A. Background

1. Tajikistan is emerging from years of economic instability and civil conflict and is reintegrating into the world and regional economy. The breakdown of economic links after the demise of the Soviet Union, civil unrest, poor governance and macroeconomic management, difficult political relations with neighbors, and overall geopolitical instability in the region—all contributed to the disruption of Tajikistan’s external economic relations in the 1990s. Exports narrowed to a few products, traditional markets were lost, and the payments system was broken. Daily household consumption had to rely to a large extent on humanitarian aid, revenues from small-scale shuttle trade, and remittances sent by a rapidly rising number of Tajik migrant workers employed outside Tajikistan.

2. The economic breakdown was aggravated by Tajikistan’s difficult geographical location. Tajikistan is a triple-locked economy: land-locked with no commercial access to sea, even by river; mountain-locked by one of the world’s highest mountain-mass—the Trans-Alay Range in the north and the Pamirs in the southeast; and distance-locked. These factors result in one of the highest export costs to international markets. Tajikistan borders four countries (Uzbekistan, Afghanistan, China, and the Kyrgyz Republic), but has only one commercially viable railroad and a few poorly maintained highways to the outside world. The longest borders are with Afghanistan, and with Uzbekistan, which is still largely a command economy.

3. Since 2000 Tajikistan has made substantial progress in reestablishing economic relations with its neighboring countries. Traditional channels of cooperation are being normalized with the countries of the former Soviet Union and new links with the partners to the south, in particular, China, Pakistan, and Iran are being established.

B. Cooperation in Trade

4. Tajikistan has been actively promoting regional cooperation by participating in regional organizations, although many of them are still at an incipient stage. In addition to CIS, Tajikistan is a member of four regional organizations:

• The Euro-Asian Economic Community (EAEC, comprising Belarus, Kazakhstan, the Kyrgyz Republic, Russia, and Tajikistan), which aims at creating a customs union by end-2006 and, eventually, a single economic space (Box 1).

• The Shanghai Cooperation Organization (comprising China, Russia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan), which initially focused on regional security, but has approved a program of promotion of trade and investment. Uzbekistan has floated the idea of a Central Asian Common Market.

• The Central Asian Cooperation Organization (comprising Kazakhstan, the Kyrgyz Republic, Russia, Tajikistan, and Uzbekistan), which focuses on developing consortiums for joint projects in hydroelectricity, foodstuffs, and transport.

• The Economic Cooperation Organization (comprising Afghanistan, Azerbaijan, Iran, Kazakhstan, the Kyrgyz Republic, Pakistan, Turkey, Tajikistan, Turkmenistan, and Uzbekistan), which seeks to develop energy infrastructure, trade, transportation, agriculture, and drug control.

External Trade by Regional Group, 2004

Source: Goskomstat of Tajikistan.

External Trade by Regional Group, 2004

		Exports		Imports
		$ mill.	Percent	$ mill.	Percent
Total		915	100.0	1375	100.0
Euro-Asia Economic Community		70	7.7	614	44.7
	Belarus	2	0.2	19	1.4
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Russia	61	6.6	333	24.2
Shanghai Cooperation Organization		140	15.3	821	59.7
	China	6	0.7	57	4.1
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Russia	61	6.6	333	24.2
	Uzbekistan	66	7.2	169	12.3
Central Asian Cooperation Organization		134	14.7	764	55.5
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Russia	61	6.6	333	24.2
	Uzbekistan	66	7.2	169	12.3
Economic Cooperation Organization		258	28.2	619	45.0
	Afghanistan	8	0.8	4	0.3
	Azerbaijan	0	0.0	86	6.3
	Iran	30	3.2	26	1.9
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Pakistan	0	0.0	0	0.0
	Turkey	140	15.3	38	2.8
	Turkmenistan	8	0.8	34	2.4
	Uzbekistan	66	7.2	169	12.3

Source: Goskomstat of Tajikistan.

View Table

External Trade by Regional Group, 2004

		Exports		Imports
		$ mill.	Percent	$ mill.	Percent
Total		915	100.0	1375	100.0
Euro-Asia Economic Community		70	7.7	614	44.7
	Belarus	2	0.2	19	1.4
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Russia	61	6.6	333	24.2
Shanghai Cooperation Organization		140	15.3	821	59.7
	China	6	0.7	57	4.1
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Russia	61	6.6	333	24.2
	Uzbekistan	66	7.2	169	12.3
Central Asian Cooperation Organization		134	14.7	764	55.5
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Russia	61	6.6	333	24.2
	Uzbekistan	66	7.2	169	12.3
Economic Cooperation Organization		258	28.2	619	45.0
	Afghanistan	8	0.8	4	0.3
	Azerbaijan	0	0.0	86	6.3
	Iran	30	3.2	26	1.9
	Kazakhstan	4	0.4	210	15.2
	Kyrgyzstan	4	0.5	53	3.8
	Pakistan	0	0.0	0	0.0
	Turkey	140	15.3	38	2.8
	Turkmenistan	8	0.8	34	2.4
	Uzbekistan	66	7.2	169	12.3

Source: Goskomstat of Tajikistan.

5. Three main factors motivate Tajikistan’s participation in these regional organizations: general formal commercial operations, labor and shuttle trade, and raising Tajikistan’s international profile. First, the main purpose of Tajikistan’s involvement in regional trade initiatives is to reestablish economic linkages with enterprises in Russia, Kazakhstan, and the Kyrgyz Republic, which were lost with the collapse of the Soviet Union. At the same time, opportunities to establish links with major regional economies, such as China, Turkey, and Pakistan, reflect pre-Soviet Union trade and cultural links. Second, with the intensive migration and shuttle trading, travel linkages, in particular with Russia and China, are important channels for private import. Finally, participation in regional groups is seen as contributing to the effort to raise the international profile of Tajikistan by engaging larger countries (Russia, China, and Turkey) in frequent and meaningful policy discussions.

