The Caucasus and Central Asian Republics at the Turn of the Twenty-First Century: A guide to the economies in transition (Routledge Studies of Societies in Transition)

The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century Following the highly successful Economies in Transition: A guide to China, Cuba, Mongolia, North Korea and Vietnam at the Turn of the Twenty-first Century (published in the Routledge Studies in Development Economics series), Eastern Europe at the Turn of the Twenty-first Century: A guide to the economies in transition and The Former Yugoslavia at the Turn of the Twenty-first Century: A guide to the economies in transition, this book is the first of two which focus on economic and political events in the countries of the former Soviet Union. The author presents a clear, detailed and accessible breakdown of the developments in the Caucasus (Armenia, Azerbaijan and Georgia) and the Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. This book provides a unique level of coverage of economic and political events of global significance, including foreign trade, foreign direct investment, the impact of oil and natural gas finds, Islamic extremism, the 11 September 2001 terrorist attacks on the United States and the reaction of the CIS countries and the war on international terrorism. It will provide an invaluable source of reference for all those interested in transitional and developing countries. The fifth volume in this sequence, The Countries of the Former Soviet Union at the Turn of the Twenty-first Century: The Baltic and European states in transition, which focuses on economic and political events in Russia, the Ukraine, Belarus, Moldova and the Baltic States, will be published by Routledge in 2003. Ian Jeffries is Member of the Centre of Russian and East European Studies at the University of Wales.

Routledge Studies of Societies in Transition 1 The Economics of Soviet Break-up Bert van Selm 2 Institutional Barriers to Economic Development Poland’s Incomplete Transition Edited by Jan Winiecki 3 The Polish Solidarity Movement Revolution, Democracy and Natural Rights Arista Maria Cirtautas 4 Surviving Post-Socialism Local Strategies and Regional Response in Eastern Europe and the Former Soviet Union Edited by Sue Bridger and Frances Pine 5 Land Reform in the Former Soviet Union and Eastern Europe Edited by Stephen Wegren 6 Financial Reforms in Eastern Europe A Policy Model for Poland Kanhaya L.Gupta and Robert Lensink 7 The Political Economy of Transition Opportunities and Limits of Transformation Jozef van Brabant 8 Privatizing the Land Rural Political Economy in Post-Communist Socialist Societies Edited by Ivan Szelenyi

9 Ukraine State and Nation Building Taras Kuzio 10 Green Post-Communism? Environmental Aid, Innovation and Evolutionary Political Economics Mikael Sandberg 11 Organisational Change in Post-Communist Europe Management and Transformation in the Czech Republic Ed Clark and Anna Soulsby 12 Politics and Society in Poland Frances Millard 13 Experimenting with Democracy Regime Change in the Balkans Geoffrey Pridham and Tom Gallagher 14 Poverty in Transition Economies Edited by Sandra Hutton and Gerry Redmond 15 Work, Employment and Transition Restructuring Livelihoods in Post-Communism Edited by Al Rainnie, Adrian Smith and Adam Swain 16 Environmental Problems of East Central Europe: 2nd edition Edited by F.W.Carter and David Turnock 17 Transition Economies and Foreign Trade Jan Winiecki 18 Identity and Freedom Mapping Nationalism and Social Criticism in Twentieth Century Lithuania Leonidas Donskis 19 Eastern Europe at the Turn of the Twenty-First Century A Guide to the Economies in Transition Ian Jeffries 20 Social Capital and the Transition to Democracy Edited by Gabriel Badescu and Eric M. Uslaner 21 The Former Yugoslavia at the Turn of the Twenty-first Century

A Guide to the Economies in Transition Ian Jeffries 22 The Former Soviet Union at the Turn of the Twenty-first Century The European and Baltic States in Transition Ian Jeffries 23 Federalism and the Dictatorship of Power in Russia Mikhail Stoliarov 24 Elites and Democratic Development in Russia Edited by Anton Steen and Vladimir Gel’man 25 The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century A Guide to the Economies in Transition Ian Jeffries

Of the few authors sufficiently knowledgeable to write on all the thirtyplus countries moving from central planning to the market, Ian Jeffries is outstanding. This sequence of books, ranging from front-rank EU candidates to barely changed Cuba and North Korea, promises to be a ‘must buy’ for any university library Professor Michael Kaser (Universities of Birmingham and Oxford)

This massive volume [The Former Yugoslavia at the Turn of the Twenty-first Century: A guide to the economies in transition]…as a reference work…will prove useful to anyone working on ‘postYugoslav’ topics… This volume… should find a place in every university library. Sabrina P.Ramet, Europe-Asia Studies, 2003, vol. 55, no. 2, pp. 329– 30)

The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century A guide to the economies in transition

Ian Jeffries

LONDON AND NEW YORK

First published 2003 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge's collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2003 Ian Jeffries All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been applied for ISBN 0-203-35847-3 Master e-book ISBN

ISBN 0-203-41539-6 (Adobe eReader Format) ISBN 0-415-32592-7 (Print Edition)

Contents

List of tables Acknowledgements

ix x

Introduction and overview

1

PART I The Caucasus: Armenia, Azerbaijan and Georgia 1 Armenia 2 Azerbaijan 3 Georgia PART II The Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan 4 5 6 7 8

52 54 83 110 163

Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan

165 214 250 285 313

Bibliography Index

353 364

Tables

1.1 2.1 3.1 4.1 5.1 6.1 7.1 8.1

Armenia: selected economic indicators 1995–2002 Azerbaijan: selected economic indicators 1995–2002 Georgia: selected economic indicators 1995–2002 Kazakhstan: selected economic indicators 1995–2002 Kyrgyzstan: selected economic indicators 1995–2002 Tajikistan: selected economic indicators 1995–2002 Turkmenistan: selected economic indicators 1995–2002 Uzbekistan: selected economic indicators 1995–2002

79 107 157 203 246 280 309 341

Acknowledgements The mammoth task of keeping up to date with rapidly changing economic and political events in thirty-five countries would not have been possible without the help of a magnificent library staff, the secretaries at the Department of Economics (Siân Brown, Frances Jackson, Jaynie Lewis and Mary Perman) and the portering/cleaning staff in general. Individuals deserving of particular mention are the following (in alphabetical order): Gwen Bailey (Library); Michele Davies (Library); Simon Davies (Library); Dianne Evans (Library); Barry Howells (Library); Chris Hunt (Library); Ray Jones (Library); Nigel O’Leary (Economics); Lis Parcell (Library); Ann Preece (Library); Paul Reynolds (Library); Kathy Sivertsen (Library); Syed Hamzah bin Syed Hussin (Library); Clive Towse (Library); Ray Watts (Library); Chris West (Library). The earliest possible access to quality newspapers and magazines has, as always, been ensured by the excellent Kays Newsagency, owned and managed by Russell Davies. Professor Michael Kaser and Professor Paul Hare have continually provided external support and encouragement. Armenia Economic Trends, Azerbaijan Economic Trends, Belarus Economic Trends, Georgia Economic Trends, Kazakhstan Economic Trends, Moldovan Economic Trends, Ukrainian Economic Trends and Uzbekistan Economic Trends are invaluable sources of information which have been provided free of charge. My thanks to all those involved in producing and sending them. The staff at Routledge have, as always, provided support of the highest degree and professionalism of the highest standard. My thanks in particular (in alphabetical order) go to Yeliz Ali, Simon Bailey, Amrit Bangard, Oliver Escritt, Tessa Herbert, Alan Jarvis, Liz Jones, Peggy Starling, Alfred Symons, Annabel Watson and James Whiting. Ian Jeffries Centre of Russian and East European Studies University of Wales

Introduction and overview A Guide to the Socialist Economies was published in 1990. Covering fourteen communist countries (accounting, in mid-1988, for 1.6 billion out of a world population of 5.1 billion), the final amendments to the book had been made in early October 1989. The book was fortunate to receive some very generous comments: Jeffries has produced a useful reference guide that will doubtless become a standard in the field and a valuable addition to academic libraries. (Journal of Comparative Economics, 1991, no. 15) The book is a very welcome addition to the library of publications on the socialist world… It is more than a textbook—it is also a reference book and a guide… Jeffries covers a vast area… It is a truly formidable task to catch up with all the changes that are taking place in these countries and the author does it with great success. (International Affairs, 1990, vol. 66, no. 3) In late 1989 communism collapsed in Eastern Europe, followed in late 1991 by the disintegration of the Soviet Union (the largest country in the world by area, covering a sixth of the world’s land area excluding Antarctica, and then a ‘superpower’ able to challenge the USA in terms of military capacity). Yugoslavia also disintegrated, and in a generally very bloody fashion. Academics like myself who had invested a lifetime in studying the communist countries saw their intellectual capital mostly vanish overnight. The effort of trying to comprehend profound changes, in many ways unique events and the multiplication of countries (as well as the disappearance of the GDR into a reunified Germany!) has been staggering. My first stab at covering what became known as the transitional economies came in 1993 with the publication of Socialist Economies and the Transition to the Market: A Guide, which includes analyses of the basic features of command economies and the general issues involved in the transition to a market economy plus chapters on the original fourteen communist countries before 1989 and their individual experiences after 1989 (including the disintegration of the Soviet Union and Yugoslavia). While most countries opted for the market economy and political democracy, Cuba (initially) and North Korea retained the essential features of the traditional communist economic and political system. China, in contrast, adopted gradual and partial economic reform. Vietnam took note of the Chinese model, although there were speedier elements. Both China and Vietnam, however, remained firmly in the grip of the communist party Some of the more generous comments on the book were as follows: This weighty tome can be unreservedly commended… Students and their

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teachers can learn a great deal from this book… Excellent! Ian Jeffries has done us all a service. (Europe-Asia Studies, 1993, vol. 45, no. 6) This hefty and well documented volume on socialist economies and the transition to the market is both useful and timely… Despite its shortcomings the book is strongly recommended to general readers, teachers and students. (Journal of Contemporary Asia, July 1995) A personal tour de force by Ian Jeffries. (Economics of Transition, 1994, vol. 2, no. 2) This book will serve as a valuable source of information for anyone with an interest (academic, business or otherwise) in the area. Simply brilliant. (Paul Nunn, Manchester Metropolitan University, Routledge Catalogue) A Guide to the Economies in Transition was published in 1996. Basically a companion volume to (as opposed to a revised edition of) Socialist Economies and the Transition to the Market: A Guide, it covers the period up to the mid-1990s. I am not an economic theorist, but the volume includes an overview of the main issues in the transition from command planning to the market (including ‘big bang’/‘shock therapy’ versus gradualism, China as an economic model and privatization). Although I am mostly interested in how economic and political systems actually change, I discuss the basic economic performance of individual countries. Since I am not an econometrician I simply provide readers with an idea both of broad economic magnitudes and of the difficulties of obtaining meaningful data during the transition. The other chapters are devoted to the major political and economic events in thirty-five countries (including the reunification of East and West Germany): the now fifteen independent countries of the former Soviet Union, the countries of Eastern Europe (broadly defined) and the non-European countries (China, Cuba. Mongolia, North Korea and Vietnam). I am increasing convinced of the artificiality of separating economics and politics. For example, the privatization programmes chosen may be profoundly affected by political factors such as the strength of the central government and whether or not to seek foreign debt forgiveness. I am not a political scientist and I am unable to interrelate the two disciplines to a desirable degree. Instead, I do attempt to do two things: (1) provide a basic guide to understanding how all the ‘bits’ fit together; and (2) present a richly endowed ‘quarry’ of up-to-date economic and political information (often presented chronologically where appropriate) to allow the reader to dig out any desired facts and figures. This is not (and is not meant to be) original research but a broad-brush painting of the overall economic and political picture. I make use of a range of secondary sources in English (necessary, given the large number of languages involved). Apart from journals and books, the sources include the following: 1 Reports such as the European Bank for Reconstruction and Development’s (EBRD’s)

Introduction and overview

3

Transition Report, the United Nations’ World Economic and Social Survey, the United Nations Economic Commission for Europe’s Economic Survey of Europe, the United Nations Economic and Social Commission for Asia and the Pacific’s Economic and Social Survey of Asia and the Pacific, the World Bank’s Transition, the IMF’s World Economic Survey and the OECD’s Economic Outlook. 2 Quality newspapers such as the International Herald Tribune (IHT), Financial Times (FT), The Times, the Guardian, the Independent, the Telegraph and the Baltic Times. 3 Weeklies such as The Economist and the Far Eastern Economic Review (FEER). 4 Quarterlies/monthlies/fortnightlies such as Business Central Europe, Eastern Europe (EEN, formerly Eastern Europe Newsletter), The World Today, Asian Survey, Current Digest of the Post-Soviet Press (CDSP, before 5 February 1992 known as Current Digest of the Soviet Press), Transition, Finance and Development, Armenia Economic Trends (ARET), Azerbaijan Economic Trends (AET), Belarus Economic Trends (BET), Georgia Economic Trends (GET), Kazakhstan Economic Trends (KET), Moldovan Economic Trends (MET), Russian Economic Trends (RET), Ukrainian Economic Trends (UET) and Uzbekistan Economic Trends (UZET). A review in the Times Higher Education Supplement (29 October 1993) kindly referred to my ‘meticulous referencing’, even though detailed referencing has the potential to be tiresome to readers. But since this is not original research and I am deeply indebted to many sources, I feel it necessary to make every effort to acknowledge the material used. It is not always feasible to name the correspondents or contributors, but I try, as far as possible, to ensure that credit goes where it is due. Partly for this reason and partly for accuracy I make extensive use of quotations, although where these include commonly quoted sayings or speeches I leave out specific sources. My task in these five companion volumes was to cover mainly the period from the mid1990s up to the turn of the century. I once naively thought that things would ‘settle down’ and that the follow-up volume (in the singular!) would be smaller than the 1996 one. Far from ‘settling down’ the amount of economic and political material to be processed has expanded almost exponentially! Routledge has kindly supported me in the gargantuan task of writing five separate volumes: 1 A Guide to the Economies in Transition: China, Cuba, Mongolia, North Korea and Vietnam at the Turn of the Twenty-first Century This was published in June 2001. The rationale for a separate volume was significantly enhanced by China, North Korea and Cuba on occasion being at the centre of world attention. China’s rapid economic progress has aroused considerable interest worldwide in China as an economic model of gradualism. China is increasingly participating in globalization (witness events such as its prospective entry into the WTO). Its economic progress has enormous implications in terms of international affairs. Hong Kong and Macao have been reclaimed but relations with Taiwan remain edgy. China’s human rights record is often the cause of friction, especially with the USA. The June 2000 summit between the leaders of North and South Korea turned out to be a dramatic event after decades of bitter division. The Elian Gonzalez case and the actions of his Miami relatives had important implications for US policy towards Cuba. Mongolia continues to provide a fascinating study case of continued commitment to market-orientated economic reform despite political squabbling and changes of government. Vietnam’s attitude to economic

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reform has fluctuated. The Asian financial crisis, for instance, dampened enthusiasm. But in July 2000 the trade agreement with the USA was signed after a year’s delay and greater encouragement has been given to the private sector and foreign direct investment. 2 Eastern Europe at the Turn of the Twenty-first Century: A Guide to the Economies in Transition This was published in February 2002. Part I covers economic and political developments in Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. Part II deals with general issues, relating to topics such as ‘big bang’/‘shock therapy’ and privatization. These issues are best analysed in this volume, e.g. Poland in 1990 was the first country to adopt ‘big bang’/‘shock therapy’. The major issues relating to German reunification had already been dealt with in the 1993 and 1996 volumes. The only thing I thought worth including in this volume was privatization in the eastern part of Germany as a revealing case study in privatization. 3 The Former Yugoslavia at the Turn of the Twenty-first Century: A Guide to the Economies in Transition This massive volume…as a reference work…will prove useful to anyone working on ‘post-Yugoslav’ topics… This volume…should find a place in every university library. Sabrina P.Ramet, Europe-Asia Studies, 2003, vol. 55, no. 2, pp. 329–30) This volume was published in May 2002. The countries covered in this volume are Bosnia-Hercegovina, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia and the Federal Republic of Yugoslavia (Serbia and Montenegro). The West intervened militarily to protect Moslems in Bosnia and in Kosovo, and international military and civilian involvement for the foreseeable future is proving critical in maintaining the peace and rebuilding economies and political structures. The terrible events of 11 September 2001, when terrorists attacked targets in New York and Washington, showed the dangers of allowing states like Afghanistan to fail. International terrorists were given sanctuary by the Moslem fundamentalist Taleban regime. There has been a profound change in the attitude of the administration of President George W.Bush towards US involvement in those countries of the former Yugoslavia affected by ethnic strife. The new president, inaugurated in January 2001, was initially very cool about the involvement of US troops. The Bush administration now sees the vital importance of the United States maintaining a presence (albeit much reduced) in the more unstable parts of the former Yugoslavia. 4 and 5 It was originally intended to include all fifteen countries of the former Soviet Union in one volume. But in order to pay sufficient attention to events of global significance it was decided to publish two separate volumes: The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century: A Guide to the Economies in Transition and The Former Soviet Union at the Turn of the Twentyfirst Century: The Baltic and European States in Transition. The stance taken by all the countries of the former Soviet Union towards the US-led war in Iraq in 2003 will be dealt with in the latter volume.

Introduction and overview

5

Armenia: a summary OSCE is not entirely satisfied with the way elections have been run in Armenia. Corruption is a major problem. Large numbers of people have left the country. A census carried out in autumn 2001 revealed that between 1991 and 2001 Armenia’s population fell from 3.7 million to 3.0 million… The figures suggest that as many as 900,000 people, or a quarter of the population, may have left the country since independence. The majority of emigrants are young and educated. (EBRD 2002b:115) Political life in Armenia is still dominated by issue of Nagorno-Karabakh even though a ceasefire has held since 1994. This is an important factor in explaining Armenia’s relatively good relations with Russia. Azerbaijan, in contrast, has relatively poor relations with Russia. There are signs of progress over Nagorno-Karabakh. Nevertheless, the economic blockade imposed by Azerbaijan and Turkey in 1992 continues to impede Armenia’s economic progress. On 3 February 1998 President Ter-Petrossian resigned, having made too many concessions to secure a deal over Nagorno-Karabakh. Robert Kocharyan is the former president of Nagorno-Karabakh. He became prime minister of Armenia on 20 March 1997 and then president (of Armenia) on 30 March 1998. On 27 October 1999 five gunmen opened fire in parliament and killed eight people, including the prime minister and the speaker, only hours after the US deputy secretary of state Strobe Talbott had left Yerevan after talks with the president about NagornoKarabakh. The gunmen said they were protesting about poverty, corruption and the lack of properly run elections. On 2 May 2000 President Kocharyan dismissed prime minister Aram Sarkisyan and defence minister Vagharshak Harutyunyan, claiming intrigues against him, their inability to work with the president and the consequent ‘snowballing’ of economic problems. Armenia is supportive of the United States over the issue of international terrorism. GDP growth resumed in 1994, 5.4 per cent compared with –8.8 per cent in 1993 and – 41.86 per cent in 1992 (EBRD 2001a:15). The Russian financial crisis was a major factor in causing growth in 1999 to be much lower than in the previous year. A strong performance was registered in 2000, 2001 and 2002. GDP in 2001 was an estimated 74 per cent of the 1989 level (EBRD 2002b:58). One factor explaining continued positive growth was the declining importance of trade with Russia (and the CIS as a whole) and the increasing importance of trade with the EU. Hyperinflation existed in the period 1992 to 1994. Inflation fell dramatically to 176 per cent in 1995 from 4,962 per cent in 1994 (ARET figures). Inflation was in single figures by 1998 and was not a problem thereafter. As regards privatization, a voucher scheme operated in the period from October 1994 to December 1998. Insiders dominated. Since then sales has been the keynote, including international tenders to attract strategic investors. In 1998 Armenia experienced some difficulty in selling enterprises at the first and even at the second attempt. Although the pace of privatization slowed in 1999, the aim (not achieved) was essentially to conclude

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privatization by end of 2000. In 2000 the government aims to complete the bulk of privatization of enterprises (included in the 1998–2000 privatization programme)… At the end of last year [1999] the government adopted a decree…[relating to] the privatization of 497 state-run enterprises… In addition to that, the government classified seventyfive enterprises of ‘strategic importance’. These enterprises represent various sectors…diamond and gold processing, mining, trade, energy and cargo transportation. It is expected that most of these enterprises will be privatized through competitive tenders… From the beginning of the privatization process to the end of March 2000, 1,527 medium-sized and large-scale enterprises (75 per cent of the total estimated stock) and 6,817 ‘small’ entities (83 per cent of the total estimated stock) had been privatized. (ARET, Quarterly Issue, January–March 2000, p. 64) At the end of April 2000 the National Assembly voted to block the privatization of four electricity distribution companies. ‘The main reason given for the decision was that the energy sector is of strategic importance to the country and its privatization could seriously affect national security’ (ARET, Quarterly Issue, January–March 2000, p. 64). ‘Companies that cannot be sold in three attempts are now liquidated’ (EBRD 2000b:130). ‘Privatization advances despite political divisions and reluctant investors’ (EBRD 2001b:110). The government is finding it increasingly difficult to attract high quality investors to the remaining state-owned enterprises…With the recent sale of the Savings Bank, all banks are now under private control’ (EBRD 2002a:40). The final stage of the Armenian privatization programme, approved in 2001, foresees the sale (or liquidation) of more than 900 enterprises, practically the entire portfolio of remaining state-owned enterprises, over a period of three years. Implementation of the programme is moving ahead slowly … With little interest being shown from large Western sponsors most firms have been sold to Russian investors or entrepreneurs connected with the diaspora… Privatization has mostly led to a consolidation of control by incumbent managers, with little injection of new capital and know-how. (EBRD 2002b:114–15) Armenia has begun to swap Russian debt with shares in Armenian enterprises. The privatization of agricultural land was rapid. But farms are very small on average and there is a lack of finance and of support services. The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was 70 per cent (EBRD 1999b:24, 188; and 2002b:20, 116). Armenia has a relatively liberal foreign trade regime. The conditions of Article 8 of the IMF were accepted in 1997. There is a managed floating exchange rate system. ‘The WTO general council yesterday [10 December 2002] approved membership terms for Armenia, which will join six former Soviet republics in the WTO’ (FT, 11

Introduction and overview

7

December 2002, p. 15). The foreign investment regime is liberal and there are no restrictions on foreigners repatriating profits (EBRD 1997b:150–1). But the volume of foreign direct investment is very small. Azerbaijan: a summary Azerbaijan is dominated by President Gaidar Aliev politically and by oil (and to a lesser extent natural gas) from the economic point of view. The dispute with Iran over oil exploration in the Caspian Sea is a particular hindrance to Azerbaijan’s progress in that area, although a start was made on the Baku-Ceyhan (Turkey) oil pipeline in September 2002. Large numbers of people have left the country. President Aliev has brought order to Azerbaijan and has adopted a strongly proWestern stance, in part a reaction to Russia’s friendly relations with Armenia. But relations with Russia have improved since Vladimir Putin became president, e.g. on 25 January 2002 agreement was reached on Russia leasing the Gabala radar station and on 23 September 2002 the two presidents signed an agreement demarcating adjacent sections of the Caspian Sea bed. There are no Russian military bases in Azerbaijan. In January [2002] Baku and Moscow succeeded in resolving their longstanding dispute over the Gabala radar station—the only Russian military installation on Azerbaijani territory… Azerbaijan is the only country in the South Caucasus in which there is no foreign military presence. But the agreement signed by Baku and Moscow changes that situation somewhat. (Nezavisimaya Gazeta, 11 March 2002, p. 9: CDSP, 2002, vol. 54, no. 10, pp. 14–15) Negative features include authoritarian traits, corruption and cronyism. OSCE has long expressed concern about the way general and presidential elections have been held. Aliev was a member of the Soviet politburo, accepted the post of chairman of parliament on 15 June 1993, became acting head of state on 18 June 1993 and accepted the power bestowed on him by parliament on 24 June 1993. He has won presidential elections (the first on 3 October 1993) by large majorities. In January 2002 twenty-six opposition parties decided to coordinate their efforts to oppose Aliev and demonstrations demanding his resignation began the following month. A controversial referendum on changes to the constitution was held in August 2002. Critics claimed that there was widespread fraud in polling and that the aim of the referendum was to ensure Aliev’s son as his successor. It took until May 1994 for a ceasefire in the war over Nagorno-Karabakh. The enclave is dominated by ethnic Armenians, who have also occupied swathes of adjacent land. (Armenia occupies almost 20 per cent of Azerbaijani territory, including areas outside Nagorno-Karabakh. There are almost a million Azeri refugees and displaced persons as a result of the conflict: IHT, Survey, 5 June 2000, p. 12.) The issue is still not resolved but there are signs of progress. (The USA has banned aid since 1992, when Azerbaijan imposed an economic blockade on Armenia: IHT, 3 March 2000, p. 15. The US Freedom

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Support Act restricts US trade and investment in Azerbaijan: IHT, Survey, 5 June 2000, p. 12.) Azerbaijan is supportive of the United States over the issue of international terrorism. GDP growth turned positive in 1996 after a string of negative double-figure rates (– 22.7 per cent in 1992, –23.1 per cent in 1993, –19.7 per cent in 1994 and –11.8 per cent in 1995: AZET, Quarterly Issue, April–June 1999, Annex. 8.1). Within the CIS developments in 1999 were dominated first by the Russian crisis, then by the unexpected strength of recovery in Russia and the rise of many commodity prices… The best placed have been countries with large natural resource sectors… Azerbaijan’s growth of 7.4 per cent in 1999 was mainly due to a 20 per cent increase in oil production and the marked upturn in oil prices. (EBRD 2000a:5) The rate of growth of GDP in 2000 was an estimated 11.1 per cent. The level of output in 2001 was still only an estimated 62 per cent of the 1989 level (EBRD 2002b:58, 121). Another strong growth performance was registered in 2002. There was hyperinflation in the period 1992 to 1994 (912.3 per cent in 1992, 1,129 per cent in 1993 and 1,664 per cent in 1994: AZET, Quarterly Issue, April–June 1999, Annex. 8.1). A stabilization policy introduced in 1995 has reduced inflation dramatically since 1996. The general (consumer) price level actually fell in 1998 and 1999 and the inflation rate was very low thereafter. Oil dominates the economy. Although the anticipated oil bonanza has not materialized, there have been encouraging natural gas finds. These sectors have attracted the lion’s share of foreign direct investment. Small privatization is almost complete. (‘Approximately 99 per cent of privatized small enterprises and sites were purchased by their workers’ collectives on preferential terms’: AZET, Quarterly Issue, January–March 2000, p. 106.) But large privatization has been very slow. Parliament did not even approve the privatization programme until July 1995, involving a combination of vouchers (with insiders given concessions) and sales. Foreigners are allowed to participate in the programme. The first voucher auctions took place in May 1997. The president has a substantial influence over the selection of important enterprises to be privatized via auctions and (since the September 1998 legislation) tenders, strategic investors being sought. Voucher privatization has been stalled for over a year and a new programme for large-scale privatization, stressing cash sales of strategic enterprises, has still not been passed by parliament. The vouchers are due to expire in August 2000, with only 10 per cent redeemed as of the end of 1999. The establishment of effective corporate governance mechanisms remains a major challenge. (EBRD 2000a:40) In September 1998 a new phase of case-by-case privatization began with the adoption of competitive tenders. However, by the end of the first quarter of

Introduction and overview

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2000 only five companies had been privatized through this mechanism… A new privatization was adopted in May 2000 and is complemented by a new privatization programme (implementing regulations) which has recently been approved by the president… The previously issued vouchers and options (the majority held by foreigners) have been extended beyond their 2000 expiry date. (EBRD 2000b:134) ‘Privatization has moved forward under a new law… Power and gas continue to be used to bolster the competitiveness of industry, while utilities are subsidized by low-cost energy inputs’ (EBRD 2001a:48). While small-scale privatization is nearly complete, privatization of larger enterprises has lagged behind. Following the adoption of the second privatization programme in August 2000, thirty-nine cash and twelve voucher auctions had been held by the first quarter of 2001… In addition, since case-bycase privatization began in late 1998 ten companies have been privatized through competitive tenders. (EBRD 2001b:114) ‘By the end of 2001 the authorities had made substantial progress in small-scale privatization… The corporatization and privatization of medium-sized companies has also advanced, but the privatization of large-scale companies remains slow’ (EBRD 2002b:118–19). The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2000 the figure was 45 per cent (EBRD 1999b:24, 192; and 2000b:14, 136). In mid-2001 the figure was 60 per cent (EBRD 2002b: 20). Current account convertibility is practised, although the IMF’s Article 8 has not been formally accepted. There is a managed floating exchange rate system. But there has been less intervention in the foreign exchange market to support the manat since the July 1999 devaluation. Azerbaijan has largely liberalized its trade and foreign exchange regime, without any backtracking… A more flexible exchange rate regime has been adopted’ (EBRD 2000b:134). ‘Azerbaijan’s exchange rate is liberal and the authorities are expected to accept the obligations of Article 8 of the IMF’s Articles of Agreement’ (EBRD 2001b:114). There has been a marked shift in foreign trade away from CIS countries (among which Russia is especially important) towards the EU in particular. ‘[The] privatization of agricultural land and issuance of land titles are nearly complete’ (EBRD 2000b:134). The share of peasant farms in agricultural land increased from 0.1 per cent in 1992 to 3.6 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 38 per cent in 1991 to 97 per cent in 1999 (p. 890).

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Georgia: a summary Eduard Shevardnadze, who was elected president on 5 November 1995 (and reelected on 9 April 2000), has been the key to relative stability in Georgia. He has survived a number of assassination attempts. Discontent about poor economic conditions led some soldiers to mutiny in May 2001. A mixture of factors such as economic hardship, rampant corruption and threats to media freedom has led to general unrest. Resignations have occurred. On 1 November 2001 President Shevardnadze dismissed the entire government. The forces of potential disintegration of the country are enormous. Abkhazia, although still nominally under Georgian sovereignty, is a running sore (e.g. there was serious fighting in the spring of 1998 and in late 2001). Some Russian troops are still there. On 5 August 2002 Georgia and Abkhazia did, however, agree to joint patrols of the Kodori Gorge. The government considered the presidential election in South Ossetia held on 10 November 1996 to be illegal. Supporters of the former president Zviad Gamsakhurdia (whose death on 31 December 1993 is still shrouded in mystery) still resort to violence on occasion. Shevardnadze is highly suspicious of Russia but has had to maintain reasonable relations with it since Georgia, for one thing, is heavily dependent on Russia for gas supplies. Gas supplies can (and have been) switched on and off. Georgia has, on occasion, even had to call upon Russia for military assistance. But Russia accused Georgia of effectively doing nothing to prevent Chechen terrorists from occupying parts of the country, a charge Georgia denied. On 11 September 2002 President Putin threatened to order military strikes inside Georgia, but was pacified after Georgia sent forces into the Pankisi Gorge. On 6 October 2002 the two presidents agreed on joint border patrols. Georgia is a member of the CIS but Russian troops are gradually being withdrawn from Georgia (Abkhazia being treated separately). In the 31 October 1999 general election Shevardnadze’s ruling Citizens’ Union won convincingly. Despite the need to keep on reasonable terms with Russia, Shevardnadze has pointed the country decidedly in a Western direction, EU membership, for example, being considered desirable. The president has blown hot and cold as regards Nato membership in his public pronouncements, but one suspects that he has one eye on Russia when he blows cold. On 6 November 2002 Shevardnadze said he would apply to join Nato at its summit being held in Prague that month. Georgia was delighted to sign an accord with Azerbaijan and Turkey on the Baku-Tbilisi-Ceyhan oil pipeline on 18 November 1999. Georgia is supportive of the United States over the issue of international terrorism. In May 2002 a team of US military instructors arrived to train Georgian troops to root out international terrorists allegedly hiding in the Pankisi Gorge. President Putin of Russia accepted US involvement and drew parallels with Central Asian countries. ‘The Soviet Union left Georgia with an energy-intensive industrial sector, and dependent on imports for 87 per cent of all its energy requirements in 1990… In 1995 81 per cent of all energy used was imported’ (GET, Third Quarter 1996, p. 7). There have been periodic restructurings of energy debts, e.g. with Turkmenistan for gas payment arrears in March 1996. Georgia sits astride major oil transportation routes but important

Introduction and overview

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domestic oil discoveries in 2000 could possibly transform the country’s resource endowment picture. GDP growth turned positive in 1995 after a string of highly negative figures: –44.8 per cent in 1992, –25.4 per cent in 1993 and –11.4 per cent in 1994. In 2001 GDP was still only an estimated 37 per cent of the 1989 level (EBRD 2002b:58, 156). The Russian financial crisis of August 1998 adversely affected Georgia, the growth rate falling sharply in 1998. There was hyperinflation in the period 1992 to 1994, consumer prices rising by 887 per cent in 1992, 3,125 per cent in 1993 and 15,607 per cent in 1993. The inflation rate fell sharply after 1995 and reached single figures in 1997 and 1998. There was a significant increase in 1999, but a marked improvement thereafter. Even if non-cash income is included ‘inequality is still horribly high’ (GET, Second Quarter 1996, p. 65). ‘The proportion of people below the official poverty line increased from 43 per cent in 1997 to 58.5 per cent in 1999’ (EBRD 2000b:167). ‘Over 50 per cent of the population live below the official poverty line’ (EBRD 2001b:151). Bankruptcy legislation is relatively advanced but largely unenforced (EBRD 1999b:223). The law on bankruptcy has still not been tested despite the many enterprises which are in arrears with creditors (GET, Third Quarter 1997, p. 8). The private sector accounted for roughly 15 per cent of GDP in mid-1990. In mid-2001 the figure was 65 per cent (EBRD 1999b:24, 224, and 2002b:20, 156). A programme for large privatization started in May 1994 with a presidential decree. A voucher-based programme for large privatization was adopted in March 1995. Cashbased sales methods will continue to be used as well. The first auction took place in June 1995. The voucher programme was to be completed by 1 July 1996 (EBRD 1995b:43). Small privatization is now virtually complete (EBRD 1997a:29). Only 4 per cent of vouchers have been invested in investment funds (p. 172). The May 1997 law was introduced to speed up the privatization process. At that time about half of the 1,115 medium-sized and large enterprises earmarked for privatization had been sold, mostly through management and employee buy-outs and voucher auctions. However, the privatized enterprises accounted for only about 10 per cent of the total book value of these enterprises. Cash auctions were introduced at the end of 1996, but failed to attract bidders due to high minimum prices. The new law allows for auctions without floor prices (‘zero price auctions’). In August 1997 the president abolished a decree suspending the privatization of so-called ‘strategic’ enterprises—a group of around fifty enterprises mostly in heavy industry. They are being privatized on a case-by-case basis owing to their significant restructuring and investment requirements (EBRD 1998b:168). Privatization in infrastructure is progressing well. ‘The sale of the largest power distribution company (Telasi) in late 1998 marked the beginning of privatization in the energy sector’ (EBRD 1999a:37). Although large-scale privatization is well advanced, the lack of transparency, unattractive terms and difficult economic conditions have slowed activity… A new law on non-agricultural land will provide for private ownership of land and for its use as collateral… Privatization of generation and distribution should mostly be completed this year [2000]. (EBRD 2000a:56)

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‘Large-scale privatization has proceeded mainly through strategic sales. However, progress has been slow, due to a lack of financial viability and high reservation prices, exacerbated by the loss of investor appetite following the crisis in Russia’ (EBRD 2000b:166–7). The state property minister is currently focussing on privatization of the main utilities, including power and telecommunications, rather than large industrial enterprises’ (EBRD 2001b:150–1). ‘The large-scale privatization process has moved slowly’ (EBRD 2002b:154). The process of small privatization is almost complete. The mass privatization process for medium-sized and large enterprises is in its middle stages. In most of these employees have officially stated their intention of opting to buy a controlling 51 per cent (a 10 per cent limit operates in the case of strategic enterprises), although there were problems in raising enough money to do this (GET, First Quarter 1996, pp. 44–5). ‘Workers and managers were given greater consideration since they both received vouchers as citizens and got free shares and preferential prices for some part of their firm’s shares’ (p. 50). Mass privatization is well over halfway, but many of the largest enterprises have yet to be privatized (p. 3). The first stage of mass privatization, completed by the end of June 1996, ‘consisted of the sale of shares in enterprises for vouchers issued by the government’ (GET, Second Quarter 1996, p. 52). ‘The second stage of mass privatization involves cash sales through tenders and auctions (pp. 57–8). Small privatization has been conducted mainly by auction or tender. The May 1994 decree gave workers and managers the right to buy their enterprises directly and at a discount within a one-year period. ‘The majority of owners after privatization thus appear to be insiders.’ Under the medium and large privatization programme 24 per cent of the shares issued are now in private ownership. The shares mentioned here do not include those of Poti port and a number of other large enterprises (such as electricity producers). ‘The state thus continues to own well over 80 per cent of the country’s capital stock.’ ‘It seems probable that enterprise insiders are now the dominant shareholders.’ The process of selling off remaining state holdings at cash auctions began on 17 October 1996. ‘The problem is that for the majority of enterprises that remain to be sold the reserve price is too high’ (GET, Third Quarter 1996, pp. 52–6). The privatization process in Georgia has slowed down dramatically…after a successful phase of voucher privatization, medium and large enterprise privatization has largely stalled’ (GET, Fourth Quarter 1996, pp. 55–6). Medium and large privatization is still largely stalled (GET, First Quarter 1997, pp. 58– 61). On 27 June 1997 the president issued a decree designed to speed up the second stage of privatization. Reserve prices were abandoned (GET, Second Quarter 1997, p. 72). On 31 August 1997 the president abolished the presidential decree of 23 May 1996 suspending privatization of the majority share of fifty-one joint stock companies, including the largest considered strategic (GET, Third Quarter 1997, p. 62). Georgia has rapidly disbanded state and collective farms and transferred land to private farmers (Ash 1993:497). More than half of agricultural land has been privatized in small plots via long-term leasing (private land ownership rights have not yet been granted). The government intends to keep approximately 25 per cent of agriculture in state hands (EBRD 1995b:43). The law on the ownership of agricultural land was passed in March 1996. Farmers now have clearer property rights to land transferred in early 1992 (representing 22 per cent of

Introduction and overview

13

agricultural land) and to land that was used for private gardens before 1992. The law provides for the right of private entities to buy, sell, lease and inherit land. In addition, the law applies to the land on which enterprises reside (EBRD 1996b:152). In 1996 private enterprises accounted for 85 per cent of agricultural output (EBRD 1997b:171). In mid1998 the share of privatized land was 26 per cent (about 60 per cent if Abkhazia and South Ossetia are excluded). The establishment of an active land market is impaired by the lack of a system for land registration (EBRD 1998b: 168). The registration of private ownership titles has been slow. The law on the privatization of non-agricultural land was approved in November 1998. It allows investors to acquire ownership rights over land, whereas before non-agricultural land could only be leased (EBRD 1999b:222). In March 1996 parliament passed the law on the ownership of agricultural land. The law applies to the 22 per cent of agricultural land (668, 500 ha), on which users’ rights had been transferred to farmers in early 1992, and also to private garden plots in use before 1992. Farmers now have clearer ownership rights to this land, provided they have citizenship. Foreigners may only lease land. (The law applies to the whole territory of Georgia except for Abkhazia and Tskhinvali region, not controlled by the Georgian government.) (GET, First Quarter 1996, p. 44) The vast majority of land is now under private cultivation. By the end of 1993 land in private hands amounted to 20 per cent of agricultural land and 44 per cent of cultivated land. As of 1 September 1996, 24 per cent of agricultural land was privatized. The March 1996 law allowed land ownership and buying and selling by Georgian citizens. The private farms that have been created are on average extremely small (GET, Third Quarter 1996, pp. 52–3). The over-whelming majority of food production now happens on small private plots’ (p. 11). The majority of agricultural land is at least occupied or used by private farmers. Most state farms collapsed soon after Georgia became independent. Their good-quality land that has not been privatized has been leased out by local authorities (GET, Fourth Quarter 1997, p. 60). By the end of 1996, 24.3 per cent of agricultural land had been privatized. Land that has not been distributed is generally lying idle or just subject to local grazing arrangements. In addition, much of the land that is nominally privatized has not been claimed or is not being used, often because of problems obtaining inputs and irrigation and sometimes because of hostility to outsiders using land. There is still no effective land market (GET, First Quarter 1997, pp. 65–6). There is no active market in land owing to the lack of proper registration systems (p. 4). As of 1 October 1997, 25.6 per cent of agricultural land had been privatized (GET, Third Quarter 1997, p. 47). Georgia has completed its first phase of agricultural land reform, transferring approximately 60 per cent of its state-owned arable agricultural land to rural households… The parliament of Georgia is expected to adopt a law on the privatization of the remaining state-owned agricultural land in late spring 2001… For more than seven years, however, the state had delayed registering full ownership of the transferred land. Without legally registered ownership,

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according to Georgian law, farmers’ property rights to the agricultural land are not officially recognized, rendering any land ownership either non-existent or restricted. In response to a growing demand for title certificates and speedy registration of land ownership, on 16 May 1999 President Shevardnadze issued [a] presidential decree… Within a relatively short period of time presidential decree no. 327 has effected ownership registration for nearly one million agricultural land parcels and has facilitated thousands of secondary land transactions among private landowners. (Cemovich 2001:81) The share of peasant farms in agricultural land (including a large share of household plots) was 21.7 per cent in 1996 (Spoor and Visser 2001:888). The share of private plots in agricultural land increased from 12 per cent in 1989 to 54 per cent in 1998 (p. 891). The share of private farms and household plots in agricultural production increased from 35 per cent in 1991 to 65 per cent in 1995 (p. 890). The lari is fully convertible for current account transactions (EBRD 1996b: 152–3). Tariffs are low, with a base rate of 12 per cent, a lower rate of 5 per cent and few exemptions. The freely floating exchange rate policy adopted in December 1998 continues (EBRD 1999b:222). Following the introduction of the lari in October 1995, the monetary authorities moved from a fixed exchange rate system to a managed floating exchange rate system (GET, First Quarter 1996, p. 32). The 12 per cent flat tariff with some exemptions was introduced to encourage free trade. The government is now coming under pressure to raise particular tariffs to protect domestic producers (GET, Third Quarter 1997, p. 38). Georgia joined the World Trade Organization (WTO) at the start of October 1999, ‘making it only the fourth member of the former Soviet bloc to be admitted’ (FT, Survey, 22 November 1999, p. i; and 25 October 1999, p. 8). The volume of direct foreign investment is very small. A new investment law was to be introduced on 1 January 1997, with the aim of equalizing conditions for foreign and domestic investors. Obstacles to foreign investment include perceived political risk, the legal situation and the lack of a law on the ownership of non-agricultural land (GET, Third Quarter 1996, p. 14). Foreigners may not own or lease land (EBRD 1996b:153). Incentives for foreign investors were abolished at the end of 1996 (EBRD 1997b:172). Kazakhstan: a summary Kazakhstan is essentially run by President Nursultan Nazarbayev, who has kept the economically well-endowed country (oil and gas in particular) relatively stable and free from serious ethnic tensions. But problems include a neutered parliament and corruption. The political and economic power of Nazarbayev’s family as a whole has caused concern. Presidential authoritarianism has generally been considered to be relatively mild (especially in comparison with Turkmenistan and Uzbekistan). But there were increasing domestic calls in late 2001 for further democratization and 2002 saw a marked increase in the degree of authoritarianism. The capital city has been moved from Almaty in the south to Astana in the north, partly in recognition of the concentration of ethnic Russians in the north. There has,

Introduction and overview

15

nevertheless, been a large outflow of ethnic Russians as well as ethnic Germans. The policy to induce ethnic Kazakhs in other countries to move to Kazakhstan has not attracted great numbers to date. (On 20 November 1999 a group of armed ethnic Russians were arrested in the north of the country. They aimed to proclaim a Russian republic in the province of East Kazakhstan, where ethnic Russians account for more than 85 per cent of the population.) International observers have been critical of the way parliamentary and presidential elections have been held. The 10 January 1999 presidential election was boycotted altogether by OSCE (e.g. a former prime minister was barred from running on a technicality). The 30 August 1995 referendum further enhanced the powers of the president, while in October 1998 a law passed by parliament became effective whereby the president’s term of office was increased from five to seven years. Minimum membership for any party has been raised substantially. Relatively good relations with Russia have not been at the expense of relations with the West. Kazakhstan is supportive of the United States over the issue of international terrorism. Negative GDP growth characterized the period 1992 to 1995, but the picture was not as bad as in some of the other CIS countries as the following figures for Kazakhstan show: – 2.9 per cent in 1992, –9.2 per cent in 1993, –12.6 per cent in 1994 and –8.2 per cent in 1995 (EBRD 2001a:15). GDP growth turned positive in 1996, but was not too impressive until 2000 and thereafter. Negative growth again made an appearance in 1998. Thus Kazakhstan did not escape the effects of the Russian financial crisis of August 1998. In 1996 Russia took 45.8 per cent of exports (the CIS countries as a whole took 47 per cent), while Russia accounted for 56.1 per cent of imports (KET, Fourth Quarter 1996, pp. 20–1). In 1998 the main destination of exports was Russia (28.9 per cent; the CIS as a whole 39.3 per cent) and the EU (31.6 per cent) (KET, Monthly Update, October 1999, p. 35). In 1998 the main source of imports was Russia (39.4 per cent; the CIS as a whole 47.2 per cent) and the EU (23.9 per cent) (KET, Monthly Update. October 1999, p. 35). In 1998 fuel and oil products accounted for 38.7 per cent of exports. Other important exports were ferrous metals (14.4 per cent) and copper and copper products (10.9 per cent) (KET, Monthly Update, October 1999, p. 34). The economy is feeling a significant impact from the crisis in Russia, with which it conducts around 30 per cent of its foreign trade’ (EBRD 1999a:38). Within the CIS developments in 1999 were dominated first by the Russian crisis, then by the unexpected strength of recovery in Russia and the rise of many commodity prices… The best placed have been countries with large natural resource sectors… In Kazakhstan the oil price recovery and the devaluation of the currency in April 1999 have helped alleviate the negative economic conditions after the Russian crisis. (EBRD 2000a:5–6) GDP in 2001 was an estimated 84 per cent of the level in 1989 (EBRD 2002b:58). There was hyperinflation in the period 1992 to 1994, consumer prices rising by 1,381 per cent in 1992, 1,662 per cent in 1993 and 1,892 per cent in 1994 (EBRD 2000a:61).

