Tajik bond potentially a tragic bond?

Tajik bond potentially a tragic bond?
The planned Rogun dam will dwarf the nearby Nurek dam, currently the second tallest in the world.
By Kanat Shaku in Almaty September 14, 2017

There was junk bond fever last week as Tajikstan made its bow on the international debt market. Central Asia's poorest nation on September 7 raised $500mn from its inaugural international bond priced at 7.125% for a 10-year term. Investors, the bulk of whom were fund managers mostly from the US and UK, were supposedly tempted into betting on the issue by Tajikistan’s vital need to maintain and expand its hydropower infrastructure – the country's goal is to use the bond’s proceeds to finance the Rogun 3,600MW hydropower project, complete with the world's tallest dam. 

The investment story meant Tajikistan received around $4bn in bids for the Eurobond, meaning the country was quickly able to reduce the initial 8% it offered on the deal. Investors were spurred on by what some observers described as the overriding of conventional logic by the lure of higher yields in the presently low-yielding world of sovereign debt, as well as the demands of investing according to index rules. It also helped that Citigroup and Raiffeisen Bank acted as bookrunners for the inaugural bond, and S&P and Moody’s maintained a stable outlook while rating the country at B- and B3 respectively. Some more assurance might have been provided, meanwhile, by the fact that Italian construction conglomerate Salini Impregilo has entered into a $3.9bn contract to build the Rogun dam. 

Still, some news outlets warned investors about Tajikistan, generally seen as a country without credit history, as well as being the poorest nation in the former-Soviet space. Several articles expressed concern that the country’s chances of succeeding with its plans to get parts of the electricity project working by 2018 appeared slim, let alone getting the project to full capacity by 2032. 

Tajikistan jump-started construction of the controversial 335m dam on the Vakhsh River – a project seen as important for both the country’s energy security and President’s Emomali Rahmon’s popularity – last October, two months after the death of the dam’s main opponent, Uzbek dictator Islam Karimov. With total costs estimated between $3bn and $6bn, the country’s turn towards the $500mn Eurobond was a rather bold move, considering Tajikistan’s poor reputation in handling money matters.

Unpredictable partner

“Reliable” is certainly not a term lenders would use to describe Tajikistan: just ask the International Monetary Fund (IMF). Back in 2008, the IMF had to ask Dushanbe to repay more than $47mn in IMF loans as a penalty for false data the Tajik authorities had provided to the global lender. Blinded by hopes of securing priority loans, the impoverished country had listed its international reserves at $450mn when in truth they stood at $115mn if not less. 

A year later, Ernst & Young auditors discovered former National Bank head Murodali Alimardon’s misappropriation of over $850mn in state funds, mostly intended for cotton-related projects. Alimardon and his allies were also allegedly involved in doling out risky loans intended for the agricultural sector. Their actions were widely seen as the cause of a liquidity drain at Tajikistan’s largest banks TSB and Agroinvestbank and the inevitable non-performing loan-driven banking crisis in 2016. 

The weakened banks could no longer handle their non-performing loans, as the economy was blown off course by the recession in Russia, Tajikistan’s main trading partner and the main source of its much needed migrant workers' remittances. In late 2016, the Tajik government launched a TJS3.85bn (€460mn at the December 2016 rate) bailout for the banks. This rescue package included more than TJS2bn to recapitalise Tojiksodirotbank (TSB) and TJS1.7bn for Agroinvestbank, Tajikistan’s largest lender. Tajikistan’s banking troubles were set to continue despite the bailout, however.

Maximilien Lambertson, Central Asia analyst at the Economist Intelligence Unit, said in comments emailed to bne IntelliNews on August 31 that the banks still remain in crisis, adding: “Tajikistan’s banking sector has been in crisis since the collapse in remittances from migrant workers in Russia in 2015-2016.”

In another case of a much smaller scope, the Global Fund sought to recover some $116,000 in misused funds from Tajikistan in 2015. The move was attributed to “improper procurement practices by a government sub-recipient of an HIV grant managed by the UN Development Programme”.

