Clare Nuttall in Almaty -

The Tajik Aluminium Company fraud case that opened at London's High Court on October 27 is set to expose dealings between Tajikistan's top government officials and businesspeople, not to mention running up one of the biggest bills in UK legal history.

The case brought by the company commonly referred to as Talco concerns allegations of bribery and corruption against the former manager Abdukadir Ermatov and his former business partner Azar Nazarov. Talco claims Nazarov and his Guernsey-based holding company Ansol siphoned off more than $500m in profits from Talco between 1996 and 2004.

Although Tajikistan produces no aluminium ore, one of the world's largest aluminium smelters was opened near Dushanbe in 1975. As the country's largest industrial asset by far, the Talco case has unsurprisingly drawn in top Tajik businesspeople and government officials as high up as President Emomali Rakhmon.

Nazarov has denied the claims and brought a rival case against Talco, claiming the company owes him over $130m. In the first week of hearings, Brian Doctor (Queen's Counsel), representing Nazarov, told the court that the accusations were brought to distract attention from the claimants' own fraud. Doctor said that Ermatov and Nazarov were ousted by "shady" individuals with ties to the Tajik government, and that control of the plant was transferred to CDH Investments, an offshore company controlled by several prominent Tajik figures including President Rakhmon.

A statement from Talco to The Times in response to the allegations said that, "The defendants' allegations of fraud involving the President are a smokescreen and utterly false." In a separate case brought in the British Virgin Islands, Talco has also accused Russian oligarch Oleg Deripaska's Rusal - a former joint venture partner of Ansol - of involvement. However, Talco failed to include Rusal in the London case.

Further controversy surrounds the legal fees, which will total around £90m. Earlier this year, it was disclosed to the court that Herbert Smith, representing Talco, is expected to spend around £55m by the end of the trial, while Clyde & Co, which is acting for Nazarov could spend £22m. Other law firms involved in the case are expected to contribute an additional £10m in legal bills.

This would make Tajik Aluminium Plant vs. Abdukadir Ganievich Ermatov one of the three most expensive commercial cases ever tried in the UK, costing around 5% of Tajikistan's GDP. After this was disclosed, a senior judge, Sir Anthony Clarke, ordered an inquiry into legal fees because of concerns they will damage the reputation of the British court system. It has also not gone unnoticed that the £750 hourly legal fees of top London lawyers are close to GDP per capita in Tajikistan, highlighting the wretched state of the CIS's poorest country.

Cold snap

After several years of growth, the 2007-08 winter, during which temperatures regularly plunged as low as -20ºC, was a serious setback to Tajikistan's fragile economy. It also highlighted the government's inability to provide even such basics as food and fuel. Food shortages led to inflation on many foodstuffs reaching between 20-30%. Energy was also in short supply. With many rivers frozen, hydropower generation was well below normal winter levels and natural gas imports from Uzbekistan were frequently halted when the state energy company Barqi Tojik failed to pay its bills. Even in the capital Dushanbe, electricity was limited to just a few hours a day, with the rest of the country faring much worse. "During the winter, the government was having trouble keeping the lights on - literally," says Jeff Erlich, president of the Eurasia Foundation for Central Asia.

As winter approaches again, fears of another crisis are growing. Droughts and locust infestations in parts of the country have resulted in a poor harvest - just 700,000 tonnes, well below the 1.2m tonnes needed for domestic consumption. Kazakhstan, Tajikistan's largest source of grain imports, also had a relatively small harvest this year. In response to this, President Rakhmon has already announced measures to ensure food security - and prevent potential unrest as a result. Having held the country together for a decade, the Tajik strongman faces increasing dissatisfaction over living conditions. This summer even saw several protests in his hometown of Kulob.

Despite these difficulties, Tajikistan has demonstrated robust growth since 2000. GDP increased by a respectable 7.8% in 2007, even though the country's two core sectors - cotton and aluminium - performed badly. Aluminium output grew by just 1.5% due to power shortages, while a lack of agricultural reform has led to declining cotton revenues. In 2007, production fell by 4%, due to a decrease in both productivity and the planted area. By contrast, almost all industrial sectors of the economy saw double-digit growth. Food processing - which given priority access to electricity - textiles and construction materials have performed particularly strongly.

Foreign direct investment has also been on the rise in recent years. According to data from the Tajik government, FDI reached $860m in 2007, with the majority directed at large-scale infrastructure projects; Chinese investments in telecommunications projects and the construction of the Sangtuda-1 hydroelectric power station accounted for around half of last year's inflows. In the long term, the government is pinning its hopes on hydropower. It hopes to become an exporter of electricity to countries such as Afghanistan and Pakistan, although observers say it will take 20 years before Tajikistan has adequate infrastructure to achieve this.

Landmark deal

In June, Tethys Petroleum signed a production sharing agreement (PSA) with the Tajik government to develop five confirmed gas fields in southern Tajikistan, estimated to contain around 1.5 trillion cubic metres of gas. The area covered by the agreement comprises almost the entire Tajik part of the Afghan-Tajik basin, an extension of the Amu Darya basin which contains giant gas fields in Turkmenistan and Uzbekistan.

The deal is highly significant because it is the first ever PSA signed in Tajikistan. Tethys, in a statement released after the deal was signed, said it had "created history." The deal was closed after many months of close collaboration between Tethys and the Tajik government. "Our patience, and close work with the government of Tajikistan, has resulted in obtaining the rights to a much larger area than was first discussed," Tethys' chief executive officer David Robson said after the signing. If successful, other agreements on the same model could well be signed.

Small business activity and investments in business infrastructure have also been increasing. The controversial move of suspending inspections of small businesses for the next two years is intended to give small and medium-sized enterprises space to grow.

Dushanbe is also set to get its first five-star hotel when the Hyatt Regency Dushanbe opens in 2009. Located in the city centre near Lake Komsomol, the hotel is being built by a local Tajik company. Erlich describes the plans as "a good jump forward." He adds that, "A new business centre has also opened there with some decent offices. This may not sound very significant, but two years ago everyone was working from their apartments. It's a sign of progress."

Obstacle course

However, progress is slow because even outside times of crisis, Tajikistan's decrepit infrastructure is an obstacle to investment.

People working in Tajikistan say that even in the capital, power outages are a daily event, water quality is poor and other public services are equally miserable. Expatriates try to rent property on the same power and water lines that serve the presidential palace. "Even there power cuts happen every day and when the electricity is on, it's 'brown', it spikes and dims, which wears computers and other equipment out quickly. The water from the taps is brown too," says one NGO worker after spending 18 months in Dushanbe. "The importance of electricity supply cannot be overestimated."

The business environment can be equally inhospitable. By any measure, doing business in Tajikistan is a considerable challenge. "Problems range from Tajikistan's isolated location to dealing with bureaucracy. It's a challenging place to do business," says Wendy Werner, project manager at the Wold Bank's IFC in Tajikistan.

Tajikistan is the 151st least-corrupt country out of 180 countries measured by the anti-graft NGO Transparency International. On the World Economic Forum's latest Global Competitiveness Report, it was 116th out of 137 countries. The WEF identifies tax rates - among the highest in the world - as the most problematic factor for doing business, followed by corruption, tax regulations, an inadequately educated workforce and inflation.

One positive note is that the low level of development means that for the boldest investors, there are opportunities everywhere. "The main attraction is that there are so many opportunities because there is so much to be done," says Erlich. "Tajikistan is a small market but an almost untapped one. There are opportunities in hundreds of areas." The question is, who will be brave enough to take them on.

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