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The inflation rate fell sharply in 1995 and was in single figures in 1998 and 1999. ‘In comparison to the previous year, in 1998 the government financed the deficit without using direct credits of the NBK’ (KET, Quarterly Issue, October–December 1998, p. 154). The inflation rate moved into double figures again in 2000 before returning to single figures thereafter. A large oil find in the Caspian Sea (announced in May 2000) is of major long-term significance. Economic reform has generally been of a gradual character, but price reform has been relatively rapid and privatization has speeded up after a relatively slow start. In January 1992 most prices were freed (EBRD 1994:27). Price legislation has been virtually eliminated, except for the regulation of natural monopolies (EBRD 1997b:177). In April 1999 a decree was introduced ‘regulating tariffs and prices for services provided by monopolists’ (KET, Quarterly Issue, January–March 1999, p. 88). The private sector accounted for roughly 5 per cent of GDP in mid-1990. In mid-2001 the figure was 65 per cent (EBRD 1999b:24, 232; and 2002b:20, 164). Small privatization has been relatively rapid (EBRD 1996b:156). It was officially completed in 1997 (EBRD 1998b:172–3). Small privatization is virtually complete (KET, Quarterly Issue, July–September 1997, p. 145). Privatization has been in three major phases: housing privatization in 1991–2 (via coupons, allocated according number of years worked); mass privatization (via investment coupons); and individual projects (KET, Quarterly Issue, April–June 1999, p. 28). The ups and downs of management contracts can be illustrated as follows: 1 In late 1994 the government introduced a management contract scheme for large state enterprises, with the aim of bringing in the management and technological expertise of foreign investors while limiting their financial risk. Foreign firms were given the right to manage enterprises for a limited period of time. In exchange for bonuses or shares in profits, or both, and (in most cases) a priority right to purchase the majority of the enterprise’s shares at the end of the contract, management companies were obliged to redeem, up front, outstanding arrears of the enterprise, implement pre-privatization restructuring or carry out specified investment projects. Starting at the end of 1994 about sixty of the largest enterprises, including most of those in heavy industry, were put under management contracts. ‘The Kazakh experience with management contracts has been a mixed success. During 1996 the monitoring of contracts was enforced and direct sales of large enterprises were accelerated. At the end of 1996 the government ceased awarding new contracts (IMF, World Economic Outlook, May 1997, p. 109). 2 Enterprises (mainly related to extractive industries) have been subjected to outside management under ‘management contracts’, whereby an enterprise is placed under the management of an interested outside party (usually a potential investor and one implicitly often assumed to hold the option of buying the enterprise later on). Outsiders included foreign managers (EBRD 1996b:156). ‘The success of “management contracts” in fostering industrial restructuring…has been very limited’ (EBRD 1997a:29). The authorities have increasingly emphasized their desire to replace management contracts with direct privatization on a case-by-case basis (EBRD 1997b:176). An initial reliance on management contracts has been effectively

Introduction and overview

17

abandoned in favour of state-led restructuring (EBRD 1998b:172–3). Several management contracts have been cancelled and a consolidation process has started, with stakes resold to large foreign investors or bought out by state concerns (EBRD 1999b:230–1). The government has cancelled a number of management contracts with foreign investors and has consolidated its ownership stake. However, given investor concerns over the sanctity of property rights and the quality of the investment climate, the authorities are finding it difficult to attract new strategic investors. (EBRD 2000a:6) 3 ‘Such contracts give investors an option to buy shares without any competing bids, a scheme that has been tainted with corruption scandals and contract cancellations’ (FT, 30 April 1996, p. 29). Over the past two years sixty-five of the country’s largest enterprises, including virtually all of the metal industry, have been placed in trust to domestic and foreign investors. The scheme is controversial because of the ability to delay payments to creditors and to suspend existing contracts (FT, 4 July 1996, p. 3). The large privatization programme for 1993–5 involved the auction sale of shares to private investment funds. The first funds were created in July 1993 and vouchers were distributed to citizens during the second half of the year (who placed their vouchers with the funds). The privatization of the largest enterprises started in July 1993 and proceeds on a case-by-case basis (EBRD 1994:26). A total of 1,700 enterprises were earmarked for privatization through the 1993–5 mass privatization programme. Between 51 and 90 per cent of shares in each enterprise were offered for sale: employees received 10 per cent and the state could retain up to 39 per cent (EBRD 1996b:156). The most important objectives of the third stage of the privatization programme covering the 1996–8 period are the following: the completion of small privatization; the cash sale of further shares in medium-sized and large enterprises; and the sale of very large enterprises on a case-by-case basis. In February 1996 the government started to divest the remaining state-held shares, including the 39 per cent stakes that had been excluded from the auctions as well as all the shares that had failed to be sold. There has been no property restitution. Overall, restructuring of large lossmaking enterprises has been difficult and slow (EBRD 1996b:156). The privatization of large enterprises on a case-by-case basis continued in 1996. Especially targeted were enterprises in the power, energy and communications sector and this attracted considerable foreign investor interest. Outside this group of large and attractive entities, however, privatization has remained well behind target (EBRD 1997a:29). Following an early focus on voucher auctions large privatization has progressed rapidly through cash auctions encompassing 1,600 enterprises by mid-1998. There are still 400 state enterprises to be sold through this method. Case-by-case sales of strategic enterprises have attracted considerable foreign participation, especially in the power and utility sectors (EBRD 1998b:172–3). The planned sale of state stakes in large companies through public offerings on the stock market (the blue chip programme) has been revived. A new programme foresees the transfer of assets of the largely defunct investment funds created during mass privatization to private brokerages and the new pension funds. Bankruptcy implementation is sluggish (EBRD 1999b:230–1). The blue chip programme,

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envisaging the sale of minority government stakes to portfolio investors, has been revived, but the first offers have not been made’ (EBRD 2000a:60). The blue chip privatization programme is effectively stalled… In May 2000 Tractebel sold its assets in the gas distribution network and Almaty’s power sector back to the government… Tractebel’s exit followed repeated difficulties to gain the anti-monopoly committee’s approval for tariff increases. (EBRD 2000b:174–5) Privatization revenues fell in 2000. A higher revenue target has been set for 2001, ‘with planned sales to strategic investors in regional power distribution and several blue chip companies’ (EBRD 2001a:70). Blue chip privatization—the sale of residual government stakes in several large domestic enterprises through the stock market—has failed to accelerate. The government now appears to favour direct sales of its residual stakes to strategic investors… The government retains control over key assets, such as oil and gas transportation, telecommunications and the railways. (EBRD 2001b:158–9) The state still holds sizeable residual stakes in some large domestic enterprises… Recent policy moves have strengthened the role of state companies in infrastructure… In February 2002 the state oil company Kazakhoil and pipeline operator Kaztransneftgaz were merged to form Kazakhmunaygaz, an integrated state-owned energy company. (EBRD 2002a:64) The new government’s privatization policy remains unclear… The wideranging business interests of public officials give rise to conflicts of interest’ (EBRD 2002b:162). ‘Sales have been marked as much by speed as by scandal’ (FT, 25 October 1996, p. 6). ‘Kazakh opposition leaders claim officials have sold assets cheap because they are silent partners in the offshore companies’ (FT, 20 December 1996, p. 6). Since becoming prime minister in October 1997 Balgimbayev has generally slowed down the pace of privatization and has shown determination to confront foreign investors whom he feels have not fulfilled their obligations. He emphasizes that he favours privatization but prefers local investors to foreigners (FT, Survey, 17 June 1998, p. ii). A law on privatization came into effect in January 1996. The preferential treatment of workers was abolished, only two privatization methods would remain (direct sales and auctions) and there would be no social guarantees for the employees of privatized enterprises. In February 1996 the government passed its programme for privatization and restructuring for the period 1996–8. The main features were the auction sale of remaining state shares and the auctioning of enterprises already offered for sale but not yet sold. Special programmes were devised for electricity, oil and gas, metallurgy and ore mining, transport and communications, agriculture, health, education, science and culture (KET, Third Quarter 1996, pp. 48–9). In November 1996 the government revealed a list of

Introduction and overview

19

assets which were not to be privatized, including the main railways, the main high voltage electricity transmission lines and water facilities (KET, Monthly Update, December 1996, p. 1). With the exception of the agricultural sector, privatization gained momentum in the first quarter of 1997 (KET, First Quarter 1997, p. 151). Small privatization is virtually complete (KET, Quarterly Issue, July–September 1997, p. 145). ‘Within the “blue chip” privatization programme, four of the ten planned privatization projects were suspended’ (KET, Quarterly Issue, January–March 2000, pp. 181–2). In March 2000 an agreement on the acquisition of 30 per cent of the shares of Kazakhtelecom was reached with the EBRD. The Kazakh government would retain a block of 35 per cent of shares (KET, Monthly Update, February 2000, p. 5). There is current account convertibility for enterprises, but there are restrictions on capital account Substantial trade liberalization had been achieved by the first half of 1995, following the abolition of most import and export licences (EBRD 1995b:46). In July 1996 all obligations under Article 8 of the IMF Agreement were accepted (EBRD 1996b:156). ‘Kazakhstan continues…[to impose] export bans on fuel products and more recently timber’ (EBRD 2002b:162). On 5 April 1999 the managed floating exchange rate regime of the tenge was replaced by a floating exchange rate. Although the National Bank does not intend to systematically intervene in the domestic currency market, the central bank is prepared to prevent unreasonable fluctuations of the tenge. For a limited period enterprises are required to sell 50 per cent of their hard currency income to the central bank at the market exchange rate (KET, Quarterly Issue, January–March 1999, pp. 87–8). The 50 per cent surrender requirement on current account transactions was lifted in November 1999 (EBRD 2000b:174). The volume of foreign direct investment is encouraging despite concerns among foreign investors about government attempts to alter the terms of contracts already signed. ‘Kazakhstan has been fairly successful in attracting FDI compared with other CIS countries’ (KET, Quarterly Issue, April–June 1999, p. 18). Some 80 per cent of foreign direct investment for 1993–6 was for oil, gas, and ferrous and non-ferrous metals (EBRD 1997b:176). The mining sector in 1999 accounted for a third of exports, almost as much as fuel and oil products. Nevertheless, foreign investment in the sector… was a fraction of inflows into oil and gas. During earlier periods many companies acquired licences under non-transparent conditions and allegations of transfer pricing and corruption have since plagued the sector. Attempts at attracting new strategic investors have been stymied by onerous tax treatment, the lack of public availability of necessary geological survey data and the apparent reluctance of the government to offer mineral deposits for open international tenders. (EBRD 2000b:175) Kazakhstan has the highest stock of foreign investment per head in the CIS … Yet the investment climate remains unfriendly in many ways. In July [2000] the government renationalized an oil refinery owned by CCL Oil, a US investor,

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after lobbying from local competitors… Belgian utility Tractebel has pulled out of the country because artificial price caps make it impossible to turn a profit. (Business Central Europe 2000:45) ‘In June 2002 the government passed a new law on investment… The new legislation makes incentives available to both domestic and foreign firms and partially abolishes the earlier protection of foreign investors against legislative changes’ (EBRD 2002b:163). ‘The government drafted a law to level the playing field between foreign and local investors that critics say worsens conditions for foreigners’ (IHT, 4 January 2003, p. 9). Private land ownership was at first prohibited. ‘While farmland appears to be almost completely privatized, restructuring has been slow. Co-operative farm ownership coupled with monopoly holdings in “agribusiness” still dominate this sector’ (EBRD 1996b:156). In north Kazakhstan peasant farms account for only 4 per cent of agricultural production (KET, Quarterly Issue, April–June 1999, p. 38). On 26 December 1995 Nazarbayev issued a decree entitled ‘On Land’ that had the force of law, legislatively establishing for the first time the right to private ownership of land (although parliament has to ratify it). About a year before that a presidential decree introduced the institution of long-term leasing of land (for up to ninety-nine years), with the right to sell and bequeath it (CDSP, 1996, vol. XLVIII, no. 2, p. 26). The law on private ownership of land was introduced in December 1995 (KET, Quarterly Issue, April–June 1999, p. 38). After political resistance forced the government to reconsider a draft new law in 1999, the revised draft no longer provides for the possibility of full private ownership over agricultural land. While the existing ninety-nine-year long-term leases are transferable and can be used as collateral, with low land values and remaining legal uncertainty, a rural land market has failed to develop. (EBRD 2000b:174) Land reform is back on the political agenda. The new draft land code provides for private, tradable land titles, although individual holdings would initially be restricted in size and owners would not be able to resell land for five years. Foreigners would remain excluded from private land ownership. (EBRD 2002b:162) ‘In… Kazakhstan only private ownership of private plots is allowed’ (Mancours and Swinnen 2002:377). The share of peasant farms in agricultural land increased from 0.3 per cent in 1992 to 12.9 per cent in 1999 (Spoor and Visser 2001:888). ‘In countries like Uzbekistan (and Kazakhstan) the comparison should be with arable land, as large tracts of agricultural land are desert (or steppe)’ (p. 889). The share of private farms and household plots in agricultural production increased from 32 per cent in 1991 to 73 per cent in 1998. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890).

Introduction and overview

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Kyrgyzstan: a summary While Kyrgyzstan under President Askar Akayev is still considered (in Central Asian terms) a relatively liberal country politically and economically, the country’s reputation is being eroded. A referendum held on 10 February 1996 granted the president increased powers. The general election of February–March 2000 gave rise to considerable concern, e.g. important opposition parties (and even some individuals) were barred from contesting seats for what international observers deemed to be technicalities. In July 2000 the central electoral commission announced that it was going to introduce language and residency requirements for presidential candidates, requirements that were seen in some quarters as being to the disadvantage of opponents of the president. President Akayev was re-elected on 29 October 2000, winning 74.5 per cent of the vote. OSCE, which monitored the election, said the Kyrgyz presidential election failed to comply with its standards for democratic elections, condemning the process in even harsher terms than it used for the country’s dubious parliamentary elections in February and March. The registration of candidates was restrictive and excluded prominent candidates; local and regional authorities interfered in the election process, and media coverage was extremely biased in favour of the incumbent, OSCE said… The creation of a special commission in June charged with testing the candidates’ knowledge of the Kyrgyz language as a prerequisite for being registered turned out to be a helpful tool to get rid of inconvenient opponents… Mr Akayev’s strongest rival, Felix Kulov, declined to take the test and was barred from standing. (The Economist, 4 November 2000, p. 105) Serious anti-Akayev riots began in March 2002, with civilians losing their lives. The government resigned in May Anti-Akayev parties have made attempts to consolidate opposition to the president. In December 2001 parliament passed a law giving Russian the status of an official language. The president once hoped that the army could be abolished altogether. But the weakness of his armed forces was revealed in July to October 1999 when hostage-taking Islamic militants moved into Kyrgyz territory. Military assistance was sought from Russia, Uzbekistan and Tajikistan. On 25 October 1999 the last of the hostages seized in August 1999 by Islamic guerrillas in southern Kyrgyzstan were released on 25 October 1999. Negotiations with the guerrillas, who had returned to Tajik territory with their hostages, were conducted by representatives from Dushanbe (the capital of Tajikistan). The guerrillas from the Islamic Movement of Uzbekistan were given safe conduct to Afghanistan. The guerrilla leaders sent President Askar Akayev of Kyrgyzstan a message in early October explaining the reasons for their incursion. The Islamists said that their ‘holy war is in no way directed against the Kyrgyz people. The aim is to topple the anti-

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Moslem Karimov regime’ (CDSP, 1999, vol. 51, no. 43, p. 19). Further serious clashes with Islamic militants began in August 2000. Russia and China strongly support the measures against Islamic militants. Akayev has nurtured the political support of the Russian-speakers in the country, e.g. on 24 May 2000 Russian became an official language. Kyrgyzstan is supportive of the United States over the issue of international terrorism. There are US troops and military aircraft stationed in Kyrgyzstan. In the struggle against terrorism Kyrgyzstan conducted, in October 2002, a joint military exercise with China and in November 2002 Russia began deploying aircraft in Kyrgyzstan. French Mirage 2000-D fighter jets participated for the first time in military operations in Afghanistan this week, taking off from an air base in… Kyrgyzstan… The sorties were a first for France and Kyrgyzstan… Kyrgyzstan is a signatory to the CIS’s collective security agreement, which in part requires a country to gain approval with the other members—former Soviet republics— before allowing foreign troops on its soil…[Kyrgyzstan] says that Bishkek consulted with all members of the collective security agreement, as well as the Shanghai Co-operation Forum, which includes China, and encountered ‘no problems’. (FT, 7 March 2002, p. 12) The country is not well endowed with natural resources by Central Asian standards (although gold is especially important and an important oil find was announced in May 2001). GDP growth turned positive in 1996 after a string of dismal figures: –19.0 per cent in 1992, –16.0 per cent in 1993, –20.1 per cent in 1994 and –5.4 per cent in 1995. ‘The economy grew rapidly in 1997, fuelled by a more than 30 per cent increase in net exports (gold making a major contribution)’ (EBRD 1998a: 37). The growth rate slumped in 1998. ‘The Kyrgyz economy has been adversely affected by events in Russia. Growth in 1998 was only 2 per cent, both inflation and the current account deficit increased sharply and the currency has lost about half its value since September 1998’ (EBRD 1999a:39). GDP in 2001 was an estimated 71 per cent of the 1989 level (EBRD 2002b:58). The poverty rate is very high. The consumer inflation rate saw a dramatic improvement in 1994, with a figure of 228.7 per cent compared with 855 per cent in 1992 and 772.4 per cent in 1993. In 1998 the figure was only 12 per cent, but there was a significant increase in 1999. There was an improvement thereafter. ‘The extent of liberalization of prices, trade and capital account transactions in Kyrgyzstan continues to exceed that of its neighbours. For example, the country is still the only WTO member in Central Asia’ (EBRD 2001b:162). The August 1991 privatization decree (the process starting in January 1992) specified the allocation of vouchers and access to interest-free loans. Large privatization was to involve the state retaining 50 per cent of shares, with 30 per cent of shares being sold to employees at a 30 per cent discount and 20 per cent being sold to the public (who could use vouchers), to foreigners (with permission) and to other related enterprises. The first

Introduction and overview

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stage of privatization had been completed by around mid-1994 (Kaser and Mehrotra 1992:41–2; Deutsche Bank, Focus: Eastern Europe, 1993, no. 70, p. 5; CDSP, 1994, vol. XLVI, no. 27, p. 20). Initially the predominant method of large privatization was the transfer of shares to work collectives, with the state usually retaining a significant proportion of the shares. By January 1994 about 4,450 enterprises (accounting for 33 per cent of total fixed enterprise assets) had been privatized. New provisions in January 1994 involved the privatization of all small enterprises through auctions and/or competitive bidding with the use of cash and vouchers. The main methods for the privatization of medium-sized and large enterprises were to be competitive cash bidding (by individual investors for up to 70 per cent of the equity) and voucher auctions (open to individuals and investment funds for 25 per cent of the equity), while 5 per cent of the equity would be preserved for the labour collectives… There is no property restitution programme (EBRD 1994:28). The government approved the 1996–7 privatization programme, which covered the 320 remaining medium-sized and large enterprises and included the sale of shares in some of the major utilities through coupon auctions. International tenders were initiated for some of the large enterprises (EBRD 1996b:157–8). Mass privatization was essentially completed by late 1996. Residual state shares were sold in cash auctions and a programme of sales of companies not covered by the 1994–5 mass privatization programme was drawn up. This foresaw the sale of shares through coupon auctions in some of the major strategic companies, including energy, mining, infrastructure, tourism and the media (EBRD 1997a:30). A new privatization law was passed in early 1998. But major impediments remain, especially in rescheduling company debt. There has been little restructuring even in privatized enterprises, which are mostly controlled by insiders and lack financial discipline. The privatization of small businesses in the retail and service sector has been quite successful (EBRD 1998a:23–5, 37). Small privatization is largely complete, with nearly 97 per cent of all small and medium-sized enterprises placed in private hands by the beginning of 1999. Large privatization, based on a combination of voucher auctions and investment tenders for strategic stakes in the largest companies, has proceeded much more slowly… Implementation of the bankruptcy law has been slow (EBRD 1999b:234). ‘Large-scale privatization has proceeded very slowly since 1997… There is little sign of active restructuring’ (EBRD 2000b: 178–9). ‘Sales of strategic stakes in telecoms, energy and transport are scheduled for 2001… Despite ambitious plans the restructuring of public utilities has progressed at a slow pace’ (EBRD 2001a:72). The government has divested most of its company holdings. The state still holds stakes in some 350 companies. State companies are concentrated in the construction…transportation…and in the energy and telecommunications sectors. In February 2001 the government approved a new state property privatization strategy for 2001–3… However, there have been no significant privatization transactions this past year… An attempt to privatize 40 per cent of…the national telecommunications company JSC KyrgyzTelekom…by international tender failed last year [2000]… About one-half of the capital in the banking sector is now foreign-owned. (EBRD 2001b:162–3)

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At the end of December 2001 the government passed a new privatization programme for 2002–3. In February 2002 parliament passed a law on the privatization of state property that takes precedence over earlier legislation that had prohibited the sale of certain enterprises classified as strategic. (EBRD 2002b:166) The 19 April 1991 decree forbade the buying and selling of land, although every citizen had the right to enjoy the use of and to bequeath a plot (CDSP, 22 June 1994, vol. XLVI, no. 21, pp. 21–2). Ian Pryde reports how the traditionally nomadic Kyrgyz lost much of the best land in the north to Russian and Ukrainian settlers in the nineteenth century. In the south the Uzbeks have been working the land for generations. (A similar situation prevails in industry, which is dominated by Russians and Ukrainians.) In consequence, many Kyrgyz demanded a halt to the privatization programme (The World Today, November 1992, p. 208). Land leases of up to forty-nine years have been introduced, which can be used as collateral and are inheritable (EBRD 1995a:59). In 1995 only around 10 per cent of agricultural output was produced by private farmers. In November 1995 a presidential decree extended the period of land-use rights to ninety-nine years. These rights can be sold (though only to Kyrgyz citizens), exchanged, rented or used as collateral (EBRD 1996b:158). A presidential decree of November 1996 apparently introduced private land ownership. But the details of the decree were unclear (EBRD 1997a:30). In 1997 more than 80 per cent of agricultural output was produced by private farms. Until October 1998 full private land ownership had been prohibited by the constitution. But a referendum held at that time approved a constitutional amendment introducing private land ownership (EBRD 1998b:174). A referendum in October 1998 introduced private land ownership (EBRD 1999a:25). ‘President Askar Akayev …has repeatedly promised to sell land, a policy which goes down well with farmers, who are fed up with leasing land off the government. But so far he has failed to deliver the goods’ (Business Central Europe 2000:46). The share of peasant farms in agricultural land increased from 0.9 per cent in 1992 to 8.6 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 38 per cent in 1991, to 47 per cent in 1992 and to 87 per cent in 1998. ‘In the Central Asian states “peasant cooperatives” are most likely included, over-representing “private production”’ (p. 890). The private sector accounted for roughly 5 per cent of GDP in mid-1990. In mid-2001 the figure was 60 per cent (EBRD 1999b:24, 236, and 2001b:20, 168). ‘The Kyrgyz economy has been adversely affected by events in Russia. Growth in 1998 was only 2 per cent, both inflation and the current account deficit increased sharply and the currency has lost about half its value since September 1998’ (EBRD 1999a:39). There is a relatively liberal foreign trade system. In March 1995 the authorities introduced full current account convertibility There is a managed floating exchange rate system. Kyrgyzstan has a very liberal trade regime and no capital account restrictions. The top customs duty was reduced by 10 per cent at the beginning of the year

Introduction and overview

25

[2000] and the average tariff is now 5.2 per cent. Nevertheless, according to a World Bank study, trade is considerably hampered by corruption in the customs service. (EBRD 2000b:178) Kyrgyzstan is a heavily indebted country and is highly dependent on foreign aid. The volume of foreign direct investment is very small. Tajikistan: a summary The death toll in the civil war between government forces and opposing Islamist forces has been typically estimated at between 30,000 and 60,000. Russian troops have fought on the side of the government. A peace accord was finally signed on 23 December 1996 in Moscow by President Rakhmonov, Said Abdullo Nuri (leader of the United Tajik Opposition) and a UN envoy. It included the following: (1) a national reconciliation commission (one of the aims being to bring opposition politicians into government); (2) a deadline of eighteen months for a final negotiated settlement; (3) a ceasefire; (4) a general amnesty and exchange of prisoners (CDSP, 1996, vol. XLVIII, no. 51, p. 20). On 27 June 1997 President Rakhmonov and Said Abdullo Nuri signed a power-sharing pact in Moscow. The agreement specified that the government would retain 50 per cent of its seats, 30 per cent were to go to opposition representatives and 20 per cent were to go to independents (FT, 1 July 1997, p. 9). On 10 March 1998 the first deputy head of the United Tajik Opposition was appointed first deputy prime minister of the Tajik government (CDSP, 14 April 1998, p. 17). A special statement on the disbanding of armed formations of the United Tajik Opposition (UTO) was read out on 3 August [1999] by Said Abdullo Nuri, the UTO’s leader and chairman of Tajikistan’s national reconciliation commission, in the presence of ambassadors of the general peace agreement serving as guarantors of the general peace agreement in Moscow on 27 June 1997… That marked the conclusion of the second stage of the Tajik peace process, namely the conversion of the UTO from a military-political organization to an exclusively political one. The former mujahadin are holding government posts… The authorities are required to lift the ban they imposed on the parties and movements making up the UTO in the spring of 1993, at the height of the civil war. That, in turn, will allow the opposition to legally commence preparations for the upcoming presidential and parliamentary elections… Those who fail to surrender their weapons voluntarily within twenty days will be declared outlaws and will be dealt with by special units made up of both government troops and former ‘holy warriors’. (CDSP, 1999, vol. 51, no. 32, p. 19) (Fighting with Islamic militants is dealt with in detail in the chapters on Kyrgyzstan and Uzbekistan.) Imamali Rakhmonov won the 6 November 1994 presidential election, but there were

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claims of irregularities in the election, e.g. ballot-stuffing and intimidation. The next presidential election was held on 6 November 1999. The UN and OSCE turned down invitations to observe the election. The sole challenger, who tried to withdraw his candidacy, said he would not recognize the results and called for the election to be invalidated. The general election of 26 February 1995 brought forth this scathing comment by Ahmed Rashid (FEER, 16 March 1995, p. 24): Tajikistan…held a farce of an election for a new 181-member parliament. The only candidates allowed to stand were those who supported President Imamali Rakhmonov. The turnout was reported to be 85 per cent, even though Rakhmonov’s writ only runs in about half the country. Western countries refused to send observers to the Tajikistan elections, saying they could not be fair. The Islamic opposition…refused to take part. The only opposition party allowed to stand—and that to just five seats—was the People’s Unity Party led by former prime minister Abdumalik Abulajanov. But it too pulled out of the polls, because of what it called ‘anti-democratic practices by the Rakhmonov regime’. On 27 February 2000 parliamentary elections were held for seats in the lower house of the Tajik National Assembly President Rakhmonov’s party is the People’s Democratic Party. Preliminary returns…[show that] the victor, with 70 per cent of the vote, was the ‘party of power’ led by President Emomali [Imamali] Rakhmonov. This was the first election in which the Islamic opposition party took part, but it did not fare particularly well. In terms of the number of seats won the Islamic Revival Party came in third, behind the Communists… The voting confirmed predictions by political analysts that the Islamists’ voter base would not exceed 12 per cent. (CDSP, 2000, vol. 52, no. 9, p. 19) Parliamentary elections were held in February [2000] with six parties competing, including former Islamic rebels in a coalition. President Imamali Rakhmonov’s People’s Democratic Party swept the polls with 64.5 per cent of the vote, the communists came second with 20 per cent and the Islamic Renaissance Party scored 7.5 per cent. However, there were charges of ballotbox stuffing as an 87 per cent turnout was recorded. Islamic Renaissance Party leader Abdullah Nuri said the results would be accepted and the peace process was irreversible. (FEER, Asia 2001 Yearbook, December 2000, p. 102) ‘International monitors said it fell short of minimum standards’ (The Economist, 4 March 2000, p. 82). The election was deemed pretty fair by regional standards’ (Business Central Europe 2000:47).

Introduction and overview

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Tajikistan is supportive of the United States over the issue of international terrorism. Positive GDP growth was not achieved until 1997: –29 per cent in 1992, –11 per cent in 1993, –18.9 per cent in 1994, –12.5 per cent in 1995 and –4.4 per cent in 1996. The civil war was one factor that had decidedly adverse effects on economic performance. A large number of ethnic Russian (among others) have left the county, many of them highly skilled. In August 1996 Russia’s ambassador to Tajikistan stated that over 450,000 Russians had left since 1991. About 70,000 Russian-speakers were left in Tajikistan, mainly pensioners and other needy people. The bulk of people leaving were in the highly skilled category (CDSP, 1996, vol. XLVIII, no. 32, p. 14). The Russian crisis and the sharp decline of cotton prices have had an adverse effect on the economy’ (EBRD 1999a:44). In 2001 GDP was only an estimated 56 per cent of the 1989 level (EBRD 2002b:58). Annual per capita income is less than $200—by far the lowest of all transitional economies. The government’s limited social transfers are poorly targeted and arrears remain high… An estimated 85 per cent of the population earn insufficient income to buy a basic food basket’ (EBRD 1999b: 271). ‘According to the Tajikistan Living Standards Survey, 83 per cent of the population live below the official poverty line’ (EBRD 2001b:199). There was hyperinflation in 1992 (1,157 per cent) and 1993 (2,195 per cent). Economic reform has been slow, an important factor, of course, being the civil war. Greater attention has been paid to economic reform since the signing of the 27 June 1997 peace agreement. An independent national currency was introduced on 10 May 1995, Tajikistan being the last republic in the former Soviet Union to do so. In early 1996 the government embarked on a renewed effort at stabilization and structural reforms. A law on bankruptcy was passed in June 1992 but few enterprises have been forced into bankruptcy (EBRD 1996b:177). A new economic programme aimed at macroeconomic stability and structural reform was launched in October 1997 with the assistance of the IMF (EBRD 1998a:42). ‘Since the introduction of the new currency, the Somoni, in late October [2000], the exchange rate has stabilized. The IMF’s new poverty reduction and growth facility is based on ambitious money supply targets for 2001’ (EBRD 2001a:90). The government has committed to restrictive monetary policy in the framework of a new three-year programme with the IMF’ (p. 28). With the removal of the last remaining price controls on agricultural goods (grain and bread) in 1996, most prices have been liberalized with the exception of water, rents, communal services and transportation. In 1997 some water usage charges were increased. But electricity tariffs still fall below recovery levels (EBRD 1998b:192). ‘Despite gradual tariff adjustments since 1996, the tariff system in the power sector remains inadequate. The government has committed itself to cut off non-payers and to increase tariffs towards cost recovery by 2001’ (EBRD 2000a:80). ‘Under an ADB energy sector rehabilitation project loan, energy prices are to be raised to cost-recovery levels over the next two years’ (EBRD 2001a:90). The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001

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the figure was 50 per cent (EBRD 1999b:24, 272; and 2002b:20, 204). Privatization has stalled since 1993 (EBRD 1995a:65). Privatization has mainly taken the form of ownership transfers to labour collectives or leasing arrangements. The government launched a new programme in May 1996. The programme introduces a ‘privatization cheque’, which will be paid out for government arrears on wages and pensions and used to purchase shares. Most transactions have involved insider privatization. Almost all dwellings have been privatized (EBRD 1996b:177). No significant progress has been made in implementing the mass privatization programme (EBRD 1997a:33). The 1996 privatization programme aimed at privatizing about 40 per cent of all small enterprises and around 10 per cent of all medium-sized enterprises by the end of 1997. As of mid-1997 only 11 per cent of medium-sized and large enterprises had been privatized. There has been no property restitution (EBRD 1997b: 203–4). The government is giving a high priority to privatization and the process has been accelerating. Over the past two years more than 20 per cent of state enterprises have been privatized (EBRD 1998a:42). Following a revision of the privatization law in May 1997 small privatization accelerated during 1997 and 50 per cent of units in this category had been privatized by the end of the year. Medium-sized and large enterprises remain predominantly state-owned, with only thirteen enterprises out of a total of over 400 privatized in 1997. Little restructuring has taken place in large state enterprises (EBRD 1998b:192). The privatization programme has been accelerating for both small and medium-sized enterprises (EBRD 1999a:44). By May 1999, 80 per cent of small enterprises had been placed in private hands. By the end of 1998, 16 per cent of mediumsized and large enterprises had passed into private ownership. Twenty-two cotton ginneries, for which international tenders were issued in January 1999, were sold by June 1999. Moreover, the domestic cotton trading company was auctioned off to a Swiss investor. But major sectors of the economy (including heavy industry, wholesale trade and transport) remain largely in state ownership (EBRD 1999b:270). ‘Reasonable progress in the privatization of medium-sized and large enterprises has been made. After the first round of tenders for twenty-three ginneries was cancelled, new tenders in November 1990 and April 2000 have been more successful’ (EBRD 2000a:80). Swift progress has been made in privatization. From the total of 9,500 state enterprises registered before privatization 6,150 have been either sold or incorporated as joint stock companies. Small-scale privatization is virtually completed with over 90 per cent of all eligible entities auctioned off by mid2000, predominantly to individual workers or employee collectives. Medium- and large-scale privatization has been slower, partially as a result of unrealistic price expectations, with only 214 of 733 incorporated units sold. In April 2000 the government successfully sold fifteen ginneries through auction… The remaining four ginneries still under state control were successfully auctioned in August 2000… Tajikistan has only a very rudimentary financial system. (EBRD 2000b:214–15) ‘Privatization revenues reached around $15 million in 2000 and 641 enterprises were

Introduction and overview

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sold, seventy-eight of which were medium-sized… The sale of all remaining state-owned cotton ginneries [took place] in 2000’ (EBRD 2001a:90). Significant progress has been achieved in enterprise sales… Small-scale privatization is largely complete and the government is now focussing on larger enterprises… The largest industrial companies, including the aluminium smelter, TADAZ, the power company, Barki Tojik, and all other utilities remain state-owned… Standards of government in enterprises remain weak as a result of insider ownership, significant remaining government influence and conflicts of interest within the public sector itself. The law on bankruptcy, adopted in 1992 and amended several times since, is largely ineffective… The state property committee has estimated that around 70 per cent of medium-sized and large privatized companies are insider-owned and controlled. Government officials often retain direct stakes in important sectors, such as cotton production and trade. (EBRD 2001b:198–9) ‘The privatization programme has lost momentum as the government focussed on political stability and anti-terrorism activities’ (EBRD 2002a:84). Privatization slowed down in the second half of 2001… However, it regained some momentum in 2002… Around half of all medium and large-scale enterprises remain state-owned. A new privatization strategy for the next two years was approved in July 2002, which contains commercialization and privatization plans for most medium and large-scale enterprises, including some strategic companies. (EBRD 2002b:202) ‘Reforms such as privatization are still only benefiting small cronyist interest groups rather than the population at large’ (Business Central Europe 2000:47). There has been a great deal of government interference in foreign trade and the determination of exchange rates. But the picture has begun to change, as has been reported by the EBRD. Tajikistan has a liberal foreign trade and exchange regime, with a mainly uniform import tariff of 5 per cent as of 1998 and de facto full current account convertibility. Regular foreign exchange auctions were reintroduced in early 1998 after their cancellation in late 1996 (EBRD 1999a:44). Tajikistan scores the lowest level on the IMF’s index of trade restrictiveness among the five members of the Customs Union (including also Belarus, Kazakhstan, Kyrgyzstan and Russia) on account of the lack of non-tariff barriers. Tariff dispersion is low and the average unweighted rate is 8 per cent… In July 2000 the central bank established an inter-bank foreign exchange market, replacing earlier foreign exchange auctions… Aluminium, cotton and mineral exports account for over 80 per cent of export revenues. (EBRD 2000b:214)

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Tajikistan has a relatively open trade system’ (EBRD 2001b:198). Aluminium and cotton account for 60 per cent of exports (Business Central Europe 1999:46). ‘Import tariffs were unified at 5 per cent in May 2002… However, private importers and exporters continue to face non-tariff barriers, such as import/export licences’ (EBRD 2002b:202). In 1994 ninety-nine-year leases were introduced in agriculture, thus mitigating the effects of the prohibition of private land ownership (EBRD 1995a: 65). The revised land code of December 1996 allows farmers to be granted lifetime leases to farmland with transfer and inheritance rights (EBRD 1998b:192). Presidential and government decrees of June and July 1998 further extended private ownership rights over farmland to include the right to freely trade land leases. As a result, the share of privately farmed agricultural land is expected to increase from 24 per cent in 1997 to more than 50 per cent at the end of 1999. The land reform committee is preparing for the breakup of large collective farms (EBRD 1999b:270). ‘Agricultural reforms have progressed, with 50 per cent of total agricultural land transferred to private hands by the end of 1999. However, the ministry of agriculture controls key inputs and a rural credit market does not yet exist’ (EBRD 2000a:80). Over 50 per cent of the population are dependent on agriculture… Land reform has advanced, although not always to the benefit of individual farmers. Around 45 per cent of all agricultural land is estimated to be privately farmed. Moreover, the dissolution of the state cotton trading monopoly Glavkhlopokoprom in January 1999 has opened the market to private financiers and input suppliers—notably two large foreign cotton trading concerns. The process of reorganizing previously state-owned and collective farms has not always proceeded smoothly, however, as farmers have remained heavily dependent on the old kolkhoz and sovkhoz management for access to key inputs and use of former collective assets, such as tractors. (EBRD 2000b:214–15) ‘The government plans to privatize 120 state-owned farms by September 2001’ (EBRD 2001a:90). Land reform is progressing, with around 40 per cent of co-operative farmland converted into dekhan farms (the former household plots of agricultural labourers) by the end of 2001. Land registration was made easier, fees were reduced and a land registry was established. (EBRD 2002:84) The share of peasant farms in agricultural land increased from 0.0 per cent in 1994, to 0.2 per cent in 1995 and to 6.6 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 44 per cent in 1992 to 58 per cent in 1998. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890). The volume of foreign direct investment is very small.

