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By John Helmer in Moscow

The wind-chill factor this winter in Tajikistan has produced record low temperatures and uncounted miseries for a population struggling with inadequate electricity supply and failing heat. Tajik newborns have been reported as having died from hypothermia while in hospital wards.

But on March 5, a single whistle-blow from the International Monetary Fund (IMF) sent a chill through the one well-heated residence in the country. That’s the presidential palace of Emomali Rakhmonov (aka Rahmon), the head of the land-locked Central Asian country since 1992.

For the IMF revealed publicly for the first time, and at the level of the fund’s board of directors, that the National Bank of Tajikistan (NBT) and the Finance Ministry in Dushanbe have been fiddling the country’s accounts for several years, falsifying the flow of funds and concealing the disappearance of as yet uncounted millions of dollars of international loan funds.

On March 5, the “Executive Board of the International Monetary Fund (IMF) met today to review a report from the Managing Director on noncomplying disbursements to the Republic of Tajikistan and a breach of obligations under Article VIII, Section 5 of the IMF’s Articles of Agreement”.

Article VIII, Section 5 is the acid test of a country’s financial reporting, for this is the provision according to which IMF members such as Tajikistan are required to report accurate values for their import and export of merchandise and also “investments within the territories of the member owned abroad and investments abroad owned by persons in its territories so far as it is possible to furnish this information”.

Investigations now underway – not only at the IMF – have begun to document Rahmon’s control of hundreds of millions of dollars taken each year out of Tajikistan from the aluminum industry and kept warm in a Caribbean haven.

Part of the secret link between Rahmon and his associates in Dushanbe and the Caribbean haven was inadvertently disclosed in the UK High Court in February. That was when a lawyer told a British judge that his clients, who own a British Virgin Islands company called CDH, operating in Tortola, can’t give their instructions to him in English because they can’t speak the language and don’t live outside Tajikistan. CDH, it was revealed in the court, is the company controlling the financial flows of the Tajik aluminum industry.

Not transparent
Since a World Bank report of 2004 first focused on Rahmon’s role directly supervising the operation of Tajikistan’s billion-dollar aluminum business – the country’s principal product and export – and the IMF warned in 2006 that “the details of the [aluminum trade] arrangement are not fully transparent”, it has been only a matter of time before the real flow of cash would fail to match the accounts handed to the IMF.

For the time being, the IMF inspectors won’t say if they are focusing on aluminum cash. At least US$79 million has gone missing over several years, the IMF said on March 5, and had been diverted from “the three-year Poverty Reduction and Growth Facility (PRGF) arrangement”. This money had been spent, in IMF bankspeak, “on the basis of inaccurate information provided by the Tajik authorities relating to the performance criteria on the net international reserves of the Republic of Tajikistan, the net domestic assets of the National Bank of Tajikistan (NBT), and against the NBT issuing directed credits.”

The fund board said it was calling in $47.4 million of the debt owing, adding that it was upset the Tajik authorities had thought they could evade repayment altogether. According to the public statement, the IMF “expressed its regret on the nature and extent of misreporting, and emphasized the seriousness it attaches to the fact that MDRI resources extended to Tajikistan cannot be made subject to repayment”.

Referring to the winter freeze, and the “severe humanitarian crisis prevailing in the country”, the IMF said it would give Rahmon’s government an extension of “the repayment period beyond the normal 30-day repayment expectation period called for under the misreporting framework.”

The IMF also said it was starting a new investigation, claiming “the Tajik authorities have agreed to undertake a special audit of the NBT, to be carried out by a recognized international firm. The audit will aim to establish a reliable foundation for the future provision of monetary data and data on external debt, and to define steps to ensure transparency of all financial operations of the NBT.”

The day after this announcement was issued at IMF headquarters, Masood Ahmed, head of the IMF’s external relations department, tried to play down the import of what had been discovered. Instead of charging that officials reporting to Rahmon had been caught red-handed, Ahmed said the IMF faced “a difficult decision … because on the one hand there has been a serious incidence of misreporting or relevant economic data by the Tajik authorities. At the same time, the board was very conscious of the fact that the country is going through a very difficult economic circumstance.”

The cynicism of protecting the culprits from the consequences of their apparent stealing, ostensibly to protect the altogether innocent Tajik population, has accelerated into a full-blown coverup by Ahmed of what the IMF investigations have shown of looting of the country’s cashflows by Rahmon and his associates. But this is getting ahead of our story.

Missing loans
On March 14, a Financial Times report from Bangkok cited the IMF as confirming that, in addition to the Washington audit revealed early in the month, the Asian Development Bank (ADB) in Manila and other multilateral lenders to Tajikistan are also investigating the apparent mis-accounting, and possibly fraudulent diversion, of about $500 million in loans intended to be channeled through the commercial banking system to the cotton sector – next to aluminum, Tajikistan’s main line of business.