6. The harmonization of trade policies with other members of the EAEC is high on the list of priorities in regional integration. The Agreement on the Establishment of a Customs Union of February 17, 2000, stipulates that the formation of the customs union should be completed in five years, i.e., by February 2005. (Box 1).

7. The EAEC members undertook to coordinate their trade liberalization strategies within the regional and multilateral context. The four EAEC members acceding to the WTO (Belarus, Kazakhstan, Russia, and Tajikistan) undertook to: (a) conduct the WTO accession negotiations individually, while developing and presenting coordinated initial offers on market access; (b) achieve a higher degree of harmonization of national tariffs with the EAEC Basic List, while enhancing its coverage from the current 6,178 to all 11,086 tariff lines; and (c) target the final rates of the common EAEC external tariff at levels below the final tariff rates bound in the WTO, while ensuring adequate protection of the priority sectors of each EAEC member.

8. The harmonization process resulted in some increase in Tajikistan’s external customs tariff. The simple average tariff has increased from 5 to 7.7 percent. The authorities justify the increased level of protection based on three factors: (i) the previous uniform tariff of 5 percent was a temporary measure introduced in 2002 for a year to allow for a smooth transition from an old—and considerably more restrictive tariff system—to a new, less restrictive system; (ii) the need to harmonize Tajikistan’s tariff with that of other members of the EAEC, in accordance with the commitments undertaken under the Agreement on the Establishment of a Customs Union of February 17, 2000, and its basic Harmonized System-based nomenclature; and (iii) the intention to preserve some leverage on tariff reduction in the upcoming negotiations on the WTO accession.

9. Tajikistan is coordinating the EAEC harmonization with its WTO accession, which is at a negotiating stage. The first meeting of the working party on accession took place in March 2004; the second is scheduled for early 2005. Key issues discussed included: the level of tariff protection for the industrial goods; the maximum level of subsidies in agriculture; and the protection of intellectual property. The Tajik authorities intend to coordinate initial offers on market access with the corresponding offers by the Russian Federation and to bind their tariffs in the WTO at rates above their currently applied rates. This would allow the Tajik authorities to increase their applied rates in case of a need without violating their WTO commitments.

C. Attracting Foreign Investment

10. Mobilizing foreign investment for projects of national importance is high on the list of the government’s priorities. Tajikistan is well endowed in rich mineral deposits (gold and other non-ferrous metals, coal, and salt) and water, a scarce resource in the region. Water is an important factor in Tajikistan’s specialization in cotton cultivation and hydropower generation, the latter, in turn, being the basis for aluminum smelting. The government’s investment strategy emphasizes the need for attracting foreign investment in key sectors of comparative advantage, which would help increase employment and productivity, raise exports, and contribute to budget revenue and poverty reduction.

11. Aluminum and energy sectors are the main focus of foreign investment. In October 2004, Tajikistan signed a seven-year $1.6 billion (76 percent of GDP) investment package with Russian interests, which at this point should be considered as an expression of interest (most of this financing is still to be raised). It includes the commitment of the Russian Aluminum holding company to invest in the Rogun hydro power station ($560 million) in 2005–2009, the reconstruction of the TadAZ aluminum smelter ($160 million), and the construction of two new aluminum plants ($600 million) in 2010—2013. The completion of the power stations will help Tajikistan solve protracted pProblems of electricity shortages, enhance aluminum production, and start commercial exports of electricity. These agreements are still preliminary and considerably more details about the projects and their export potential will need to be discussed before the investment could materialize.

12. The agreements on two Sangtuda hydro power stations are closer to the finalization stage, although the modalities of the projects still remain uncertain. RAO EEC has committed to invest $200 million in Sangtuda I during 2005-2009, which will complement a $50 million investment by the Tajik government on behalf of Russia as part of the debt regularization agreement concluded in October 2004. Iran will invest in the construction of the Sangtuda II power station, which will export to Iran and Pakistan.

13. Transport infrastructure is also an important area of regional investment projects. A number of major infrastructure projects are in different phases of development: roads from Dushanbe through the Anzob tunnel to Khujand (estimated cost of $360 million); from Dushanbe to the Chinese border ($290 million); and from Dushanbe to the Kyrgyz Republic ($110 million); as well as roads to the Afghan border and bridges over the Pianj river. Iran is providing co-financing in the form of a $25 million loan and a $10 million grant for the construction of the Anzob tunnel, the project of major economic significance for Tajikistan. The tunnel is viewed as a major economic link for the central and northern parts of Tajikistan, and for Iran, to Kazakhstan and Russia. China provides partial financing for upgrading the road to the Chinese border, which will give Tajikistan access also to Pakistan and India. The United States, together with Norway, will finance the construction of a new transport bridge to Afghanistan. The rehabilitation of roads, in particular to the Kyrgyz Republic, is viewed as an important commercial bypass of Uzbekistan (see Box 2 on roblems related to transit through Uzbekistan).

D. Conclusions

14. Tajikistan has taken substantial steps towards reestablishing regional linkages. Cooperation in the areas of investment and trade has contributed to economic growth, the cementing of political relations with neighbors, and the easing of social tensions. Regional cooperation has helped raise Tajikistan’s profile in the world by promoting private sector development, learning from the experience of others, and facilitating the transition to a market economy. However, the cumbersome transit through Uzbekistan and numerous procedural requirements in Russia and other EAEC countries still need to be addressed on a bilateral and regional basis.