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Turkmenistan: a summary Turkmenistan is dominated politically by Saparmurad Niyazov (its autocratic president) and economically by gas. ‘Mr Niyazov is spinning his existing cult of personality into something approaching a state religion’ (Business Central Europe 1999:47). The president of Turkmenistan, Saparmurad Niyazov, is reputed to rule with an iron hand, tolerate no opposition and encourage a cult of personality. But his country has vast reserves of natural gas and a long border with Iran, which is why President Bill Clinton received him at the White House … Much as they did with China, Mr Clinton and his senior foreign policy advisers decided that the imperatives of doing business with Mr Niyazov outweighed their objections to his domestic repression, administration officials said. US officials are encouraging the former Soviet republics of Central Asia to develop greater political and economic independence from Moscow while trying to discourage them from forming closer ties with Iran … The US Trade and Development Agency agreed to provide $750,000 to finance a feasibility study of a natural gas pipeline that would run beneath the Caspian Sea, giving Turkmenistan access to the Turkish natural gas market without having to cross either Russia or Iran. (Thomas Lippmann, IHT, 25 April 1998, p. 5) [A] book published last year [2001] called Ruhnama…roughly translated as ‘spiritual revival’…[is] written by Saparmurad Niyazov… Teachers are being selected and promoted for their mastery of its contents and its systematic study in schools has squeezed out other subjects… But satellite dishes across the country allow residents to keep track of the outside world … The sacking of much of the hierarchy of the KNB, the security service, earlier this year [2002] …seems to have slightly eased the apparatus of repression. (Andrew Jack, FT, Weekend, 13 July 2002, p. i) Turkmenbashi…means ‘father of all Turkmen’… Turkmenbashi the Great is the glorified identity adopted by Saparmurad Niyazov… Every student in the country studies his book, the Ruhnama. Every government office has a weekly study hour to discuss Ruhnama… Niyazov perceived a nation deprived of a history or a code of its own traditions and values so he included both in his stream-of-consciousness guide to good thinking, the Ruhnama…[The] educational system is in dire straits. There are virtually no textbooks in the schools, according to teachers and foreigners. Niyazov banned all the Soviet-era texts, but new ones have not been produced to replace them… The important jobs…were filled by ethnic Russians and most Russians left Turkmenistan soon after independence… [But] Niyazov does not routinely terrorize his countrymen. There are fewer political prisoners here than in any other Central

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Asian states… The Turkmen have a reputation for gentleness and no democratic tradition… Gas…brings substantial revenues—not to the national treasury, but to Niyazov’s ‘presidential fund’, currently said by Western specialists to hold about $2.5 billion. Only the Great Leader can dispense these funds, which are held offshore. (Robert Kaiser, IHT, 11 July 2002, p. 2) Relations between Russia and the United States improved considerably after the 11 September 2001 terrorist attacks on New York and Washington. Turkmenistan was the Central Asian state which did least to help the United States as regards Afghanistan. Elections were held on 12 December 1999 for the fifty seats in parliament. Nearly all of Turkmenistan’s registered voters turned out to cast ballots for a legislature that will be monopolized by members of President Saparmurad Niyazov’s political party. Election officials said 104 candidates, 99 per cent of them members of the president’s Democratic Party of Turkmenistan, were competing for fifty seats in parliament. The voting did not even have a minimum level of pluralism necessary for a truly competitive election, OSCE said. (IHT, 13 December 1999, p. 4) On 28 December 1999 parliament amended the constitution to allow Saparmurad Niyazov to hold the presidency for life (IHT, 29 December 1999, p. 5). ‘Parliament meets for a few days annually to rubber-stamp his decrees… Mr Niyazov’s loyal parliamentarians…at their most recent meeting refused to leave…until he agreed to become president for life’ (The Economist, 8 January 2000, p. 66). [There has been criticism of a] law removing term limits for Mr Niyazov, effectively making him president for life… Observers in Washington and Ashkhabad, the capital, say political repression, harassment of religious organizations and promotion of a cult of personality around Saparmurad Niyazov have grown worse over the past year… Only two religions are officially recognized—Sunni Islam and Russian Orthodoxy. (FT, 1 April 2000, p. 7) In November 2001 there were the stirrings of real opposition to Niyazov, centred on exiled former foreign minister Boris Shikhmuradov. He was joined by other ex-ministers and ex-diplomats, who launched an effective campaign from abroad. Niyazov blamed Shikhmuradov and others (aided from abroad) for an alleged assassination attempt on 25 November 2002. Critics think Niyazov invents such incidents to justify crackdowns. The last Russian border guards left on 20 December 1999. The reliance of the economy on gas has often been emphasized. Although its gas reserves are the fourth largest in the world…its hands are tied when it comes to using this potential. Access to the only pipeline linking Turkmenistan with the outside world is restricted by Russia, and customers in

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the CIS partner countries are strapped for cash…60 per cent of gross domestic product comes from gas. (Deutsche Bank, Focus: Eastern Europe, 1996, no. 162, p. 3) The economy is dominated by the gas industry, which in 1996 accounted for close to half of GDP and three-quarters of industrial production and export revenues. In 1997 gas supplies to CIS customers were disrupted following disputes about rapidly accumulating payments arrears. Their resumption has been stalled by disagreements with Russia’s Gazprom over transit fees through Russia. This led to a 49 per cent decline in gas production, dragging down industrial production by 30 per cent. (EBRD 1998b 194) Policy has been to reduce the dependence on Russian pipelines for the transport of gas. On 29 December 1997 the new president of Iran, Mohammed Khatami (a moderate cleric elected in May 1997), attended the opening of the first pipeline to pump natural gas from Turkmenistan to Iran (IHT, 29 December 1997, p. 9). Although the scale of the pipeline development, financed by the government of Iran, is relatively small by world standards, the pipeline is important for Turkmenistan. Export revenues plummeted after March 1997 when Turkmenistan cut off gas exports to Russia, Ukraine and other former Soviet republics in a dispute about gas prices (FT, 30 December 1997, p. 1). Turkmenistan has the fourth largest natural gas reserves in the world and the pipeline will lessen dependence on Russian pipelines. Iran financed the pipeline and gas deliveries will be used to pay off Turkmenistan’s debt (IHT, 31 December 1997, p. 2). On 18 November 1999 an agreement was signed on a gas pipeline from Turkmenistan via the Caspian Sea to Turkey. Most of the population still has access to free water, gas and electricity (EBRD 1997b:206). Electricity, gas and water, as well as rents, remain free of charge for households (EBRD 1998b:194). Turkmenistan is one of the few transition economies where price controls remain in effect outside of public utilities and rents. The domestic prices of flour, bread, petrol and building materials are subject to control and are substantially below world market levels… Households have free access to water [there are frequent shortages due to under-investment] and pay nominal sums for electricity and gas… Enterprises pay slightly more [for electricity], but still well below costrecovery levels. (EBRD 1999b:274–5) ‘Public utilities remain a major source of subsidies to domestic enterprises, as power, gas and water are supplied virtually free of charge’ (EBRD 2000a:82). ‘The recent creation of a state fund for the textiles industry confirms Turkmenistan’s dirigiste approach to economic development’ (EBRD 2001a:92). ‘Both gas and oil are sold domestically at prices below short-run operational costs… From May 2001 individuals who want to claim government coupons for subsidized flour and bread have to apply to a committee’ (EBRD 2001b:202).

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Access to foreign exchange and provision of large subsidies to domestic consumers for water, gas, electricity, fuel and other public services remain under government control… The prevalence of output targets is another manifestation of the prevailing central planning mode in the country. (EBRD 2002b:206) ‘Only Turkmenistan, already lagging in reform, registered a further decline this year [2001]’ (EBRD 2001b:17). ‘Only in Turkmenistan, where the political commitment to reform has been weak, was there a backtracking in reform’ (p. 30). GDP growth did not turn positive until 1998 but in and after 1999 it was very high. The GDP growth rate was –5.3 per cent in 1992, –10 per cent in 1993 and –17.3 per cent in 1994 (EBRD 2000a:83). ‘Within the CIS developments in 1999 were dominated first by the Russian crisis, then by the unexpected strength of recovery in Russia and the rise of many commodity prices… The best placed have been countries with large natural resource sectors’ (pp. 5, 7). GDP in 2001 was an estimated 96 per cent of the 1989 level (EBRD 2002b:58). There was hyperinflation or near so in the period 1992 to 1996, with consumer prices rising by 493 per cent in 1992, 3,102 per cent in 1993, 1,748 per cent in 1994, 1,005 per cent in 1995 and 992 per cent in 1996. There was a significant improvement from 1997 onwards. The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was still only 25 per cent (EBRD 1999b:24, 276; and 2002b:20, 208). The slow pace of privatization has been traced in the EBRD’s Transition Reports. Large privatization remains largely at the planning stage. Little has been achieved to date in small privatization, but there has been substantial growth in the number of small private enterprises. There is no programme of property restitution (EBRD 1994:38). Large privatization has seen little progress (EBRD 1997a:33). Privatization has been slow, involving mainly small service units. A significant acceleration of the process was pledged in a series of presidential decrees in April and August 1997. Only enterprises such as public utilities were to be exempt. By the end of 1996 not a single large enterprise had been transferred to majority private ownership. In the first half of 1997 a handful of medium-sized enterprises were privatized by public tender (EBRD 1997b: 205–6). The April 1997 privatization programme continues to suffer from slow implementation (EBRD 1998a:42). Both small and large privatization continue to lag. Line ministries continue to exert effective control over the corporate sector. A modest acceleration of privatization occurred in the first half of 1998 when thirty medium-sized companies were sold (EBRD 1998b:194). Large-scale privatization is moving ahead at a modest pace. Problems remain with the framework for privatization. In particular the practice of setting a reservation price equal to book value makes sale of firms difficult because the true value of firms tends to be less than their book value. Social obligations on the privatized firms’ owners further reduce the value of enterprises on offer. (EBRD 1999a:45)

Introduction and overview

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‘Social obligations (such as a prohibition on laying off employees) are imposed on privatized firms, thus reducing their value to potential investors’ (p. 20). Twenty-three medium-sized enterprises were privatized in the first half of 1999, ten of them in textiles, seven in food and one in electric appliances (EBRD 1999b:274–5). ‘Recently completed sales of six pilot privatizations for larger enterprises suggest a preference for tight state control’ (EBRD 2000a:82). Since 1997, when the first wave of small-scale privatization came to an end, Turkmenistan has managed to sell only some 200 companies from over 2,000 of the original list of 4,300 privatization objects still remaining in state hands. It is thus one of the few countries in the region in which smallscale privatization has not been completed… The government has made several attempts in recent years to accelerate the process of medium-scale privatization. From the total list of 280 companies, a pilot list of eighteen was drawn up in 1999. By mid-2000, however, privatization was completed in only six of these companies. In most cases shares were distributed among the work force, the management and key suppliers to the plant (particularly in food processing). The government’s concern seems to have been to minimize potential disruptions that might result from reorientation of production post-privatization by building vertically integrated ownership structures along traditional ministerial lines… In January 2000 President Niyazov set up a new bank…to provide cheap loans primarily to small and medium-sized enterprises. By mid-year, however, only one loan had been approved… In June 2000 the president outlawed domestic citizens from holding foreign bank accounts… Over 95 per cent of credit still goes to the state sector. (EBRD 2000b:218) ‘Little progress in privatization…has been made since 1997’ (EBRD 2001b: 202). Privatization has stalled and is no longer on the policy agenda. No enterprise sales have taken place since the responsibility for privatization moved back to the ministry of economy and finance in 2001. All strategic assets remain stateowned and the government tends to hold at least a 50 per cent stake in all new commercial investments… Outside agriculture the private sector role in the economy is very limited. (EBRD 2002b:206) Centralized state trading remains a prevalent influence on both foreign trade and production. Outside this system licences can be obtained for most imports and exports, but duties and tariffs can be very high (EBRD 1994:39). There are formally few quota restrictions on imports but most foreign trade is subject to licensing (EBRD 1996:179). Centralized state trading remains a prevalent influence on both foreign trade and production (EBRD 1997b:206). At the beginning of November 1993 full currency convertibility and a unified exchange rate for the purpose of trade transactions were introduced in principle (EBRD 1994:39). There are various restrictions on current

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account convertibility and there are capital controls. There is a 50 per cent surrender requirement at the official rate and there are multiple exchange rates for different transactions (p. 111). The authorities moved to unify the exchange rate on 2 January 1996 at a rate close to the market rate. Prior to this an ‘official rate’ applied to all government transactions and a ‘commercial rate’ applied to all other transactions. After keeping the two exchange rates largely unified during January 1996, the authorities allowed a substantial wedge to emerge between the rates during the first half of February. On 22 February 1996 the manat was revalued. But on 30 March 1996 the official rate was again sharply devalued, leading to a reunification of the official and commercial exchange rates (EBRD 1997b:206–7). The commercial and official exchange rates were unified in April 1998, implying a depreciation of the official rate by 25 per cent. But the government continues to screen access to the central bank’s non-cash foreign exchange auctions, thereby implicitly regulating imports by enterprises. Moreover, surrender requirements on hard currency export earnings remain in place (EBRD 1998b:194). While Turkmenistan has few tariff and non-tariff barriers, foreign trade remains tightly constrained by restrictions on access to foreign exchange. Enterprises may apply for (but not necessarily receive) foreign exchange through the banking system to purchase capital equipment or to repay foreign currency loans. Consequently, there is a large parallel foreign exchange market (EBRD 1999b:274). An 11 March 1993 source reported that a law on the introduction of private land ownership had been adopted. Every citizen had the right to own up to 50 ha of land or to lease up to 500 ha on a long-term lease (CDSP, 1993, vol. XLV, no. 10, p. 26). A small share of land has been leased to private individuals. Land ownership has been legalized (EBRD 1994:38). The maximum plot size that can be owned privately is 50 ha (EBRD 1995b:60). During the first half of 1997 almost all land was allocated to individual farmers and the transfer of land titles to private ownership was envisaged after a two-year lease (EBRD 1997b:206). Following a decree on land reform in December 1996 most land has been allocated to individual farmers on a two-year lease and for eventual private ownership. But the registration of land titles has been slow owing to a lack of administrative capacity. Ownership rights remain contingent upon fulfilment of government-determined output targets for cotton and wheat. State control is also exercised through the allocation of collectively owned assets, input supplies and subsidized rural credit. Most individual plots are small and ownership rights do not extend to the sale of land (EBRD 1998b:19). State procurement remains in place for raw cotton and wheat, at prices representing less than half of their value on world markets. The government has extended substantial subsidized directed credits to agriculture. The latter are rarely paid back, effectively resulting in money creation by the central bank’ (EBRD 1999b:274). ‘Land reform is progressing with the allocation of individual land leases to almost all farmers’ (EBRD 2000a:82). As a result of below world market procurement prices for wheat and cotton and the distortions in the foreign exchange market, the agricultural sector in Turkmenistan is very heavily taxed… Net transfers out of agriculture reach 15 per cent of GDP… Given large effective taxation, the government’s push for further production increases in wheat and cotton has been based on very limited

Introduction and overview

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freedom for farmers to choose what to produce. (EBRD 2000b:218) ‘Little progress in…land reform has been made since 1997… The land reform process has stalled as few private land titles have been issued to existing leasehold farmers’ (EBRD 2001b:202). According to official figures, private sector employment reached 63 per cent of the total in 2001. However, this figure includes estimates for people employed in their own household and rural Dayhan farms (25 per cent of total employment), where commercial autonomy is limited. Their land rights are not tradable and they are typically reliant on the state for all inputs and are subject to strict output quotas. (EBRD 2002b:206) The share of peasant farms in agricultural land increased from 0.0 per cent in 1994, to 0.02 per cent in 1995 and to 0.04 per cent in 1998 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 17 per cent in 1991, to 22 per cent in 1992 and to 42 per cent in 1996. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890). The volume of foreign direct investment has been very modest considering the country’s natural resources. Uzbekistan: a summary Uzbekistan is dominated by the autocratic President Islam Karimov politically and by primary commodities such as cotton, gas and gold economically. ‘Mr Karimov has kept a tight grip at home, particularly over the media and the Islamic movement… Mr Karimov is suspicious of the free market’ (Business Central Europe 1997:53). ‘Mr Karimov seems more comfortable using the same repressive measures to control the economy that he uses to control political opposition: show-trials of speculators and money-changers are commonplace’ (Business Central Europe 1999:48). ‘The opposition parties in Uzbekistan have been clamped down on and the US state department has revealed significant abuses of human rights. President Karimov argues that restrictions on opposition parties are necessary to prevent the spread of Islamic fundamentalism’ (FEER, Asia 1994 Yearbook, 1994, p. 112). There were a number of bomb blasts in Tashkent on 16 February 1999 for which President Karimov blamed Islamic fundamentalists. Six people were sentenced to be shot. Clashes with Islamic militants have involved not only Uzbekistan but also countries such as Kyrgyzstan and Tajikistan. Critics of President Karimov say that he (along with others) is using the Islamic fundamentalist issue as an excuse to clamp down generally on political opposition, especially after the 11 September 2001 terrorist attacks on the United States.

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The Central Asian regimes launched repeated crackdowns against Islamic activities, in which not only militants but also thousands of ordinary prac-tising Moslems were jailed, tortured and sentenced to long prison terms in new gulags set up in remote corners of their countries… The refusal of the leadership to consider democratic or economic reforms, combined with their repression of religion, pushed moderates and political reformers into the camps of the radicals… The Islamic Movement of Uzbekistan has thus become the most powerful militant Islamic group operating in Central Asia today. Formed in 1998 by extremists who were determined to topple the government of… Islam Karimov, the IMU launched attacks against the regime from bases in Tajikistan and Afghanistan in 1999, 2000 and 2001… The IMU has extended its jihad to the whole of Central Asia… The IMU is still growing. (Ahmed Rashid, Telegraph, 22 January 2002, p. 15) An even more widespread Islamic Movement [than the IMU] is the Hizb-utTahrir al-Islami (the Party of Islamic Liberation) has taken root in Central Asia… The HT has become the most widespread popular underground movement in Uzbekistan, Kyrgyzstan and Tajikistan… The HT… seeks to unite Central Asia, the Xinjiang province in China and, eventually, the entire Islamic world community under a caliphate…liph [is a] civil and religious leader… The HT…does not advocate a violent overthrow of Moslem regimes. (Ahmed Rashid, Telegraph, 23 January 2002, p. 19) A presidential election was held on 9 January 2000. Islam Karimov was reelected with 91.9 per cent of the vote. His opponent, Abdulkhafiz Dzhalalov (first secretary of the national council of the People’s Democratic Party) won 4.17 per cent of the vote. President Islam Karimov of Uzbekistan was assured of victory in the presidential election Sunday [9 January] during which his only rival revealed that he had cast his vote for the head of state… OSCE refused to send observers to the vote. It said that authorities had done little to offer voters ‘genuine choice’. The only other candidate, Abdulkhafiz Dzhalalov, showed television cameras that he had voted for Mr Karimov. (IHT, 10 January 2000, p. 6) Proxy voting [e.g. a man voting for members of his family] is illegal in Uzbekistan, but the ban is not generally enforced… Islam Karimov…retained the presidency with 92 per cent of the vote. This was Uzbekistan’s first presidential election for eight years. One due in 1996 was cancelled…[His opponent] Abdulkhafiz Jalalov [Dzhalalov], a philosopher…voted for Mr Karimov. (The Economist, 15 January 2000, p. 72) A general election was held on 25 December 1994. Ahmed Rashid (FEER, 16 March 1995, p. 24) assessed the results thus:

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His [Karimov’s] People’s Democratic Party won 231 seats, with the remainder going to close allies in the Party of National Progress, which Karimov set up two years ago. Opposition parties, most of whose members have been jailed or forced into exile, have been barred since 1992 and were barred from standing in the elections… The turnout was high. Some 93 per cent of Uzbekistan’s people voted, many because government officials forced them to. A parliamentary election was held on 5 December 1999. ‘Western groups refused to send observers, saying the poll had failed to satisfy democratic norms’ (IHT, 6 December 1999, p. 6). ‘[In February 2000] pro-government parties won all the seats in parliamentary elections, with no opposition candidates standing’ (Business Central Europe 2000:49). In January 2002 Karimov used a referendum to extend the president’s term of office from five to seven years and to make parliament bicameral. Parliament voted Friday [5 April] to hold the next presidential elections in December 2007, adding two years to the term of President Islam Karimov … The vote ensured that a referendum extending the presidential term from five to seven years would affect Karimov’s current term. (IHT, 6 April 2002, p. 3) On 3 February 1999 Uzbekistan announced that it was to opt out of the CIS Collective Security Treaty, which had been signed in May 1992 by Armenia, Azerbaijan, Georgia, Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan (CDSP, 1999, vol. 51, no. 5, p. 11). By the time of the CIS meeting held on 2 April 1999 Uzbekistan, Azerbaijan and Georgia had withdrawn from the security treaty (CDSP, 1999, vol. 51, no. 14, p. 20.) ‘Uzbekistan has joined GUAM, the alliance comprising Georgia, Ukraine, Azerbaijan and Moldova. The alliance was renamed GUUAM’ (UZET, Quarterly Issue, January–March 2000, p. 19). Uzbekistan is supportive of the United States over the issue of international terrorism. It was the first former Soviet republic to allow the US military use of its bases to attack the Taleban regime in Afghanistan after the 11 September 2001 terrorist attacks on the United States. Uzbekistan announced yesterday [14 June 2002] that it was withdrawing from the alliance of five post-Soviet states known as GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova)… The GUUAM organization was created in 1997 as a strategic alliance of four states (Uzbekistan joining it two years later). Its official purpose was to broaden political and economic cooperation among the member states. In reality, however, the GUUAM countries joined forces in order to work together to break free of Russian influence… President Islam Karimov…[visited] the United States in March… Almost as soon as he returned to Tashkent…he said that the United States had done for Uzbekistan what its CIS partners had been unable to do. For the past five years

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Uzbekistan and its people had lived under the threat of an armed invasion by the Taleban and the ‘decisive role in easing the tensions on Uzbekistan’s southern borders was played solely by the United States and its resolve and well-trained military forces, not by the parties to the CIS Collective Security Treaty’. (Kommersant, 15 June 2002, pp. 1, 4: CDSP, 2002, vol. 54, no. 24, pp. 14–15) Although the GDP growth rate turned positive only in 1996, Uzbekistan’s earlier growth record was relatively good by CIS standards: –11.1 per cent in 1992, –2.3 per cent in 1993, –4.2 per cent in 1994 and –0.9 per cent in 1995 (EBRD 2000a:87). In 2000 GDP was an estimated 98 per cent of the 1989 level (EBRD 2001b:59). In 2001 GDP was 5 per cent in excess of the 1989 level (EBRD 2002b:58). ‘The economic downturn typical of all transition countries has been relatively mild in Uzbekistan… The production structure of Uzbekistan has been rather favourable… Availability of easily marketable products like cotton, gold and gas has alleviated the situation’ (UZET, Quarterly Issue, January–March 1998, p. 11). ‘Compared with the situation in other emerging markets the effects of the Russian crisis have been relatively mild’ (UZET, Quarterly Issue, April–June 1999, p. 44). The proportion of exports going to Russia was 15 per cent in 1998, while Russia accounted for 16 per cent of Uzbekistan’s imports (UZET, Quarterly Issue, October– December 1998, p. 5). There was hyperinflation in 1994 (1,568 per cent), with consumer prices rising by 645 per cent in 1992 and 534 per cent in 1993. Inflation fell sharply in 1995, but the lowest inflation rate to date was achieved in 1998 (EBRD 2002b: 217). ‘Uzbekistan has been struggling this year [2000] with…a severe drought, the worst in the past hundred years’ (CDSP, 2000, vol. 52, no. 42, p. 16). Economic reform has been slow. On 19 December 1996, for example, the IMF announced that it had suspended disbursements of a $185 million stand-by loan because of foreign exchange controls and a failure to meet inflation targets (FT, 20 December 1996, p. 6). An IMF mission ended in early March 1998. The government failed to reestablish an agreement owing to its adherence to exchange rate and trade restrictions (EBRD 1998a:43). The EBRD has referred to ‘increasingly severe administrative limitations on currency convertibility’ (EBRD 1996b:183–4). In the wake of intensifying balance of payments pressures the authorities have increasingly resorted to various restrictions on access to foreign currency, effectively reintroducing a currency rationing and licensing system with little transparency. At the beginning of 1997 an explicit multiple exchange rate regime was institutionalized. (EBRD 1997:212) The exchange rate had been unified in October 1994 (EBRD 1995a:68). The bulk of foreign trade is still channelled through state-owned foreign trade companies (EBRD 1995b:63). Since the second half of 1996 there have been significant setbacks in trade liberalization. Currency convertibility has been severely restricted since mid-1996 (EBRD 1997b:211). The state trading monopoly for the export of cotton and gold, which generated over 40 per cent of foreign exchange earnings in 1998, also remains in place

Introduction and overview

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(EBRD 1999b:282). Restrictive trade practices introduced in 1997 remain largely in place, including registration and prepayment requirements for imports and high average import tariffs. However, in recent months two encouraging steps were taken. The official exchange rate, at which mainly budgetary operations were calculated, and the inter-bank rate, at which companies with import permissions could obtain foreign currency, were reunified at the end of April 2000 at the higher commercial exchange rate, thus bringing the average administrative rate closer to the underlying market rate. Furthermore, at the end of June the government allowed banks to buy hard currency from the public at a rate close to the black market rate and excluded the import of consumer goods from the list of goods imported at the lower inter-bank rate. Yet full convertibility seems to have been postponed another six months to the middle of 2001… Limiting access to the official exchange rate market to capital goods was a welcome step. (EBRD 2000b:226) ‘While a multiple exchange rate regime is still maintained the decree on access to foreign currency issued in June and July 2001 has reduced distortions in the economy significantly’ (EBRD 2001b:210). The staff monitoring programme agreed with the IMF foresees full current account convertibility by mid-2002. This is to be achieved by gradually removing restrictions on access to hard currency for importers’ (EBRD 2002a:90). The recent reduction in the wedge between the official and black market exchange rates has been achieved, to a large extent, through lower cash emissions and tighter monetary policy rather than liberalizing the foreign exchange market. Uzbekistan maintains tight controls on cash withdrawals from banks by companies. This has allowed the authorities to liberalize the cash market while keeping a separate exchange rate for non-cash transactions… The list of consumer goods for which no foreign currency is available was abolished in June 2002 and the number of goods that cannot be exported was reduced. (EBRD 2002b:214) ‘Progress on the implementation of reforms decelerated significantly from late 1996 onwards. Especially, the collapse of world prices for cotton fibre and gold led the government to tighten trade and foreign exchange restrictions’ (UZET, Six-monthly Issue, July–December 1999, p. 54). ‘Instead of exchange interventions for supporting own currency the central bank practices the rationing of participants in foreign exchange sales. This surrender requirement was raised from 30 per cent to 50 per cent of proceeds in January 1999’ (UZET, Quarterly Issue, April–June 1998, p. 150). In 1997 cotton fibre accounted for 36 per cent of exports and energy products for 12 per cent (UZET, Quarterly Issue, January–March 1998, p. 17). The resolution on improving and developing the country’s off-exchange

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currency market (29 June)…aimed at putting an end to the foreign currency black market. Under the resolution authorized banks are entitled from 1 July 2000 to freely purchase and sell cash foreign currency in a bid through their specialized currency exchange offices… These banks have a limit on selling foreign currency (500 US dollars per person conditional upon the presentation of a visa or proof of travel). (UZET, Quarterly Issue, April–June 2000, p. 33) In January 1997 Uzbekistan (re)introduced a system of multiple exchange rates and restrictions on current account transactions with the aim of promoting import substituting industries, protecting foreign exchange reserves and subsidizing basic food imports… After a period of foreign exchange and trade liberalization in 1995–6, this system was first created as an emergency measure in response to growing balance of payments pressures… Since then the authorities have justified the continued—and intensified—use of current account restrictions with a need to direct resources from traditional exports (such as cotton, gold, minerals) to the development of a capital-intensive, importsubstituting industrial base (for example, automobiles, energy, chemistry) and to subsidize socially important consumer good imports… In practice Uzbekistan’s foreign exchange market is split into three segments: two official and one unofficial. In 1997 the largest segment was the so-called auction market at the Uzbek Republican Currency Exchange. In this market the government determines administratively an appreciated exchange rate, well below the market clearing level. Since at this rate demand for foreign exchange exceeds supply, the government has to restrict access and enforce supply [the latter through mandatory surrender of foreign exchange earnings]. (Rosenberg and De Zeeuw 2001:160–1) Uzbekistan has pursued a path of gradual price liberalization (UZET, Quarterly Issue, January–March 1998, p. 52). By 1998 almost all prices had been liberalized, the exceptions including flour, energy, housing services and some transportation tariffs (mainly for passengers) (p. 52). There are still monopolies (energy supply, transportation services, household services) or oligopolies (in industrial goods production) and their prices are controlled by government bodies (p. 54). There has been little restructuring in the economy and few bankruptcies. Large privatization in the non-agricultural sectors has been very slow. The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was still only 45 per cent (EBRD 1999b:24, 284; and 2002b:20, 216). The government is now starting to sell off larger enterprises, using management or employee buy-outs and auctions (Business Central Europe, May 1994, p. 74). Officially, small privatization is well advanced. In practice many privatized enterprises go on much as before. Large privatization is not progressing (Business Central Europe, April 1996, p. 78). ‘Privatization is at best half-hearted despite continual promises of strategic sales’ (Business Central Europe 1997:53). There has been no property restitution (EBRD 1994:40). ‘Application of vouchers has

Introduction and overview

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been excluded from the very beginning… Since January 1994 cash auction has become the basic method of small-scale privatization.’ The first auctions took place in March 1994. A mass privatization scheme using investment funds was adopted in 1995, but implementation has been ‘significantly delayed’. The ‘Privatization Investment Funds’ are expected to be formed by private entrepreneurs. Each citizen will be allowed to purchase from each fund up to one hundred ‘public privatization shares’, each costing the equivalent of 25 per cent of the minimum monthly wage. The funds will buy shares from the government (EBRD 1996b:23). The state would temporarily retain a majority interest in strategic sectors such as energy, fuel and gold mining. Economic restructuring has been hindered by the slow pace of privatization, the predominantly insider nature of the privatization process so far, strong bureaucratic obstacles and shortage of skilled managers, as well as the low degree of competition throughout the economy. (EBRD 1996b:183) By the end of 1996 about 94 per cent of small state enterprises had been transferred to private hands, typically to employee collectives. But less than 20 per cent of the 11,800 medium-sized and large enterprises had been privatized, in most cases only partially. The long-delayed mass privatization programme, based on investment funds, finally began to be implemented in late 1996. The first auction took place in December 1997. The typical ownership structure of a privatized enterprise is as follows: 25 per cent of shares retained by the state property committee; 26 per cent sold to employee collectives; 49 per cent available to the general public, including foreign investors. In many cases, however, a large part of this 49 per cent shareholding has either been transferred or sold to other state structures or remains with the state property committee. Shareholdings by individual investment funds are subject to a limit of 10 per cent (EBRD 1997b:211). The second phase of the programme has been delayed. The secondary market for shares has almost completely dried up since the government prohibited managers from buying shares in their own enterprises in early 1998 (EBRD 1998b:198–9). ‘In Uzbekistan the state remains unwilling to relinquish control of newly privatized entities’ (EBRD 1999a:20). Despite plans to speed up privatization ‘the privatization process has been slowed down by the state’s reluctance to give up controlling stakes in the newly privatized industries’ (p. 46). Privatization has so far been limited mainly to small enterprises, most of which had been transferred to employee collectives by the end of 1996. The mass privatization programme launched in 1996 has not given controlling stakes in industrial enterprises to private owners. Individuals invested vouchers in Privatization Investment Funds, which were then used to bid for minority stakes (most not exceeding 30 per cent) in around 150 mostly medium-sized enterprises. In 1998 the government shifted to trade sales for medium-sized enterprises. In 1998 international investment tenders were announced for some of its largest industrial assets. However, only one large chemical plant had been sold by September 1999. The main problem remains the government’s reluctance to offer majority stakes to strategic investors, although unrealistic price expectations, a difficult

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investment environment and the slump in commodity prices have also played a role… An example of the state’s interventionist approach to industrial restructuring is a legal provision granting the state veto rights over major restructuring decisions even in companies where it holds small minority stakes. (EBRD 1999b:282–3) Advances in the planned strategic sales of large industrial enterprises will depend on offering controlling stakes as well as lowering unrealistic price expectations… Recent attempts to sell state property via international tenders largely failed due to low demand in the face of the multiple exchange rate regime… The government is prepared to consider the sale of majority stakes. (EBRD 2000a:86) The state remains a majority shareholder in most large enterprises. Given the reluctance of the government to give up control to foreign investors, the World Bank-supported case-by-case privatization programme has not been successful. It was revitalized late in 1999 when a new list of twenty-seven companies to be privatized was drawn up… The state continues to hold majority stakes in most banks in the country and interferes in the credit allocation under the national investment plan. About two-thirds of all outstanding loans were extended under state direction. (EBRD 2000b:226–7) Progress in large-scale privatization remains slow, mainly as a result of exchange rate distortions and fears of government interference. Under the privatization programme, Uzbektelekom, ElectroChimProm (the energy monopoly), the National Bank for Foreign Economic activity (the country’s largest bank) and the Asaka Bank are to be sold. The government has extended the deadline to 2005 and has reduced the number of companies to be privatized from 258 to 162… A 50 per cent stake of Uzbektelekom is to be sold to a strategic investor. (EBRD 2001a:96) ‘Large-scale privatization is still lagging…and the government continues to be reluctant to sell majority stakes… The banking sector continues to be dominated by the state banks’ (EBRD 2001b:210–11). A new privatization plan for the sale of thirty-eight large enterprises was adopted in March 2001. So far majority stakes in two of the listed companies … have been sold to Russian investors… Measures [taken] have resulted in a large increase in the number of registered small and medium-sized enterprises. (EBRD 2002b:215) Insider control of privatized enterprises is still common.

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Many managers of large companies have been reluctant to sell shares to outside investors, preferring state and collective control. At present the law limits state ownership to 25 per cent and collective ownership to 26 per cent of the shares of privatized companies but this rule is not always observed. (UZET, Quarterly Issue, April–June 1998, p. 15) The privatization programme in Uzbekistan has been implemented in three stages. The first stage, largely completed in 1995, involved the privatization of housing units and small enterprises, essentially through the transfer of ownership to workers and managers. The second phase, which started in late 1996 and is still in progress, involves the privatization of medium-sized enterprises through a specific scheme: the Privatization Investment Funds programme… Basically, PIFs are to be offered (through auctions) shares of 600 pre-selected medium-sized and large enterprises, with, in turn, the possibility to sell public participation shares to the public. The third phase, which began in mid-1998, involves the privatization of large enterprises. It is based on a caseby-case approach and designed so as to involve substantial participation of foreign investors. (UZET, Quarterly Issue, October–December 1998, p. 60) ‘Although the current law restricts state ownership to 25 per cent, a resolution of the cabinet of ministers (August 1998) granted state representatives the right to postpone strategic decisions in shareholder meetings if the latter do not meet the interests of the state’ (p. 62). ‘The acceleration of the privatization process (especially the privatization of large-sized enterprises) is hampered by the lack of foreign investors’ interest… About 20 per cent of Uzbekistan’s medium- and large-sized enterprises have been privatized (p. 47). ‘Restructuring of privatized enterprises…remains so far limited. In particular the influence of the state on governance remains strong’ (p. 11). The main designs of the privatization process for medium-sized/large state enterprises were originally contained in…[a cabinet resolution] dated 18 November 1998… The resolution provided for a list of 258 enterprises to be sold by tender to foreign investors. However, the lack of buyers’ interest, especially due to the high prices of enterprises and the requirement that companies do not change their specialization, has led to the government adopting a new resolution in December 1999. The number of enterprises listed for privatization in 2000–2001 has been reduced to 162… Generally the state is to keep a controlling interest in major enterprises, including the Almalyk mining and metallurgical plant, the Tashkent Chkalov Aviation Production Association, the National Bank for Economic Activity and the Uzbek Oil and Gas Holding Company. (UZET, Six-monthly Issue, July–December 1999, p. 55) Agriculture accounts for about one-third of GDP… Nowadays the main objectives in agriculture are to shift from cotton monoculture to food grains

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(grain, fruits and vegetables) in order to achieve self-sufficiency and settle the ecological problems caused by wasteful usage of water for cotton irrigation. (UZET, Quarterly Issue, January–March 1999, p. 87) In 1991 individual subsidiary farming accounted for 60.6 per cent of total agricultural output. In addition 8,000 farmer holdings have been established. Unprofitable state farms have been transformed into co-operative and leased enterprises (Nikonov 1992:1161). The July 1990 law allowed individuals to lease but not to buy land. Even after January 1992 Uzbekistan retained retail price controls on basic foodstuffs and the system of state orders for agricultural production. The law on peasant farms was adopted on 3 July 1992. Individual peasant families were allowed to obtain a share of land and assets from the farm in order to establish their own private farms. But the right to leave with a land share was absent. So peasant farms can be established only as sharecropping operations within the large farms, when an entire state or collective farm is reorganized into peasant farms by its membership or on (the very little) unused yet suitable land (Van Atta 1993:598– 602). In Uzbekistan, where a large part of the state and collective farm economy is linked to the cotton complex, land reform has been limited. Some land distribution took place in 1992 and 1993, involving around 12 per cent of cultivated land. Most was allotted as very tiny plots to households on state and collective farms (Spoor 1995:51). In Soviet times the kolkhozes were formally co-operatives, not state-owned. Lately these and the state farms (former sovkhozes) have been transformed into co-operatives, joint stock companies, split up into family (dehkan) farms etc. The creation of such private farms (average size 15 ha) has been encouraged… Land remains state property. (UZET, Quarterly Issue, January–March 1998, p. 11) ‘At present different organizational forms are functioning: collective farms (shirkats), peasant (dehkan) farms, farm enterprises, tenant-operated farms, etc. Large collective farms are mostly specialized in cotton and grain’ (p. 30). In 1997 agriculture employed 40 per cent of the labour force, of which the contributions in percentage points were as follows: collective farms, 18.4; peasant (dehkan) farms, 1.6; private plots, 16.2; farm enterprises, 2.2. Some 87 per cent of arable land is irrigated. Agricultural products are sold by farms at free-market prices, except cotton and grain for which state orders still partly apply. In 1998 it was stipulated that state purchases for cotton fibre should amount to 30 per cent of output at a price of 85 per cent of the world market price. The remainder of output could be sold at market prices. State grain purchases were set at 25 per cent of output (p. 30). In conditions…where agriculture is mainly specialized in cotton on irrigated lands, and where agricultural production is inseparably connected with interfarm irrigation systems, the opinion prevails that land cannot be an object of purchase and sale. Otherwise it may lead to serious social and economic problems, sharp polarization of society, emergence of conflicts caused by land and water use,

Introduction and overview

47

degradation of irrigation systems etc. For the solution of the issue of land property sharing relations will be developed in the countryside. In this system land is distributed between members of farms, but it will not be an object that can be bought or sold. Each member of the farm shall be given a certificate, which secures him his share of the property and the profit obtained by the farm. (p. 31) In 1998 private farms accounted for 11.3 per cent of cultivated land, compared with 0.3 per cent in 1992 (UZET, Quarterly Issue, July–September 1998, p. 29). Large collective or co-operative farms still dominate cotton and grain production. The share of private farmers is still relatively small, while private plots make up the largest share in such products as potatoes, vegetables and fruit (p. 52). In 1998 dehkan farms accounted for 60.3 per cent of agricultural production (compared with 56.6 per cent in 1997). Cooperatives accounted for 35.8 per cent (compared with 40.2 per cent in 1997). The share of the household plot is substantial in livestock production and it has also significantly increased with respect to the production of cereals, vegetables and fruit. However, state involvement in the agricultural sector remains substantial. First…land largely remains state property. Second, public authorities still control agricultural enterprises through state orders for cotton and wheat. In addition, the state remains very active in the distribution of essential agricultural inputs…as well as in the financing of the irrigation system. Significant state support for the sector also takes place through preferential credits, rescheduling of debts and arrears, as well as preferential tax treatment. (p. 49) Since 1991 state farms (former sovkhozes) have been transformed into various forms of non-state collective enterprises. These include the creation of joint stock companies and producer co-operatives (shirkats). Private farming (dehkan farms and the private plots of rural households, farming enterprises) have also been especially encouraged. The process of ownership transformation in agriculture noticeably accelerated in 1999. In 1999, 989 agricultural enterprises (former kolkhozes) were converted into shirkats, which raised their total number to 963. The latter made up 33.7 per cent of overall production in 1999 against 60.7 per cent for dehkans. (UZET, Six-monthly Issue, July–December 1999, p. 57) In 1998 and 1999 the respective percentage contributions to agricultural output were as follows: dehkans, 62.8 per cent and 60.7 per cent; shirkats and other agricultural enterprises, 33.7 per cent and 34.7 per cent; farming enterprises, 3.5 per cent and 4.4 per cent (UZET, Quarterly Issue, January–March 2000, p. 62). The shirkat is a co-operative with permanent collective possession of land. As regards capital (land, equipment), shirkat members have their own shares. ‘Activity in shirkats is carried out by work teams (divided into work groups) and family contracts… Part of family production is owned by the family contractor (after provision of the production agreed upon in the contract).’ The

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dehkan involves the dehkan farm itself (with lifetime possession of land and family workers with only occasional hired labour) and household plots (with lifetime inheritable possession). Farming enterprises involve land leases of between ten and fifty years and family workers plus hired labour (pp. 63–4). ‘According to official statistics, the nonstate sector accounted for 65.6 per cent of GDP in 1999, 73 per cent of employment, 99 per cent of agricultural output and 61.4 per cent of industrial output’ (UZET, Quarterly Issue, April–June 2000, p. 13). The state owns almost all land but long-term leases for land exist. Most of the agricultural land has been leased to state farms and collectives. Land for individual use (commercial and residential) and attached to a building can be owned by private individuals. But the land must be used for its original purpose and cannot be traded freely. One-fifth of agricultural land is occupied by private farms or household plots, In January 1996 a regulation was issued which permitted the auctioning of land with the right of lifetime ownership and heritage (EBRD 1996b:183). Procurement prices for cotton and wheat, for which the state order system is still in place (covering 40 per cent of cotton production and 25 per cent of wheat production) are also administratively set (EBRD 1997b:211). The agricultural sector is largely unreformed. The state has almost full control over the vital cotton industry. The state sets production targets, supplies all inputs and procures the bulk of the crop. Individual farms have to fulfil a state order quota before being allowed to market the remaining cotton. All exports have been effectively centralized in four state foreign trade agencies. Land continues to be owned mostly by the state. A land code came into force in July 1998, which declared land state property that cannot be traded or mortgaged except in cases where there are specific provisions in other pieces of (as yet unspecified) legislation (EBRD 1998b:198–9). The government extracts large transfers from the agricultural sector to support its import substitution programme in industry. The cotton sector…is implicitly taxed at a rate of around 75 per cent’ (EBRD 2000a:86). Through a system of implicit and explicit taxation, every year the authorities transfer about 15 per cent of GDP out of agriculture into import substituting industries. As a result wages for farmers are a quarter those of industry and there is under-investment in the sector’s infrastructure… Compared with other transition countries, Uzbekistan maintains relatively high levels of social assistance… Expenditures [are tilted] towards the better-earning large cities. Wages in the agricultural sector are rapidly falling behind the national average, largely as a result of the government’s taxation policies. These policies have contributed to increased civil unrest …[The authorities insist] on the replacement of cotton and fodder with wheat. (EBRD 2000b:227) Reform of the agricultural sector is proceeding slowly. Government interference in the sector is still pervasive… State procurement of cotton, which is at a fraction of world market prices, continues to cover around 70 per cent of the total harvest…government has allowed a private company to procure and gin cotton.