“In an investigation report released in late March, the Office of the Inspector General determined that the Committee for Youth, Sports and Tourism (CYST), overpaid a supplier by more than $109,000 — primarily for non-health products,” the Global Fund had said in a statement. “An additional $7,000 was paid for products for which there was no proof of delivery.”

One would think Tajikistan’s record in misallocating funds and lying to foreign entities who provide financial support to one of the world’s poorest countries would force its authorities to pull their act together. Alas, previous experiences with money have not deterred Tajikistan from its unreliable path even by its own standards. The autocratic country’s foreign debt stood at $2.3bn or 35.8% of GDP in the first half of 2017. According to Tajikistan’s Strategy for Managing Government Debt programme, the country’s foreign debt must not rise above the threshold of 40% in debt-to-GDP, but Tajikistan still went along with the bond issue, which pushed the debt-to-GDP ratio to 50%. It goes without saying that the Tajik government will inevitably fail to lower the level of foreign debt to below 17.3% of GDP in 2017 as it officially planned.

“The construction of the Rogun Hydropower Project (HPP) may stress debt and external sustainability.” the IMF said in its Financial Sector Sustainability Assessment Report for Tajikistan released on December 31. “In addition, the fiscal position may be adversely affected by possible costs of bank recapitalisation as well as by external debt service-related budgetary outlays on behalf of two lossmaking state-owned enterprises (SOEs).”

Disputes between neighbours

Meanwhile, the prospects for the dam do not presently look too bright as only $200mn had been allocated for its construction prior to the bond’s debut and work has long been stalled.

International lenders, including the World Bank, have previously refused financing for the project. The lack of funding incentive was mostly because of another Central Asian country, however — neighbouring Uzbekistan. Bickering between Tajikistan and Uzbekistan was always to blame for most of the delays in the past. It is no accident that construction has been launched just a few months after the death of Karimov, who had long tried to block the project over fears it would affect the irrigation of lucrative cotton crops in Uzbekistan.

Rogun is now regarded as mainly a Tajik venture, but prior to the collapse of the Soviet Union it was originally intended to be a regional energy project, involving Tajikistan and Uzbekistan. The project is seen as vital for easing Uzbekistan’s own energy problems, as it would allow Tajikistan to supply power to its neighbour, Farkhod Aminjonov, deputy director of the Almaty-based Central Asia Institute for Strategic Studies, told bne IntelliNews in an interview last year.

Recent developments in Central Asia look more promising than damning for the dam’s prospects, as current Uzbek President Shavkat Mirziyoyev appears willing to put an end to bilateral conflicts. Mirziyoyev’s willingness to set aside differences over similar hydropower plant construction issues with neighbouring Kyrgyzstan and even promises to support its efforts indicate the current Uzbek leader’s knack for compromise. 

He has already met Rahmon and has not yet openly condemned Rogun. But no official agreements were signed, and no formal promises have been made.

“I’m sure there most likely was an unofficial unspoken agreement between Mirziyoyev and Rahmon on Tajikistan’s decision to begin construction,” Aminjonov said. “[But] Mirziyoyev’s silence on the issue in no way means that everything will go on perfectly and smoothly in the future.”

Uzbekistan’s acquiescence will be needed to secure further international funding for the project. Rogun’s funding by international financial institutions is dependent on Tashkent’s willingness to publicly agree with the World Bank’s established feasibility study on the project. 

Ongoing efforts to lower reliance on cotton could help persuade Tashkent to support the project. Uzbekistan uses huge amounts of water for its cotton farming but it has been cutting down the areas of its land designated for cotton, replacing them with relatively more water-efficient fruits and vegetables. Tashkent nearly halved the lands allocated for cotton between the 1990s and today and aims to free up an additional 175,000 hectares of farmland by 2020.

Yet even with these improvements, the country still consumes huge amounts of water because it wastes so much due to its archaic irrigation system. A lot of the water from the Vaksh River never even reaches its agricultural fields.

Unless Uzbekistan intends to fix these problems, it may continue to oppose the Rogun dam. “Unless [Tashkent] solves its irrigation problems in the near future, Rogun will only become an irritant for Uzbekistan’s agriculture - a condition Uzbekistan won’t accept,” argued Aminjonov.

