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By John Helmer in Moscow

A new IMF report reveals for the first time where Tajikistan’s aluminium revenues are going.

The International Monetary Fund (IMF) has issued a report that is sharply critical of the Tajikistan Aluminium Company (Talco), the leading enterprise of the Central Asian republic run by President Emomali Rahmon; and has ordered an independent international auditor to check Talco’s accounts for what the IMF describes as “most worrisome financial operations [which] remain nontransparent.”

For the first time, the IMF report has disclosed how little the country’s economy — the poorest in Central Asia — earned from its principal industry, biggest electricity consumer, and most valuable exporter — in 2006 and 2007, just 17% of the value of the aluminium Talco produces and ships to foreign buyers.

The IMF action is an embarrassing curtain-raiser for President Rahmon, who directly controls Talco, and who is behind the hugely expensive UK High Court case, which Talco is waging against Avaz Nazarov and his group of companies, who were ousted from management of the Tajik smelter in 2004, on Rahmon’s order. The four-year old case, in which Talco is represented by the UK law firm, Herbert Smith, has set a UK and world record for legal costs that have now exceeded $126 million. The judge in the case, Justice Tomlinson, has ordered leading figures in Tajikistan, including the President’s brother-in-law, the leading commercial banker of Tajikistan, Hassan Saduloev, to appear for testimony on oath and cross-examination in the trial now scheduled to commence in October.

In an implicit move to have the Tajik government curtail the expenditure of aluminium revenues on London legal fees, the IMF has ordered the establishment of “a special monitoring unit at the ministry of finance”, whose mandate will include identification in Talco’s books of “untapped tax revenues and hitherto hidden contingent liabilities.”

In acknowledgment that the disclosures of the Talco court case in London have seriously undermined Talco’s credibility among government donors and international bank lenders, the IMF report “urges the authorities not only to co-operate fully with the auditor-and disclose publicly all the results of the audit-but also to promptly take up the recommendations of the auditor once the work is concluded. Anything less will fail to restore the authorities’ credibility in the eyes of the international community. In this connection, unwavering political support for bringing more transparency to the operations of the largest SOEs is also critical.” Talco is the largest of Tajikistan’s state-owned enterprises (SOEs).

In a letter to the IMF, accompanying the report, President Rahmon refers to a March announcement by the World Bank and IMF, when serious problems were revealed at the National Bank of Tajikistan (NBT). “We regret the recent misreporting incident,” Rahmon writes, “and assure you that we are determined and ready to address the institutional weaknesses that led to it.” The NBT affair triggered early loan repayment orders by the IMF, and an extensive probe into NBT’s use of loan guarantees and reserve collateral operations involving more than $300 million in previously undisclosed state debts obligations. Another $232 million in “misreported” NBT credits to the Tajik cotton sector and intermediaries have also been identified. The state bank is insolvent, the IMF has concluded.

Rahmon does not address the aluminium sector problems, but declares: “in order to enhance transparency of our economic policies, we find it appropriate that all the documents related to the SMP [Staff Monitored Program] be published on the Fund’s website.”

One of the new points in the IMF’s SMP program is the requirement that Talco spending must be approved by the finance ministry — in place of the presidential office. According to the IMF report, Rahmon is to issue a decree to “require the SOEs to provide the Ministry of Finance and Ministry of Economic Development and Trade draft annual financial plans for review and approval before the beginning of each financial year and submit their quarterly financial statements and their external audit reports.”

Another IMF demand, which the agency says has been agreed with Rahmon, is aimed at uncovering who benefits from a group of British Virgin Island-registered companies which manage Talco financial operations, as well as from NBT loan guarantee operations. According to the text of the IMF report, Rahmon should promptly enact a law for “official identification and disclosure of beneficial owners of registered companies, including financial institutions. Lack of public disclosure of significant shareholders of financial institutions and of legal definitions for connected business interests and beneficial ownership are key obstacles to good governance, the prevention of conflicts of interest, and implementation of prudential norms (e.g.; limits on connected party lending).”

The new report was issued by the Washington-based IMF on June 10, 2008. The details and recommendations appear to have been co-ordinated with the World Bank and the Asian Development Bank. Together with the European Bank for Reconstruction and Development in London, these are the principal international banks on which Tajikistan’s finances precariously depend. The recommendation for appointment of an international audit of the flow of aluminium cash followed a public call for the measure by the US Ambassador to Tajikistan, Tracey Jacobson.