Introduction and overview

49 (EBRD 2001b:211)

In an important pilot scheme introduced in January 2002 the government has agreed to transform all co-operative farms in three districts into private farms. Furthermore, the government has agreed under the [IMF] staff monitoring programme that the rules for state procurement of cotton and grain will be changed during 2002. Farms will now have to sell half of the actual harvest at fixed prices to the state rather than half of an unrealistically high target (as in the previous system). (EBRD 2002a:90) The prices [of cotton and grain] paid by the state are now linked to world market prices. However, the extent to which these [procurement and price] changes have been implemented for the 2002 harvest remains unclear… The government has reorganized the former sovkhozes and kolkhozes into new forms of collective farms (shirkats), whose subdivisions are farmed by extended families. The former household plots of farm labourers have been turned into peasant farms (dehkan), which have become the main source of dynamism in the agricultural sector. (EBRD 2002b:215) Uzbekistan initiated its agrarian reform in 1992. Land remained state property but land use was devolved, as state farms were replaced by collective farms and private use rights were established on the collectives (Pomfret 2000a:269–70). ‘In Uzbekistan the reform came from above and, although new household farms were created, they did not displace the old farms that remained as parallel institutions.’ The July 1992 law on peasant farms established 9,254 peasant (dehkan) farms and by the end of 1995 their number had increased to 21,514. Of these 9,346 were independent peasant farms with lifetime inheritable possession of use right and 12,168 were leasehold peasant farms formed on land from collectives. A January 1993 decree laid out a programme for restructuring the 1,062 state farms and by the end of 1995 only sixteen of these remained. Most of the state farms were turned into collective farms (p. 271). Twenty-six state farms, all producing only cotton and grain, were converted into joint stock companies, ‘apparently with little change in their behaviour’ (p. 280). ‘The collectives subsequently adopted something akin to the Chinese household responsibility system, creating new leasehold peasant farms on which families were granted use rights to parcels of land subject to providing their share of the output quota.’ Further decrees in 1994 authorized the creation of private livestock farms and private vineyards and orchards. At the end of 1995 the distribution of land area by farm type was as follows: state farms, 3.7 per cent; collective farms, 46.6 per cent; leasehold dehkan farms, 6.7 per cent; independent dehkan farms, 5.5 per cent; smallholdings, 9 per cent. The remainder of the land included the private livestock farms and other minor farm types. Smallholdings, which increased from 2.3 million in 1990 to 2.9 million in 1995, supply over two-thirds of animal products by value as well as a large share of potatoes, vegetables and melons, but they are minor producers of cotton or grain (p. 271).

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The kolkhoz [collective farms] dominate Uzbekistan’s agriculture, and not just by their size. They have retained responsibility for the distribution of water… The collectives often control other inputs, such as fertilizer, and sometimes the marketing of outputs… State control is reinforced by dependence on a major crop that requires state-provided inputs (especially irrigation) and is produced for export rather than local markets… The former state farm managers have retained their authority and their links with other key players in Uzbekistan’s political system… The statecontrolled banking system often acts as a monitor. By law purchases of seeds, fertilizer, machinery, fuel and other inputs must be through bank transfer, and revenue from agricultural sales must be deposited in a bank and can only be used for approved purposes. Depositors’ right of withdrawal in cash is circumscribed by centrally determined limits and local practice. The banks…serve the state in checking that funds are appropriately used… The pricing system gives little incentive for increasing output. The state order system is being liberalized as the percentage of the crop that must be sold to the state has been reduced—down to 30 per cent for cotton and 25 per cent for grain by 1998—but these numbers are misleading. If a farm produces less than its target output of cotton then the entire crop must be sold through the state order system… Although over four-fifths of livestock are now on some sort of private farms, rather than collectives, the livestock sector remains heavily influenced by kolkhoz policies. (Pomfret 2000a:272–3) The share of peasant farms in agricultural land increased from 0.1 per cent in 1992 to 1.7 per cent in 1999 (Spoor and Visser 2001:888). ‘In countries like Uzbekistan (and Kazakhstan) the comparison should be with arable land, as large tracts of agricultural land are desert (or steppe). In the Uzbek case this changes the percentage to 7.3 per cent’ (p. 889). The share of private farms and household plots in agricultural production increased from 33 per cent in 1991 to 53 per cent in 1997. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890). The Ferghana Valley is…home to a third of Uzbekistan’s population of 24 million… In return for their produce farmers are paid by the state up to one year late and then often in grain and cooking oil only. The state decides what crops they grow, and the harvest is turned over to officials, a muchresented practice retained since Soviet times. (The Economist, 10 November 2001, p. 80) ‘The burden of red tape is such that foreign investment is negligible for a country of Uzbekistan’s size’ (Business Central Europe, The Annual 1997–98, p. 53). A foreign exchange system that hinders the repatriation of profits continues to be a major impediment to foreign direct investment. In the oil and gas sector the

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country is increasingly looking to Russian energy companies as a source of investment but it is also implementing production sharing agreements for the first time with Western/Uzbek joint ventures. (EBRD 2001b:210) ‘Faced with difficulties in repatriating profits, long delays in obtaining vital inputs and a generally difficult investment climate, many foreign investors have left Uzbekistan over the last few years’ (EBRD 2002b:214).

Part I The Caucasus Armenia, Azerbaijan and Georgia

1 Armenia POLITICS The historical and demographic background Some major events in history: 1915, in response to the independence movement the Ottoman Empire kills more than 1 million Armenians in massacres and forced deportations; 1918, Armenia becomes an independent republic; 1918–20, at war with Azerbaijan and Turkey; 1920, made part of the Soviet Union; 1923, Stalin draws the current borders that places Nagorno-Karabakh in Azerbaijan (FT, 29 October 1999, p. 9). There are thought to be some 3.5 million Armenians in the diaspora, the trigger for which was the massacres of 1915 perpetrated by the Ottoman Turks (FT, Survey, 7 June 1995, p. 38). Around 95 per cent of the population in Soviet Armenia was Armenian. In 1992 only 2 per cent of the population were ethnic Russians (The Economist, 10 July 1993, p. 33). Ethnic Armenians account for 93 per cent of the population, Russians 2 per cent, Kurds 2 per cent and others 3 per cent (FT, Survey, 7 June 1995, p. 35). According to official figures, the population grew from 3,648,900 at the end of 1991 to 3,798,200 at the end of 1998. ‘As of 1 July 1999 the Armenian population officially amounted to about 3.8 million, even if, according to more realistic unofficial estimates that take into account people permanently living abroad, the actual population is around 3.1 million or even less’ (ARET, Quarterly Issue, April–June 1999, p. 23). Unofficial estimates indicate that more than 500,000 Armenians have fled in the last three years, reducing the population to 3 million (IHT, 28 April 1994, p. 12). Those leaving over the last year number somewhere in the range of 300,000 to 800,000 (CDSP, 1994, vol. XLVI, no. 16, p. 21). The exodus has reduced the population by 20 per cent to 30 per cent (IHT, 25 October 1995, p. 5). About a sixth of the population has fled abroad since 1991, to Russia, the USA and elsewhere (IHT, 20 September 1996, p. 2). According to official data, no migration change has occurred in Armenia over the past few years. On the other hand, different surveys assess very large rates of migration and it can be estimated that from 400,000 to 1 million persons have left Armenia during the past few years. (ARET, Quarterly Issue, January–March 1998, p. 27) ‘Western diplomats estimate that fully 2 million people have emigrated from Armenia since independence—more than half the population’ (The Economist, 19 August 2000, p. 20). ‘Western diplomats estimate that a third of Armenia’s Soviet-era population of 3.6 million people has left the country since independence in search of work and better living

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conditions’ (IHT, 7 September 2000, p. 2). ‘At least 40 per cent of its 3.5 million people have left since 1990’ (IHT, 28 May 2001, p. 6). In recent years lobbying groups representing 1 million Armenian Americans have used their wealth, influence and votes to sharply increase US economic assistance to their compatriots overseas. With the help of key members of Congress, they have turned Armenia into one of the largest recipients in recent years of US aid on a per capita basis after Israel. Last year [2000] US aid to Armenia accounted for $42 per person, compared with $34 per head for Bosnia, $3 for Rwanda, $1.4 for Russia and fourteen cents for India. Armenia’s good fortune is all the more remarkable because the overall US foreign aid budget is dropping. In an era when Washington stresses investment and trade as the best way to raise living standards, aid fell from around 0.2 per cent of GDP to 0.1 per cent during the eight years of the Clinton administration, ranking the United States at the bottom of donor nations in generosity. But in Armenia the trajectory has been up. Despite evidence of corruption and a patchy record on democracy and human rights there, Congress has voted six years in a row to increase aid for the nation of 3 million beyond levels requested by the Clinton administration. The tale demonstrates how, in an era of shrinking foreign aid, political connections are more important than ever. (Michael Dobbs, IHT, 25 January 2001, p. 5) A census carried out in autumn 2001 revealed that between 1991 and 2001 Armenia’s population fell from 3.7 million to 3.0 million… The figures suggest that as many as 900,000 people, or a quarter of the population, may have left the country since independence. The majority of emigrants are young and educated. (EBRD 2002b:115) ‘Western officials believe emigration may have halved the population over the past ten years, to about 2 million people’ (FT, 14 May 2001, p. 8). The fighting, which has killed about 30,000 people, peaked following the collapse of the Soviet Union in 1991, when Armenian troops seized NagornoKarabakh and hundreds of square kilometres of Azerbaijani territory surrounding it. Russia helped negotiate a ceasefire in 1994, but about 100 people a year are still killed by snipers and land mines near the line of control. (IHT, 17 July 2001, p. 2) Political developments 2 February 1993: prime minister Khozrov Arutyunyan and his government are dismissed. (He thought the economic programme did not sufficiently protect the interests of the neediest segments of society) Grant Bagratian was made premier. Strongly proreform, he was a deputy prime minister who had pioneered land privatization. 7 September 1993: Armenia agrees (subject to ratification) to take part in the rouble

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zone. 28 December 1994: president Levon Ter-Petrossian suspends the opposition Armenian Revolutionary Federation (Dashnak) for six months and the party’s members will be allowed to stand only as individuals in the 5 July 1995 general election. The president talked of terrorism and drugs, calling Dashnak a ‘terrorist, fascist organization’. (The mayor of Yerevan had been murdered a couple of weeks earlier.) Eleven opposition publications were closed. 12 January 1995: the suspension of Dashnak is upheld by the supreme court, but on the grounds that its ruling Athens-based ‘bureau’ has foreign citizens as members (Guardian, 19 April 1995, p. 10). 5 July 1995: the general election takes place as well as a referendum on whether to adopt a powerful presidency. The ruling party is the All-Armenian National Movement. ‘Most analysts expect the new parliament to have a close resemblance to the current legislative body, which is dominated by state factory directors, local politicians and other allies of Mr Ter-Petrossian’ (FT, Survey, 7 June 1995, p. 35). Candidates competed for seats in the 190-member National Assembly. Forty seats were allotted to party lists and 150 seats to single-member constituencies. The Dashnak suspension has already been mentioned, but nine other parties were excluded from the election (on technical grounds such as allegedly forged signatures). Thirteen parties and around 2,000 candidates (including some thirty ‘independents’ from Dashnak) took part. OSCE observers thought the election ‘generally free but not fair’. Apart from the banning of certain parties from participating, mention was made, for example, of the manipulative use of the media by the government and inadequate explanation of the new constitution. According to preliminary figures, the Republic bloc (headed by the All-Armenian National Movement) won twenty out of the forty seats allotted to party lists. There were reports that the bloc also won a convincing victory in the election for the 150 seats allotted to single-member constituencies. All told, the ruling party is assured of at least two-thirds of the seats in parliament’ (CDSP, 1995, vol. XLVII, no. 28, p. 19). The referendum on the constitution needed at least one-third support from eligible voters for the constitution to be approved. The draft constitution envisaged a powerful presidency, e.g. with the ability to dissolve parliament and appoint senior members of the judiciary. ‘In all, 68 per cent of the voters cast their ballots in favour of it’ (CDSP, 1995, vol. XLVII, no. 28, p. 19). ‘Mr Ter-Petrossian emerged from the elections with effective control of all three branches of government, including 160 of 190 parliamentary seats and the right to appoint all judges’ (IHT, 28 November 1995, p. 7). 22 April 1996: a partnership and co-operation pact is signed with the EU. The pact offers trade concessions and access to certain EU loans (IHT, 23 April 1996, p. 5). 22 September 1996: the presidential election takes place. The turnout was 52.9 per cent. The electoral commission declared Levon TerPetrossian the winner in the first round with 51.75 per cent of the vote. Vazgen Manukian was given 41.29 per cent, Sergei Badalian 6.34 per cent and Ashok Manoucharian 0.60 per cent.

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There followed days of demonstrations by supporters of opposition parties alleging massive fraud. International observers reported some cases of fraud and intimidation at polling places, but said that the incidents did not appear to be systematic (IHT, 30 September 1996, p. 11). ‘International observers said there had been problems, but stopped short of calling the election unfair. Some said the irregularities might have been enough to tip Mr Ter-Petrossian over the 50 per cent needed to win in the first round’ (FT, 30 September 1996, p. 2). A group of international observers presented its preliminary findings: there had been some serious violations of the law, but they ‘had no substantial effect on the election results at this stage’ (CDSP, 1996, vol. XLVIII, no. 39, p. 12). OSCE released its final statement on 1 October. It highlighted serious breaches during the tabulation of results, noting the disappearance of some 22,000 ballots. This was enough to bring Ter-Petrossian’s share of the vote below 51 per cent and, argued the statement, given the small margin of his victory could ‘only contribute to a lack of confidence in the overall electoral process and could even question the results of the first round of balloting’ (Edmund Herzig, The World Today, 1996, vol. 52, no. 11, p. 294). More encouraging, says Herzig, was the release of a number of opposition figures detained in the wake of the violence (p. 295). At first the security forces tried to restore order, but on 26 September the president sent in tanks and troops and banned rallies and demonstrations. Parliament voted to allow criminal investigations against eight opposition leaders by lifting legal immunity. (Six were detained on 26 September but released the following day. As a presidential candidate Vazgen Manukian had legal immunity until 29 September. He went into hiding.) ‘By official count fifty-nine people were wounded and eight arrested, but diplomats and opposition leaders say more than 200 Armenians have been detained and some seriously beaten’ (FT, 5 October 1996, p. 2). One soldier and one demonstrator were reportedly killed on 26 September. The candidates: Levon Ter-Petrossian. Slogan is ‘Victory, Stability and Independence’. Vazgen Manukian. Former prime minister (1990–1) and defence minister. Most opposition parties rallied behind him. He came out of the Armenian national movement in the late 1980s (IHT, 20 September 1996, p. 2). He comes from much the same nationalist background as the president. He does not offer useful new policy ideas, he has launched telling attacks on Mr Ter-Petrossian’s monopolistic rule. It has led, he says, to cronyism in business and government and to an erosion of civil freedoms. Mr Manukian promises a fight against corruption, plus stronger constitutional and judicial checks on presidential power. (The Economist, 21 September 1996, p. 50) Manukian agrees with free-market economics…but… Mr Manukian has played the populist. Tapping into deep dissatisfaction among the poor, he has promised to increase wages tenfold, repatriate Armenian capital, fight official corruption and prevent Armenia from turning into a ‘Middle Eastern trading country’ devoid of industry. (David Hoffman, IHT, 20 September 1996, p. 2) Sergei Badalian. Communist candidate. Ashok Manoucharian.

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According to international observers, the vote was marred by ‘significant and serious breaches in the law’. Their preliminary report suggested that such breaches were not enough to sway the election, but now that Mr Ter-Petrossian has claimed just shy of 52 per cent of the vote, the legitimacy of his victory is in strong doubt. (Washington Post, leader column, IHT, 2 October 1996, p. 6) In a final assessment OSCE talked of serious irregularities in vote counting. There was a disparity of 22,013 between the number of registered voters and the number of ballots cast as reported by the electoral commission (21, 701 of which were in the capital Yerevan). (Ter-Petrossian passed the 50 per cent threshold by 21,941 votes.) The OSCE report concluded that: ‘Errors in the verification process can only contribute to a lack of confidence in the entire electoral process and call into question the results…[But the irregularities were not a] systematic attempt to deny the will of the people.’ At a clandestine press confidence (since he was in hiding) Vazgen Manukian remarked that: The illegitimacy of power could have very serious consequences for Armenia. We must insist that the results are checked. If that is not possible it is necessary to organize new presidential elections’ (IHT, 3 October 1996, p. 5). Vazgen Manukian has only recently emerged from hiding (IHT, 4 January 1997, p. 7). 4 November 1996: prime minister Grant Bagratian resigns and is replaced by Armen Sarkisyan. 8 November 1996: over a third of the cabinet is replaced (CDSP, 1996, vol. XLVIII, no. 45, p. 19). 22 November 1996: the constitutional court declares the election valid (CDSP, 1996, vol. XLVIII, no. 47, p. 20). 20 March 1997: Robert Kocharyan, the president of Nagorno-Karabakh, is appointed prime minister of Armenia. 29 August 1997: Yeltsin and Ter-Petrossian sign a treaty of friendship, co-operation and mutual assistance (CDSP, 1997, vol. XLIX, no. 35, pp. 16–17; ARET, Quarterly Issue, January–March 1998, p. 73). The military and economic cooperation pact between the two countries includes a promise to consult each other whenever there is an external threat (Business Central Europe, October 1997, p. 17). 30 August 1997: a joint stock company called the Armenian and Russian Gas Industry is formed, owned by the Armenian ministry of energy (45 per cent), Russia’s Gazprom (45 per cent) and the Itera International Power Corporation (10 per cent). The new company will transport gas from Russia to Armenia and to third countries (primarily Turkey). It will also produce, distribute and sell electricity (CDSP, 1997, vol. XLIX, no. 35, p. 17). 3 February 1998: President Ter-Petrossian resigns: ‘I have faced demands to resign. Considering that in this situation exercising the president’s constitutional powers may cause a serious destabilizing of the situation, I accept this demand and announce my resignation.’ The key problem was the president’s willingness to make concessions over Nagorno-Karabakh in order to help Armenia’s economy and avoid international isolation. His main opponent was prime minister Robert Kocharyan, who thought the president was

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making too many concessions. The power struggle caused a split in Ter-Petrossian’s ruling Respublica bloc and on 2 February several senior officials defected, including the foreign minister and the chairman of the central bank (FT, 4 February 1998, p. 2; IHT, 4 February 1998, p. 7). OSCE’s latest two-stage proposal involves Armenia withdrawing from the districts around Nagorno-Karabakh and putting off discussing the status of Karabakh and the road link to Armenia. Ter-Petrossian backed the plan. He said that Nagorno-Karabakh would have to settle for de facto independence while technically staying part of Azerbaijan. Kocharyan has rejected the OSCE plan, saying that no land will be handed back without agreement on the status of Nagorno-Karabakh (FT, Survey, 3 March 1998, p. ii). 4 February 1998: parliament accepts the resignation of the president and the speaker of parliament. Under the constitution the person next in line to be acting president after the speaker is the prime minister. A presidential election must be held within forty days (IHT, 5 February 1998, p. 7). ‘His [Ter-Petrossian’s resignation]…formalizes the increasing grip on power of an unsavoury band of military and security officials. Their troops beat demonstrators protesting election fraud, and some have ties to a group that has attacked religious minorities’ (The New York Times, editorial, IHT, 10 February 1998, p. 8). Even before Levon Ter-Petrossian resigned as president… Armenia’s top military officials had become the nation’s main political power brokers, local officials and Western diplomats say… The ascendancy of Armenia’s military takes place in a region where military force has tipped the balance of power… In a speech in September [1997 Ter-Petrossian said that]… Nagorno-Karabakh could retain effective independence but would technically have to remain part of Azerbaijan. (Steve LeVine, IHT, 10 February 1998, p. 5) ‘Let us not be preoccupied with self-deception,’ he [Ter-Petrossian] wrote, adding, ‘On the issue of Nagorno-Karabakh, we have no allies. Our only ally is to reject adventurism… Certain powers you all know demand my resignation,’ he said, using an old Soviet euphemism for the police and army. Mr TerPetrossian’s sin was acceptance of a step-by-step approach to resolving the Nagorno-Karabakh conflict. Under a formula proposed by the ‘Minsk group’ of negotiators, in which the United States plays a leading role, Armenia would surrender some buffer zones to Azerbaijan and allow refugees to go home, while international peacekeepers would be employed in Nagorno-Karabakh. Talks on the final status of Nagorno-Karabakh would be put off… Mr TerPetrossian’s shift toward compromise grew out of persistent hardship… ‘The only option is a compromise,’ Mr Ter-Petrossian warned. ‘We cannot wait’… Armenia is losing out in the regional oil sweepstakes. It would have been a natural route for a pipeline from Azerbaijan. The pipeline and revenue from it are now likely to go to Georgia. The border with Turkey…is closed in solidarity with Azerbaijan … Opponents of compromise…argue that a solution must come in the form of a package deal, including an agreement about the final

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status of the enclave… Acting president Robert Kocharyan…prefers a package deal. (Daniel Williams, IHT, 5 March 1998, p. 6) 9 February 1998: the justice ministry lifts the suspension on Dashnak. (Dashnak, the opposition party, was suspended by Ter-Petrossian in December 1994. The supreme court upheld the suspension in January 1995.) The justice ministry also orders the release from prison of Vahan Oganesian and Grant Markaryan, both of Dashnak. The former was sentenced in 1995 to four years in jail on charges of having incited a coup, while the latter was serving a sentence for allegedly antigovernment activities. In April 1997 Oganesian sought to run for parliament but prosecutors refused to let him out of jail to campaign (IHT, 11 February 1998, p. 5). 16 March 1998: the first round of the presidential election takes place. The turnout is 65 per cent. There were twelve candidates. Robert Kocharyan won 38.8 per cent of the vote. Karen Demirchyan came second with 30.7 per cent of the vote. (He was leader of the Communist Party in Armenia from 1974 until he was dismissed in 1988.) Other candidates included former prime minister Vazgen Manukian and communist party candidate Sergei Badalian. International observers talked of violations smaller than on the last occasion and uncoordinated. But the voting still fell short of Western standards. OSCE representatives observed ‘significant violations’ in 15 per cent of precincts, including ballot-stuffing and the presence of undercover government agents in polling stations. But the first two candidates were so far in front that the result was not affected (IHT, 19 March 1998, p. 4). 30 March 1998: the second round of the presidential election takes place, with a turnout of around 50 per cent. Robert Kocharyan wins by an unexpectedly large margin of 59.33 per cent of the vote to Karen Demirchyan’s 40.67. OSCE said that there had been some instances of fraud but it did not question the outcome. Some of the 150 observers, however, criticized the report as too soft and claimed that the level of fraud could have affected the result (IHT, 2 April 1998, p. 10). A statement from the 140-strong OSCE observer mission called the final round ‘a step forward…towards a functioning democracy’. The irregularities did not affect the outcome. But other independent Western observers were outraged by the OSCE statement and said it did not reflect what they had seen (FT, 2 April 1998, p. 2). A preliminary OSCE report described irregularities in the 30 March vote, including ballot-box stuffing and ‘sufficient indication of vote fraud to require further investigation and possible criminal charges’. But the observers also said that in terms of equal access to media, reduced pressure on voting soldiers and unfair use of state resources this election was cleaner than the last. The irregularities uncovered would not have produced a different result. Kocharyan is committed to introducing legislation to curb the president’s wide-ranging powers in favour of parliament and to improve the election law. He has said that he will appoint a government representing a broad range of parties and interests. He has acknowledged that parliament, from which much of the opposition was excluded, does not fairly represent the country (IHT, 7 April 1998, p. 8). 10 April 1998: Armen Darbinyan is appointed prime minister. He was deputy head of

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the central bank from 1994 to 1997, when he was appointed finance minister (IHT, 11 April 1998, p. 2). (He was formally accepted by the president on 20 April 1998.) 30 May 1999: a general election is held. There are 131 seats in the National Assembly. Unity bloc. The leaders are Karen Demirchyan (former Soviet communist leader and leader of the People’s Party) and Vazgen Sarkisyan (defence minister and leader of the Republican Party). Communist Party. National Democratic Union (centre-right). Dashnaktsutiun (right-wing). Advocates a tough stance over Nagorno-Karabakh (FT, 29 May 1999, p. 5). Six parties (blocs) obtained more than the minimum 5 per cent of votes needed to win seats. Unity bloc came first with 41.7 per cent of the vote, the Communist Party was second with 12.1 per cent of the vote, and Right and Unity bloc was third with 8 per cent of the vote (ARET, Quarterly Issue, April–June 1999, p. 61). Vazgen Sarkisyan, the defence minister, led his Unity bloc to victory in the election (FT, 8 June 1999, p. 2). 7 June 1999: prime minister Armen Darbinyan resigns. He did not actually take part in the election (FT, 8 June 1999, p. 2). (He was replaced by Vazgen Sarkisyan.) 22 June 1999: a partnership and co-operation agreement is signed with the EU (ARET, Quarterly Issue, July–September 1999, p. 71). 29 June 1999: Karekin I, Catholicos and Supreme Patriarch of All Armenians, dies in Etchmiadzin, the spiritual centre of the Armenian Church (The Times, 14 July 1999, p. 23). (A new head of the Armenian Church was elected on 26 October 1999: Guardian, 20 October 1999, p. 22.) 27 October 1999: five gunmen open fire in parliament. The eight dead were prime minister Vazgen Sarkisyan, Karen Demirchyan (speaker of parliament), two deputy speakers of parliament, the energy minister, a senior adviser on economic policy and two MPs. The gunmen then took hostages in the building. One of the gunmen was ultranationalist Nairi Unanyan, a journalist and editor of the publication Dashnik. The radical Dashnak Party (a nationalist group) said that Unanyan was once a member of the party but denied his claim that he is a current member. (He was expelled from the party in 1994.) Unanyan's brother and uncle were among the gunmen. The gunmen demanded to be allowed to address the nation on television and radio. Witnesses said they talked of a ‘payback’ for corruption by the elite. The gunmen also said: ‘It is a gang of parasites’; ‘We have come to avenge those who drank the blood of the nation.’ The gunmen claimed they were launching a coup and called for the people to support them. Unanyan had previously complained of the lack of proper elections in Armenia. US deputy secretary of defence Strobe Talbott had left Yerevan only hours before the incident, following talks with President Robert Kocharyan about Nagorno-Karabakh. (Strobe Talbott returned to Armenia on 29 October.) (IHT, 28 October 1999, p. 1; The Times, 28 October 1999, pp. 1, 21, 25, 27;

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Independent, 28 October 1999, pp. 1, 15; FT, 28 October 1999, p. 10; Telegraph, 28 October 1999, pp. 1, 18.) 28 October 1999: after negotiations with President Robert Kocharyan the gunmen surrender. As part of the deal they are promised a fair trial and allowed to broadcast a recorded statement on national television. Nairi Unanyan: ‘Apart from prime minister Vazgen Sarkisyan all the other victims are unfortunately accidental and they are innocent victims’; ‘The time has come for these vampires to pay for what they have done to our nation. They have driven the country into deadlock. We did not have elections in this country for five years now. People are desperately poor’; 'It is the miserable situation the people are in. There is not a single positive development in Armenia; development is being hindered by the bloodsuckers of the nation’; ‘We wanted to save the Armenian people from perishing and restore their rights. Those responsible for robbing the country must face trial along with us’; ‘We have no demands; we want the people to live well.’ Other comments by Unanyan: ‘The country has been pillaged. Our compatriots have only one idea—to leave’; ‘Our children do not have any shoes or books to take to school. Our economy is in ruins’; ‘Our wonderful country has fallen to pieces’; ‘The country finds itself in a deadend situation and this was an attempt to unite the people.’ (IHT, 29 October 1999, pp. 1, 4; The Times, 29 October 1999, p. 19; Independent, 29 October 1999, p. 16; Telegraph, 29 October 1999, p. 15; Guardian, 29 October 1999, pp. 15, 22; FT, 29 October 1999, p. 9.) 29 October 1999: ‘President Robert Kocharyan said Friday [29 October] that he would assume control of the government until a new prime minister is appointed’ (IHT, 30 October 1999, p. 2). 3 November 1999: Aram Sarkisyan is appointed prime minister. He is a director of a cement enterprise and is the younger brother of the assassinated prime minister. 2 May 2000: president Robert Kocharyan dismisses prime minister Aram Sarkisyan and defence minister Vagharshak Harutyunyan, claiming intrigues against him. Kocharyan: What is happening in our country is directly shaking the foundations of our state. The political games of certain ministers within the government have become a way of life, and all of the country’s economic problems are increasing because of this. (IHT, 3 May 2000, p. 4; FT, 3 May 2000, p. 10) Kocharyan: The Armenian constitution requires that the government and the president work closely together. That requires that there be a single team acting to achieve common goals. Unfortunately, such a team could not be created. Moreover, political intrigue had become a way of life in the executive branch, while economic problems continued to snowball. (CDSP, 2000, vol. 52, no. 18, p. 15) Appointment of the prime minister is the prerogative of the president (CDSP, 2000, vol.

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52, no. 18, p. 15). 15 May 2000: President Robert Kocharyan has appointed Republican Party leader Andranik Margaryan to the vacant post of prime minister… He [the president] said that the People’s Party of Armenia…had refused to join the Republican Party, its partner in the Unity bloc, in taking responsibility for the government… Yerkrapa (Defenders of the Country) public organization of Karabakh war veterans, which until now had been a major political base for the Republican Party, has also refused to support the Republicans. (CDSP, 2000, vol. 52, no. 20, p. 22) 26 September 2000: Armenia and Russia sign an agreement on reciprocal visafree travel by the two countries’ citizens. ‘Armenia is the first state in the CIS to resolve one of the most serious problems of the past several months in relations with Russia’ (CDSP, 2000, vol. 52, no. 39, p. 19). 11 September 2001: there are terrorist attacks on the USA. (For details, see the entry in the chapter on Tajikistan.) 17 September 2001: The first official visit to Armenia by a Russian president was marked by success from the very beginning… The Russian president said…[the settlement of the Nagorno-Karabakh issue] should be based on a compromise between Armenia and Azerbaijan… Moscow’s decision to reinforce its military presence in Armenia is further evidence of Russia’s intention to fundamentally strengthen its position in the Transcaucasus. Russian defence minister Sergei Ivanov, who accompanied Vladimir Putin to Yerevan, confirmed the establishment of Armenian-Russian armed units… Russia and Armenia signed five key agreements on economic co-operation. (CDSP, 2001, vol. 53, no. 38, p. 19) 25–7 September 2001: Pope John Paul II visits Armenia. ‘He will join celebrations of 1,700 years of Christianity as the state religion. Armenians adopted Christianity as their official religion in 301’ (IHT, 22 September 2001, p. 2). Armenia in 301 became the world’s first country to declare itself Christian. The Armenian and Catholic Churches split in a fifth-century theological dispute over the divine and human natures of Jesus Christ. But the Armenian Church has established friendly relations with both the Vatican and the Orthodox Churches. (IHT, 26 September 2001, p. 7) ‘The Armenian Apostolic Church broke away from the Vatican in the sixth century’ (IHT, 28 September 2001, p. 4).

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Pope John Paul II paid a moving tribute Wednesday [26 September] to as many as 1.5 million Armenians who were killed in the early twentieth century, but stopped just short of using the word ‘genocide’ to describe what happened to them… The Pope’s prayer was in English except for the words metz yeghern, which mean ‘great crime’ or ‘great evil’ in Armenian. For more than seventyfive years the Armenians have used the term to refer to the deaths of 1.5 million Armenians when the Ottoman Empire collapsed during World War I. Turkey firmly denies Armenian charges that Ottoman Turk armies were involved in a genocide, a word that came into general use only after World War II… The Pope…was flanked by the Armenian Apolistic Church’s leader, Catholicos Karekin II. Mount Ararat…could be seen across the border in eastern Turkey, the region where Armenians say their forefathers were exterminated between 1915 and 1923. (IHT, 27 September 2001, p. 5) Some dictionaries say that over the years yeghern has come to mean ‘genocide’… Turkey strongly denies the Armenian community’s accusation that Ottoman Turk armies carried out a policy of genocide… Turkey says that Armenians died, in much lesser numbers, as part of normal warfare…In February Ankara banned two French companies from defence tenders for a year after the French national assembly voted to recognize the accusation of genocide. (Guardian, 27 September 2001, p. 18) 14 December 2001: ‘US defence secretary Donald Rumsfeld left Friday [14 December] to visit Azerbaijan, Armenia and Georgia for talks on the war on terrorism… The three countries have offered Washington use of their airspace for military action in Afghanistan’ (IHT, 15 December 2001, p. 4). 26 March 2002: Armenia has agreed to hand over to Russia the ownership of five state enterprises, including the country’s main thermal power plant, in return for cancelling $98 million in state debt… An agreement would be signed within a month… Armenia’s cabinet last week approved a list of companies to be transferred to Russian ownership. It included the Razdan thermal power plant, the Mars electronics factory in Yerevan and three research institutes that were once part of the Soviet military-industrial complex… Armenia…has seen a sharp drop in foreign investment in recent years. The Russian debt accumulated in the ten years since independence. (FT, 27 March 2002, p. 6) 12 April 2002: Thousands of Armenians angry that a television station had been taken off the air marched to the residence of President Robert Kocharyan on Friday [12 April]

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to demand his resignation. The police said about 8,000 demonstrators took part in the rally to support the A1-Plus television station. (IHT, 13 April 2002, p. 3) 5 November 2002: An agreement transferring the shares of five enterprises [to Russia]…in payment of Armenia’s $93.76 million debt was signed in Yerevan yesterday [5 November]… For the first time the Russian government is applying the ‘debts in exchange for investments’ scheme to its own debtors… Russian prime minister Mikhail Kasyanov…believes that exchanging debts for assets is best suited for credit settlements between companies… He promised to soon identify companies that will work with the transferred enterprises and did not rule out the possibility that the Armenian companies would be privatized. The most important thing is that the currently idle enterprises start operating again. The enterprises in question are the Razdan State Regional Power Station, the MARS closed joint stock company and three research institutes (dealing with automatic control systems, computers and material science). The shares will be transferred to the ministry of property relations by May 2003 in payment of the $93.76 million principal of the debt. Armenia will pay the rest of the debt, $3.2 million in interest, by the end of the year. (CDSP, 2002, vol. 54, no. 45, p. 16) February 2003: Russia has assumed management of Armenia’s only nuclear power station and main electricity producer in exchange for $40 million in fuel debts… The deal, announced last week, is the latest instance where Armenian officials handed over prime pieces of industry to write off sums owed to Russia. Yerevan last year [2002] cleared around $100 million in outstanding debt by transferring ownership of five of the country’s main enterprises, including the main thermal power plant and an electronics factory. Details of the agreements on the Medzamor nuclear power plant were few, however. Moscow would take over financial management, while the plant itself, which provides around 40 per cent of Armenia’s electricity needs, remained in Armenian hands… Medzamor not only helps provide round-the-clock power, but provides a margin to export electricity to nearby Georgia… Press reports said Russia’s atomic energy ministry and RAO UES, the Russian electricity monopoly, would pay off Armenia’s $32 million debt to TVEL, Russia’s nuclear power operator, and would provide $8 million to purchase additional nuclear fuel. Medzamor…[is] built to the same design as the Chernobyl atomic power station in Ukraine… [and] is located on a highly sensitive seismic fault line. The plant was shut down following a devastating earthquake in 1988…but restarted in 1995… The EU… originally demanded that the plant be closed by 2004. (FT, 10 February 2003, p. 5)

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16–19 February 2003: About 20,000 people…demonstrated in the capital [Yerevan] on Sunday [16 February] in support of an opposition candidate in the presidential election Wednesday [19 February], insisting that it was time for the incumbent, Robert Kocharyan, to be removed. Eight opposition parties took part in the rally…in support of the People’s Party chairman Stepan Demirchyan, who is running on an anti-corruption platform. (IHT, 17 February 2003, p. 3) Stepan Demirchyan, a leading candidate, [is] the son of Armenia’s communistera boss… Eight candidates are challenging the president, Robert Kocharyan, who is expected to win another five-year term. The race is being monitored by more than 200 observers from twenty-five countries. (IHT, 20 February 2003, p. 3) ‘Mr Demirchyan is the son of Armenia’s Soviet-era leader [Karen Demirchyan], whom Mr Kocharyan defeated when he came to power in 1998’ (Guardian, 21 February 2003, p. 15). ‘Karen Demirchyan…was one of eight leading politicians assassinated in parliament in 1999… The trial of the killers still drags on’ (The Economist, 22 February 2003, p. 44). In the election itself Robert Kocharyan did not achieve the minimum 50 per cent of the vote necessary to avoid a run-off (on 5 March). He won 48.48 per cent of the vote compared with Stepan Demirchyan’s 27.4 per cent. The turnout was 64.5 per cent. ‘Rivals claimed the vote was rigged’ (IHT, 21 February 2003, p. 3). The opposition accuses Mr Kocharyan’s supporters of ballot box stuffing, irregularities during vote counting and intimidating voters. Observers from OSCE and the Council of Europe said the election showed less evidence of fraud than in previous years. ‘The counting process was flawed and the longterm election process fell short of international standards in several respects’… the head of an OSCE monitoring group said. (Guardian, 21 February 2003, p. 15) OSCE, which had sent 200 observers, said the election process culminating in the vote on 19 February ‘fell short of international standards in several key respects’… Robert Kocharyan also had the media behind him… Early results gave Mr Kocharyan 51 per cent…[But] by the afternoon the election commission was announcing that Mr Kocharyan…had 49.8 per cent … Stepan Demirchyan…scored—officially—only 27.7 per cent. (The Economist, 22 February 2003, p. 44) Observers from OSCE and the Council of Europe said that a number of serious violations had been detected during the vote count… Meanwhile, the secretary of the CIS executive committee, who observed the Armenian presidential

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election, said that it had been honest, free and transparent, and that certain deviations from the general rules could not have had a serious impact on the normal course of the electoral process. (CDSP, 2003, vol. 55, no. 7, p. 16) 23 February 2003: ‘The opposition held large demonstrations in Yerevan on 23 February. Estimates of the number of people who took part range from 60,000 to 100,000’ (CDSP, 2003, vol. 55, no. 8, p. 13) 5 March 2003: the run-off is won by Robert Kocharyan with 67.5 per cent of the vote compared with 32.5 per cent for Stepan Demirchyan. The turnout was 67.5 per cent. ‘The opposition swore not to recognize the vote, citing fraud and intimidation. Some 200 observers from OSCE said the run-off campaign did not meet international standards for openness’ (IHT, 7 March 2003, p. 5). Observers from OSCE and the Parliamentary Assembly of the Council of Europe…spoke of widespread ballot-stuffing and other irregularities during the voting… Television broadcasts openly supported the incumbent president during the election campaign…[But] the results of the election’s second round received a positive assessment from members of a CIS observers’ mission… Approximately 10,000 supporters of the defeated candidate demonstrated [on 6 March]. (CDSP, 2003, vol. 55, no. 9, pp. 13–14). 11 March 2003: ‘Armenia’s electoral commission announced final results… but two members refused to sign the statement as opposition supporters continued to protest the vote… Kocharyan is to be sworn in for a second five-year term on 9 April’ (IHT, 12 March 2003, p. 8).

THE ECONOMY Background information ‘Turkey and Azerbaijan have imposed a total import blockade on Armenia. That leaves Iran and Georgia as neighbouring trading partners’ (IHT, 4 January 1997, p. 7). ‘As Armenian officials explain, the economic blockade has acted as an unlikely catalyst for reforms, forcing Yerevan to adopt radical economic measures that more prosperous former Soviet republics could afford to delay’ (Chrystia Freeland, FT, Survey, 7 June 1995, p. 35). The weakness of Armenia’s politicians has worked to the greater good of the economy. Although ravaged by the post-Soviet diseases of rampant corruption, illiquidity and enterprise mismanagement, the Armenian economy has responded well to laissez-faire. Economic growth is among the most robust in the CIS… Its tax take doubled between 1996 and 1998.

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(Business Central Europe 1999:41) International assistance as a percentage of GDP was as follows: 1992, 2.4 per cent; 1993, 11.2 per cent; 1994, 14.7 per cent; 1995, 11.3 per cent; 1996, 7.1 per cent; 1997, 8.6 per cent; 1998, 5.8 per cent; 1999, 4.9 per cent (United Nations, World Economic and Social Survey 2001, p. 192). Financial policy Armenia’s own currency (the dram) was introduced on 22 November 1993. Armenians were entitled to exchange up to 50,000 roubles for drams, with higher sums frozen in special accounts. Old (pre-1993) roubles were finally declared invalid in March 1994 (Deutsche Bank, Focus: Eastern Europe, 1994, no. 113, p. 5). The dram became the sole legal tender on 1 March 1994 (EBRD 1994:17). Monetary policy was tightened sharply in the spring of 1994 (EBRD 1995a: 11). Interest rates became highly positive in real terms from June 1994 onwards (p. 52). Interest rate limits were removed in the last quarter of 1995. A law on bankruptcy was approved by parliament in 1995 (EBRD 1995b:34). A wage indexation law was passed in early 1992, giving the government discretion over nominal wage adjustments (EBRD 1996b:138). A new bankruptcy law was adopted on 4 December 1996, effective 1 March 1997 (EBRD 1997b:152). In mid-December 1994 the IMF approved a $25 million systemic transformation facility. The government aims to bring monthly inflation down from 26.3 per cent in 1994 to 5 per cent in 1995 (Transition, January–February 1995, p. 23). Since May 1994 the nominal exchange rate has been stable and the dram has sharply appreciated in real terms. The monthly inflation rate averaged 46 per cent in the first quarter of 1994, but fell to 1.2 per cent in March 1995 (FT, Survey, 7 June 1995, p. 35). Central bank financing of the budget deficit as a percentage of GDP was 32 per cent in 1993, 3 per cent in 1994 and less than 1 per cent in 1995, in part owing to the increased availability of external financing (Transition, 1996, vol. 7, nos 11–12, p. 18). In 1995 anti-inflation policies were adopted. But inflation increased in 1997 owing to a rise in public utility prices and an easing of monetary policy during the third quarter of 1996. There was a high level of deficit financing associated with the September 1996 presidential election (ARET, Quarterly Issue, January–March 1998, p. 40). The slowdown in inflation in 1996 was attributable to tight monetary policy, the stability of energy prices, an insignificant rise in government-regulated prices, the deceleration of growth in the summer and the stability of the dram’s exchange rate. ‘Nevertheless, a huge inflationary potential was accumulated during the last part of 1996, as a result of deficit spending and the depreciation of the dram, which showed up in 1997.’ Administered prices were also increased in 1997. ‘The depreciation of the national currency and the monetary financing of the budget in late 1996 and early 1997 added to inflationary expectations’ (p. 35). In 1995, 95.7 per cent of the budget deficit was financed by external sources (p. 57). In 1997 the deficit was financed primarily by external sources and Treasury bills (p. 58).

