the site.

Tajik officials often block websites that carry material critical of the government. Odnoklassniki is popular among the million-plus Tajik migrant workers abroad who use it to communicate with their families back home, and some users told Radio Ozodi that the site may have been blocked because some Tajiks fighting alongside jihadists in Syria have used it to post extremist content. Others point out that, like Facebook – which also has been blocked at times – Odnoklassniki is frequently used to spread material critical of the government and its president.

News in brief

July, 2014


Tajikistan, Pakistan to boost energy cooperation

Tajikistan and Pakistan discussed an electricity transmission and trade project between Central Asia and South Asia, and other elements of energy cooperation on July 22, the Tajik president's press service said, according to Xinhua.

Tajik President Emomali Rahmon met with visiting Pakistani Water and Power Minister

Khawaja Muhammad Asif in Dushanbe, where the two sides also discussed investment projects and the elimination of regional trade barriers.

The CASA 1000 power transmission project extends from Kyrgyzstan to Afghanistan and Pakistan, and is expected to be completed by 2017. The project is designed to transmit surplus power from existing generation facilities in Tajikistan and the Kyrgyz Republic to Afghanistan and Pakistan.

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July, 2014

bne:Invest in Tajikistan - July 2014

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