Mohsin Khan, head of the IMF’s Central Asia Department, declared: “Was it fraud, mistakes or some systematic policy? The country is going to have to work hard at re-establishing its credibility.” Khan was putting the position mildly.

But Ahmed, head of the fund’s external relations department, conceding there was no disputing what Khan had said publicly, told Asia Times Online he would not be drawn into identifying the scope or targets of the new financial checks in Dushanbe. Through a spokesman, Ahmed said he would have “no further comments”. He implied wanting to keep clear of the flow of Tajik aluminum money. What had been released publicly was “exhaustive as regards the IMF’s assessment of the case”.

Ahmed is trying to conceal a serious shift in sentiment towards Tajikistan, inside the IMF and among the other international lenders – the ADB, the World Bank, and the European Bank for Reconstruction and Development. A cold warrior who also served three years, 2003-2006, with the UK’s Department for International Development, Ahmed was in charge of aid and grant schemes to boost Rahmon as an anti-Russian figure in Central Asia.

Now, however, Ahmed risks protecting Rahmon from liability in one of the biggest kleptocratic (state stealing) schemes the IMF has publicly admitted to uncovering. Just how big has been substantiated, also for the first time, in documentary evidence and witness statements presented in the UK High Court on February 15, before Justice Tomlinson.

In the London court, three agreements that regulate Tajikistan’s aluminum business were disclosed. The documents had been ordered for disclosure by the court, which is hearing a claim by the Tajikistan Aluminum Plant (TadAZ aka Talco), at Rahmon’s instruction, against Avaz Nazarov and his companies; Nazarov is a leading Tajik businessman and formerly actively involved in the smelter’s operations and trade. Nazarov has filed a counter claim against Talco, accusing it of fraud, forgery and a scheme to divert most of the country’s earnings from aluminum to British Virgin Islands (BVI)front companies.

Three agreements were identified in court: one dated December 17, 2006, is between the aluminum plant and the Norwegian company, Hydro Aluminum; another dated December 27, 2006, between Hydro, the plant, and CDH, the BVI affiliate supervising the plant’s business; and a third, dated April 18, 2007, between Hydro, the plant, and Talco Management, a company, also registered in the BVI, which substituted for CDH from the start of last year and which appears to be controlled by the same people in Dushanbe.

The three agreements, and an explanatory document spelling out how the flows of raw materials, aluminum and money move in and out of Tajikistan, amplify on Hydro’s public announcements in 2006 and 2007 that it had resolved its conflicts over broken contracts with Tajikistan and is now committed to supplying the smelter with about 150,000 tonnes of alumina each year, and taking about 200,000 tonnes of aluminum from the plant.

If that looks straightforward – Hydro appears to sell alumina to Talco, and Talco appears to sell aluminum to Hydro – then appearances are deceiving. The court presentation of the documents shows that, according to a scheme of tolling the raw materials for processing at contrived prices, Talco receives alumina from Hydro and gives it to CDH. CDH then contracts it for processing by the smelter and receives the metal back in exchange. CDH then sells the same metal back to Talco at the market price, and Talco sells it to Hydro at a loss.

The combination of input and output prices leaves Hydro with a profit on its alumina and its aluminum. However, the biggest profit is reserved for CDH, leaving the plant in Tajikistan with what is described in court as “a huge loss on the entire transaction”. This diversion is done with the full knowledge of Hydro.

From the thicket of commercial language spelling out the trading scheme, the court was told that the Caribbean cutout CDH (later Talco Management) “sells the aluminum and it allocated that
between the two parts of this one project and so on, all the way down.The gross profit is then 136 million [dollars], of which 99 million is allocated to CDH and 17 to TadAZ. Then they have some commercial expenses. Net profit before interest/tax is paid out of profit and depreciation is 103 million of the project.

“So the EBIT, or the net profit before interest and tax is paid after profit, is 98 million, of which 3 million is allocated to TadAZ and income tax is all paid by TadAZ of 3 million. The other 98 million is in the BVI. That is enjoyed by whoever owns CDH. Then the net profit is set out at the bottom. So after all a year’s activity, TadAZ makes a net profit of 1.8 million on a business which actually generated $96 million in profits.”

Huge diversion of funds
Over time, and with growing tonnages of aluminum produced at the Tajik smelter, the diversion of funds to the Caribbean is huge. Judge Tomlinson confirmed his interpretation that the plant was losing $27 for every tonne of alumina (6% of the average market price for alumina at the time) sold by Hydro to the smelter, because it paid too much. The judge also confirms his understanding that “the distribution [of costs] to the plant is all debited against TadAZ, not CDH. They do not seem to contribute to that.”