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In the first half of 1999 23 per cent of budget deficit was financed by domestic sources and 77 per cent by foreign. Privatization receipts were the main source of domestic financing, while the issue of Treasury bills and credits extended by the central bank to the government were negative in net terms. (ARET, Quarterly Issue, April–June 1999, p. 45) The planned budget deficit for 2000 was 5.9 per cent of GDP (compared with an actual 5.2 per cent in 1999). [The planned budget deficit for 2000] will be covered mainly through foreign sources, as only 25.8 per cent of the overall deficit is planned to be financed by domestic sources (22.8 per cent of the overall deficit will be covered by privatization proceeds and 3.1 per cent through Treasury bills). No financing is planned from the central bank. (ARET, Quarterly Issue January–March 2000, p. 57) On 17 July 1999 there was a meeting with a delegation from the IMF. As a result, the disbursement of the last tranche of the IMF’s credit in the framework of the ESAF was delayed (ARET, Quarterly Issue, July–September 1999, p. 71). Tax and expenditure arrears have been accumulating at an alarming pace during 1999. Following the results of the IMF mid-term monitoring, the third quarter has been devoted to renegotiating the terms of the programme… The result of the negotiations has been a new letter of intent signed by the Armenian government in mid-September. The new memorandum of economic and financial policies is not radically different from the previous one. The new programme has targeted a real growth rate of 4 per cent, the lower side of the previous 4 per cent to 6 per cent target range. Inflation is expected to be 8 per cent, instead of 10 per cent at the end of December. (P. 7) ‘The government of Armenia introduced in August 1999 an emergency package which included higher taxes and excise duties’ (United Nations, Economic and Social Survey of Asia and the Pacific 2000, p. 68). Prices Comprehensive price liberalization was introduced in January 1992. Controlled prices and subsidies still exist for bread, medical care, energy and certain public utilities (EBRD 1994:17). Further price liberalization took place in the fourth quarter of 1994 (EBRD 1995a:52). Since October 1995 only a few goods and services have been subject to price controls and subsidization (bread, urban transport, state-owned housing, communal services and domestic phone calls) or to limits on profit margins (bread, electricity and natural gas). During the first half of 1995 subsidies on bread and electricity prices were

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reduced substantially. In July 1995 bread prices were fully liberalized, while rents were to be liberalized by the end of 1995 (EBRD 1995b:34). Prices remain administered for bread. Direct price controls remain in place for flour through the setting of maximum profit margins for flour mills. The only consumer subsidies that remain are on district heating and hot water (EBRD 1996b:138). Price controls remain on the following services: urban transport, electricity, hot water, gas, heating, sewerage, rubbish collection, telephones and irrigation (EBRD 1997b:150). In 1995 a major portion of government-regulated prices were liberalized. But transport prices and the prices of some other services provided by local government are still regulated (ARET, Quarterly Issue, January–March 1998, p. 35). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 30 per cent; 1992, 35 per cent; 1993, 40 per cent; 1994, 40 per cent; 1995, 45 per cent; 1996, 50 per cent; 1997, 55 per cent; 1998, 60 per cent; 1999, 60 per cent; 2000, 60 per cent; 2001, 70 per cent (EBRD 1999b:24, 188; and 2002b:20, 116). The law of 27 August 1992 was amended in November 1993. At least five large-scale enterprises have been privatized. The government intends to distribute freely to the population 20 per cent of the shares in 70 per cent of large and medium-sized industrial enterprises. No property restitution had taken place by summer 1994 (EBRD 1994:16). The distribution of mass privatization vouchers began on 10 October 1994. Six hundred small enterprises were privatized in the fourth quarter of 1994 and another 40 per cent of the housing stock and agricultural land was privatized in the second half of 1994 (EBRD 1995a: 52). The first privatization auction, involving ten large and medium-sized enterprises, was concluded in May 1995, with over 900 scheduled for privatization by the end of the year (EBRD 1995b:34). The distribution of vouchers began in October 1994 and was completed in March 1995. By mid-1995 about 1,100 medium-sized and large enterprises had been converted into joint stock companies, with 20 per cent of the shares distributed to employees. As of mid-August 1996, 626 medium-sized and large enterprises had been privatized. The majority of the enterprises were offered by public subscription and a few were sold by auction. There were also employee buy-outs. In addition, ten enterprises were to be sold through international tender. It was expected that privatization would continue at least until the end of 1997. Of the roughly 5,000 earmarked for small privatization, 3,238 had been privatized by the end of August 1996. Employees have the first option to buy by means of cash or vouchers. Otherwise the enterprise is offered for sale by auction. No property restitution has taken place. Eleven loss-making enterprises were placed in a restructuring programme in 1995 (EBRD 1996b:138). By January 1997, 975 medium-sized and large enterprises out of 1,100 that were converted into joint stock companies had been privatized under the voucher-based mass privatization programme, up from 626 in August 1996. By the end of 1996, 3,988 out of 4,740 small enterprises earmarked for privatization had passed into private hands (EBRD 1997a:26). Some 70 per cent of enterprises are non-public (64 per cent private and 6 per cent owned by co-operatives). By the end of September 1997 an estimated 88.4

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per cent of medium-sized and large enterprises had been privatized. The privatization of all small and most medium-sized and large enterprises should be completed by the end of March 1998 (EBRD 1997b:150). The privatization process stalled in the third quarter of 1997. Following the appointment of a new privatization minister in November of that year the threshold price for the sale of small enterprises was reduced. The process speeded up and by mid-March 1998 around 80 per cent of all enterprises had been privatized. Large privatization has also accelerated since the end of 1997 (EBRD 1998a:32). Some 50 per cent of the remaining state enterprises were to be privatized in 1998 (p. 22). Voucher privatization has resulted in corporate governance structures characterized by insider ownership, as public participation in the programme was low and no alternative investment vehicles were set up to counterbalance managers. By mid1998, 70 per cent of medium-sized and large enterprises and over 80 per cent of small enterprises had been privatized (EBRD 1998b:150). Privatization through cash auctions and international auctions advanced during 1998… The voucher privatization programme, launched in 1994, ended in December 1998. The sale of the remaining state-owned small enterprises, around 15 per cent of the originally targeted firms, will now take place exclusively through cash auctions and should be finished by 2000. The government is pushing ahead with international tenders for strategic enterprises, despite parliamentary opposition to the price and terms of some sales… Privatization of the energy sector should progress significantly during 1999 with the offering of electricity distribution companies to strategic investors. Gas storage and distribution firms will also be considered through gas-for-equity swaps with foreign companies. Progress on restructuring [and privatizing] the banking sector has continued recently. (EBRD 1999a:32–3) By mid-1999, 75 per cent of medium-sized and large enterprises and over 85 per cent of large enterprises had been privatized. The 1998–2000 privatization programme envisaged complete privatization by the end of 2000. But the privatization process decelerated in late 1998 (EBRD 1999b:186). The programme of medium- and large-scale privatization is nearing completion… More emphasis in the design of privatization is now placed on attracting strategic investors… The insider-dominated privatization process has left enterprises with little access to finance for investment and no injection of new management skills… A management contract for the operation of the Yerevan water and waste-water system was awarded to an Italian consortium in November 1999. This project marks the first significant involvement of the private sector in municipal infrastructure. (EBRD 2000a:38). ‘The Shogakn diamond processing plant…has been sold to an Israeli investor… Companies that cannot be sold in three attempts are now liquidated’ (EBRD 2000b: 130).

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Forty large and medium-sized enterprises and forty-four small businesses were privatized in 2000. A further fourteen major enterprises are scheduled for privatization in 2001… Many remaining state-owned enterprises have substantial outstanding debts… Several companies are controlled by senior government officials or political insiders… The industrial sector continues to be plagued by structural weaknesses and the pace of restructuring is slow. In an effort to improve payment discipline and to stimulate the economy, the government simplified the tax code and reduced the overall tax burden for 2001. (EBRD 2001a:46) ‘Armenia…has just one remaining state-owned bank’ (p. 29). [The] savings bank has been sold… Privatization advances despite political divisions… In a push to conclude the privatization programme parliament recently approved a final list of over 900 enterprises to be privatized over the next three years. The list includes strategic mining, metallurgical and energy assets. However, domestic political divisions over privatization have widened and this has dampened the interest of foreign investors, many of whom were already concerned about Armenia’s poor investment climate. Nevertheless, seven of the fourteen largest companies included in the 2001 programme have been sold, including the Yerevan Jewellery Factory and the Hrazdan cement plant… Armenia’s attempt to privatize its four electricity distribution companies foundered in April 2001 when an international tender failed to attract bids… Many enterprises, in particular larger firms, owe their continued survival to tax and energy arrears and ineffective bankruptcy enforcement. (EBRD 2001b:110–11) ‘The government is finding it increasingly difficult to attract high quality investors to the remaining state-owned enterprises… With the recent sale of the Savings Bank, all banks are now under private control’ (EBRD 2002a:40). The final stage of the Armenian privatization programme, approved in 2001, foresees the sale (or liquidation) of more than 900 enterprises, practically the entire portfolio of remaining state-owned enterprises, over a period of three years. Implementation of the programme is moving ahead slowly … In mid2002 the government agreed to sell the large Nairit chemical plant to the British trading group that had assumed control a few months earlier. An agreement has also been reached with a South American diaspora investor on Zvartnots airport. With little interest being shown from large Western sponsors most firms have been sold to Russian investors or entrepreneurs connected with the diaspora… Privatization has mostly led to a consolidation of control by incumbent managers, with little injection of new capital and know-how… Two attempts to privatize the country’s four power distribution utilities failed in 2001 owing to a lack of interest by leading international power companies. Following the second

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tender the government merged the four utilities into a single company and in August 2002 announced the sale of an 80 per cent stake in the new company to a UK-based investor… The civil service law, introduced in 2001, set limits on the participation of state officials in business enterprises and the 2001 financial disclosure law aims to increase transparency by requiring all highly placed officials to fully declare their property and income. (EBRD 2002b:114–15) The privatization of small enterprises began in 1991 when employees were given a buyout option. In 1994 the number of small enterprises rose sharply; nevertheless, cash payments to the budget decreased since privatization was conducted by means of vouchers. The intention was to complete small privatization by the end of 1998. In 1993 the privatization of state-owned apartments began and in 1994 medium-sized and large enterprises joined the privatization list. (In 1994 vouchers were introduced to accelerate the privatization process: p. 51.) In 1994 some 1,100 industrial enterprises were transformed into joint stock companies. By the end of 1995, 240 medium-sized and large enterprises had been privatized and in 1997 the number reached 1,250. Nearly 2,500 enterprises were privatized in 1997. Since the beginning of the privatization process more than 7,000 enterprises have been privatized, of which 5,993 were small and 1,222 were medium-sized and large enterprises (ARET, Quarterly Issue, January–March 1998, p. 23). In December 1997 the 1998–2000 programme was adopted by parliament. Investments promotion and selling of enterprises to strategic investors were emphasized (p. 72). The voucher system has thus been replaced by a system of cash privatization (p. 24). The official figure for the output of the informal (shadow or hidden) economy is over a third of GDP. But ‘approximately 50 per cent of GDP seems still missing’ (p. 7). ‘According to different estimates, the size of the hidden economy may represent a gap anywhere between 30 per cent and 70 per cent’ (p. 11). The 1998–2000 privatization programme planned to privatize 140 enterprises in 1998 (50 per cent of the total), eighty-four in 1999 (30 per cent) and fifty-six in 2000 (20 per cent). Privatization was to be mainly achieved through cash payments. Previously issued vouchers would be valid until the end of 1998. From the start of the privatization process until the end of September 1998 the privatization of 1,413 medium-sized and large enterprises was completed, while 461 failed to be privatized. The largest number of enterprises (75.2 per cent) were privatized through the creation of joint stock companies, mainly (94.3 per cent of cases) via public offer of shares. The same pattern was observed in 1998. During the first nine months 165 enterprises completed their privatization process, with forty-eight in progress. Again, the most common form was joint stock companies (71 per cent). A worrying aspect was the increasing share of enterprises which failed to be privatized at the first or second attempt. From 1994 to the end of September 1998, 6,539 small entities were privatized, 522 during the first nine months of 1998. The main part of privatization cash receipts arose from the privatization of enterprises, in particular through international tenders. At the end of 1997 ArmenTel, the main supplier of communication services, was privatized. The government holds 10 per cent of share capital, while the Greek telecommunications operator OTE holds 90 per cent. In June 1998 a French company took over the Yerevan cognac factory (which led to a row in parliament). Agreements for the privatization of two large hotels in

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Yerevan by US companies were signed (ARET, Quarterly Issue, July–September 1998, pp. 45–6). In 1998, 210 mediumsized and large enterprises were privatized, but 204 enterprises failed to be privatized. In 1998 privatizations were carried out mainly through cash payments… The main part of collected proceeds came from privatization of a few enterprises through international tenders, in particular the Yerevan cognac factory and two large hotels located in the centre of Yerevan… Almost all of these deals led to a large public row which reached the National Assembly. (ARET, Quarterly Issue, October–December 1998, pp. 62–3) In accordance with the programme on 1998–2000 state property privatization, voucher privatization stopped at the end of 1998 and in 1999 privatization was to be continued only in the form of cash payments. In the first quarter of 1999 the privatization of sixteen medium-sized and large enterprises was completed. The main form of privatization is still the public offer of the shares of joint stock companies, with ten of the sixteen done in this way. Despite the public row on the terms and schedule of privatization of companies through international tenders, the government has continued its policy of offering some enterprises for sale to strategic buyers. In the first quarter of 1999 two enterprises completed their privatization through international tenders. [These were Hotel Yerevan (in March) and a tourist complex.] (ARET, Quarterly Issue, January–March 1999, p. 49) During the first half of 1999 the process of privatization has been going on very slowly. Privatization has been completed for thirty-three enterprises only, is still in progress for thirteen and failed to be realized for fifty-seven… From 1999 privatization of state property can be accomplished only through cash payments. In addition, in the first half of 1999 151 ‘small entities’ and four unfinished construction sites were privatized. Despite the slow pace of the process of privatization, the authorities are still emphasizing the importance of attracting strategic investors as is testified by the following deals: (1) the privatization of the Hotel Yerevan in March 1999 [involving an Italian company]…(2) in April the National Assembly adopted the law on the privatization of [the chemical company] Promety-Khimprom; the privatization deal will be done through the direct sale of the company…to a Russian concern…(3) the government is going to privatize four electricity distribution companies. (ARET, Quarterly Issue, April–June 1999, p. 46) In May 1999 the government and the French Pernod Ricard Company signed the final deal on the sale of the Yerevan cognac factory (p. 61). In 2000 the government aims to complete the bulk of privatization of enterprises (included in the 1998–2000 privatization programme)… At the end of last year

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[1999] the government adopted a decree…[relating to] the privatization of 497 state-run enterprises… In addition to that, the government classified seventyfive enterprises of ‘strategic importance’. These enterprises represent various sectors…diamond and gold processing, mining, trade, energy and cargo transportation. It is expected that most of these enterprises will be privatized through competitive tenders… From the beginning of the privatization process to the end of March 2000, 1,527 medium-sized and large-scale enterprises (75 per cent of the total estimated stock) and 6,817 ‘small’ entities (83 per cent of the total estimated stock) had been privatized. (ARET, Quarterly Issue, January–March 2000, p. 64) At the end of April 2000 the National Assembly voted to block the privatization of four electricity distribution companies. The main reason given for the decision was that the energy sector is of strategic importance to the country and its privatization could seriously affect national security’ (ARET, Quarterly Issue, January–March 2000, p. 64). Almost at the last stage of the announced tender the National Assembly at the end of April voted against the privatization of these companies [the electricity distribution companies] and to regulate it by a special law… At the end of July [2000], however, the National Assembly reversed its decision, voting for a law by which the privatization of four electricity distribution companies will be accomplished. (ARET, 2000, Quarterly Issue, April–June 2000, p. 57) Other sources dealing with privatization: 1 A draft privatization programme envisages the partial sale of state enterprises (perhaps up to 30 per cent of total state assets) through the use of vouchers. But details have not been issued (Business Central Europe, November 1993, p. 60). The declared intent was to privatize all smallscale enterprises and a quarter of large manufacturing enterprises by 1995 (Business Central Europe, December 1993/January 1994, p. 74). Privatization got off to a slow start and 700 enterprises were scheduled for sale by the end of 1995 (Business Central Europe 1995:48). The telecommunications enterprise ArmenTel was privatized in 1997 (Business Central Europe 1998:46). The Yerevan cognac factory, the national telephone monopoly and two hotels have been sold (Business Central Europe 1998:41). 2 Legislation passed in July 1992 provided for the privatization of small and large enterprises. By September 1992, 300 small enterprises and forty-five large enterprises had been privatized. Vouchers need to be issued (Havrylyshyn et al.: (1994:383). 3 Armenia has launched a campaign to sell 64 per cent of shares in ten of its largest enterprises for vouchers and cash. The enterprises would be transformed into joint stock companies and also open to foreign investors. Shares would be on sale for two months (FT, 17 March 1995, p. 2). The government pledged to implement a mass privatization programme in 1995. A textile enterprise was one of the first ten enterprises privatized in May 1995 under the voucher sell-off scheme, workers

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receiving a 20 per cent stake free and then buying another 16 per cent with their vouchers. Vouchers are freely transferable and there are no limits on foreign participation. There were plans to sell another fifty enterprises in the following two months and to offer 900 medium-sized and large enterprises by the end of 1995 (FT, Survey, 7 June 1995, p. 36). 4 The privatization of small and medium-sized enterprises was achieved quickly. Ambitious goals for the privatization of large enterprises have been set for 1997, with another ten destined to pass into private ownership before the end of the year (including the telecommunications company, a cognac plant and the national airline). Problems with the voucher scheme (such as an insufficient number still in circulation) mean that the government is thinking of changing over to cash privatization (Deutsche Morgan Grenfell, Focus: Eastern Europe, 5 September 1997, p. 72). Foreign trade The openness of the economy is very high, the ratio of total trade (exports plus imports) to GDP being almost 70 per cent (ARET, Quarterly Issue, January–March 1998, p. 63). As in the past, Armenia remains heavily dependent on imports of food (wheat, meat and dairy products). Domestic production, on average, covers less than 50 per cent of total domestic demand. Surpluses remain for fruit and vegetables (ARET, Quarterly Issue, April–June 1998, p. 18). ‘The fact that its main export product is jewellery is an indication of the fragility of its resource base’ (Business Central Europe 1999:41). In 1998 the main exports were as follows: precious or semiprecious stones and precious metals, 24.1 per cent; machinery and equipment, 18.5 per cent; base metals, 18.3 per cent; mineral products, 10.1 per cent (ARET, Quarterly Issue, July–September 1999, p. 111). ‘The structure of trade by commodity reveals the growing importance of precious and semiprecious stones, metals and products for both exports and imports; this sector reached more than half (almost 51 per cent) of total exports in the first quarter of 2000.’ The share of CIS countries in foreign trade sharply decreased from 62.6 per cent in 1995 to only 25.04 per cent in the first quarter of 2000. The importance of the EU, which accounted for only about 18 per cent of exports in 1995, rose to almost 48 per cent in the first quarter of 2000 (ARET, Quarterly Issue, January–March 2000, pp. 68–9). ‘Some 40 per cent of Armenia’s exports are now finished diamonds and jewellery from three firms owned respectively by Belgian, British and Israeli investors’ (United Nations, World Economic and Social Survey 2001, p. 177). A system of state-negotiated barter arrangements with other countries of the former Soviet Union still dominates trade. Otherwise there are few explicit tariff or non-tariff barriers to trade (EBRD 1994:17). Most of the regulatory obstacles to external trade have been progressively removed. Import and export licences are required only for health, security and environmental reasons. All bilateral clearing arrangements that existed with other countries of the former Soviet Union have been eliminated (EBRD 1996b:138). The government adopted a floating exchange rate regime in the second half of December 1993, after a short period with a fixed peg to the dollar. The exchange rate is

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determined in an auction in which currency surrendered by enterprises is offered for sale to financial institutions. Full convertibility for current account purposes has not yet been achieved (EBRD 1994:17). There are restrictions on current and capital account convertibility. There is a 50 per cent export surrender requirement of foreign exchange at the official rate (p. 111). The export surrender requirement was reduced to 30 per cent at the start of 1995 and eliminated by mid-1995. Most current account transactions have been liberalized (EBRD 1995b:34). The dram is fully convertible for current account transactions (EBRD 1996b:138). Armenia accepted the conditions of Article 8 of the IMF Agreement in 1997 (EBRD 1997b:151). There is a managed floating exchange rate system (EBRD 1999b:188). In mid-1994 a de facto fixed exchange rate regime was introduced to keep inflation under control. In 1995 a gradual deregulation of foreign exchange regulations began. In 1996 a policy of freely floating exchange rates was adopted, thus liberalizing current account transactions. Article 8 of the IMF has now been accepted (ARET, Quarterly Issue, January–March 1998, p. 39). While in 1995 and 1996 interventions in the foreign exchange market were aimed at a stable exchange rate, in 1997 ‘participation was driven exclusively by purposes of monetary policy—to manage the money supply and provide for price stability’ (p. 48). In 1996 Armenia accepted Article 8 of the IMF agreement. Since then the dram has floated. ‘However, to restrict the impact of speculative attacks in the foreign exchange market and to enhance financial stability the CBA periodically intervenes in the market to curb depreciation expectations during 1996–99’ (ARET, Quarterly Issue, January–March 2000, pp. 54–5). A partnership and co-operation agreement between the EU and Armenia went into effect in July 1999 (EBRD 1999b:186). ‘The WTO general council yesterday [10 December 2002] approved membership terms for Armenia, which will join six former Soviet republics already in the WTO’ (FT, 11 December 2002, p. 15). Armenia and the Asian/Russian financial crisis While the effect [on financial markets] has been on the whole negative, so far it is limited in size. The declining trend in interest rates was interrupted, but the official rate had to be raised only once and the actual level is still much lower than that prevailing at the end of the first quarter. The exchange rate has lost some of its value against the dollar, but the slide has been gradual, without those abrupt jumps that have been witnessed on other markets. The Treasury bills market had to stand some net sales, especially by foreign investors, but the shorter issues have met some demand without dramatic increases in interest rates. This apparently calm response of financial markets in some way is related to their small size and relevance. However, the gradual improvement in public finance has also probably played a positive role. (ARET, Quarterly Issue, July–September 1998, p. 7)

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The depreciation of the dram with respect to the US dollar has been relatively small (about 5 per cent in October)… Capital flows related to portfolio investments are still negligible… However, the share of Treasury bills in the hands of foreigners is high. In this respect the effects of the crisis has already been evident in the decline of that share recorded in the summer months [1998]. (p. 13)

‘[In 1998] dram depreciation against the dollar, on average, was 2.9 per cent, which is surely not a bad result in a year marked by high exchange rate instability all around the world’ (ARET, Quarterly Issue, October–December 1998, p. 7). However, following the financial crisis in Russia, the economic environment deteriorated seriously in Armenia, as in other CIS countries… Yearly data show a fairly good picture for the Armenian economy…[But] the annual results mask a negative profile: fourth quarter 1998 data show a fall in industrial production, a worsening of the trade balance and, in general, a steepening of the path towards structural adjustment. (p. 7) The CIS countries have accounted for a declining proportion of exports and imports, respectively (figures for Russia alone in brackets): 1995, 62.5 per cent and 49.6 per cent (33.5 per cent and 20 per cent); 1998, 36.5 per cent and 25.5 per cent (18.1 per cent and 21.2 per cent); first half of 1999, 24.3 per cent and 23.9 per cent (12.7 per cent and 19.4 per cent). The importance of the EU as regards exports and imports, respectively, has increased over time: 1995, 17.8 per cent and 13.2 per cent; 1998, 34.6 per cent and 28.7 per cent; first half of 1999, 41.7 per cent and 32.6 per cent (ARET, Quarterly Issue, April– June 1999, p. 103). The most acute phase of the crisis in Asia and in Russia seems to be over… Economic activity [in Armenia] is increasing, inflation is surely not showing signs of being out of control, the trade balance in the last quarter [first quarter of 1999] actually improved, the exchange rate has stabilized. The most recent assessment of CIS growth forecasts by the EBRD shows that Armenia has had the lowest revision in the 1999 growth forecast with respect to the pre-crisis forecasts… It is probably true that Armenia has been spared some of the hardest consequences of the crisis thanks to…the lack of natural resources (especially oil) in a moment of falling prices, the relative underdevelopment of capital markets and openness to foreign investors, and the geographical and political positions which limit the exposure to the decreasing demand coming from CIS countries other than Russia. On the other hand the economic situation…needs some qualifications…[For example] the level of interest rates is the clearest indicator that not everything is going smoothly. They are much higher than they were in July of last year [1998]. Given the apparent good performance of other

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indicators of economic activity, the well-behaved inflation and the relative stability of the exchange rate in the last few weeks, rates lower than the 60–70 per cent now prevailing should have been expected. (ARET, Quarterly Issue, January–March 1999, p. 7) Foreign direct investment In June 1995 the 35 per cent limit on foreign share ownership in the financial sector was abolished. The first foreign-owned bank was established at the end of June 1995 (EBRD 1995b:34). Nationals can, subject to restrictions, own or lease land. Foreigners can acquire property and the right to use land, but there is no law that allows outright ownership of land by foreigners (EBRD 1996b:139). The foreign investment regime is liberal and there are no restrictions on foreigners repatriating profits. But cumulative foreign direct investment is only $35 million (EBRD 1997b:150–1).

Table 1.1 Armenia: selected economic indicators 1995–2002

Economic indicator

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

Rate of growth of GDP (%)

6.9

5.9

3.3

7.3

3.3

6.0

9.6

12.9

Rate of growth of industrial output (%)

1.5

1.4

0.9

–2.5

5.2

6.4

3.8

14.2

Rate of growth of agricultural output (%)

4.7

1.8

–5.9

13.1

1.3

–2.3

11.6

4.4

Inflation rate (consumer, %)

175.8

18.7

13.8

8.7

0.7

–0.8

3.2

1.2

Budget surplus or deficit (% GDP)1

–9.0

–8.5

–5.8

–4.9

–7.4

–6.3

–3.8

–0.6

Unemployment rate (end of year, %)2

6.7

9.3

10.8

9.4

11.2

11.7

9.6

9.4

–0.218 –0.291 –0.295 –0.403 –0.307 –0.278 –0.201

–0.147

Balance of payments (current account, $ billion) Foreign direct investment (net, $ million)

25

18

52

221

122

104

70

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report; Armenia Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe. Note:

110

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1

General government balance: consolidated accounts of the Republican government and the local authorities (EBRD) 2 Registered. Unofficial estimates indicate substantially higher unemployment (EBRD)

‘Foreign investment totalled only some $120 million last year [2000], with only $606 million invested in total at the end of 2000’ (FT, 14 May 2001, p. 8). The paucity of net foreign direct investment can be seen in the figures in Table 1.1. Agriculture By the end of 1992 there were 243,000 private farms, with an average size of 2 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for 37.4 per cent of total agricultural land (United Nations Economic Commission for Europe 1993:206). As of 1 April 1993 there were 246,000 private farms, with an average size of less than 2 ha; a large proportion of the publicly owned farms have been transformed into peasant farms (CDSP, 1993, vol. XLV, no. 21, p. 20). Privatization covers more than 90 per cent of arable land (Business Central Europe, December 1993/January 1994, p. 74). Privatized agricultural units account for more than 60 per cent of arable land (EBRD 1994:16). Another 40 per cent of the housing stock and agricultural land was privatized in the second half of 1994 (EBRD 1995a:52). Almost all of the state and collective farms, numbering over 800, have been broken up. More than 300,000 private farms have been created (EBRD 1996b:138). Private farms provide 95 per cent of agricultural output. About 87 per cent of agricultural land has been privatized and land titles have been made freely transferable (EBRD 1997b:150). In the land privatization programme of spring 1991 each collective farm was divided into as many parcels as there were households. The head of each household drew a lot, each lot corresponding to one of the parcels of land. Another important development, which was to be fully implemented in 1995, was a new system of taxation. Taxes were to be based on the potential production of land, thus helping to compensate for differences in land quality and providing an incentive to sell land that cannot be farmed properly (the threeyear moratorium on the sale of land has now expired). More than 80 per cent of agricultural land is now in the hands of private farmers (FT, Survey, 7 June 1995, pp. 35– 6). While industry collapsed, the agricultural sector at the beginning of the nineties improved. This is primarily the result of the early privatization of land (already done in 1991–92) and the liberalization of prices… After the first two positive years of the decade [however] agricultural production showed continuous ups and downs, so that its level is lower in 1997 than it was in 1992. The opportunities offered by land reforms have probably been underutilized as they were not supported by an adequate system for agricultural product processing and because the formation of the service infrastructures needed for market functioning has been slow.

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(ARET, Quarterly Issue, January–March 1998, p. 16) ‘Land fragmentation and the lack of financial resources are preventing farmers from enacting the needed investments.’ As a consequence of agrarian reforms and land privatization 319, 300 peasant farms and 273 peasant collective farms have been organized. They have 452, 100 ha of arable land, i.e. 1.36 ha and 65.7 ha of privatized arable land for each peasant farm and peasant collective farm (p. 20). The output of the agricultural sector is still limited by the structural weaknesses evident since privatization. First of all the high rate (up to 30 per cent) of unused land (even of arable land) due to its non-profitability… A second weakness is represented by the chronic lack of investment in the sector. Finally, the pulverization of farms. (ARET, Quarterly Issue January–March 1999, p. 19) The share of private ownership in the sector is almost 100 per cent… However, the allocation of land into small batches (on average 1.33 ha per farm), the delays in developing an adequate irrigation system and the lack of infrastructure (financing, intermediate marketing and export-import organizations) are limiting the growth of the sector. (ARET, Quarterly Issue, January–March 2000, p. 18) The share of peasant farms in agricultural land increased from 11.8 per cent in 1992, to 17.0 per cent in 1993, to 21.3 per cent in 1994 and to 23.8 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 77 per cent in 1991, to 96 per cent in 1992 and to 99 per cent in 1998 (p. 890). Economic performance Armenia’s growth and inflation performance in the latter half of the 1990s was creditable, despite factors such as the economic blockade imposed by Azerbaijan and Turkey in 1992 (over Nagorno-Karabakh) and the Russian financial crisis of August 1998. (See Table 1.1.) GDP growth resumed in 1994, 5.4 per cent compared with –8.8 per cent in 1993 and – 41.86 per cent in 1992 (EBRD 2001a:15). The Russian financial crisis was a major factor in causing growth in 1999 to be much lower than in the previous year. A strong performance was registered in 2000, 2001 and 2002. GDP in 2001 was an estimated 74 per cent of the 1989 level (EBRD 2002b:58). One factor explaining continued positive growth was the declining importance of trade with Russia (and the CIS as a whole) and the increasing importance of trade with the EU. In 1997 output was still 40 percentage points lower than in 1990 (ARET, Quarterly Issue, January–March 1998, p. 8). Since almost 90 per cent of energy supply is imported, during the period of blockade and isolation the energy crisis was one of the major constraints on the economy. The reopening of the Medzamor nuclear power plant was a

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partial solution (p. 22). (It was mothballed in February 1989, three months after a massive earthquake. The reactor was restarted on 25 October 1995.) Industry is operating at 30 per cent capacity owing to a fuel shortage that results in electricity being available for only two hours a day (IHT, 28 April 1994, p. 12). In late May 1995 Armenia announced that the nuclear plant at Medzamor was to be restarted. The two reactors at Medzamor used to produce some 30 per cent of Armenia’s electricity (IHT, 25 October 1995, p. 5). Medzamor accounts for 40 per cent of electricity (The Times, 11 April 1996, p. 14). Hyperinflation existed in the period 1992 to 1994. Inflation fell dramatically to 176 per cent in 1995 from 4,962 per cent in 1994 (ARET figures). Inflation was in single figures by 1998 and was not a problem thereafter. ‘Unemployment, officially at 9 per cent, is at least 20 per cent’ (FT, 5 October 1996, p. 2). The real rate of unemployment (the share of hidden unemployment minus the selfemployed underemployed) may be estimated at 25 to 28 per cent (ARET, Quarterly Issue, January–March 1998, p. 33). Unofficial estimates put the unemployment rate at 25 per cent in 1997 (EBRD 2000a:39). ‘One-third of the population live in “absolute poverty”, according to the EBRD’ (FT, 14 May 2001, p. 8). ‘Over half the families and 80 per cent of children remain below the national poverty line, according to a ministry of health estimate’ (EBRD 2002b:115). ‘The share of the population in poverty [was] down from 58 per cent in 2001 to 50 per cent in 2002. Those in extreme poverty fell from 22 per cent to 16 per cent’ (EBRD 2003a:42). ‘The shadow economy remains large, estimated at 50 per cent [of GDP]’ (EBRD 2003a:42).

2 Azerbaijan POLITICS The political background Azerbaijan has no Russian troops or military bases. Russia is friendly with Armenia. (The USA has banned aid since 1992, when Azerbaijan imposed an economic blockade on Armenia: IHT, 3 March 2000, p. 15. The US Freedom Support Act restricts US trade and investment in Azerbaijan: IHT, Survey, 5 June 2000, p. 12.) Karabakh means ‘black garden’ (The Economist, 8 November 1997, p. 135). Nagorno means ‘mountainous’. The ancient name for Nagorno-Karabakh was ‘Artsakh’. Azerbaijan hosts around 800,000 Azeri refugees displaced by the war with Armenia of 1988–94 (EBRD 1999b:191). There are various estimates of the war toll over NagornoKarabakh: 1 The war has so far claimed 15,000 lives and produced a million refugees (IHT, 30 July 1993, p. 2). 2 UN estimates put the number displaced from their homes at 800,000–1,000,000 (Independent, 22 September 1993, p. 13). 3 About 10,000 people have been killed in the five years of fighting over NagornoKarabakh and about 20 per cent of Azerbaijan is now occupied (Guardian, 7 September 1993, p. 8). 4 The sixth year of the war may have claimed more than 15,000 lives on both sides; about 1 million have become refugees (FT, Survey, 7 March 1994, p. 13). 5 Over 20,000 have been killed and over 1 million have become refugees (IHT, 13 May 1994, p. 2). 6 There are over 40,000 dead and more than 1 million homeless (IHT, 21 November 1994, p. 7). 7 On 3 November 1993 President Gaidar Aliev talked of 16,000 Azeris dead and 22,000 wounded. In December 1994 Aliev talked of more than 20,000 having been killed in and around Nagorno-Karabakh since 1988 (Guardian, 28 December 1994, p. 11). 8 The war toll was some 25,000 dead (Independent, 25 July 1997, p. 14; IHT, 14 July 1997, p. 9). 9 About 35,000 people had died before the 1994 ceasefire was signed (FT, 3 September 1997, p. 3). 10 Armenia occupies almost 20 per cent of Azerbaijani territory, including areas outside Nagorno-Karabakh. There are almost a million Azeri refugees and displaced persons as a result of the conflict (IHT, Survey, 5 June 2000, p. 12).

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The demographic background At the start of 1999 the population of Azerbaijan was 7,953,000. In 1989 the ethnic composition of the population was as follows: Azeri 78.1 per cent; Russian 7.9 per cent; Armenian 7.9 per cent; other 6.1 per cent (Economic Bulletin for Asia and the Pacific, 1991, vol. XLII, nos 1 and 2, p. 2). The population comprises 82 per cent Azeris, 6 per cent Armenians, 6 per cent Russians and 2 per cent Kurds (Deutsche Bank, Focus: Eastern Europe, 31 August 1993, no. 86, p. 3). Business Central Europe (July–August 1993, p. 64) estimated the population split as 83 per cent Azeri, 6 per cent Armenian, 6 per cent Russian and 5 per cent ‘other’. In the Soviet era NagornoKarabakh’s 174,000 population was split 76 per cent Armenian to 23 per cent Azeri (most Azeris have now been displaced). In 1991 the proportion of Russians was 4.1 per cent (The Economist, 10 December 1994, p. 52). According to various figures, somewhere between 2 million and 3 million Azerbaijanis live and work in Russia… Since Aliev came to power it has become easier for citizens of Azerbaijan to leave the republic, so the outflow has increased. During Aliev’s six-plus years in office over 3 million people have left Azerbaijan. The majority of them have emigrated to Russia, Ukraine, Turkey, the United Arab Emirates or the USA… According to reports from trustworthy sources, the republic’s population has shrunk by more than 40 per cent since it gained its independence. (CDSP, 1999, vol. 51, no. 46, p. 11) Azerbaijan has lost around a fifth of its population, about 1.5 million having left the country (The Economist, 19 August 2000, p. 20). Around 1 million Azeris have emigrated, either to Russia or Turkey’ (The Economist, 2 September 2000, p. 49). Political developments 9 March 1993: an agreement is reached with Turkey about an oil pipeline. 2 April 1993: a two-month state of emergency is declared after strong Armenian gains in the fighting over Nagorno-Karabakh (opening up another corridor to Armenia). There are many refugees. 5 April 1993: the UN Security Council calls on Armenian forces to withdraw from Azerbaijani territory. 8 April 1993: Russia announces a ceasefire, but the two opposing camps deny that such an agreement has been reached. 30 April 1993: under international pressure Armenian forces begin to withdraw from Azerbaijani territory. 7 June 1993: rebel Azerbaijani troops under recently dismissed Colonel Surat Huseinov capture Gyanja, the second largest town in the country, in protest at the military defeats over Nagorno-Karabakh. They later make strong territorial gains. 14 June 1993: the Armenians in Nagorno-Karabakh announce their acceptance of a ceasefire which had been earlier brokered by Russia, the USA and Turkey (it had been set

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to start on 29 May). But fighting appears to have gone on as the political situation in Azerbaijan continued to deteriorate. 15 June 1993: Gaidar Aliev (who was removed from the Soviet politburo in October 1987 and is now head of the Azerbaijani exclave and autonomous republic of Nakhichevan situated in Armenia) accepts the post of chairman of parliament as the authority of the president continues to fall. 18 June 1993: president Abulfaz Elchibey (who was democratically elected, supported by Turkey but not Russia and was a former dissident jailed when Aliev was in charge of Soviet Azerbaijan) flees Baku for his home territory of Nakhichevan (it seems as though army commanders refused to offer protection from the rebels). But he does not resign as president. Aliev takes over as acting head of state. 24 June 1993: parliament votes to hand over power to Aliev. 27 June 1993: the rebel forces pledge allegiance to Aliev. The last large Azeri town in Nagorno-Karabakh falls to the Armenians. The signing of an oil contract with Western multinational companies, planned for 2 July, is postponed. 30 June 1993: Surat Huseinov is appointed prime minister and ‘supreme commander’ of all the security forces. 24 July 1993: a three-day ceasefire is supposed to come into effect with Armenian forces in Nagorno-Karabakh as of midnight (subsequently extended to 2 August). 23 August 1993: the Azerbaijani towns of Cebrayil (21–2 August) and Fizuli (23 August) fall to the Armenians, who now occupy large swathes of Azerbaijan around Nagorno-Karabakh, in effect substantially closing the land gap with Armenia (despite condemnation by the UN Security Council). Jebrail fell the following day. 29 August 1993: a national vote of confidence in Elchibey’s presidency is held via a referendum, which goes decisively against the former president (97 per cent in a 92 per cent turnout). 4–5 September 1993: the town of Goradiz falls to the Armenians. 6 September 1993: Aliev hints that Azerbaijan may join the CIS. (Presidential elections are set for 3 October 1993.) 20 September 1993: parliament votes to join the CIS. 24 September 1993: Azerbaijan joins the CIS. 3 October 1993: Aliev wins the presidential election with 98.8 per cent of the vote (the turnout was more than 95 per cent). 21 October 1993: the ceasefire, which had been extended to 5 November, breaks down. (A counter-offensive by Azerbaijan began in mid-December 1993. There was some success at first, but the Armenians had regained the upper hand by early 1994.) 20 February 1994: Russia brokers a ceasefire over Nagorno-Karabakh (to begin on 1 March). 28 July 1994: an indefinite extension of the 17 May ceasefire agreement is announced (those of 9 and 11 May had broken down). 3 October 1994: Aliev proclaims a state of emergency and talks of an attempted coup. (On 29 September two senior officials were murdered and several members of the interior ministry’s special police force were arrested. Some of their colleagues seized the general prosecutor for a short while. Rebel forces were then besieged.)