Dying energy sector 

Tajikistan’s desire to go ahead with Rogun is not simply a profit motive, but, some experts argue, a matter of survival — something that could encourage the country to finally make the project a reality. 

Currently, the total capacity of Tajikistan’s hydropower plants amounts to 5,190 MW, but ageing infrastructure makes only 3,600MW of that capacity usable. That, in turn, leads to chronic winter electricity shortages. The Rogun project envisages installing six additional hydropower turbines, with a capacity of 600MW each, that, once fully operational, will put an end to the winter woes.

Supporters of the project also believe it is a vital for the country’s energy security. “Without Rogun, Tajikistan’s hydropower sector will simply die,” Aminjonov had said. 

More immediately, the dam could help solve Tajikistan’s problems with the 2,600MW Nurek hydroelectric plant, the main source of electricity in the country, whose water reservoir is also located along the Vaksh River.

“The water entering the reservoir flows along with various minerals and river clays which clog up the bottom of the reservoir, leading the bottom of the reservoir to grow taller year by year,” according to Aminjonov. In several decades, the reservoir could be incapable of holding water to sustain the plant’s electricity production. 

The Rogun dam would grant Tajikistan the ability to “regulate the flow of water into Nurek’s reservoir, preventing it from filling up with ores and minerals”, as Aminjonov noted. The trouble is, works on the dam would take “16 years in the best-case scenario”. That means, “construction cannot be delayed for another 10 years”, as irreparable damage to Tajikistan’s energy sector would then take place before the dam’s launch.

Political goals 

Another motivation drives the dam’s fate — a political one. The decision to proceed with Rogun’s construction is Tajik President Emomali Rahmon’s attempt at bolstering his waning popularity. Rahmon has significantly trampled his reputation in Tajikistan after in 2015 he banned and persecuted the members of the opposition Islamic Renaissance Party (IRP), a faction with a wide appeal in the Muslim majority country. His image worsened even further when he initiated constitutional amendments in 2016 to make himself president for life.

Launching the dam’s construction could, in theory, improve Rahmon’s standing with the Tajiks, even if the poor country, bereft of its own money to fund it, never pushes past the initial stage of construction.

The IRP was the only major opposition party in Tajikistan until Rahmon’s crackdown on the party in 2015, which eventually led to the imprisonment of many of its members for life. Rahmon’s witchhunt was accompanied by various bans on Islamic customs that alienated the country’s Muslim majority.

Dreaming of exports

In addition to boosting Rahmon domestically, if completed, the Rogun dam could help support Tajikistan’s goal of exporting electricity within the framework of the CASA-1000 project launched in May 2016. It envisages the country, along with neighbouring Kyrgyzstan, supplying their summer electricity surpluses to Pakistan via Afghanistan. 

Tajikistan and Kyrgyzstan have recently announced a tender for the construction of a 500kV 450km-long power transmission line from Khujand in Tajikistan to Datka in Kyrgyzstan under the CASA-1000 plans. The first 125km Tajik segment is set to be financed by the Islamic Development Bank, while the remaining 325km Kyrgyz section will be funded by the World Bank and the European Investment Bank. 

Overall, the CASA-1000 project’s goal is to construct 1,200 kilometres of electricity transmission lines in order to create a four-country electricity transfer system. Under the initial plans, Kyrgyzstan and Tajikistan planned to supply 1000MW of power to Pakistan and 300MW of power to Afghanistan during the summer months, until Afghanistan announced it would simply remain a transit zone for supplying power to Pakistan. 

Again, the question of reliability is a murky subject even in this ambitious project: primarily, the participation of Afghanistan in CASA-1000 automatically makes it a risky venture. Even if Kyrgyzstan and Tajikistan manage to pull through with their segments of the transmission lines, a lot rests on their partners.  

Tajikistan exported 1.3bn kWh of electricity in 2016 and its electricity production grew by 9.1% to 7.736bn kWh in the first half of 2017. If the Central Asian nation manages to stick to its timetable with Rogun, it might meet its 2020 annual electricity exports goal of 3bn kWh.

For all intents and purposes, staying on schedule would be crucial for the small nation of 8.7mn, as Tajikistan is unlikely to receive a second chance if it fails to deliver on its Eurobond.