The February 15 hearing goes on to show that in 2007 the same people substituted Talco Management for CDH, while the diversion scheme remained the same.

Another revelation in the court testimony – the BVI company is charging the smelter $12 million per month in legal fees for the court action in London. Herbert Smith is the firm of solicitors receiving this money.

When lawyers for the smelter and the BVI affiliate claimed they had been unable to find related documents, spelling out the current accounting of the Hydro scheme, the judge declared: “There must have been a scheme document at some stage. It may be that it cannot be found, but there must have been a document … Looking at the reality of this, looking at the profit and loss account, there must be a fairly close relationship between TadAZ and CDH.”

When lawyers for Talco testified in court that the missing scheme documents were not relevant, Judge Tomlinson retorted: “The longer the argument about it goes on, the more interested in it I become.”

The judge ordered further disclosures in court by March 20. Thereafter, Hydro was warned, company executives may be obliged to give testimony on oath.

The last Asia Times Online report of Hydro’s involvement in the Tajik aluminum business Cover off Tajikistan’s missing millions Asia Times Online, January 11, 2008) included charges from members of the Norwegian Parliament and public governance organizations in Oslo that Hydro is knowingly participating in the corrupt diversion of aluminum profits from Tajikistan to CFH, then Talco Management.

Answering questions last November (Global tizz over Tajik aluminum deal Asia Times Online, November 21, 2007), the company said: “Hydro has a zero tolerance towards corruption and we are following Hydro’s guidelines in all parts of the world where we are doing business. We have spent a lot of time discussing issues concerning transparency and corporate governance with the World Bank and EBRD and other NGOs. Our opinion is that it is better for the people of Tajikistan that we are involved in doing business in the country than not.”

A Hydro spokesman declined to provide details of the contracts it has with the Tajikistan aluminum plant, or with its BVI-registered affiliate, Talco Management. But he claimed: “Talco Management Ltd has also undertaken an obligation to be audited by an international recognized auditor. Such audit reports are to be displayed to the World Bank, EBRD and Hydro.”

Audits at face value
Tajikistan audits are a screen, Khan of the IMF now concedes. “We were shown the balance sheet of the national bank and it had unqualified reports from PwC [PriceWaterhouseCoopers] in Rotterdam. PwC told us that these accounts were fine so we took them at face value. For several years we were just going by the audits.”

So much for Article VIII, section 5. When Ahmed of the IMF was asked to say whether this means that PwC has been ruled ineligible for the new audit, he told Asia Times Online: “The special audit of the National Bank of Tajikistan will be undertaken by the Tajik authorities.” Literally interpreted, this is false.

Hydro’s defense for its participation in the Tajik aluminum business is that it relies on internationally accepted audits of the $1.2 billion in cash flow that the smelter now generates annually. But if this is “fraud, mistakes, or systematic policy”, according to Khan, and in default of Tajikistan’s IMF obligations, Hydro is left with no defense at all.

Now that Hydro’s contracts have been disclosed in London, Hydro was asked to explain its public claims that its buy-sell agreements for alumina and aluminum in Tajikistan are “based on market conditions”; and that the company is not aware of “details in the tolling contract between Talco Management Limited and the Talco smelter”. The company refuses to answer.

But Hydro is not the only one running for cover from disclosure of what is now known of the disappearance of Tajikistan’s aluminum fortune. The European Bank for Reconstruction and Development (EBRD) has been a consistent backer of Rahmon and has endorsed his agreements to run the aluminum plant, first with Russian Aluminum (Rusal), which EBRD also finances, and then for the past 15 months with Hydro.

But the EBRD refuses to disclose how much of its loan money is being repaid by Tajikistan; how much the accumulated debt now totals; and what the EBRD is doing to audit for possible diversion. Anthony Williams, an EBRD spokesman, claims that a recent cotton loan to Tajikistan, announced the day before the IMF announcement was published, was disbursed “without any state involvement”. Consequently, he said, concern for compliance with loan conditions does “not appear to be pertinent”.

The World Bank has also been signing and handing out substantial loans intended for Tajik cotton farmers, and these loan agreements contain explicit auditing and compliance conditions.

But as the evidence of wholesale cash-stripping mounts in both London and Washington, World Bank officials refuse to answer questions about what they know and what they are doing about it.
Makoto Ojiro is the Asian Development Bank’s director for Tajikistan; he’s new at his job, taking over just three months ago. But in that time Ojiro has been busy at the cash window handing out money. The planned ADB allocation of funds to Tajikistan for 2007 and 2008 is $70.23 million. Three new ADB loans were approved in the week of the IMF default announcement – on February 29, March 3, and March 7.

Ojiro refused to say what the ADB investigation of the $500 million in missing funds has shown to date. Whether Ojiro intends to throw more good ADB money after lost, he isn’t willing to say.

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