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5 October 1994: Aliev declares the coup attempt to have failed. 6 October 1994: parliament supports Aliev’s call for the dismissal of prime minister Surat Huseinov for alleged involvement in the coup attempt. 5–6 December 1994: the CSCE meeting in Budapest decides in principle to send a multinational peacekeeping force to Nagorno-Karabakh. But conditions are laid down, such as the declaration of a formal truce, negotiations starting between the warring factions and prior approval being given by the UN Security Council. 16 March 1995: Aliev talks of an attempted coup and the country being ‘on the brink of civil war’. Baku is put on a war footing. (On 13 March an attempt was made to disband an elite police force commanded by deputy interior minister Rovshan Javadov and his brother Makhir; the former also lost his deputy premiership. They were supporters of Surat Huseinov and of former president Ayaz Mutalibov. They accused the government of corruption and demanded the resignation of Aliev and the formation of a coalition government. There were reports of fighting in the north and the headquarters of the elite police force was put under siege in Baku.) 17 March 1995: the rebellion is crushed and Rovshan Javadov is killed. 31 March 1995: the Grey Wolves opposition party is banned (The Economist, 22 April 1995, p. 48). 28 October 1995: more than 300 people are killed when a train catches fire in a tunnel in the Baku underground. 12 November 1995: there take place both the general election and a referendum on the new constitution (which increases the power of the presidency). There are 125 seats in the Medzhlis (parliament), a hundred elected in majority districts and twenty-five elected from party lists (there is an 8 per cent threshold). According to official preliminary figures, 80 per cent of voters approved the new constitution. According to official figures, there was an 80 per cent turnout and Aliev’s New Azerbaijan Party received 70 per cent of the vote. But OSCE observers declared that the results were ‘not in accordance with international standards’. Irregularities included disqualification of many opposition candidates, multiple voting, stuffed ballot boxes and changed results. The People’s Front of Azerbaijan came second in the proportional representation vote and the National Independence Party came third. 4 February 1996: fifteen seats are rerun. According to official returns, the New Azerbaijan Party wins twelve, the People’s Front of Azerbaijan one and the Moslem Democratic Party one. 12 April 1996: Ayaz Mutalibov (ousted as president by the Popular Front on 15 May 1992) is arrested in Moscow. (Two days later the former defence minister Ragim Gaziyev is arrested in Moscow. They are both wanted in Azerbaijan for alleged attempted coups against President Aliev, with Gaziyev being sentenced to death in absentia in 1995. Azerbaijan sought their extradition. Mutalibov was released by the Russian authorities on 13 May owing, for example, to a lack of convincing evidence that he was involved in stealing weapons and forming up armed groups.) 22 April 1996: a partnership and co-operation pact is signed with the EU. The pact offers trade concessions and access to certain EU loans (IHT, 23 April 1996, p. 5).

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21 July 1996: President Aliev dismisses prime minister Faud Guliyev and other senior members of the government. Before dismissing them the president talked of an economic morass, widespread corruption and slowness in implementing market reforms (Guardian, 22 July 1996, p. 10). 24 November 1996: Robert Kocharyan (the incumbent) wins the presidential election in (and organized by) Nagorno-Karabakh, with 86.1 per cent of the vote. The turnout is 77.6 per cent (CDSP, 1996, vol. XLVIII, no. 47, p. 20). (He was made prime minister of Armenia on 20 March 1997.) 1 September 1997: Arkady Gukasyan is elected president of Nagorno-Karabakh with almost 90 per cent of the vote. November 1997: Georgia, Ukraine, Azerbaijan and Moldova, meeting in Baku, form a new group, named from their first letters (GUAM). Priorities are defined as the fight against separatism and regional conflicts, the development of Eurasian and Transcaucasian transport and energy corridors, and integration into Euro-Atlantic and Atlantic structures. In Chisinau in October 1997 the presidents of the four countries ‘came out strongly against what they saw as Yeltsin’s over-commitment to CIS integration’ (EEN, 1998, vol. 12, no. 1, p. 7). 11 October 1998: the presidential election takes place. The turnout was 77.9 per cent. Aliev wins another five years in power with 76.1 per cent of the vote. Etibar Mamedov is second with 11.6 per cent. OSCE and the Council of Europe issue a joint statement: ‘The overall election process did not comply with international standards.’ International observers said that they found no flagrant violations that could have ‘seriously affected’ the outcome of the election (CDSP, 1998, vol. 50, no. 19, p. 19). There were five challengers. The main challenger, Etibar Mamedov, accused Aliev of cheating (IHT, 13 October 1998, p. 8). International observers noted some improvements in the conduct of the October election, compared with other polls that Azerbaijan has held. But they also found serious violations, including widespread ballot-box stuffing. ‘A missed opportunity,’ concluded observers from the US International Republican Institute… Azerbaijan is headed for serious difficulty if it does not democratize. So far, its oil wealth has mostly created corruption and wide disparities of wealth. Those trends will worsen if unchecked by political accountability... In his presidential campaign Mr Aliev’s police allowed some opposition demonstrations but responded with excessive force to others. The government ended censorship three months before the vote, but state television featured ‘almost continuous, favourable coverage’ of the incumbent, as IRI’s observers noted. Mr Aliev improved some election laws, but maintained such tight hold of the election machinery that most serious opposition parties boycotted the vote. (Washington Post, editorial: IHT, 20 October 1998, p. 8) Five opposition candidates, led by former president Abulfaz Elchibey, boycotted the election because they claimed it was ‘undemocratic’. ‘The remaining five candidates from pro-government parties and organizations were no match for Aliev’ (CDSP, 1998,

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vol. 50, no. 41, p. 19). 17 January 1999: Aliev is flown to a hospital in Turkey for treatment for acute bronchitis. 25 January 1999: Aliev’s top foreign policy aide: ‘In order to guarantee Azerbaijan’s security the US, Nato or Turkey should establish bases here’ (IHT, 26 January 1999, p. 5). Azerbaijan…wants the United States to open a military base on Azerbaijani territory… In his [Aliev’s] absence, his chief foreign affairs adviser, Vafa Guladze, has been giving interviews asserting that Azerbaijan wanted a military protector. Mr Guladze said he was prompted by evidence that Russia was sending advanced weapons to Armenia… ‘Azerbaijan is under a big threat from Russia,’ Mr Guladze said in an interview. ‘They are waiting to use the Armenians to strike against us. I think Turkish and American military bases would be welcomed here.’ (IHT, 1 February 1999, p. 6) 30 January 1999: Aliev returns home after thirteen days in a Turkish hospital. 15 February 1999: the supreme court sentences former prime minister (June 1993 to October 1994) Surat Huseinov to life in prison for his involvement in a 1994 coup attempt. He is found guilty on forty-five charges, including high treason for leading the coup attempt. (He fled to Russia and was arrested outside Moscow in March 1997 and extradited to Azerbaijan.) The court also finds him guilty of organizing coup attempts in 1995 and 1996, while he was in Russia. A year ago Aliev personally ordered that death sentences be commuted to life imprisonment (CDSP, 1999, vol. 51, no. 7, pp. 15–16; IHT, 16 February 1999, p. 6). 19 November 1999: an OSCE summit meeting is held in Istanbul. ‘OSCE hails the recent thaw in relations between Armenia and Azerbaijan over [Nagorno-Karabakh]… and plans to involve itself further in the search for a solution’ (FT, 20 November 1999, p. 5). 22 March 2000: Arkady Gukasyan, president of Nagorno-Karabakh, is wounded when gunmen open fire on his car in Stepanakert (the capital). ‘Authorities detained about twenty-five suspects…including Samvel Babayan, the province’s former defence minister and a rival to Mr Gukasyan’ (FT, 23 March 2000, p. 14). Former defence minister Samvel Babayan and several of his supporters—all outspoken political opponents of the Karabakh leadership—have been arrested on suspicion of involvement in the attempted assassination… The ex-minister [and former commander of the NKR defence army] and his supporters, most of them former field commanders, have been at odds with the Karabakh authorities for almost a year now. The veterans are upset with the fact that prime minister Anushavan Daniyelyan, who came to Karabakh from the Crimea (where he held senior posts in the early 1990s and was on the outs with law enforcement agencies) has, with the president’s connivance, taken control of virtually the

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entire economy of the republic. (CDSP, 2000, vol. 52, no. 12, pp. 19–20) Prime minister Anushavan Daniyelyan: ‘When Babayan and his supporters lost power, they also lost a lot of money. They were able to control half the trade and industry here. This was an attempt to preserve their personal power and wealth’ (IHT, 7 September 2000, p. 2). 29 April 2000: an opposition march is violently dispersed (CDSP, 2000, vol. 52, no. 18, p. 16). 22 August 2000: Abulfaz Elchibey, the former president, dies. 5 November 2000: Two elections took place in Azerbaijan on 5 November. In the official version almost 70 per cent of the electorate went to the polls, where people voted…en masse for the ruling New Azerbaijan Party… In reality the poll was a damning indictment of the government. Independent observers reckoned that barely onethird of the electorate bothered to vote. And despite a barrage of favourable coverage on Azerbaijan’s government-controlled television and the barring of hundreds of opposition candidates, the governing party ran neck and neck with the main opposition, the Moslem Democratic Party, known as Musavat… [whose] leader [is] a former speaker of parliament, Isa Gambar… The election was a farce… Foreign witnesses watched in astonishment as boxes were stuffed with false ballots and opposition politicians were threatened with arrest. Many observers were ejected from polling stations…[The] head of the democracy and human rights office within OSCE called it ‘a crash course in the differing methodologies of manipulation’. (The Economist, 11 November 2000, pp. 62, 67) President Aliev’s New Azerbaijan Party…captured around 70 per cent of the popular vote and the lion’s share of the 125-seat Milli Mejlis [Medzhlis]. But international observers said they witnessed widespread irregularities, including ballot-stuffing, intimidation by officials and protocol tampering… The parliamentary elections were condemned by OSCE as marked by ‘serious irregularities’… A large proportion of the population stayed away from the polls altogether… Some observers reported a heavy vote in areas for the opposition Musavat Party… The controversy seems to have united Azerbaijan’s longdivided opposition, who so far say that they will refuse to recognize the new parliament… Azerbaijan’s application to join the Council of Europe, the political rights forum…was accepted, along with Armenia’s, but only on condition that it tackles electoral abuses… The council…a European prodemocracy forum…agreed to accept Azerbaijan, but only on condition that it reviews the election and tackles abuses. (FT, Survey, 22 November 2000, p. iii) 9 January 2001:

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Azerbaijan and Russia agreed yesterday [9 January 2001] to draw a line marking the borders between the two countries in the Caspian Sea… The deal signed during a two-day visit by Russian president Vladimir Putin… was hailed as a big step towards an overall agreement for dividing up the sea’s considerable hydrocarbon reserves and natural resources. The four Caspian states created by the breakup of the Soviet Union (Azerbaijan, Russia, Turkmenistan and Kazakhstan) along with Iran have been unable to reach agreement on the overall status of the world’s largest inland body of water. The decision could also affect the future of the…sturgeon… Mr Putin and Gaidar Aliev…agreed to the principle of drawing a line from a mutually recognized point in the middle of the sea, to be determined later, to the borders of the two countries on the shoreline. The line would mark off the Caspian’s seabed, but not its waters or surface. (FT, 10 January 2001, p. 8) Mr Putin…signed documents outlining future co-operation between Russia and Azerbaijan in finance, politics and the use of the Caspian Sea… The talks led to the signing of the Baku Declaration, described as a pact to guide the countries’ relations in the future. The two leaders also signed a document aimed at the eventual drawing of economic borders in the oil-rich Caspian Sea, which has yet to be demarcated. (IHT, 10 January 2001, p. 4) 12 July 2001: [Azerbaijan has signed] an agreement with the IMF on the creation of an extrabudgetary oil fund, in which petroleum profits will be collected and then spent gradually. To date $368 million has been deposited in the fund … IMF officials approved a $100 million, three-year poverty reduction and growth facility loan for Azerbaijan, $10 million for immediate use. Two key conditions for the loan were that the government agree a longterm programme to reduce wealth discrepancies in the country and establish rules to manage the oil fund’s assets. Azerbaijan was denied a final $22 million tranche of separate IMF funding last year [2000] after it failed to carry out a number of requests… The [oil] fund will be consolidated with the national budget and expenditures will be made through the state treasury. IMF and Azeri authorities hope that by keeping billions of dollars from entering the economy immediately, they can avoid the destabilizing effect of a rapid rise in oil income… The [oil] fund’s directors… published a set of asset management rules last month [June]… [Azerbaijan] should also hold tenders soon to elect fund asset managers. The fund will issue quarterly and yearly reports and undergo audits by international accounting firms… Azerbaijan was recently put among the world’s ten most corrupt countries by Transparency International, the risk management group, raising concerns that some allocated money could disappear. Experts also worry about the tight

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control that President Gaidar Aliev exercises over the fund… A similar institution is being set up …in Kazakhstan. (FT, 13 July 2001, p. 9) 24 July 2001: Long-simmering tensions over the… Caspian Sea flared on Tuesday [24 July] as Azerbaijan alleged that an Iranian warship had violated its territorial waters and had threatened to use force against an Azerbaijani oil exploration ship. British Petroleum [BP] announced it was suspending oil exploration in the disputed area… Iran says the field…the second-biggest oil project in Azerbaijani waters…is in its territory. (IHT, 25 July 2001, p. 4) BP Amoco said an Iranian gunship had pulled alongside two Azeri survey vessels operated by the company…on Monday night [23 July]…[and] asked them to leave… A BP Amoco-led consortium was awarded a contract to develop the field in 1998 and plans to drill its first well there next year [2002]. (FT, 25 July 2001, p. 9) Teheran’s show of force…has met with an unprecedentedly fierce reaction from the other Caspian states (with the exception of Turkmenistan). The presidents of Russia, Kazakhstan and Azerbaijan…declared resoundingly that any redrawing of maritime borders would be ‘inappropriate’. (CDSP, 2001, vol. 53, no. 32, p. 5) [The president of Turkmenistan] Saparmurad Niyazov…has not endorsed Vladimir Putin’s proposal to hold a summit of the four Caspian countries that are CIS members in order to formulate a common position on a new international legal status for the sea. (p. 6) ‘[Iran believes] that all the oil fields Azerbaijan is claiming belong indisputably to Iran’ (CDSP, 2001, vol. 53, no. 34, p. 2). Iran, which had demanded that Azerbaijan cease all work in disputed areas of the Caspian shelf until the Caspian’s legal status is determined, has achieved its goal. All operations at the Alov, Araz and Sharg oil fields have been suspended, a situation that will remain unchanged at least until President Gaidar Aliev’s scheduled visit to Teheran in September… For the first few days after [the 23 July incident in which Iranian patrol boats and planes…forced an Azerbaijani oil exploration vessel to leave the area of the Caspian in which it had been working] a certain amount of confusion reigned in Baku…[But later] it was decided that Gaidar Aliev would make his historic trip to Iran in… September. (P. 4)

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Azerbaijani leaders have repeatedly provoked Teheran by hinting at the possibility of unification with their ‘brothers living in South Azerbaijan’ (meaning Iran’s northern provinces, which have a large population of ethnic Turks…[Azerbaijan has] ‘special ties’ to Turkey…[which has made direct threats] against [Iran]. (p. 1) A quarrel drags on between Azerbaijan and Turkmenistan…about gas debts from the early 1990s, which Azerbaijan says were incurred by private companies. Turkmenistan wants Azerbaijan to pay and has closed its embassy in Baku as a sign of its displeasure. (The Economist, 4 August 2001, p. 49) 1 August 2001: The country started writing the local Azeri language with a Latin, rather than Cyrillic, alphabet. The change caps a ten-year campaign to discard the Russian Cyrillic alphabet that Josef Stalin imposed on Azeri, which closely resembles Turkish… Children have been taught Azeri in Latin since the breakup of the Soviet Union. (FT, 2 August 2001, p. 6) ‘This is the third change of script in a century for Azerbaijan… In 1921 its leaders decided to drop the Arabic script and adopt the Latin alphabet. Eighteen years later… Cyrillic letters were adopted’ (Guardian, 2 August 2001, p. 17). The changeover of Azerbaijan’s written language to the Latin alphabet was completed yesterday [1 August]. A decree to that effect was signed by president Gaidar Aliev. The transition to the Latin alphabet took a little over nine years. The law on the official alphabet [was] enacted in February 1992 … As of yesterday…all documents at both government and private organizations must be written in the Latin script. All publications printed in the Azerbaijani language are switching to the Latin alphabet as well… The Latin alphabet has been used in all elementary schools since 1992. (CDSP, 2001, vol. 53, no. 31, p. 15) (‘The Azeri National Language Act became law in June [2002]… The law requires all official documents to be written in Azeri, which uses the Latin rather than the Cyrillic alphabet, and makes Azeri information and dubbing mandatory for all television broadcasts… Stalin imposed Cyrillic on Azerbaijan in 1936… Between 30,000 and 50,000 of Azerbaijan’s 8 million people are ethnic Russians, and many other minorities— including Turks, Jews, Georgians, Lezghinians, Talysh, Armenians, Ukrainians and others—also use Russian widely. More than 2 million residents, many of them ethnic Azeris, are estimated to speak Russian at home and at work’: Baltic Times, 25–31 July

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2002, p. 6.) 21 August 2001: Tanks and special forces were sent to the city of Zakataly in northern Azerbaijan yesterday [21 August] in response to an attack on the district police department by a group of Avars. Large numbers of Avars live in the district. Azerbaijani politicians are speaking of an attempted armed coup aimed at making Zakataly part of Dagestan. (CDSP, 2001, vol. 53, no. 34, p. 15) 11 September 2001: there are terrorist attacks on the USA. (For details, see the entry for 11 September in the chapter on Tajikistan.) 1 October 2001: ‘Azerbaijan and Georgia are themselves victims of terrorism and, in the light of this fact, will work together to fight it,’ [Azerbaijan president] Gaidar Aliev declared at a signing in ceremony for an agreement on transporting Azerbaijani natural gas from the [Caspian offshore] Skakh-Deniz gas field to Turkey via Georgia…through the Baku-Tbilisi-Erzurum pipeline… The signing of the document was postponed several times due to interference from the World Bank…[which wanted] Georgia to raise its gas transit fees. (CDSP, 2001, vol. 53, no. 40, p. 20) 14 December 2001: ‘US defence secretary Donald Rumsfeld left Friday [14 December] to visit Azerbaijan, Armenia and Georgia for talks on the war on terrorism… The three countries have offered Washington use of their airspace for military action in Afghanistan’ (IHT, 15 December 2001, p. 4). 11 January 2002: Yesterday [11 January 2002] Azerbaijan’s opposition parties agreed to form an organization that will be known as the United Movement of Azerbaijani Opposition Parties, which will co-ordinate the struggle against President Gaidar Aliev. The initiator of the forum and of the establishment of the UMAOP was Musavat, the country’s largest opposition party. The document creating the movement was signed by twenty-six parties. (CDSP, 2002, vol. 54, no. 2, p. 15) 25 January 2002: ‘Russia and Azerbaijan resolved a long-standing dispute on Friday [25 January 2002] by signing an agreement allowing Russia to use the Soviet-built Gabala missile-tracking station for ten years but recognizing it as Azeri property’ (IHT, 26 January 2002, p. 2). ‘Under the deal the radar station at Gabala will be operated by 1,500 Russian servicemen under a ten-year lease… Azerbaijani troops will guard the base and its data will be shared with Baku’ (The Times, 28 January 2002, p. 4).

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The tracking facility and Daryal radar station built there [in Gabala] in 1985 are an element of…[the Russian] missile-attack warning system… Some 1,500 Russian servicemen man the facility… The installation is the property of Azerbaijan and Russia has the right to lease the facility and use its equipment and grounds for ten years… Baku will be able to obtain some of the classified information gathered by the Gabala radar station… Azerbaijan [will receive]… $7 million…a year for the lease of the facility. (CDSP, 2002, vol. 54, no. 4, p. 16) ‘The Russian side will pay Azerbaijan an additional $31 million for its use of the radar station over the past five years… The station belonged to Russia up until now’ (CDSP, 2002, vol. 54, no. 5, p. 17). In January Baku and Moscow succeeded in resolving their long-standing dispute over the Gabala radar station—the only Russian military installation on Azerbaijani territory… Azerbaijan is the only country in the South Caucasus in which there is no foreign military presence. But the agreement signed by Baku and Moscow changes that situation somewhat. (Nezavisimaya Gazeta, 11 March 2002, p. 9: CDSP, 2002, vol. 54, no. 10, pp. 14–15) 16 February 2002: Large-scale clashes between police and supporters of the opposition took place on Saturday [16 February] in Baku. The opposition protesters were demanding President Gaidar Aliev’s resignation… Observers say that Saturday’s protest marked the beginning of a new phase of demonstrations by the opposition in Azerbaijan. The day before leaders of Azerbaijan’s major opposition parties— Musavat [led by Isa Gambar], the Civic Unity Party, the Democratic Party and the Liberal Party—agreed to wage a joint struggle against the ‘Aliev regime’. The opposition adopted a joint statement saying that mass protest demonstrations would begin in March and would not end until President Gaidar Aliev is removed from power. The Democratic Party organized the first demonstration the very next day, on Saturday (CDSP, 2002, vol. 54, no. 7, p. 17) 23–4 March 2002: ‘Fierce clashes between opposition members and lawenforcement authorities took place…in Baku, triggered by the authorities’ refusal to issue a permit to hold a large rally to demand President Gaidar Aliev’s resignation’ (CDSP, 2002, vol. 54, no. 12, p. 14). 22–3 May 2002: the Pope visits Azerbaijan. ‘[There are] just 120 registered Roman Catholics…[Of the] population of 7 million most…are Shiite Moslems’ (Guardian, 23 May 2002, p. 14). 3 June 2002:

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Residents of the village [of Nardaran]…are tired of living without gas and electricity, and above all without work. And for that reason the people of Nardaran have been demonstrating…for several months. And whereas earlier the authorities engaged in a dialogue with local residents and promised to solve all the accumulated problems…on 3 June…eight of Nardaran’s elders went to the Sabunchin district administration to ask for the release of seven local men who had…[been arrested after] trying to pressure…their settlement’s representative to the district administration… On 7 May…they tried to force [him] to step down… The authorities deemed the situation [on 3 June] an attempted coup and decided to send police and internal troops into the settlement… One resident was killed. (CDSP, 2002, vol. 54, no. 23, p. 16) 9 June 2002: Russia and Azerbaijan said yesterday [9 June] they had agreed basic terms for dividing the north-west part of the oil-rich Caspian Sea between them. But they postponed a signing ceremony…saying some ‘technical’ points had still to be resolved. The move follows the failure of the five Caspian states—Russia, Kazakhstan, Turkmenistan, Iran and Azerbaijan—to reach a general agreement on sea borders at a summit in April. Last month [May] Russia reached a bilateral agreement with… Kazakhstan. The deal with Azerbaijan will complete the division of the northern Caspian. But Azerbaijan and Kazakhstan have yet to reach agreement with Iran and Turkmenistan on sharing out the southern part of the sea. (FT, 10 June 2002, p. 9) 26 June 2002: [President Aliev] has announced possible changes to the…constitution that could smooth the way for his son Ilham to become president after him. Mr Aliev said the country would vote on 24 August on [constitutional] alterations… One change would include making the prime minister the country’s second most powerful politician and the person who would take charge should the president be unable to govern. This is significant because at the moment the speaker of parliament, who is elected by deputies, assumes power if the president steps down. The prime minister, in contrast, is appointed by Mr Aliev… Mr Aliev also announced recently that he would run for a third five-year term next year [2003]. (FT, 27 June 2002, p. 7) 11 August 2002: Arkady Gukasyan is re-elected president of Nagorno-Karabakh. He won more than 88 per cent of the vote. ‘Arkady Gukasyan has already said that the only possible alternative to independence for Nagorno-Karabakh would be for the region to become part of Armenia’ (Moskovskiye

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Novosti, 13–19 August 2002, p. 9: CDSP, 2002, vol. 54, no. 32, p. 14). 24 August 2002: The government of Azerbaijan claimed victory in a controversial referendum that critics say is designed to allow President Aliev, seventy-nine, to name his son as his successor. The central election commission… announced that well over 80 per cent of voters cast ballots… The over-whelming majority supported the referendum’s thirty-nine changes to the constitution, the commission declared. The opposition had called for a boycott and said that there was widespread fraud. Its monitors said turnout was between 15 per cent and 20 per cent… Some changes have been welcomed by human rights advocates. But two—an end to proportional representation in parliament and a change in the order of succession to the president—have drawn criticism. (The Times, 26 August 2002, p. 13) The United States [had] called for a delay [in the referendum]…One amendment specifies that the prime minister will become officially the second most powerful person in the hierarchy, standing in if the president is unable to govern, instead of the parliamentary speaker as now. As the prime minister is named by the president, Aliev will effectively be able to make his son, Ilham, or another loyal ally, his legal stand-in. (IHT, 26 August 2002, p. 3) The central electoral commission [said] the turnout was 88 per cent and approximately 70 per cent of those who voted backed the proposed amendments…[Aliev] suggested thirteen amendments to the constitution. The opposition, however, was alarmed by three main proposed changes: (1) abolishing the proportional electoral system in parliamentary elections; (2) transferring presidential authority to the prime minister in the event that the head of state cannot perform his duties; and (3) permitting political parties to be banned not by decision of the constitutional court, as was the case before, but by ruling of ordinary district courts… Opposition figures, who believe President Gaidar Aliev wants to use the amendments to legitimize a transfer of power to his son Ilham, are charging that numerous irregularities took place during the voting… The proposed changes were also criticized by the US State Department and the Parliamentary Assembly of the Council of Europe… According to the opposition, approximately 15 per cent of the voters went to the polls… A member of the opposition’s overall co-ordinating council…[said that] ‘no more than 8 per cent of the voters cast ballots’… The head of… For a Civil Society, an affiliate of the American National Democratic Institute [said that] ‘no more than 20 per cent of the voters actually went to the polls’. (CDSP, 2002, vol. 54, no. 34, pp. 14–15) 18 September 2002:

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Construction has formally begun on a pipeline [Baku-Ceyhan] to carry oil from the Caspian Sea to the Mediterranean coast of Turkey, bypassing Russia and Iran… Presidents of the three countries crossed… Azerbaijan, Georgia and Turkey…took part in the groundbreaking ceremony [in Baku]…as did the US energy secretary… The United States has been a major proponent of the project. (IHT, 20 September 2002, p. 12) ‘A symbolic first pipe section was laid in Baku, although actual construction will not begin until the first half of next year [2003]’ (FT, 1 October 2002, p. 34). 23 September 2002: ‘President Vladimir Putin and…Gaidar Aliev signed an agreement on demarcating adjacent sectors of the Caspian Sea bed’ (CDSP, 2002, vol. 54, no. 39, p. 18). 21 November 2002: A platoon of men from the Azerbaijani armed forces flew to Kabul yesterday [21 November]. The Azerbaijani peacekeepers, who will become part of a Turkish battalion, will help patrol the Afghan capital and guard the city’s airport. Azerbaijan thus becomes the first CIS country to take part in the peacekeeping operation in Afghanistan. This is Azerbaijan’s second peacekeeping mission. The first began in September 1999, when an Azerbaijani platoon (which likewise became part of a Turkish battalion) participated in the Nato operation in Kosovo. Azerbaijani soldiers continue to serve in Kosovo to this day. (CDSP, 2002, vol. 54, no. 47, p. 22) 27 February 2003: [Azerbaijan and Russia] signed an intergovernmental agreement on militarytechnical co-operation…[The Russian defence minister, Sergei Ivanov, said] ‘This is the first document of its kind signed by Russia and Azerbaijan in their modern history’ …Azerbaijani political analyst Rasim Musabekov [said]: Azerbaijan is now perhaps the only former Soviet republic not in debt to Russia. On the contrary, Moscow owes Baku—I am referring to its debt for the use of the Gabala radar station, which, including old arrears, totals about $100 million. The Azerbaijani side can use that money without much trouble to buy weapons.’ (CDSP, 2003, vol 55, no. 8, p. 14) 16 March 2003: thousands of opponents of President Gaidar Aliev, now recovering from an operation, staged a noisy protest Sunday [16 March 2003] to demand fair procedures in a presidential poll the veteran leader is sure to contest. Up to 10,000 demonstrators shouting ‘Resign!’ paraded through the city centre [of Baku] two days after Aliev, seventynine, returned from the United States, where he underwent a hernia operation. (IHT, 17 March 2003, p. 7)

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13 April 2003: Opponents [of the president]…rallied [in Baku] to demand…proper conditions for democratic presidential elections [in October]… The protest, organized by a coalition of twelve opposition groups and approved by the authorities, attracted 12,000 to 13,000 demonstrators. The demonstrators demanded that the government adopt an electoral code that fully meets democratic principles for free and fair elections. They also called for Aliev’s immediate resignation. Aliev has announced his intention to run again in presidential elections this October… [Aliev] is accused by critics of stifling dissent and media freedom. (IHT, 14 April 2003, p. 9)

THE ECONOMY Financial policy The manat was introduced in August 1992 alongside the rouble (for cash transactions only). It was to replace the latter entirely on 15 June 1993, but the deadline was postponed, first until 1 July and then until 1 September 1993. After the Russian currency reform of late July 1993 Azerbaijan vowed to end dependence on the rouble as soon as possible. Since May 1994 wage ceilings have been imposed on enterprises (EBRD 1994:19). A bankruptcy law, published in December 1994, was to come into force in 1995 (EBRD 1995a:53). A new bankruptcy law was enacted in 1997 (EBRD 1997b:152). A comprehensive stabilization and economic reform programme was initiated in early 1995, supported by a systemic transformation facility from the IMF (EBRD 1995b:35). The pre-independence management structure and the relationship between enterprises and ministries remain largely intact, supported until mid-1995 by budgetary subsidies and bank credits to enterprises. But there has been progress. Over the past year the government has cut back on subsidies and directed-credits to enterprises (EBRD 1996b:139). Inflation peaked in 1994 (1,664 per cent). ‘In early 1995 the government changed its entire economic policy’, with liberalization and macroeconomic measures successfully implemented (AZET, Quarterly Issue, January–March 1998, p. 25). Real interest rates turned positive at the end of 1995 (p. 58). Prices In January 1992, 70–80 per cent of producer and consumer prices were liberalized, with further rounds later in 1992 and 1993. This has left bread and energy as the main goods subject to continued price controls. Energy prices are still about a quarter of world market prices (EBRD 1994:19). Subsidies on bread were eliminated on 1 February 1995 (EBRD 1995a:53). In January 1995 the bread price subsidy and the state order system for agricultural products were abolished. Prices for oil and oil products were gradually

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increased during the course of 1995, reaching world market prices by the end of that year. But prices for utilities, housing and transport remain controlled at levels that often fail to cover production costs. The state anti-monopoly committee, established in 1993, regulates markups in nearly 1,000 enterprises categorized as ‘monopolistic’ (EBRD 1996b:140, and 1997b:153). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 10 per cent; 1993, 10 per cent; 1994, 20 per cent; 1995, 25 per cent; 1996, 25 per cent; 1997, 40 per cent; 1998, 45 per cent; 1999, 45 per cent; 2000, 45 per cent; 2001, 60 per cent (EBRD 1999b:24, 192; and 2002b:20, 120). Political instability has badly affected the economic reform programme. For example, the privatization Act was only passed in January 1993 (Deutsche Bank, Focus: Eastern Europe, 31 August 1993, no. 86, p. 6). Business Central Europe (November 1993, p. 60) reported that the voucher system had been thrown out by parliament earlier in the year. ‘Voucher privatization kicked off in March [1997], albeit with only partial success. Much more significant was the later liquidation and restructuring of some large state companies’ (Business Central Europe 1997:47). The size of the private sector, including informal activity, is likely to be within the range 15–25 per cent. The government programme put forward in April 1994 envisaged the privatization of medium-sized enterprises in 1996–8 and of large ones from 1998. Around 30 per cent of small enterprises were earmarked for privatization in 1994–5. There is no individual property restitution law (EBRD 1994:18). A privatization programme, due to come into force in 1995, has yet to be approved by the National Assembly (EBRD 1995a:53). The private sector, including informal activity, may account for 15–25 per cent of GDP (EBRD 1995b:35). A privatization programme, approved by parliament in July 1995, aimed to transform at least twenty large enterprises into joint stock companies and sell majority stakes to both domestic and foreign purchasers. A plan to use vouchers for a mass privatization scheme has also been approved (p. 35). The distribution of vouchers should be completed by the end of 1996 and the first voucher auction was to take place in early 1997. Foreigners are allowed to participate. Many shops, restaurants, small manufacturing enterprises and trade and service units have been leased out. The privatization programme approved in July 1995 envisaged that small enterprises (employing fewer than fifty workers) would be auctioned or sold directly to individual workers. The process started in March 1996 and 2,500 small enterprises should be sold by the end of the year (EBRD 1996b:139). The distribution of vouchers is now expected to be completed by mid-1997. Some 70 per cent of all state enterprises are planned to be privatized by the autumn of 1999 under the voucher-based mass privatization programme (which gives preference to ‘insiders’, i.e. managers and workers) (EBRD 1997a:26). The distribution of vouchers started in spring 1997. The first voucher auctions took place in June 1997 and the first cash auctions are in preparation. The programme stipulates that at least 50 per cent of the shares will be allocated to the

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public in voucher auctions, 15 per cent are to go to employees against vouchers and 25 per cent are to be held by the state in investment funds. Laws stipulate the privatization of about 70 per cent of all enterprises by 1999. The imminent completion of small privatization was announced in June 1997 (EBRD 1997b:152). There are no private pension, investment or mutual funds (p. 153). In mid-1997 the first of fourteen mediumsized and large enterprise voucher/cash auctions was held (EBRD 1998a:32). A limited number of strategic enterprises, mainly in the extractive and petrochemical industries, banking and infrastructure (selected on a case-by-case basis by the president) were to be sold through investment tenders. Privatization has so far largely transferred ownership to enterprise insiders, with little control exercised by outside shareholders (EBRD 1998b:152–3). The large-scale privatization programme continues to lag behind schedule. In 1998, 944 out of a total of 3,200 enterprises were transferred to private ownership through the voucher process… These enterprises have so far been predominantly medium-scale. By October [1998] only 10 per cent of all distributed vouchers have been redeemed in voucher auctions… The government has presented the draft 1999–2000 privatization programme to parliament. Drawn up with World Bank advice it envisages sales of strategic stakes in large enterprises to foreign investors through tenders. (EBRD 1999a:33) In voucher and cash auctions after May 1997, 954 medium-sized enterprises (accounting for an estimated 10 per cent of total assets of state firms) had been offered to private investors by July 1999. Of these 170 were fully privatized. But only one voucher and two cash auctions took place in the first eight months of 1999 and only 10 per cent of all issued vouchers have been redeemed (EBRD 1999b:190). Voucher privatization has been stalled for over a year and a new programme for large-scale privatization, stressing cash sales of strategic enterprises, has still not been passed by parliament. The vouchers are due to expire in August 2000, with only 10 per cent redeemed as of the end of 1999. The establishment of effective corporate governance mechanisms remains a major challenge. (EBRD 2000a:40) By the end of 1999…1,065 medium-sized and large enterprises had been transformed into joint stock companies and privatized… In September 1998 a new phase of case-by-case privatization began with the adoption of competitive tenders. However, by the end of the first quarter of 2000 only five companies had been privatized through this mechanism… A new privatization was adopted in May 2000 and is complemented by a new privatization programme (implementing regulations) which has recently been approved by the president… The previously issued vouchers and options (the majority held by foreigners) have been extended beyond their 2000 expiry date… The International Bank of Azerbaijan, which dominates the sector, was recapitalized

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in January 1999 and a decree for its privatization was issued. However, there is no clear indication of the timing of the sale, nor of the acceptance of the need for strategic investors. The three other state-owned banks have been restructured by merging their assets into a single new bank, the United Universal Bank, and by transferring non-performing assets to an asset collection agency. (EBRD 2000b:134) In December 2000 a decree was issued announcing that the State Oil Fund is an extra-budgetary institution, solely accountable to the president… Privatization has moved forward under a new law… Power and gas continue to be used to bolster the competitiveness of industry, while utilities are subsidized by low-cost energy inputs. (EBRD 2001a:48) While small-scale privatization is nearly complete, privatization of larger enterprises has lagged behind. Following the adoption of the second privatization programme in August 2000, thirty-nine cash and twelve voucher auctions had been held by the first quarter of 2001… In addition, since case-bycase privatization began in late 1998 ten companies have been privatized through competitive tenders. (EBRD 2001b:114) By the end of 2001 the authorities had made substantial progress in small-scale privatization, with more than 29,000 small enterprises privatized. The corporatization and privatization of medium-sized companies has also advanced, but the privatization of large-scale companies remains slow. The most noteworthy success over the last year was the privatization of the electricity distribution company in Baku… The announced withdrawal of the main foreignowned bank, HSBC, in March 2002 is a significant setback to the development of, and competition in, the banking sector. (EBRD 2002b:118–19) About 70 per cent of enterprises were to be privatized by the end of 1998. Under a threeyear privatization programme 15,000 small enterprises have been sold by auction. Under a mass privatization programme launched in March 1997, 7.1 million voucher books (each containing four vouchers) were distributed among the citizens. In larger enterprises that have been converted into joint stock companies 15 per cent of shares were to be sold to employees for vouchers, another 55 per cent at open voucher auctions, and the remaining 30 per cent in cash auctions in which foreigners may also participate. By the end of 1997 shares in 400 larger enterprises were expected to be sold (out of a total of some 2,000). Railroads, water facilities, historical and cultural monuments, pension funds and the national bank are excluded from privatization. The president or the council of ministers can authorize the sale of fuel and energy production, petrochemicals, telecommunications and bread and wine production (a non-voting ‘golden share’ being reserved for the state). The stock exchange and investment funds have yet to be

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established (Transition, 1997, vol. 8, no. 6, p. 26). Azerbaijan was one of the last of the countries of the former Soviet Union to launch an official privatization programme. The 1995–8 privatization programme was not approved until 21 July 1995: 1 The first cash auction for small privatization was conducted on 26 March 1996. The programme laid down that 15 per cent of the enterprise was to be sold to the workers’ collective on preferential terms and 85 per cent sold through cash auctions and competitive tendering. Small privatization is almost complete, mostly involving cash auctions (AZET, Quarterly Issue, January–March 1998, pp. 61–2). 2 After extensive delays large privatization began on 1 March 1997. Vouchers were distributed to all citizens registered on 1 January 1997. Groups such as widows of war heroes qualified for additional vouchers. The first voucher auction took place on 18 May 1997. There have been unsubstantiated reports that the vouchers are now concentrated in the hands of a few individuals who are able to manipulate both the voucher market and the auctions. The Azerbaijani State Property Committee is also not above suspicion… Greater transparency in privatization procedures could have helped to nurture public confidence in and support for the privatization process. As it transpired, the transparency of the privatization procedures, and thus ‘fairness’, was sacrificed for the acceleration of the process. (AZET, Quarterly Issue, January–March 1998, pp. 61–2) All medium-sized and large enterprises have to be reorganized into joint stock companies prior to privatization. The programme stipulated that at least 50 per cent of the shares were to be allocated to the public in voucher auctions, 15 per cent were to go to employees against vouchers on preferential terms, 10 to 20 per cent were to go to cash auctions and up to 25 per cent were to be held by the state in closed-end investment funds. ‘Privatization options’ (tradable) were to be issued to foreign investors, who were to be eligible to buy either one privatization voucher per option or enterprise shares (the number being determined in the auction). Twenty voucher auctions were held between 18 May 1997 and 24 April 1998, with more than 300 medium-sized and large enterprises being privatized. The majority were in light industry (e.g. cotton gins) and in the agroindustrial complex (e.g. canneries and bakeries). Little progress has been made in the separation and corporatization of industrial giants in, for example, the chemical and metal processing industries (pp. 62–5). The government aims to privatize around 70 per cent of all enterprises by 1999. A presidential decree of 5 June 1997 provided enterprise owners with a first refusal in buying the land on which enterprises are built. Only five investment funds are operating. There are plans to set up a stock exchange (p. 66). As of 1 October 1998, 913 medium-sized and large state enterprises had been corporatized and thirty voucher and thirty-one cash auctions had been held (AZET, Quarterly Issue, July– September 1998, p. 89). Shares of many of the 913 joint stock companies have been offered in both types of auctions. Between May 1997 and the end of the third quarter of 1998 the shares of 872 companies were traded in voucher auctions and 870 companies

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were traded in cash auctions. But the shares of only 182 companies were sold at the cash auctions. Shares of 872 joint stock companies have been sold to their employees through ‘closed subscription’ (p. 98). In July 1998 the first competitive tender was advertised for a corporatized state enterprise. This was the beginning of a new ‘case-by-case privatization’ stage in the privatization process. On 28 September 1998 legislation for competitive tenders was adopted, while on the following day an internationally advertised tender was announced to select a financial consultant for the privatization of a corporatized enterprise. The 1995–8 privatization programme ends in 1998. The main difference between the old and the new (1999–2000) programmes is that there are new guidelines for medium-sized and large privatization and the latter programme provides a list of individual enterprises to be privatized (p. 89). On 2 July 1998 the president issued an instruction on the privatization of an enterprise which produces heavy machinery for electric power generators. An open tender was subsequently announced, thus heralding the beginning of the new stage of competitive tenders (p. 94). On September 1998 the deadline for the distribution of vouchers was postponed until the end of 1998 (p. 91). Since the beginning of the privatization process 21,281 small enterprises have been privatized. In addition, 1,000 enterprises have been transformed into joint stock companies, of which 170 have been fully privatized through voucher and cash auctions. Altogether thirty-seven voucher auctions and forty-one cash auctions have been held. Only a small fraction of vouchers have been used to date, the expiry date being 15 August 2000. (On 28 December 1998 the president signed a decree giving an extra voucher to groups such as victims of war and the Chernobyl accident: p. 17.) Small privatization is almost complete, but large privatization has come almost to a standstill. ‘At present the number of large and medium-sized individual enterprises to be privatized, the sequencing of their privatization and the methods used for individual enterprises is unknown.’ A draft privatization programme for 1999–2000 has been prepared and submitted to the president, but it has not yet been approved by parliament (AZET, Quarterly Issue, January–March 1999, p. 109). In the first quarter of 1999 only one enterprise was privatized by competitive tender, while one voucher auction (the thirtyseventh) and two cash auctions (the fortieth and forty-first) took place (pp. 112–14). In the second quarter of 1999 the privatization process further stagnated… No cheque auctions took place and the four cash auctions held were rather dissatisfying in their result… The most important event was the privatization of 56 per cent of the concrete factory Garadag-Sement by competitive tender… So far 30, 153, 112 of the 32 million cheques have been distributed to the population. Foreign investors have bought options for almost $13.3 million… with which they acquire the right to buy and use more than half of all vouchers. (AZET, Quarterly Issue, April–June 1999, pp. 81, 86) The draft 1999–2000 programme, which was prepared and submitted to the president back in 1998, is still under consideration… In 1999 only two cheque auctions took place…the thirty-seventh was held between 15–28 January…and the thirty-eighth…between 2–16 September… Only 13 per cent of distributed vouchers have been redeemed so far… In 1999 there were sixteen cash

