BACKGROUND: When Tajikistan became independent in 1991, Russia kept its 201st Motorized Rifle Division and its border forces there. The Tajik group that ended up controlling the government welcomed the assistance of these two in providing stability during the civil war and in securing the border with Afghanistan. Russia did not, however, offer substantial economic assistance, except for credits in the period immediately after the breakup of the USSR. Tajikistan turned to the IMF and World Bank, which used the leverage of their assistance to persuade the country to undertake politically difficult reforms such as freeing grain and bread prices in 1995. The Bank and the Fund quickly came forward with money to support implementation of the 1997 accords ending the civil war, as did the United States and a few other developed countries. Russia, while delivering some humanitarian aid, did not offer major reconstruction assistance. Russian companies showed little interest in a country which had been the poorest republic in the Soviet Union and which possessed neither oil nor gas. Tajikistan’s GDP dropped precipitously after independence and only began to recover after conclusion of the peace accords. Cotton production, the mainstay of the economy, fell from as much as one million tons a year in Soviet times to only 319.000 tons in 1996. Tajikistan’s leadership increasingly focused on harnessing the country’s hydroelectric potential as a way forward, looking to markets beyond its immediate neighbors. Nobody came forward, however, with the massive amounts of capital necessary to complete the large projects begun in the Soviet period, let alone start on new ones. Hydroelectric production in Tajikistan has been intimately associated with the large scale aluminum smelter constructed there during the Soviet period. The smelter essentially converted the electricity produced by the Nurek dam into something more easily transported for use elsewhere. When the smelter was constructed, however, transport costs of raw materials were not being set at economic rates. After independence and the rise of transport costs, at least one international consultant concluded that the plant was not economically sustainable if the electricity it used was valued at international prices. (The report estimated that for the plant to be profitable, international prices needed to rise above $1970 per ton; recent prices have been in the range of $1500-1800 per ton.) Even so, the smelter continued to operate, consuming as much as 40 per cent of the electricity produced in Tajikistan, for which it sometimes did not pay.

IMPLICATIONS: Deals announced during Russian President Putin’s October 16-18 visit to Tajikistan, if they come to fruition, will affect both the nature of Russian engagement and the prospects for growth in Tajikistan. He announced that Russia would invest $2 billion in Tajikistan, partly in completing major hydroelectric projects in the Vaksh valley planned before independence and partly in increasing the aluminum smelting capacity in Tajikistan. According to press reports, Russia’s Unified Energy Systems pledged to complete the Sangtuda hydroelectric power plant, providing $200 million in direct investment and getting $50 million worth of shares in the project in a debt for equity swap. Also, Russian Aluminum announced it would put $160 million into equipment for the existing smelter, $600 million in construction of a new smelter and $500 million in building the much larger Rogun hydroelectric power plant. However, there is a considerable distance between announcement and implementation of such projects. Assuming the money is available, political and economic considerations could come in the way of completion. The electricity generated by in Tajikistan has little value unless there is a market, preferably one connected to exports. In principle, neighboring Uzbekistan should rely on cheaper hydroelectricity from Tajikistan and Kyrgyzstan during the main, summer generating season and on thermal stations using its natural gas during the winter, but it prefers energy independence. Afghanistan is a potential market but has no money to pay for the electricity. Tajikistan thus has to seek markets beyond these two countries. That poses problems. Uzbekistan has to cooperate with transmission of electricity across it to Russia or beyond, and transit across Afghanistan requires pacification of that country first. Also, in both cases, distances are long to reach major markets in Russia or South Asia, which translates into high transmission losses. Converting the electricity into aluminum in the expanded smelter capacity avoids these problems but poses other issues. Transport across Uzbekistan by rail of increased quantities of the raw materials and of the finished product is one potential problem, and higher costs for that could eat into the profitability of the project. Beyond this, there is the potential for serious friction between the demands of operators of the hydroelectric installations and of operators of the aluminum smelters. The companies to be set up to operate Sangtuda and Rogun will want to charge enough for the electricity to earn a profit on investment, and they will want to be sure that its major customer pays its bills. Russian Aluminum will want to pay as little as possible for the electricity. It may be difficult to satisfy both groups. The package gave Tajikistan another benefit, however – virtual elimination of its debt to Russia. Not only did it swap $50 million of debt for equity in the Sangtuda project, but it also got rid of $250 million in return for turning over the Nurek space telescope to Russia. This took care of the major debt requiring current payment, as opposed to the debt to institutions such as the World Bank with low interest and long grace and repayment periods. This is no small accomplishment, particularly in view of recurrent IFI expressions of concern about Tajikistan’s debt burden.

CONCLUSIONS: The Russian investments in Tajikistan announced during Putin’s visit appear to represent a new phase in Russian involvement there. However, it is hard to see how they will be profitable for the Russian companies involved in the short term. If this is true and the companies go ahead with the investments anyway, they risk resurrecting debate in Russia about the usefulness of putting money into the poorer parts of the former Soviet Union. Right now, the major beneficiary in economic terms seems to be Tajikistan, which has greatly reduced its debt and has at least opened the possibility of investment in sectors of the economy desperately in need of such help.

AUTHOR’S BIO: R. Grant Smith is a former U.S. State Department official who served as Ambassador to Tajikistan. He is now a Senior Fellow at the Central Asia-Caucasus Institute.