Almost unnoticed in the statistical section of the report is a line detailing how much revenue is earned from the Tajikistan aluminium smelter. Considered secret until now, the IMF tabulation indicates that Talco receives an annual “tolling fee” for converting imported alumina, supplied by external companies, into primary aluminium, which is then taken by offshore companies and traders, and sold on their account. Testimony and documents submitted in the London court case have focused on tolling, and what has been termed the “Hydro scheme” — after Hydro Aluminium, the Norwegian company currently involved with Talco. The core allegation of the court case is that tolling allows Talco’s profits to be transferred out of Tajikistan to offshore havens.

The IMF tabulation of Tajikistan’s balance of payments for 2005-2008 now reveals how much money appears to have been involved.

The tolling fee for 2005 is reported as $116 million; for 2006, $173 million; for 2007, $183 million; and for the first half of 2008, $120 million. Talco was asked to confirm the accuracy of these figures. It declined to respond.

In parallel, with IMF help, the National Bank of Tajikistan publishes detailed export and import figures for the same years; these show the value of aluminium exported by Talco, and the cost of alumina imports. From these data it is possible to calculate that the tolling fee, revenue benefit, or earnings of Talco’s aluminium operations have amounted to a small fraction of the value of the metal production. It was just – 21% in 2005, when aluminium exports were worth $563 million. But when aluminium nearly doubled in value in 2006 and 2007 ($1,050 million and $1,083 million, respectively), Talco’s share of the gain actually shrank to 17%. This year, for the first half results already in, the international pressure on Rahmon and Talco appears to have led to an increase in the relative size of the tolling fee paid as a proportion of expert revenues; it is now up to 36%.

Experts on the Tajikistan aluminium trade warn that the NBT figures may be unreliable, understating the value of the exported aluminium. Said one: “you also have to appreciate that Talco — that is the plant, not to be confused with Talco Management, the BVI company — is no longer in the business of buying and importing alumina and other raw materials, and selling aluminium for export. It is simply a machine that converts the raw materials owned by Talco Management, into metal whose profits flow to the BVI. It is important to note that the cashflow is not registered in Tajikistan, and is not contributing to the GDP figures. ”

Executives at Hydro in Oslo refuse to discuss the details of their operations with Talco, and Talco Management, or the disclosures of the Hydro scheme in the High Court

The nontransparency of the Talco accounts means that the only evidence of how much profit is exported has leaked out of the High Court proceedings. But the IMF report, combined with the NBT trade figures, enable a first approximation. Subtracting the cost of alumina imported to make aluminium, and the tolling fee for each year, the balance for 2005 was $85.2 million; $490.4 million in 2006; $523.7 million in 2007; and $46 million so far this year. Altogether, this adds up to $1,145 million in apparent profit, generated by Talco inside Tajikistan, but diverted tax-free abroad into other, private hands.

Mineweb asked Talco in Dushanbe to comment on the accuracy and interpretation of these financial results, but there was no answer on the company telephone, and no reply to email. Talco was also asked to explain why the company management had cut the proportion of the tolling fee to export value when international aluminium prices were booming, but raised it this year, as the commodity price eased, but the public controversy over Talco’s financial practices intensified. There has been no comment.

The latest economic statistics from Tajikistan indicate that the near-catastrophic power shortages, which occurred through the past winter, caused a significant slowdown in the country’s GDP growth and industrial production in the first quarter of the year, but NBT figures claim that both recovered in the second quarter. New figures published last week by Asia-Plus, a Central Asia news agency, suggested there has been a 3.3% contraction in Tajikistan’s industrial output from January to July of this year. The IMF report suggests that real GDP will slow this year to 5%, compared to 7.8% in 2007.

The Fund shifts the blame for this from the unusually severe cold weather to the Rahmon administration for “years of serious mismanagement of the sector, including underinvestment and lack of appropriate maintenance.”

The IMF report does not explicitly refer to the diversion of aluminium profits. But the agency does note that the government has failed to make timely payment of wages and pensions. This suggests that Rahmon has been penalizing the Talco workforce at the same time as the offshore profit take has been growing.

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