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auctions… In 1999 five competitive tenders were held… The most important privatization was the 56 per cent of the concrete factory ‘Garadag-Sement’…by competitive tender. ‘Garadag Holding Ltd’, which was the winner of this tender, could not fulfil all the conditions of the agreement… Holderbank [Switzerland], second in the tender process, became the owner of 86 per cent of ‘GaradagSement’ shares (of which 30 per cent of shares were bought on the fiftieth cash auction…held on 7 September)… In the period 9–19 April 1999 a closed subscription was held in which 15 per cent of shares were offered to the workers’ collective on preferential terms. (AZET, Six-monthly Issue, July–December 1999, pp. 97–107) ‘The result of one competitive tender of the six which were held in 1998–9 [the one held in February 1999] was cancelled in the first quarter of 2000… [The winner of the tender] could not fulfil all the conditions of the agreement’ (AZET, Quarterly Issue, January– March 2000, p. 103). ‘Approximately 99 per cent of privatized small enterprises and sites were purchased by their workers’ collectives on preferential terms’ (p. 106). President Aliev is expected to decree a new law governing the procedures of the privatization programme next week, following its passage by parliament … Foreign investment will play a very big role… Mr Aliev says that the decree may cancel the debts of companies in the non-oil sector and allow investors to set their own prices. (IHT, Survey, 5 June 2000, p. 11) Foreign trade Foreign trade is largely centrally controlled. Extensive export quotas are backed by a licensing system and export taxes. Most imports are arranged by bilateral agreement. Since May 1994 the official manat exchange rate has been set weekly, based on a weighted average of exchange rates quoted by authorized commercial banks. Both current and capital account convertibility is heavily restricted. There is mandatory surrender of proceeds from nonstrategic exports at the official rate (EBRD 1994:19). Strategic exports, mostly raw materials, are sold through bilateral trading agreements at fixed prices (p. 111). Trade with Russia dropped sharply when Russia halted rail traffic to Azerbaijan through Chechnya in September 1994 (EBRD 1995a:53). All quotas and licensing restrictions for both imports and exports were removed by spring 1995, with the exception of some ‘strategic’ goods such as oil and cotton (EBRD 1995b:35). Until March 1995 exporters were required to surrender a fixed proportion of their foreign currency at an unfavourable exchange rate. In March 1995 the exchange rate was effectively unified when the government abolished the unified foreign exchange fund and the rate applied for surrender requirements was aligned with market rates. Capital account convertibility remains limited (1996b:140). State dominance in foreign trade is being reduced. The official exchange rate is determined on the inter-bank currency exchange (EBRD 1997a:26). All export duties were abolished in 1997. Tariffs have been substantially diminished. While the trade regime is quite liberal state trading

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organizations continue to enjoy special privileges (EBRD 1997b:153). Azerbaijan already complies with the IMF’s Article 8 on current account transactions, formal acceptance being envisaged by early 1999 (EBRD 1998b:152). A plan to reduce the general tariff from 15 per cent to 12 per cent in 1999 has been postponed owing to revenue considerations. There is a managed floating exchange rate regime. ‘On 9 July 1999 the manat was devalued by 7 per cent against the US dollar, after having remained the only CIS currency immune to the Russian crisis.’ Although full current account convertibility applies in effect, official acceptance of the IMF’s Article 8 is still outstanding (EBRD 1999b:190). Azerbaijan has largely liberalized its trade and foreign exchange regime, without any backtracking. The relatively low and uniform general tariff still stands at 15 per cent… A more flexible foreign exchange regime has been adopted. The manat was allowed to depreciate about 11 per cent against the US dollar during 1999. As a result, the effective exchange rate has returned to around the level prior to the onset of the Russian financial crisis. (EBRD 2000b:134) ‘Azerbaijan’s exchange rate is liberal and the authorities are expected to accept the obligations of Article 8 of the IMF’s Articles of Agreement before the end of 2001’ (EBRD 2001b:114). In June 2002 the National Bank of Azerbaijan issued new rules which further liberalize foreign currency transactions…[For example] they remove all restrictions on residents withdrawing cash from banks in foreign currency and permit individuals to carry out foreign currency transactions through authorized banks without having to open an account. The authorities have also informed the IMF of their intention to accept some of the obligations of Article 8 of the IMF’s Articles of Agreement…although some issues still have to be resolved. (EBRD 2002b:118) The nominal exchange rate of the AZM [manat] vis-à-vis the US dollar has been fairly stable since January 1995… This relative stability of the AZM nominal exchange rate ended in July 1999 with a devaluation of 6.8 per cent. Since then a slight depreciation can be observed… This can be explained by a change in the exchange rate policy of the ANB [the central bank]. In previous years the ANB frequently intervened in the exchange rate market to avoid depreciation and maintained high rates of interest. Since July 1999 the ANB seems to prefer market mechanisms for the exchange rate adjustment. (AZET, Six-monthly Issue, July–December 1999, p. 77) In July 1997 a 5 per cent import tax was imposed on industrial goods, grain, timber and car wheels (foreign investors being exempted in all these cases) (Deutsche Morgan Grenfell, Focus: Eastern Europe, 5 September 1997, p. 74). In 1991 Azerbaijan accounted for only just over 2 per cent of Soviet oil production, but

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supplied 70 per cent of Soviet oil equipment (Deutsche Bank, Focus: Eastern Europe, 31 August 1993, no. 86, pp. 3–4). Exporters have to sell 60 per cent of their export revenues to the state (Deutsche Bank, Focus: Eastern Europe, 1994, no. 113, p. 6). The government requires 85 per cent of hard currency earned from the sale of ‘strategic’ goods (almost 75 per cent of all traded goods) to be surrendered to the state in exchange for domestic currency (FT Survey, 7 March 1994, p. 12). The US Freedom Support Act (passed in 1992 at the urging of pro-Armenian members of the US Congress) prohibits direct US economic and humanitarian aid to Azerbaijan until the government of Azerbaijan takes ‘demonstrable steps’ to lift its economic blockade of Armenia. Azerbaijan has received barely $100 million in US aid for limited humanitarian purposes, routed through private relief groups, compared with more than $600 million in direct assistance for Armenia (IHT, 7 July 1997, p. 7). In 1992 the CIS accounted for 49.2 per cent of exports (Russia 23.4 percentage points). The EU accounted for 15.2 per cent. In 1998 the CIS accounted for 38.3 per cent of exports (Russia 17.5 percentage points). The EU accounted for 21.7 per cent (AZET, Quarterly Issue, April–June 1999, p. 71). In 1999 the CIS accounted for 22.7 per cent of exports (Russia 8.9 percentage points). The EU accounted for 45.6 per cent (AZET, Sixmonthly Issue, July–December 1999, p. 41). In 1992 the CIS accounted for 64.6 per cent of imports (Russia 26.8 percentage points and Ukraine 22.8 percentage points). The EU accounted for 11.2 per cent. In 1999 the CIS accounted for 22.6 per cent of imports (Russia 15.8 percentage points and Ukraine 2.7 percentage points). The EU accounted for 13.3 per cent (AZET, Six-monthly Issue, July–December 1999, p. 42). In 1997 petroleum products accounted for 61.4 per cent of exports (AZET, Quarterly Issue, January–March 1998, pp. 35–7). Foreign direct investment See Table 2.1 for the volume of net foreign direct investment. A progressive law was passed in 1992, e.g. joint ventures with a foreign stake of more than 30 per cent pay a corporate tax rate of 25 per cent instead of 35 per cent (Business Central Europe, July–August 1993, p. 64). The January 1992 law says that foreigners can hold up to 100 per cent of capital (though only 49 per cent in the case of banks), but for the time being it is not possible to purchase real estate (Deutsche Bank, Focus: Eastern Europe, 1993, no. 86, p. 6). Non-residents are not allowed to buy land, but they can lease it long term (Deutsche Morgan Grenfell, Focus: Eastern Europe, 11 June 1997, p. 67). Profits are freely convertible and may be freely repatriated. There are no legal obstacles to the ownership by foreigners and nationals of shares in enterprises. Foreigners may lease but not own land (EBRD 1996b:140). An agreement in principle with a BP-led consortium of Western oil companies to develop oilfields in the Caspian Sea was signed on 1 November 1993. The deal was finally signed on 20 September 1994, with the nine Western companies taking a 70 per cent stake, the Azerbaijani State Oil Company 20 per cent and Russia’s Lukoil 10 per cent (derived from the State Oil Company’s original 30 per cent stake). The agreement

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specifies that 80 per cent of the profit goes to Azerbaijan. (Note that Russia’s foreign ministry refused to recognize the deal, even though a representative of the Russian ministry of fuel and power attended the signing ceremony.) It was announced on 13 November 1994 that Iran was to be offered a 5 percentage point share (coming out of Azerbaijan’s 20 per cent), but the offer was withdrawn when the USA raised objections. On 13 March 1995 President Aliev announced that he had agreed to increase Turkey’s share from 1.75 per cent to 6.75 per cent, with the extra 5 percentage points coming from the State Oil Company’s stake (the deal was signed on 13 April 1995). On 9 October 1995 it was announced that two pipelines would be used to transport the oil, one running through Russia (via Chechnya and the Black Sea port of Novorossiisk) and the other through Georgia and Turkey. In August 1997 four US oil companies signed deals worth a total of $8 billion to develop offshore fields (Business Central Europe 1997:47). The predicted oil bonanza has not materialized (although encouraging amounts of natural gas have been found) but a number of important agreements have been reached:

Table 2.1 Azerbaijan: selected economic indicators 1995–2002

Economic indicator

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

Rate of growth of GDP (%)

–11.8

0.8

5.8

10.0

9.5

11.1

9.9

10.6

Rate of growth of industrial output (%)1

–21.4

–6.7

0.5

2.2

4.2

6.9

5.1

3, 6

Rate of growth of agricultural output (%)

–6.8

3.0

6.1

6.2

7.0

12.1

9.7

–

Inflation rate (consumer, %)

411.7

19.7

3.5

–0.8

–8.5

1.8

1.5

2.8

Budget surplus or deficit (% GDP)2

–3.1

–2.4

–4.0

–4.9

–4.7

0.6

1.4

1.5

Unemployment rate (end of year, %)3

0.7

0.8

1.0

1.1

1.2

1.2

1.2

–

–0.318 –0.821 –0.915 –1.364 –0.600 –0.168 –0.051

–0.457

Balance of payments (current account, $ billion) Foreign direct investment (net, $ billion)

0.330

0.627

1.115

1.023

0.510

0.119

0.227

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, Azerbaijan Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe.

1.417

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Note: 1 Industrial output excludes crude oil production 2 General government consolidates all levels of government except for municipalities and SOEs, and includes the Oil Fund and other extra-budgetary funds (EBRD) 3 Less than 5 per cent of all unemployed are registered (EBRD)

1 On 17 April 1999 the opening ceremony took place of the Baku (Azerbaijan)-Supsa (Georgia) oil pipeline. 2 On 18 November 1999 Azerbaijan, Georgia and Turkey signed an accord on the controversial Baku-Tbilisi-Ceyhan oil pipeline (much favoured by the USA). Kazakhstan agreed to contribute ‘significant’ volumes of oil to the project. Turkey agreed to guarantee any cost overruns on its section. Ceyhan is the Turkish port on the Mediterranean Sea (FT, 18 November 1999, p. 12, and 19 November 1999, p. 10). Under a new tax code companies will be exempted from corporate profits tax until all invested capital is recovered (IHT, Survey, 5 June 2000, p. 10). Azerbaijan and Georgia signed an agreement on Saturday [29 September 2001] on the transit, transport and sale of natural gas, marking an important step towards a planned gas pipeline running across Georgia to Turkey … Earlier this year Azerbaijan signed an agreement to supply Turkey… Parliaments…[in] Turkey, Georgia and Azerbaijan…must still ratify the host-government and inter-governmental agreements… In July Azerbaijan, thinking it had reached agreement with Georgia, prepared to host a signing ceremony However, a letter from the World Bank convinced Georgians that they should negotiate a higher tariff. (FT, 1 October 2001, p. 14) The international partners…gave the project the go-ahead [on 27 February 2003]… Work begins next year [2004] and the first gas deliveries are expected in 2006. BP will operate the pipeline. Other partners are Norway’s Statoil, Azerbaijan’s State Oil Company and France’s TotalFinaElf. (FT, 28 February 2003, p. 9) ‘The announcement of HSBC’s withdrawal from retail banking in March 2002 is a significant setback to the development of the banking sector’ (EBRD 2002:42). Agriculture Azerbaijan prohibits private land ownership by its nationals and legal entities, although leasing is allowed (EBRD 1994:74). ‘[The] privatization of agricultural land and issuance of land titles are nearly complete’ (EBRD 2000b:134). ‘In Azerbaijan many large farms are breaking up into independent multifamily units that occupy an intermediate position between individual farms and former

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collectives’ (Lerman 1999:273). The volume of agricultural output declined by 40 per cent between 1992 and 1995. One of the main factors explaining this decline has been government pricing and procurement policies during this period, which have been reinforced by the breakup of the traditional trade links. The liberalization of input prices and the system of compulsory deliveries to the state at low prices has imposed a too strong pressure on profitability of the sector. (AZET, Quarterly Issue January–March 1998, p. 19) The share of the private sector in total agricultural output increased from 49.3 per cent in 1992 to 74.1 per cent in 1997 (p. 19). The share of peasant farms in agricultural land increased from 0.1 per cent in 1992 to 3.6 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 38 per cent in 1991 to 97 per cent in 1999 (p. 890). Economic performance GDP growth turned positive in 1996 after a string of negative double-figure rates (–22.7 per cent in 1992, –23.1 per cent in 1993, –19.7 per cent in 1994 and –11.8 per cent in 1995: AZET, Quarterly Issue, April–June 1999, Annex. 8.1). (See Table 2.1.) Within the CIS developments in 1999 were dominated first by the Russian crisis, then by the unexpected strength of recovery in Russia and the rise of many commodity prices… The best placed have been countries with large natural resource sectors… Azerbaijan’s growth of 7.4 per cent in 1999 was mainly due to a 20 per cent increase in oil production and the marked upturn in oil prices. (EBRD 2000a:5) The rate of growth of GDP in 2001 was an estimated 9.9 per cent, but the level of output in that year was still only an estimated 62 per cent of the 1989 level (EBRD 2002b:58, 121). Another strong growth performance was registered in 2002. There was hyperinflation in the period 1992 to 1994 (912.3 per cent in 1992, 1,129 per cent in 1993 and 1,664 per cent in 1994: AZET, Quarterly Issue, April–June 1999, Annex. 8.1). A stabilization policy introduced in 1995 has reduced inflation dramatically since 1996. The general (consumer) price level actually fell in 1998 and 1999 and the inflation rate was very low thereafter.

3 Georgia POLITICS The political background In 1992–3, 800,000 people left Georgia, one-third of them Georgians (CDSP, 1994, vol. XLVI, no. 20, p. 12). The civil wars have resulted in 4,000 dead and more than 250,000 refugees (Business Central Europe, March 1994, p. 18). There is a small OSCE mission in South Ossetia. Georgia has lost around a fifth of its population, about 1 million people having left the country (The Economist, 19 August 2000, p. 20). The population at the end of 1998 was 5.4 million. Tbilisi has been the capital of Georgia since 458 (IHT, 7 August 1998, p. 12). Political developments 16 March 1993: Eduard Shevardnadze accuses Russian forces of backing the ‘separatists’ in Abkhazia, including the bombing of Sukhumi (the regional capital of Abkhazia and a port). In 1986 the (Moslem) Abkhazians accounted for only 17 per cent of the (0.53 million) population of the province (Georgians 44 per cent and Russians 16 per cent). In Georgia as a whole the 5.2 million population was split as follows: Georgians, 68.8 per cent; Armenians, 9 per cent; Russians, 7.4 per cent (5.9 per cent in 1991, according to The Economist, 10 December 1994, p. 52); Azeris, 5.1 per cent; Ossetians, 3.2 per cent; Abkhazians, 1.7 per cent. Abkhazia (the name means ‘country of the soul’) came under Tsarist rule in 1810. It was a separate Soviet republic until 1930, when Stalin (a Georgian) attached it to Georgia (Independent, 29 September 1993, p. 13). In August 1992 defence minister Tengiz Kitovani invaded Abkhazia without the approval of Shevardnadze. Georgian troops engaged in wholesale looting, raping and killing (IHT, 9 June 1994, p. 6). 19 March 1993: a Russian warplane is brought down by Georgian forces. 7 April 1993: an agreement is reached with Russia to allow Russian troops to stay until 1995. 13 April 1993: a Treaty of Friendship and Mutual Assistance is signed with Ukraine. 7 May 1993: the defence minister, Tengiz Kitovani, is dismissed by parliament. 14 May 1993: Yeltsin and Shevardnadze agree a ceasefire between Georgian and Abkhazian forces starting 20 May. 2 July 1993: parliament endows Shevardnadze with special powers, e.g. to appoint and dismiss all cabinet ministers (except the prime minister) and to issue decrees.

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Heavy fighting is reported in Abkhazia. 6 July 1993: martial law is declared in Abkhazia for a period of two months. 25 July 1993: after an acrimonious debate parliament grants Shevardnadze authority to approve a peace agreement in Abkhazia. Georgian troops will be removed and replaced by Russian military personnel. Monitoring will be performed by UN observers (approved by the UN Security Council earlier in the month provided there was a ceasefire). Abkhaz guerrillas will withdraw from the ‘zone of conflict’ and those from outside will leave Abkhazia. Local autonomy would be restored. 27 July 1993: a ceasefire is signed, effective as of noon 28 July. 6 August 1993: prime minister Tengiz Sigua and his government resign when parliament rejects the proposed budget (the background is the state of the economy and the military situation). Shevardnadze is appointed caretaker premier. (Otar Patsatsia was approved as prime minister by parliament at the end of the month.) 28–9 August 1993: armed supporters of ousted president Zviad Gamsakhurdia take over three towns in western Georgia (the Mingrelia region) and another one on 7 September. 12 September 1993: Shevardnadze assumes the post of interior minister. 14 September 1993: Shevardnadze is granted emergency powers (for two months starting 20 September, during which parliament will be suspended) only after he says he will resign. (The state of emergency was later extended to 20 January 1994. In November 1993 Shevardnadze formed his own political party, the Citizens’ Union.) 16 September 1993: Abkhazian separatists (led by parliamentary speaker Vladislav Ardzinba) break the ceasefire and attack Sukhumi. (The Georgians are caught off guard, having withdrawn many of their forces and much of their heavy weaponry.) Russia demands a halt to the fighting. (Russia later cuts off fuel supplies.) 19 September 1993: a truce is signed, but Abkhazian separatists continue to attack Sukhumi. The Mingrelian ‘rebels’ (who are nationalists opposed to the Abkhazians; the nationalists claim that rogue Russian military units are helping the Abkhazians) say that they will come to the aid of the Georgian defenders. 24 September 1993: Zviad Gamsakhurdia returns to the Mingrelia region. His priority is to defeat the Abkhazians, but he also calls for Shevardnadze’s resignation and the restoration of power to what he calls the ‘legitimate authorities’. 27 September 1993: Sukhumi falls. Shevardnadze, who has joined his forces there, escapes. 28 September 1993: Shevardnadze returns to the Georgian capital Tbilisi. He claims that Sukhumi will be recaptured (although perhaps by the next generation) and that ‘The plan to occupy Sukhumi was masterminded at Russian [military] headquarters.’ 30 September 1993: the loss of Abkhazia is almost complete. The conflict to date has resulted in more than 30,000 dead and 100,000 made homeless (Telegraph, 1 October 1993, p. 15; IHT, 1 October 1993, p. 2). 1 October 1993: the Abkhazians claim that their territory is now ‘completely liberated’. Georgian government troops clash with supporters of Gamsakhurdia. 2–3 October 1993: supporters of Gamsakhurdia take control of the port of Poti and the small town of Khoni. 4 October 1993: government forces retake Khoni.

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8 October 1993: Shevardnadze announces that Georgia will seek to join the CIS. (A majority in parliament agreed on 20 October and Shevardnadze signed the decree on 24 October. Parliament ratified a bill on 1 March 1994.) 17 October 1993: supporters of Gamsakhurdia take Samtredia and Khoni. 18 October 1993: Shevardnadze appeals to Russia for military support after admitting that ‘the Georgian army has practically disintegrated’. 20 October 1993: Russian troops begin deploying along the rail link with the Black Sea. (There were subsequently many reports of Russian equipment and even some personnel helping Georgian forces.) (Note that agreement was reached to allow some 20,000 Russian troops to stay. The troops were to have been withdrawn in 1995.) Government forces claim that they have retaken Poti, Lanchkhuti and Khoni. 22 October 1993: government forces claim that they have retaken Samtredia. 25 October 1993: government forces claim they have retaken Poti. (But the situation was fluid. Russian troops took over key transport points on 4 November.) 26 October 1993: Senaki falls to government forces. (There followed a counterattack by Gamsakhurdia’s supporters, taking Khoni and Senaki only to lose them again.) 29 October 1993: Shevardnadze claims there is an alliance between Gamsakhurdia’s supporters and the Abkhazians. 6 November 1993: Zugdidi, Gamsakhurdia’s stronghold, falls to Georgian government forces. 9 November 1993: Russia warns Georgian government forces and Abkhaz separatists not to attack each other. 30 November–1 December 1993: UN-sponsored talks in Geneva produce agreement. The elements include the cessation of hostilities, the exchange of prisoners of war, the return of refugees, the creation of a commission of inquiry into the status of Abkhazia, an appeal for a UN peacekeeping force and a pledge to begin political negotiations in January 1994. 5 January 1994: there is debate about whether Zviad Gamsakhurdia committed suicide on 31 December 1993 when surrounded by enemy forces. 3 February 1994: Presidents Yeltsin and Shevardnadze sign a ten-year treaty of friendship and military co-operation. Russia is to retain three military bases in Georgia and station troops on Georgia’s border with Turkey. Russia will also provide help with training and equipping the Georgian army. 4 April 1994: the Georgian government and the Abkhaz separatists agree to allow refugees to return and also make an appeal for a UN peacekeeping force. The conflict has left 3,000 dead (Guardian, 5 April 1994, p. 9). (The problem of resettling refugees continued.) 9 June 1994: Yeltsin issues a decree for the sending of peacekeeping troops to Abkhazia. (The Council of the Federation approved this on 21 June.) 22 July 1994: the United Nations Security Council approves the use of Russian peacekeeping troops on condition that UN military officers monitor the operation. December 1994: Abkhazia comes under a very tight Russian blockade. Electricity has been shut off periodically, Sukhumi airport is closed and deliveries of fuel, food products and medical supplies have been limited. The

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protocol on the resumption of railway traffic in the republic that was signed by the Abkhaz and Russian sides on 20 October 1995 has not been implemented because of opposition from Georgia. Since 30 October 1995, on instructions from the Russian Federation ministry of foreign affairs, Abkhaz ships have been prohibited under various pretexts from putting out to sea from the Sukhumi port, and since 5 January 1996 the port has been closed to all foreign ships… Abkhaz passports are no longer recognized by the Russian Federation’s border and customs services. (CDSP, 1996, vol. XLVIII, no. 2, p. 25) 10 February 1995: Abkhaz ‘rebels’ say they will give up demands for independence. The invasion of Chechnya is cited as the reason, the West being unwilling to help independence-seekers (The Economist, 18 February 1995, p. 46). 2 May 1995: Shevardnadze issues a decree on the disarming of unrestrained gunmen. The decree was mainly aimed at the Mkhedrioni (Horsemen) led by Dzhaba Ioseliani. Set up six years ago, they actively participated in the overthrow of Zviad Gamsakhurdia’s regime during the Abkhazian and civil wars and were granted official status in 1993 as the Corps of Rescuers. But their criminal activities forced Shevardnadze to act and Ioseliani decided to comply (Moscow News, 12–18 May 1995, p. 5). (On 1 October 1995 Shevardnadze signed a decree disbanding the armed wing of the Mkhedrioni. The political wing was also disbanded and banned from participating in the elections: CDSP, 1995, vol. XLVII, no. 40, p. 23; no. 46, p. 15.) 24 August 1995: parliament approves a new constitution, a strong presidency being a key feature. 29 August 1995: Shevardnadze survives, with only minor injuries, an assassination attempt when a car bomb explodes outside parliament. (He was on his way to a signing ceremony for the new constitution.) 30 August 1995: Shevardnadze, who was elected speaker of parliament on 11 October 1992, announces that he is to stand in the presidential election of 5 November 1995. 2 September 1995: the security minister is dismissed. 1 October 1995: the former security minister, Igor Georgadze (now in Moscow), is accused of masterminding the assassination attempt in league with Russian ‘reactionary forces’. (In early October 1995 Shevardnadze signed a decree disbanding the armed wing of the Mkhedrioni. The political wing was also disbanded and banned from participating in the election: CDSP, 1995, vol. XLVII, no. 40, p. 23.) 9 October 1995: the chapter on Azerbaijan deals with the oil pipeline agreement. 5 November 1995: Shevardnadze easily wins the election for the reinstated presidency in a turnout of 64.24 per cent. He receives 74.3 per cent of the vote, while the nearest of his five challengers, Dzhumber Patiashvili (First Secretary of the Central Committee of the Georgian Communist Party, 1985–9), is accredited with only 19.3 per cent. (There is a minimum 30 per cent turnout for the general election and 50 per cent for the presidential election.) There are 235 seats in parliament, 150 decided according to proportional voting from party lists and seventy-five from regional first-past-the-post polling. (The remaining ten have been set aside for Abkhazia and South Ossetia, which boycotted the election.) Run-off elections will be held on 19 November.

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In the first round of the general election only three of the fifty-four parties and blocs clear the 5 per cent hurdle needed to win parliamentary seats by proportional representation. The Communist Party falls short with 4.6 per cent. Shevardnadze’s Georgian Citizens’ Union gains 23.5 per cent of the party list vote. The National Democratic Party wins 7.9 per cent. It is led by Irina Sarishvili-Chanturia, who took over after her husband, Giorgi Chanturia, was assassinated. The centre-right party is pro-West, anti-mafia and against the concessions made to Russia. The centre-right All-Georgian Union of Rebirth wins 7.1 per cent of the vote. It is led by Aslan Abashidze and is supportive of Shevardnadze. 15 November 1995: Dzhaba Ioseliani is arrested. (A warrant for his arrest was issued on 30 August, after drugs and weapons had been confiscated from his office: CDSP, 1995, vol. XLVII, no. 46, p. 15.) 2 February 1996: Shevardnadze issues a decree which states that the Sukhumi seaport, the nearby waters of the Black Sea and the Abkhaz section of the state border between Russia and Georgia will be closed to all international shipments except those that are made for the purpose of providing humanitarian assistance to the general public. Humanitarian freight will be allowed into Abkhazia only on the basis of one-time authorizations issued by the appropriate Georgian agencies (CDSP, 1996, vol. XLVIII, no. 5, p. 22). 22 April 1996: a partnership and co-operation pact is signed with the EU. The pact offers trade concessions and access to certain EU loans (IHT, 23 April 1996, p. 5). 10 November 1996: Lyudvig Chibirov wins the presidential election in South Ossetia with 52.3 per cent of the vote in a turnout of 61.3 per cent. The Georgian government has branded the poll illegal. 23 November 1996: parliamentary elections take place in Abkhazia. (Before hostilities broke out ethnic Georgians accounted for 45 per cent of Abkhazia’s population and Abkhaz about 15 per cent. Today Georgians make up no more than 20 per cent of the population and most live in Gali district next to the Georgian border: CDSP, 1997, vol. XLIX, no. 27, p. 16; June 1997 source). 31 July 1997: the Abkhazia mandate for Russia’s troops expires but their withdrawal is delayed. 14–15 August 1997: Eduard Shevardnadze and Vladislav Ardzinba (accompanied by Russia’s foreign minister Yevgeni Primakov) meet in Tbilisi. The Georgian and Abkhazian leaders issue a joint statement at the end of their twoday meeting: ‘To take upon themselves the obligation not to use arms to resolve differences between them and under no circumstances to allow a resumption of bloodshed… Only peaceful political methods through negotiations should be used.’ (The conflict in Abkhazia cost 10,000 lives and caused 300,000 people to flee their homes: FT, 28 July 1997, p. 2. About 10,000 people were killed and some 150,000 ethnic Georgians made refugees: Guardian, 16 August 1997, p. 11.) 9 February 1998: Shevardnadze’s motorcade is attacked but he survives this assassination attempt (the second). Two bodyguards and one assailant are killed and others are injured. Shevardnadze warned of a ‘third force’ of ‘international terrorism’ in Russia.

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I cannot tell you who took part but by the scale and level it was conducted I can say it was a kind of international terrorism…[I do not] have in mind the leadership of Russia. But there are certain other circles who have their own interests and use the kind of methods as last night. (IHT, 11 February 1998, p. 5) Shevardnadze said that ‘very powerful forces are interested in a different solution of the questions linked to the transportation of oil through Georgia’ (FT, 11 February 1998, p. 2). Shevardnadze, in an interview in April 1998, stated: The organizer of the previous attempt against me is hiding in Russia [a reference to the former Georgian intelligence chief Igor Georgadze, who fled in 1995 after a car bomb failed to kill Shevardnadze]. We could also see his handwriting in this latest attempt. It does not mean that all of Russia thinks this way There are people there who are very progressive. But, unfortunately, the majority are reactionary and that creates a problem. They want Georgia to be obedient, but freedom and obedience are not compatible. Russia is fighting very hard against the establishment of democracy here. (IHT, 4 May 1998, p. 5) 19 February 1998: Georgian police surround a house in which four UN military observers (monitoring the truce in Abkhazia) are held hostage (along with other people) by armed kidnappers demanding the release of seven people arrested for allegedly taking part in the assassination attempt on Shevardnadze. The Georgian government thinks the kidnappers are supporters of late president Zviad Gamsakhurdia (IHT, 20 February 1998, p. 5). The captors are demanding that the authorities release all jailed supporters of Zviad Gamsakhurdia, including those arrested in connection with the latest assassination attempt (IHT, 21 February 1998, p. 2). Shevardnadze: ‘I know that among them [the kidnappers] are people who took part in the attack against me’ (IHT, 21 February 1998, p. 2). 22 February 1998: one UN military observer is released. 25 February 1998: the remaining UN hostages are released after Shevardnadze began talks with a representative of supporters of the late Gamsakhurdia. 20 May 1998: fighting breaks out in Abkhazia’s Gali district, which borders on the Abkhaz-Georgian demarcation line established after the end of the 1992–3 civil war. Both sides blame each other for starting the fighting. Units of the Abkhaz police are fighting guerrilla formations known as the ‘White Legion’ and ‘Forest Brothers’ (CDSP, 1998, vol. 50, no. 20, p. 19). Fighting flared up in Abkhazia after Georgian partisans (including the White Legion) attacked police stations (Guardian, 13 June 1998, p. 21). A week of fierce fighting in Abkhazia’s Gali district ended with the routing of two Georgian commando battalions and internal troops sent out to assist them… The answer to the question of ‘who started it’ may not turn out to be in Georgia’s favour… Georgia…tried to gain control over Gali district by using the

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forces of the White Legion and Forest Brothers commando battalions— allegedly ‘people’s avengers’ who are not under Tbilisi’s control … For all practical purposes the White Legion and Forest Brothers are actually units of the regular army… Their operations are co-ordinated by…an official in the Georgian ministry of security. (Sevodnia, 28 May 1998, p. 1; CDSP, 1998, vol. 50, no. 21, p. 22) The retaliation that followed led to large numbers of Georgian refugees leaving Abkhazia. A ceasefire was agreed on 25 May. On 27 May President Vladislav Ardzinba of Abkhazia imposed emergency rule for three months (IHT, 28 May 1998, p. 6). 1 July 1998: preparations for a phased transfer of control over Georgia’s borders by Russian border troops to their Georgian counterparts get under way. Under an intergovernmental agreement initialled on 27 June the actual transfer will begin on 16 July There will be a number of phases. Finally, the Batumi and Khichauri detachments of the Russian border service will leave Georgia over the course of 1999. The presidents of the two countries entered into an agreement in February 1994 (CDSP, 1998, vol. 50, no. 26, pp. 17–18). 31 July 1998: the mandate of the Russian peacekeepers in the zone of the GeorgianAbkhaz conflicts expires. But Shevardnadze says that a withdrawal is ‘not advisable at this time’ (CDSP, 1998, vol. 50, no. 31, p. 15). 19 October 1998: over 200 troops (supporters of the late Zviad Gamsakhurdia) stage a one-day mutiny in the army base in Senaki. One pro-government soldier is killed. The rebels demanded the resignation of the ‘Shevardnadze regime’ and restoration of the Gamsakhurdia-era Supreme Soviet (CDSP, 1998, vol. 50, no. 42, p. 15). 17 April 1999: the opening ceremony takes place of the Baku (Azerbaijan)-Supsa (Georgia) oil pipeline. 27 April 1999: Georgia becomes the forty-first member of the Council of Europe, the organization that promotes human rights and democracy (IHT, 28 April 1999, p. 7). 30 August 1999: Georgia extends the mandate of Russian peacekeepers in the Georgian-Abkhaz conflict zone. The mandate expired a year ago (CDSP, 1999, vol. 51, no. 35, p. 21). 27 September 1999: Shevardnadze (in response to the Russian government’s decision to open its border with Abkhazia): If Russia believes it has the right to unilaterally decide what kind of procedures should be instituted on the Abkhaz section of the Russian-Georgian border, then Georgia, too, has the right to take analogous measures and to independently decide what kind of border-crossing procedures will be in effect on the Chechen section of the Georgian-Russian border. (CDSP, 1999, vol. 51, no. 39, p. 20) 31 October 1999: a general election is held. Of the 235 seats being contested, 150 will be distributed to party lists. There is a 7 per cent threshold for parties. The remaining eightyfive seats in the five-year parliament are to be allocated on a first-past-the-post system. ‘The parliament in Georgia, unlike some former Soviet states, has significant

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powers’ (FT, 30 October 1999, p. 5). ‘The pre-election period has been characterized by angry exchanges between the two leading parties’ (FT, 30 October 1999, p. 5). Citizens’ Union. Revival of Georgia. The opposition Revival of Georgia is a diverse alliance of antiShevardnadze forces, uniting nationalists and socialists under the leadership of Aslan Abashidze, head of Georgia’s autonomous Ajaria region on the Black Sea. The leader of the Renaissance Union in Georgia, Aslan Abashidze, also intends to run for president next year (2000). The Renaissance Union includes a wide spectrum of politicians, from socialists to nationalists, and it appealed to protest voters who are dissatisfied with the status quo. Shevardnadze (1 November): ‘Preliminary results show that this is a convincing victory for Citizens’ Union’ (FT, 2 November 1999, p. 11). ‘President Eduard Shevardnadze’s ruling Citizens’ Union claimed a crushing victory in the parliamentary elections over the main opposition Revival bloc, which opposes his pro-Western policies, including seeking membership in the Nato military alliance’ (IHT, 2 November 1999, p. 7). Mr Shevardnadze’s pro-Western party did rather well, getting 42 per cent of the vote and…an absolute majority of seats… Aslan Abashidze runs an odd and thoroughly autocratic mini-state, Ajaria, on the Black Sea border with Turkey. He opposes Mr Shevardnadze’s zeal for joining the EU and Nato. (The Economist, 6 November 1999, pp. 53–4) ‘Mr Abashidze accused Mr Shevardnadze’s party of vote rigging. Foreign observers reported some irregularities’ (IHT, 2 November 1999, p. 7). ‘Outside observers criticized the conduct of the campaign: the main media slavishly backed the government, public officials campaigned vigorously, dirty tricks abounded’ (The Economist, 6 November 1999, p. 54). Abkhazia holds a presidential election. Vladislav Ardzinba (the sole candidate) is reelected, with 99 per cent of the vote. There is also a 97.5 per cent ‘yes’ vote in a referendum on the ‘independence and sovereignty of Abkhazia’. ‘Neither Tbilisi nor Moscow has recognized the results of the election and referendum’ (CDSP, 1999, vol. 51, no. 40, p. 18). 8 November 1999: the Pope visits Georgia. The Orthodox Church barred its flock from attending a mass to be celebrated by the Pope [on 9 November]… ‘Orthodox Christians do not have the right to attend religious services of other confessions,’ a statement from the Patriarchate in Tbilisi said. (The Times, 9 November 1999, p. 20) 10 November 1999: it is announced in Sukhumi that the last Russian border guard will have left Abkhazia by the end of the week (Sunday 14 November) (CDSP, 1999, vol. 51, no. 45, p. 19).

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18 November 1999: Azerbaijan, Georgia and Turkey sign an accord on the controversial Baku-Tbilisi-Ceyhan oil pipeline (much favoured by the USA). Kazakhstan agrees to contribute ‘significant’ volumes of oil to the project. Turkey agrees to guarantee any cost overruns on its section. Ceyhan is the Turkish port on the Mediterranean Sea (FT, 18 November 1999, p. 12, and 19 November 1999, p. 10). 19 November 1999: at the OSCE summit meeting in Istanbul Russia agrees to reduce its troops in Georgia. ‘The CFE Treaty [revised in Istanbul]…requires that a state cannot deploy forces in another state without the host country’s consent… Russia agreed…to dismantle two of its four bases in Georgia, by mid-2001’ (FT, 20 November 1999, p. 5). Moscow has four military bases in Georgia and the Georgians do not want all of them to close just yet… Under the accord Russia will close two military bases in Georgia by mid-2001. One is the Vaziani air base near Tbilisi … The other is the Gudauta base, which is in the secessionist province of Abkhazia. The Russians will still be allowed to use their bases in Akhalkalaki and Batumi. The Georgians fear the economic impact of closing the Russian base in Akhalkalaki, an ethnic Armenian area, because it is one of the region’s main employers. The new accord will also require the Russians to reduce their weapons in Georgia. The most significant cut is in armoured combat vehicles, which will be slashed to 241 from 481. (IHT, 25 November 1999, p. 7) A protocol was signed in Moscow on 25 April 2000. Two bases would cease to exist by 1 July 2001, while the fate of the other two would depend on Russia’s position on Abkhazia. Weapons would be located on the two military bases that Russia would continue to operate after 1 July 2001—those in Batumi and Akhalkalaki—but only until 2003. If Russia supports Georgia—if only politically—on the Abkhaz issue then Georgia would be willing to discuss an agreement under which Russia could keep the bases for another ten to fifteen years (CDSP, 2000, vol. 52, no. 17, p. 17). The bases in Vaziani (a suburb of Tbilisi) and Gudauta (Abkhazia) are the first to be closed by the deadline of 31 July 2001. [As for] the airfield at Vaziani… Moscow takes the view that this airfield… is not part of the Vaziani base… Russia would retain the Vaziani airfield in order to supply Russian troops remaining on Georgian territory. The Georgian military is categorically against that idea… Efforts to load the contents of the Vaziani base’s arsenals on to the first special train got under way yesterday [3 August]. (CDSP, 2000, vol. 52, no. 31, p. 18) President Eduard Shevardnadze announced yesterday [21 August] that he was prepared to make some changes in the plan for dismantling Russian military bases… The changes would essentially involve keeping the military base at Gudauta, on the territory of the self-proclaimed Republic of Abkhazia. (CDSP, 2000, vol. 52, no. 34, p. 21)

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9 April 2000: a presidential election is held, with a turnout of 70 per cent. There were six candidates, but Aslan Abashidze pulled out the day before. Eduard Shevardnadze was reelected in the first round of voting, with 80.4 per cent. Dzhumber Patiashvili came second with 16.6 per cent of the vote. The parliamentary assembly of the Council of Europe, which monitored the vote, said 600 polling places were visited ‘and no serious violations have been registered’. It said that there were some irregularities but that ‘such violations happen in any country’. (IHT, 11 April 2000, p. 7) 19 April 2000: parliament passes a bill renaming Adzharia the Adzhar Republic, making Georgia a federation (CDSP, 2000, vol. 52, no. 16, p. 19). 25 November 2000: Tbilisi is preparing to take ‘commensurate measures’ in response to Russia’s decision to require visas for travel to and from Georgia as of 5 December, President Eduard Shevardnadze said yesterday [25 November]… The Georgian government will never agree to relaxed requirements for Abkhazia and South Ossetia… Although Georgian legislation prohibits dual citizenship, many residents of South Ossetia and Abkhazia have taken Russian citizenship, and they are unlikely to accept the need for full-fledged visas at the Russian border. (CDSP, 2000, vol. 52, no. 46, p. 17) 5 December 2000: Russia imposes visa restrictions on travel between the two countries (Guardian, 6 December 2000, p. 17). On 5 December Russia started requiring Georgian visitors to have visas… Around 500,000 Georgians work in Russia… Georgians in Russia now have a three-month grace period to return home and try to put their papers in order… The new visa rules are milder in… South Ossetia and Abkhazia … Many people there already have Russian passports. (The Economist, 9 December 2000, p. 61) As of yesterday [5 December] ‘all categories of Georgian citizens’ may enter Russia only through border checkpoints for international traffic and only with Russian visas in their national passports. Officials in Moscow stress that this move is dictated by the need to seal holes in the Russian-Georgian border through which foreign mercenaries are making their way to Chechnya… Despite the Russian foreign ministry’s announcement that visas are now required for ‘all categories of Georgian citizens’, Russian has instituted simplified procedures for crossing the frontier areas bordering on Abkhazia and South Ossetia. (CDSP, 2000, vol. 52, no. 49, p. 17)

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25 December 2000: Talks held in Tbilisi on the fate of the Russian military bases in Georgia have revealed that the leadership…intends to make some significant concessions to Moscow. This is borne out by Georgia’s consent to joint operation of the airfield at Vaziani… This arrangement will remain in effect for as long as the Group of Russian Forces in the Transcaucasus exists… Meanwhile no final decision has been made yet on exactly how long the military bases at Akhalkalaki and Batumi will remain in Georgia… The Georgian defence minister…[said that] ‘Georgia does not intend to join the [Nato] alliance.’ (CDSP, 2000, vol. 52, no. 52, p. 19) (Eduard Shevardnadze in an interview on 21 December 2000: ‘If a country cannot solve its problems in one system of security co-ordinates it is simply obliged to look for a solution to them in another existing system… In 1999… I said that Georgia would be knocking on Nato’s doors in 2005, although that does not mean those doors will open immediately, of course’: CDSP, 2001, vol. 53, no. 1, p. 11. ‘[A] recent declaration [has been made by] Eduard Shevardnadze…that his country might drop its (vain) hope of becoming a Nato member and instead aim at neutral status’: IHT, 15 March 2001, p. 10. ‘Eduard Shevardnadze…said his country would remain neutral and abandon plans to become a member of Nato’: FT, Survey, 9 April 2001, p. iv.) 1 January 2001: ‘Russia has cut off gas supplies to Georgia [on 1 January 2001] in an escalation of tensions. The two are in dispute over the withdrawal of Russian forces…and over alleged Georgian support for Chechen rebels… Georgia is entirely dependent on Russian gas’ (FT, 4 January 2001, p. 7). The supply of electricity for Georgia, which is already starved for energy, faced a sharp reduction early Thursday [4 January] when natural gas was expected to stop flowing to the nation’s only remaining gas-fired generating plant, officials said Wednesday [3 January]… The Russian company that sells gas to the plant’s operator cut off the supply at the start of the New Year over what it called a price dispute. The Georgian plant continued to operate on gas already in the pipeline… It was the second time in thirty days that the Russian company cut off supplies to AES Corp., an American company providing electricity to Georgia… The shutdown of the gas-fired plant means Georgia must rely on a handful of hydroelectric power plants, which are not operating at capacity now because of a drought last summer [2000]. It also gets electricity from neighbouring Armenia… Georgian officials said privately that the motive for the two cuts appeared to be at least partly political… Some officials also said they believed the Russian government wanted to make sure that AES did not develop enough electricity to begin exports to Turkey. (IHT, 4 January 2001, p. 2) ‘Russia provides Georgia with 90 per cent of its gas… AES is the sole supplier of energy to Tbilisi, the Georgian capital’ (IHT, 5 January 2001, p. 5).

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The Russian company that supplies gas for Georgia’s main power generators cut off supplies in early December [2000]… AES Corp. agreed to pay a 10 per cent increase [in price to Inertgazstroi] and the supply resumed. On 1 January Inertgazstroi again cut supplies, saying it acted under orders from the Russian government. (IHT, 9 January 2001, p. 5) 4 January 2001: Russia yesterday [4 January] averted a big power failure in Georgia by restarting gas supplies suspended because of what analysts believe are attempts by Russia to retain strong influence in the Caucasus. An emergency $3 million supply contract was signed late on Wednesday [3 January] by… the Georgian energy minister and Itera, an independent gas trading company with opaque links to Russia’s… Gazprom… Analysts believe Russia is trying to prevent Georgia from becoming a natural transit route for oil and gas to the West from fields in Central Asia and the oil-rich Caspian Sea region… The deal struck between the Georgian government and Itera has left the trading relationship between AES, the US company which runs power distribution in Georgia, and its partner Inertgazstroi (INGS), an associate of Gazprom, in limbo. AES had to shut one of its power plants on Monday [1 January] after Russia cut gas supplies… The Georgian government has signed a contract [with Itera] which may have to be renewed if the situation with INGS is not resolved by then. (FT, 5 January 2001, p. 11) Russia has repeatedly exploited its monopoly of gas supply to various former Soviet republics as leverage in regional disputes… Moscow said Monday [1 January 2001] that it had met a 31 December [2000] deadline to close two Russian bases in Georgia… The fate of Russia’s two other military bases at Batumi and Akhalkalaki…is to be decided by the end of 2001. (IHT, 5 January 2001, p. 5) The decision by the Russian government to cut off gas supplies…this month [January] came after high-level lobbying by UES, the Russian electricity utility, as part of its efforts to win a lucrative export contract to Turkey… AES runs part of Georgia’s electricity network and controls the transmission network through which UES would export to Turkey… UES …said it was ‘absurd’ to suggest that it had applied pressure on Moscow to interfere in gas supplies to Georgia. (FT, 10 January 2001, p. 8) 16 February 2001: Parliament acknowledged Russia’s right to both debts and overseas assets of the

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former USSR… Kiev has accused Tbilisi of betrayal. In the early 1990s Moscow signed with the CIS countries a package of documents under which the latter gave up any claims to the assets and liabilities of the former USSR. Ukraine and Georgia refused to ratify the documents. (CDSP, 2001, vol. 53, no. 8, p. 18) 24 April 2001: The process of dismantling the first [the Vaziani military base in a suburb of Tbilisi] of the four Russian military bases on Georgian territory was completed yesterday [24 April]. Georgian authorities said that the withdrawal of all Russian forces from Georgia is to be completed in the next three to four years… Under the [November 1999] accords the Vaziani and Gudauta military bases are to be dismantled by 1 July 2001… Russia and Georgia continue to hold talks on the fate of the other two Russian military bases, at Akhalkalaki and Batumi. (CDSP, 2001, vol 53, no. 17, p. 18) (‘The final stage of the transfer of Russian Military Base No. 137 in Vaziani to Georgia has gotten under way in Tbilisi’: CDSP, 2001, vol. 53, no. 26, p. 15. ‘[The first of July 2001] was the deadline for closing the Russian military base in Gudauta (Abkhazia)… [But Russian] servicemen are still on Abkhaz territory… Local residents have pitched tents around the Russian base… Residents of Abkhazia are determined to save the base at any cost’: Noviye Izvestia, 3 July 2001, p. 2: CDSP, 2001, vol. 53, no. 27, p. 16.) 25 May 2001: Georgia’s government was on high alert last night [25 May] as negotiators tried to end what senior officials called an ‘attempted coup d’état’ by up to 1,000 mutinous soldiers at a military base near… Tbilisi. The crisis began when 500 highly trained soldiers marched from their base…they barricaded themselves inside another military base… A further 500 interior ministry soldiers caught inside the Mukhrovani base…joined the revolt… After talks with the soldiers army representatives said the battalion was not interested in political upheaval, but was simply protesting at the dire conditions within the Georgian military. (Guardian, 26 May 2001, p. 21) About 1,000 Georgian troops armed with tanks and submachine guns mutinied Friday [25 May], taking over an interior ministry base to demand back wages and better conditions… The mutineers insisted the protest was economic, not political… The drama began Friday morning [25 May] when a 400-man National Guard battalion withdrew from military exercises and appropriated an interior ministry base nearby… The men were joined by interior ministry troops and their number grew to about 1,000… President Eduard Shevardnadze…said he was ready to discuss ‘all the painful problems’ with the soldiers… He promised to drop criminal charges against them if they surrendered. (IHT, 26 May 2001, p. 2)

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President Eduard Shevardnadze closed the book yesterday [29 May] on the incident… After receiving officers from the battalion…he declared the matter closed… The battalion’s officers swore up and down that staging a coup d‘état had never entered their minds, that they had simply wanted to draw… attention…to the desperate social plight of the army and especially to the chronic failure to pay officers… The president ordered the formation of a special commission…to develop a concrete plan to deal with the social problems. (CDSP, 2001, vol. 53, no. 22, p. 19) 26 May 2001: Georgia observes its independence day. Russian prime minister Mikhail Kasyanov has signed a directive establishing visa-free travel across the Russian-Georgian border via the Verkhny LarsKazbegi checkpoint for Russian citizens who permanently reside in the republic of North Ossetia-Alania and for Georgian citizens who permanently reside in Kazbegi district. They may now cross the border freely and spend up to ten days in the country next door. A visa system was introduced on Russia’s initiative last December [2000] and became fully operational on 1 March [2001]. (CDSP, 2001, vol. 53, no. 22, pp 19–20) 26 July 2001: an outspoken independent television journalist, Georgi Sanaya, is shot dead. 17 August 2001: The trial of the men involved in planning and perpetrating the terrorist attack on President Eduard Shevardnadze on 9 February 1998 ended yesterday [17 August]. All were sentenced to lengthy prison terms. On that day in 1998 a group of armed supporters of former Georgian president Zviad Gamsakhurdia, all of whom had undergone training at camps run by [rebel leaders] Khattab and Basayev in Chechnya, opened fire on President Eduard Shevardnadze’s motorcade in Tbilisi… At the scene of the attack the police found the body of a Chechen who had died during an exchange of fire with the president’s bodyguards. Eight Zviad supporters were arrested a week later; they told investigators that four more Chechens had taken part in the attack. The attackers had acted on the personal instructions of [Chechen rebel leader] Salman Raduyev, who, incidentally, never concealed his role in the attempted assassination of President Shevardnadze, whom he referred to as Moscow’s front man in the Caucasus. (Kommersant, 18 August 2001, p. 3: CDSP, 2001, vol. 53, no, 33, pp. 16–17) 11 September 2001: there are terrorist attacks on the USA. (For details, see the entry for 11 September in the chapter on Tajikistan.) 18 September 2001

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The Russian foreign ministry yesterday [18 September] sent Tbilisi an unprecedentedly harsh note accusing Georgia of abetting terrorism... In it Moscow states that ‘despite numerous requests from Russia hundreds of terrorists’…have not been handed over. Russia demands the ‘immediate extradition of those responsible for terrorist attacks, bombings of civilian facilities, hostage-taking and armed resistance to the authorities’. The Pankisi Gorge is termed a ‘logistics base for international terrorists’, while the ‘mission and information centre of the Chechen Republic of Ichkeria’ operating in Georgia are described as ‘rebel supply’ channels… Boris Nemtsov…late last week…said since Georgia was incapable of solving the problem itself, it should agree to allow Russian servicemen to take part in operations… Georgia declared categorically that it would ‘not allow its territory to be used for military operations by foreign states’. That was on Friday [14 September]. But on Monday Georgia’s leaders said that they were willing to make their military bases available to the United States. (CDSP, 2001, vol. 53, no. 38, p. 20) 26 September 2001: President George W.Bush: ‘To the extent that there are terrorists in Chechnya, Arab terrorists associated with the al-Qaeda organization, I believe they ought to be brought to justice. We do believe there are some al-Qaeda folks in Chechnya’ (IHT, 28 September 2001, p. 3). A spokesman for President George W.Bush: The Chechen leadership, like all responsible political leaders around the world, must immediately and unconditionally cut all contact with international terrorist groups such as Osama bin Laden and the Qaeda organization… The United States has always said that only a political process can resolve the conflict in Chechnya and we welcome the steps by the Russians to engage the Chechen leadership. Respect for human rights and accountability for violations on all sides are crucial to a durable peace. (IHT, 27 September 2001, p. 4) (‘Last week it [the Bush administration] delivered a tough message to the exiled Chechen foreign minister demanding that the rebel leadership break off relations with two Chechen commanders who represent the movement’s radical Islamic faction. And this week it is telling the visiting president of Georgia, Eduard Shevardnadze…that he must… [take] action against Chechen militants in Georgia’: IHT, Friday 5 October 2001, p. 8. ‘Georgia is handing over thirteen people detained on its northern border who Russia claims are Chechen fighters’: The Economist, 6 October 2001, p. 42.) President Eduard Shevardnadze stated at a meeting…yesterday [26 September] that there were Chechen rebels on Georgian territory. He also said that Georgia was prepared to work with Russia in taking every possible measure against these people. This was the Georgian president’s response to a request that

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Vladimir Putin made yesterday by telephone… For the past two years the Georgian leader had categorically denied that there were any Chechen rebels in his country. (Nezavisimaya Gazeta, 27 September 2001, p. 5: CDSP, 2001, vol. 53, no. 39, p. 19) 28 September 2001: ‘Georgian authorities yesterday [28 September] asked the notorious Chechen field commander Ruslan Gelayev…to leave the republic… In the past…the Georgian side admitted only to the presence of “civilian refugees”’ (Izvestia, 29 September 2001, p. 2: CDSP, 2001, vol. 53, no. 39, pp. 19–20). 1 October 2001: ‘Azerbaijan and Georgia are themselves victims of terrorism and, in the light of this fact, will work together to fight it,’ [Azerbaijan president] Gaidar Aliev declared at a signing in ceremony for an agreement on transporting Azerbaijani natural gas from the [Caspian offshore] Skakh-Deniz gas field to Turkey via Georgia…through the Baku-Tbilisi-Erzurum pipeline… The signing of the document was postponed several times due to interference from the World Bank…[which wanted] Georgia to raise its gas transit fees. (CDSP, 2001, vol. 53, no. 40, p. 20) 3 October 2001: A detachment of about fifty rebels descended from the mountainous areas around the Kodori Gorge on Wednesday [3 October] and seized…[a] village. Fierce fighting with units of the Abkhaz army went on… The Abkhaz armed forces managed to repulse the aggressors… By late Thursday the guerrillas had been ejected from the settlement… It has been reported on several occasions that joint forces of Chechen rebels and so-called Georgian ‘partisans’ are concentrating in mountainous Svanetia, a part of Georgia. According to some reports, the band is now led by the notorious Chechen field commander Ruslan Gelayev. (CDSP, 2001, vol. 53, no. 40, p. 17) October 2001: ‘[The] Western-educated justice minister, Mikheil Saakashvili, recently resigned in disgust over the issue [of corruption]’ (The Economist, 13 October 2001, p. 45). 8 October 2001: Five United Nations observers and four others [a local translator and three Ukrainian crewmen] apparently died Monday [8 October] when rebels shot down their helicopter in Abkhazia… Russia quickly blamed the attack on rebels from… Chechnya and accused Georgia of contributing to the tragedy by allowing the rebels to cross into the breakaway Abkhazia region in an effort to destabilize its separatist government. But Georgia has denied that charge, and

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there seems little clear evidence of the rebels’ origins. The helicopter had been flying an inspection mission into the Kodori Gorge in the Caucasus mountains… where rebels opposing the breakaway Abkhaz government have been operating lately… UN workers serve only as observers in Georgia, where a ceasefire with the Abkhaz has been patrolled by Russian troops at the request of both sides. Abkhazia claimed independence from Georgia in 1991 and ejected Georgian government troops two years later… Although the Abkhaz are ethnic North Caucasians, like Chechens, their dispute with Georgia over independence has been mainly political rather than religious or ethnic. The attack on Monday complicates a dispute that is already so labyrinthine that neither Georgia nor the Abkhaz themselves agree on the identity of the rebels who apparently shot down the helicopter or who supports them … The Kremlin maintains that the rebels are a combination of Georgian military and Islamic extremists from Chechnya, which borders eastern Georgia. It contends that Georgia allowed the rebels to move from guerrilla training camps inside Georgia into Abkhazia in order to destabilize the Abkhaz regime. Georgia concedes that some Chechen commanders and guerrillas have stolen into Georgia. But it denies that it has allowed them to train or use Georgia’s territory to infiltrate Abkhazia, saying instead that the rebels responsible Monday came directly from southern Russia. (IHT, 8 October 2001, p. 9) ‘Witnesses said rebels aimed missiles at the helicopter, which was clearly identified in bright colours as a UN aircraft’ (IHT, 13 October 2001, p. 5). Abkhazia claimed de facto independence from Georgia in 1993 after a war in the early 1990s in which the separatists were supported by Moscow. Russia sent a contingent of peacekeeping troops to the region in 1994’ (IHT, 18 October 2001, p. 7). ‘Abkhaz officials say Georgian guerrillas and Chechen rebels are operating… in the Kodori Gorge… However, it was unclear who shot the helicopter down’ (FT, 9 October 2001, p. 16). ‘On Monday night [8 October] Abkhaz authorities said armed men had attacked villages in the region, killing fourteen’ (FT, 12 October 2001, p. 12). Abkhaz officials blamed Chechen and Georgian fighters who they say have entered the republic and set up a base in the Kodori Gorge… UN observers were sent to Abkhazia…in 1993 to monitor a fragile truce with Georgia following a war in which 10,000 people died. (Guardian, 9 October 2001, p. 21) Anti-Moscow fighters fled Chechnya to find refuge from Russian bombing in the remote Pankisi Gorge in Georgia. Russia now claims Georgia has let these Chechen rebels into Abkhazia. Georgia has publicly denied the accusation, though some officials in Tbilisi have admitted that Chechens control the area of the Pankisi Gorge. (Guardian, 15 October 2001, p. 14) 9 October 2001:

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Sergei Ivanov, Russia’s defence minister…accused the Georgian government of ‘manipulating terrorists’. Yesterday [9 October] unmarked aircraft were reported to have bombed Georgian villages, close to where a United Nations helicopter was shot down… Yesterday’s bombing raid and Monday’s helicopter attack both occurred in the Kodori Gorge, a no-man’s land between Georgiancontrolled territory and the breakaway republic of Abkhazia, which declared independence from Georgia in 1994. Abkhazia has blamed Georgia for the bombing. Georgia denies this and says the unmarked aircraft flew off towards Russian airspace. It has called on Russia to investigate. No party has claimed responsibility for the shooting. (FT, 10 October 2001, p. 2) Sergei Ivanov [said that]… ‘It is becoming absolutely clear that either the Georgian leadership does not control the situation on its own territory, or that it is manipulating terrorists to its own ends’… On Tuesday morning [9 October] unmarked aircraft bombed three villages. Abkhazia claimed the attacks were by Georgian warplanes seeking out Abkhaz military positions. Georgia claimed the aircraft came from Russia. If so, they were probably looking for Chechen rebel camps in the valley, Russian analysts said. (FT, 12 October 2001, p. 12) ‘Chechen and Georgian fighters were accused by officials in Georgia’s breakaway Abkhazia region of raiding a village and killing fourteen people. Georgia, which was also accused of bombing three villages, denied involvement’ (Independent, 10 October 2001, p. 16). ‘Unmarked fighter-bomber jets attacked three villages… Abkhazia and Russia claim they were Georgian aircraft providing tactical support to the insurgents. Georgia says the airplanes were Russian’ (Independent, 13 October 2001, p. 18). President Eduard Shevardnadze said that the planes flew in from Russian airspace to carry out the raid on Kodori Gorge… Russia denied its planes were involved. The Russian defence minister, Sergei Ivanov, said Georgia had not done enough to control bandit groups operating in the valley, but said that Russia respected Georgia’s territorial integrity (IHT, 10 October 2001, p. 6) Military aircraft bombed the outskirts of two villages in the gorge. Abkhazian officials said the planes flew off toward Georgia and blamed the Tbilisi government for attacks they said killed fourteen civilians… [Georgia said] Sukhoi-25 aircraft flew over the gorge from Russian territory…in an effort to quell the rebels. Russian air force officials denied it … In Russia’s view the developments in the Kodori Gorge amount to further evidence that Georgia, willingly or not, is harbouring Chechen fighters. (IHT, 13 October 2001, p. 5)

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10 October 2001: Russian troops headed Wednesday [10 October] toward the border with … Abkhazia, where officials said their forces had surrounded 200 Georgian fighters and Chechen rebels. The movement of units from Russia’s defence and interior ministries to the border came a day after Abkhazian leaders ordered a partial military mobilization in response to raids by suspected Georgian guerrillas. Abkhazian separatists drove out Georgian forces in a 1992–3 war that ended in a ceasefire and de facto independence. (IHT, 11 October 2001, p. 8) 11 October 2001: ‘The leader of the breakaway Abkhazia [Vladislav Ardzinba] appealed Thursday [11 October] to President Vladimir Putin to prevent war after Georgia announced it was sending troops toward the…region’ (IHT, 12 October 2001, p. 6). Military forces of the breakaway region clashed overnight Thursday [11 October] with ethnic Georgians and Chechen guerrillas… Rebel leaders have said they oppose Abkhazia’s government because it betrayed Abkhazia by cooperating with the Russians… On Thursday Georgian troops were ordered to the gorge… The Georgian parliament, backed by Mr Shevardnadze, voted to ask Russian peacekeepers in Abkhazia to leave. Georgian officials also called on Russia to turn over its military bases in Abkhazia. (IHT, 13 October 2001, p. 5) Georgia said yesterday [11 October] that like Russia it was sending armed units to the conflict zone in Abkhazia… Russia…has accused Georgia of harbouring guerrillas among the 6,000 Chechen refugees that Georgia has admitted… Georgia denies all Russia’s charges but over the past week 200 armed Chechens and Georgians have broken into Abkhazia from Georgia. Abkhazian officials say they were trying to enter Russia but were beaten back into the Kodori Gorge. (The Times, 12 October 2001, p. 21) The Georgian government decided yesterday [11 October] to dispatch troops to the Kodori Gorge…to the area controlled by Georgia… Meanwhile Abkhaz units blocked the forward movement of a guerrilla detachment in the upper reaches of the Kodori… According to the authorities in Sukhumi, about 200 militants are bottled up in the gorge. (CDSP, 2001, vol. 53, no. 41, p. 9) The peacekeeping force…operates under mandate from the CIS… Moscow has sought to portray the [guerrilla] units as part of the same international terrorism that the USA is targeting in Afghanistan… The Russian president…[has] linked the resurgence of fighting in Abkhazia explicitly to the international war against terrorism, accusing Georgia of offloading terrorist gangs from its territory on to

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its neighbours. (FT, 15 October 2001, p. 8) Russia claims that the valley is a main haven for Chechen fighters…Russia has kept a military base in Abkhazia, breaking a promise to withdraw by July this year… Abkhazia has accused Georgia of planning to use Chechen fighters alongside its own partisans in an assault on Abkhazia… Yesterday [11 October] Russian television reported renewed fighting in the gorge overnight. Abkhazia claimed hundreds of armed men were arriving in Kodori from western Georgia. (FT, 12 October 2001, p. 12) Some 200 armed men—or perhaps more than 1,000 of them, depending on whom you believe—are holed up [in the Kodori Gorge]… Some or most of them are Chechens, apparently bent on opening a second front. Someone, presumably they, shot down a UN helicopter… The next day aircraft and helicopters, probably Russian, bombed them… The Abkhaz say the Chechens have teamed up with Georgian paramilitaries who have been keeping up a sporadic guerrilla war in the region and are now planning an attack on the capital, Sukhumi… Georgians [recall]…that Chechens fought on the Abkhaz side in the 1991 war. (The Economist, 13 October 2001, p. 45) ‘[There are] nearly 2,000 Russian peacekeepers…[and] up to 250,000 Georgian refugees… Chechen warlords and the Abkhaz are traditional allies, hence the presence of the Chechen fighters in the war against Georgia’ (Guardian, 15 October 2001, p. 14). 12 October 2001: An army of rebels…[is advancing] on Sukhumi…vowing to restore the breakaway region to Georgian rule. Russian news reports suggested yesterday [12 October] that as many as 500 rebels, including Chechen guerrillas and Georgian irregulars, had attacked Russian peacekeeping troops and Abkhazian positions from base in the rugged Kodori Gorge… Some 250,000 Christian Georgians [were] expelled after the mainly Moslem Abkhazians’ victory… Most insurgents marching on Sukhumi are thought to be from this group… Most experts believe Georgia is sponsoring the armed attempt to seize back Abkhazia… Eduard Shevardnadze…has denied involvement in the insurrection/but…this week…[he said] ‘I am sure we will return to Abkhazia and it will happen soon’… Georgia officially demanded yesterday that Russia withdraw within three months the 1,600 peacekeeping troops it has maintained in Abkhazia since 1993. The Georgian parliament voted overwhelmingly this week to remove Russian troops immediately… The peacekeepers no longer had a mandate… Georgia also said it will leave the CIS… Russia accuses Georgia of harbouring [Chechen] fighters…in the remote Pankisi Gorge, near Georgia’s border with Chechnya. Some Russian experts say mercenaries could be fighting for Georgia.

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(Independent, 13 October 2001, p. 18) [Abkhazia has a population of] about 120,000… With the help of Russia’s military the region broke away from Georgia in 1993 and declared independence… A group of armed rebels in Abkhazia’s Kodori Gorge…appear to act independently of any official or semi-official power… Georgian authorities…say they do not know who the rebels are… Abkhazia’s leaders have ordered what it said to be the biggest mobilization since their soldiers drove out the Georgian troops nine years ago. (IHT, 13 October 2001, p. 5) President Vladimir Putin: If the Georgian administration is prepared to take responsibility before the international community and before its own people [for security in the region], then that is their choice, we will remove our peacekeepers… We have enough problems of our own [without intervening in Georgia’s internal affairs]. (FT, 15 October 2001, p. 8; Guardian, 15 October 2001, p. 14) President Putin: ‘Russia’s fundamental position is that Georgia’s territorial integrity should be maintained’ (CDSP, 2001, vol. 53, no. 41, p. 9). The fighters melted away as strangely as they had appeared, after some equally mysterious bombing raids by planes widely assumed to be Russian … Some said they were going [to Abkhazia] to help the Georgians reconquer the region. Others feared they hoped to wreak havoc in another part of Russia. (The Economist, 10 November 2001, p. 50) 14 October 2001: ‘Abkhazian officials said their fighters clashed with guerrillas … The Abkhaz prime minister…said yesterday that the enclave would seek security by applying to join the Russian Federation as an associate member’ (Guardian, 15 October 2001, p. 14). 15 October 2001: ‘The past few days have seen several more armed clashes… On Monday morning [15 October] the fighting became more intense and encompassed several different areas’ (CDSP, 2001, vol. 53, no. 42, p. 15). 17 October 2001: [The] Abkhazia region said Wednesday [17 October] that it had begun an airborne attack against Georgian and Chechen guerrillas… The attack on the militants began a day after the leaders of Georgia and Russia…agreed to intensify efforts to avert a full-scale conflict. (IHT, 18 October 2001, p. 7) Last night [17 October] a large detachment of guerrillas broke through a line of Abkhaz forces that had encircled them… Throughout the day Abkhaz aircraft

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launched powerful strikes against the retreating guerrillas, among whom was [Chechen rebel leader] Ruslan Gelayev, according to intelligence reports. (CDSP, 2001, vol. 53, no. 42, p. 16) 1 November 2001: ‘This week Georgia…said Russian planes had again bombed its territory’ (The Economist, 3 November 2001, p. 48). President Eduard Shevardnadze…dismissed his entire government on Thursday [1 November] as a dispute over media freedom plunged the country into political turmoil… Thousands of angry demonstrators took to the streets denouncing corruption and demanding changes at the top… [The president] dismissed all members of the cabinet and accepted the resignation of the country’s chief prosecutor after allegations of widespread graft and other abuse. The dramatic decision came just hours after the speaker of parliament and next in the line of succession… Zurab Zhvania …announced his surprise resignation…[The president] vowed to restructure government by creating a new executive cabinet led by a prime minister who would take over many of the duties and powers now in the president’s hands… The crisis was sparked by a security police raid against an independent television network on Tuesday [30 October]. The state security ministry dispatched thirty agents to the headquarters of Rustavi-2 for an ostensible tax investigation…[The raid on] the independent Rustavi-2 television channel, a sharp critic of the president…[was] widely seen as an attempt to muzzle the media… The station director refused to allow the agents to examine financial records, creating an awkward standoff that was broadcast live. Outraged by the move an estimated 5,000 to 10,000 people, mainly students, gathered in central Tbilisi to protest beginning Wednesday [31 October]… Under pressure the minister for state security resigned Wednesday, but Mr Shevardnadze at first refused to force out interior minister Kakha Targamadze, who controls the domestic police and has been the focus of accusations of abuse. By Thursday morning, however, Mr Zhvania’s resignation and the growing public support of the demonstrators changed Mr Shevardnadze’s mind…[There is] deep discontent with a decade of economic hardship, civil strife and rampant corruption… With 60 per cent of the population living under the poverty line, pervasive tales of graft in government—and even within Mr Shevardnadze’s own family—only provoke more indignation. (IHT, 2 November 2001, pp. 1, 6) ‘Rustavi-2 is extremely popular… In July the station’s most famous broadcaster, Georgi Sanaya, was shot dead in circumstances which have yet to be explained’ (Guardian, 2 November 2001, p. 17). ‘[There were] massive street protests over the murder of Georgi Sanaya…for which some blamed government officials’ (FT, 3 November 2001, p. 9). The popular justice minister, Mikheil Saakashvili, resigned in September, saying he could no longer stomach such flagrant corruption… He won a parliamentary

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by-election last month [October] on an anti-corruption ticket … Messrs Saakashvili and…parliament’s reformist speaker, Zurab rity men, who run their own lucrative web of business. Instead, Mr Zhvania, who has since resigned… told the president to sack his top secuShevardnadze sacked the entire government. (The Economist, 10 November 2001, p. 50) Even the student leaders who spearheaded the demonstrations and carried out daily rallies in front of the Georgian parliament stopped short of calling for Shevardnadze’s departure… The ‘young reformer’ faction [is] led by Zurab Zhvania, the ex-parliament speaker, and Mikheil Saakashvili, the exjustice minister… The two politicians say they are forming a ‘National Movement’, which could eventually become a political party. Their demands include early parliamentary elections and the creation of the post of prime minister, based on the British model, limiting the powers of the president. (FT, 20 November 2001, p. 12) Georgian parliamentary speaker Zurab Zhvania, whom many regard as a likely successor to the incumbent president, travelled to Moscow, where he tried to correct the impression that he is a pro-Western politician. Upon his return to Tbilisi he spoke out openly against Eduard Shevardnadze. (Kommersant, 10 November 2001, p. 2: CDSP, 2001, vol. 53, no. 45, p. 15) 9 November 2001: ‘President Eduard Shevardnadze…at a meeting yesterday [9 November] with [the Turkish] president…asked him to send a Turkish peacekeeping contingent to Abkhazia…replacing the Russian peacekeepers’ (CDSP, 2001, vol. 53, no. 45, p. 15). 27 November 2001: Several combat helicopters and warplanes bombed the outskirts of Georgian and Chechen villages in Georgia’s Pankisi and Arkhotsk Gorges, on the border with Chechnya, on Tuesday night [27 November]. Georgia immediately accused Russia of aggressive actions, but Russia categorically denied any involvement in the bombardment. (CDSP, 2001, vol. 53, no. 48, p. 15) ‘Moscow denied that its bombs, aimed at Chechen rebels, had landed across the border’ (The Times, 29 November 2001, p. 19). 3 December 2001: President Eduard Shevardnadze said yesterday [3 December] that he would not meet parliament’s demand for a withdrawal of the Russian peace-keepers from Abkhazia because there still is not anyone to take their place. The Georgian leader said that, during his recent one-on-one meeting with the Russian president in Moscow, Vladimir Putin told him that Russia was prepared to withdraw its

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troops from Abkhazia… ‘At this point there is no country that is willing to replace the Russian peacekeepers’ [said President Shevardnadze]. (Kommersant, 4 December 2001, p. 18, p. 3: CDSP, 2001, vol. 53, no. 49, p. 18) 6 December 2001: The winner…of the presidential run-off in South Ossetia…is thirty-eight-yearold businessman Eduard Kokoyev, who holds both Russian and South Ossetian citizenship… Mr Kokoyev had already beaten his chief rival, now former South Ossetian president, Lyudvig Chibirov… Eduard Kokoyev takes a tougher line towards Tbilisi than did his predecessor… He would not resume the negotiating process with Georgia until Eduard Shevardnadze apologizes to the people of South Ossetia for the genocide that was committed during the 1989–92 armed conflict. (CDSP, 2001, vol. 53, no. 49, p. 18) 14 December 2001: ‘US defence secretary Donald Rumsfeld left Friday [14 December] to visit Azerbaijan, Armenia and Georgia for talks on the war on terrorism… The three countries have offered Washington use of their airspace for military action in Afghanistan’ (IHT, 15 December 2001, p. 4). 14 January 2002: President Eduard Shevardnadze agreed yesterday [14 January 2002] to extend the mandate of the Russian peacekeeping force in the Georgian-Abkhaz conflict zone. The Russian paratroopers will remain in Abkhazia until at least 31 July. In the fall of 2001 the Georgian parliament passed a resolution calling for Russian peacekeepers’ withdrawal from the Georgian-Abkhaz conflict zone. But the resolution was not binding and the final say rested with the president. (CDSP, 2002, vol. 54, no. 3, p. 19) 27 February 2002: [Russian] foreign minister Igor Ivanov said Wednesday [27 February] that an American proposal to deploy about 200 US military specialists to train and equip the Georgian armed forces and improve their counter-terrorism capabilities ‘could further aggravate the situation in the region, which is difficult as it is’. Ivanov was responding to reports from Washington that the United States was undertaking the training mission in order to assist Georgia in rooting out Afghan and Arab extremists, some of them possibly linked to the Qaeda terrorist network from the Pankisi Gorge region north-east of the capital, Tbilisi…[The USA] said no weapons were planned beyond the ten unarmed transport helicopters that were shipped to Georgia in October [2001]…[and that] Russian officials [were briefed] last fall [2001] on the plan to provide training assistance and helicopters to Georgia. (IHT, 28 February 2002, p. 3)

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Dozens of Afghan and Arab mujahadin are hiding in…the Pankisi Gorge … according to Georgian officials. They say at least some of the new arrivals are plotting terrorist strikes in Russia or seeking to reach Europe and the United States to mount attacks… But the government of President Eduard Shevardnadze is reluctant to act while an estimated 8,000 Chechen refugees and about 1,500 Chechen rebels are also taking shelter in the area …about 65 kilometres long…which has long served as a no-man’s land of crime, drugtrafficking and hostage-taking… The Russian defence minister, Sergei Ivanov, referred this month to the Pankisi Gorge as a ‘miniAfghanistan on Russia’s doorstep’… Georgia…would like the United States to provide military hardware—tanks, artillery munitions and armoured vehicles—before Georgian troops are sent against the hardened fighters of the gorge… So far Shevardnadze insists that neither Russian nor American troops will be allowed to intervene… Ruslan Gelayev, the Chechen rebel commander, has set up training camps for fighters who use the gorge as a rear area for rest, training and arms supply, Russian officials say. Western officials say some criminals operate from the gorge, in league with corrupt Georgian political figures… Western diplomats say there is clear evidence that Shevardnadze employed Gelayev’s forces last year [2001] in a ill-considered military operation in Abkhazia. This month Russian and Georgian officials met and discussed a proposal to take a census of thousands of Chechen refugees and offer them an opportunity to return home. But so far there are no takers… The Pankisi Gorge is a haven for the Moslem Chechens in part because it houses Georgia’s tiny population of Kistinians, who share the same language and faith. Georgia is predominantly Christian. The number of Islamic extremists sheltered among the 1,500 Chechen fighters under Gelayev’s command is small by all accounts. (IHT, 28 February 2002, p. 3) ‘Igor Ivanov, the Russian foreign minister…said Moscow wanted “joint efforts” between Georgia and Russia…to fight “the terrorist threat”’(FT, 28 February 2002, p. 8). [The] US embassy in Tbilisi told a Georgian newspaper recently that ‘several tens of mujahadin fled from Afghanistan and are now hiding in the Caucasus’. Some of these found their way to Pankisi…[it said] and were maintaining contact with Khattab, an associate of Osama bin Laden and one of the top antiRussian rebel leaders in Chechnya. (FT, 25 February 2002, p. 7) The Kists settled in the Pankisi Gorge on the border with Chechnya in the nineteenth century… Georgia used to deny their [the Chechen rebels’] presence, but last summer [2001] President Shevardnadze admitted that up to 300 revolutionaries were in the region. This was far fewer than Moscow’s estimate of up to 2,000. An estimated 7,000 refugees from the Chechen wars have moved into the region.

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In November [2001] the USA sent Georgia ten helicopters to support operations in the Pankisi Gorge, along with a US military adviser and six private contractors to help train Georgian pilots in their use… Last November President Shevardnadze sacked the ministers of state security and the interior, who had long been suspected of corruption [with links to Chechen gangs in the Pankisi Gorge]… The chief envoy of Chechnya’s rebel leadership, Akhmed Zakayev, welcomed the prospect of US advisers arriving in the region, claiming it would nail the Russian myth that Chechen rebel bases sheltered on Georgian territory. (Guardian, 28 February 2002, p. 17) ‘The Pentagon and CIA believe that Arab members of al-Qaeda have joined Chechen rebels to fight the Russians… Georgia’s security minister: “few dozen” Arab militants are in the gorge’ (Telegraph, 28 February 2002, p. 16). America…[is] considering the dispatch to Georgia of up to 200 elite soldiers to train the republic’s own ramshackle forces for action in Pankisi… home to a mixture of local Georgians, Georgian-speaking Chechens (known as Kists) who have been there since the nineteenth century, and about 7,000 refugees from the war in Chechnya—plus a few hundred Chechen fighters from Chechnya and maybe some foreign friends… On 11 February…[the US embassy in Tbilisi] said that dozens of fighters from Afghanistan might be hiding in Pankisi—and suggested that they had links with Khattab, a Jordanian-born warrior who has been fighting in Chechnya. (The Economist, 2 March 2002, p. 46) 28 February 2002: The leaders of… Abkhazia said Thursday [28 February] they were accelerating their efforts to secede from Georgia and seek an ‘associated’ relationship with Russia following an announcement that the United States planned to train and equip Georgia’s armed forces. Abkhazia’s leaders fear that a rearmed Georgia will turn its military forces against Abkhazia instead of using them to combat terrorists and criminal gangs…in the Pankisi Gorge… Moscow [has] afforded easier visa access across its border from Abkhazia than from the rest of Georgia… President Eduard Shevardnadze said Thursday that stepped-up military co-operation with the United States was part of a long-standing programme to bolster Georgia’s security. ‘We have been working toward this for eight years,’ he said in Tbilisi. ‘We also tried to establish good-neighbourly relations with Russia, but nothing came of it,’ he added… Last October [2001] hundreds of Georgian soldiers accompanied by Chechen fighters based in the Pankisi Gorge staged an attack on Abkhazian positions in the Kodori Gorge in western Georgia. (IHT, 1 March 2002, p. 3)

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1 March 2002: President Vladimir Putin: If we today are speaking about a fight against terrorism in the Pankisi Gorge, we support this fight no matter who takes part in it, American or European partners or our Georgian colleagues directly. If Central Asian countries can do it, why can’t Georgia? (IHT, 2 March 2002, p. 2) President Putin: ‘It is no tragedy, nor could it be. How could it be okay in Central Asia but not in Georgia?’ (CDSP, 2002, vol. 54, no. 9, p. 3). Russian foreign minister Igor Ivanov: ‘Georgia is a sovereign state and has every right to turn to international organizations and the United States to ask for international help… The arrival of American soldiers could [however], in some way, make the situation in Georgia more difficult’ (IHT, 2 March 2002, p. 2). On Friday [1 March] an American official provided new details of the initial US mission, saying that Washington was offering $64 million to train and equip four 300-man battalions of Georgian forces. The equipment would include light weapons, vehicles and communications gear. Also as many as 200 military trainers will be employed there. (IHT, 2 March 2002, p. 2) ‘In Tbilisi officials said a contingent of US instructors would arrive in mid-March’ (FT, 2 March 2002, p. 10). 4 March 2002: Eduard Shevardnadze: ‘I want to say that Putin’s statement was truly brave. To say that was very difficult’ (FT, 5 March 2002, p. 8). The Georgian leader’s comments were made just days after unidentified aircraft were reported to have violated Georgian airspace. Moscow has bombed the Georgian side of the border on a number of occasions in what were said to be attempts to root out Chechen rebels. Russian officials denied the aircraft were theirs. (FT, 5 March 2002, p. 8) 6 March 2002: Eduard Kokoyev (president of South Ossetia): We are asking that the Republic of South Ossetia be recognized as independent and that we are allowed to become part of Russia… We favour an expansion of the Russian peacekeeping battalion… My conditions [for contact with Eduard Shevardnadze] remain in force. He has to acknowledge the genocide against the Ossetians and offer a personal apology. (CDSP, 2002, vol. 54, no. 10, p. 15) 27 March 2002:

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Abkhazia…was hit by series of bomb blasts on Wednesday [27 March]… Four separate explosions in the area of Ochamchira port on the Black Sea hit a commuter train, the rail station, a main road and the docks area… killing three people… Abkhaz officials…said the explosions…were engineered by Georgian special forces. (FT, 28 March 2002, p. 8) 2 April 2002: An agreement between Georgia and Abkhazia on withdrawing troops and weapons from Abkhazia’s Kodori Gorge was signed at the UN mission in Tbilisi yesterday [2 April]… Approximately 300 soldiers and officers of the Georgian armed forces were sent…in October last year [2001] in response to a raid by a group led by [Chechen rebel leader] Ruslan Gelayev. Abkhazia, Russia and the UN regarded Tbilisi’s move as a violation of the 1994 Moscow accords…[The agreement] calls for withdrawing all Georgian defence ministry soldiers from the Kodori Gorge (armed formations of local Georgians will remain there) and for removing artillery and heavy equipment belonging to the Abkhaz military from the gorge to the Abkhaz town of Tkvarcheli. (CDSP, 2002, vol. 54, no. 14, pp. 15–16) 12–14 April 2002: Russian troops have withdrawn fully from a remote gorge…just days after their sudden deployment… Dozens of heavily armed Russian troops descended by helicopter Friday [12 April] on the Kodori Gorge, a no-man’s land on the edge of… Abkhazia, against the wishes of Tbilisi. On Saturday [13 April], however, they started pulling out of the area… The Russian deployment of eighty soldiers to the upper section of the gorge, part of which is controlled by Georgia…was seen by Tbilisi as an act of aggression… The Russian foreign ministry said Friday that Moscow had sent the unit to the gorge under an agreement this month requiring Russian and UN observers… But Georgia said the deal did not include armed Russian troops. (IHT, 15 April 2002, p. 3) Heavily armed Russian troops were abandoning [the gorge] last night [14 April] … President Shevardnadze…flew to the Kodori Gorge on the border with Abkhazia at the weekend to stop an ‘attempt at aggression’ by eight Russian soldiers… He threatened to expel the 1,500 Russian peacekeepers in Abkhazia… Russian commanders insisted that they had secured agreement to protect Russian and UN observers working there. (The Times, 15 April 2002, p. 14) 19 May 2002: a team of US military instructors arrives in Georgia.

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Leaders of [Abkhazia and South Ossetia]…have expressed concern about the presence of US military advisers in the country and promised mutual assistance in the event of conflict. After meetings in Moscow at the end of last week top officials from Abkhazia and South Ossetia also accused Georgia of ‘conducting large-scale military preparations to try to bring Abkhazia and South Ossetia back into the fold under the pretext of fighting international terrorism’. (FT, 3 June 2002, p. 5) 13 June 2002: The Georgian foreign ministry sent a protest note to Moscow yesterday [13 June] in connection with Russia’s new citizenship law… Under the new Russian law citizens of the former USSR who live in so-called unrecognized states (including Abkhazia and South Ossetia) and who refuse to recognize the authority of the mother country (and are therefore stateless) may exchange their Soviet passports for Russian ones… Tbilisi also expressed concern about reports that Russian weapons are being smuggled into Abkhazia. Russia has denied all charges. (CDSP, 2002, vol. 54, no. 24, p. 15) 4 August 2002: ‘Georgia accused Russia yesterday [4 August] of launching its third air attack on its territory in a week’ (Guardian, 5 August 2002, p. 12). (The first was on 29 July and the second was on 30 July.) ‘Georgia has accused Russia of bombing its territory in efforts to attack Chechen rebels, while Russia denies the charges and criticizes Georgia for failing to police its border with Chechnya adequately’ (FT, 6 August 2002, p. 8). (Eduard Shevardnadze said on 29 July that: ‘The Chechens in the Pankisi Gorge, some of whom are rebels, want to return to their homeland, so it is no surprise that they are trying to go back to their homes any way they can’: Izvestia, 30 July 2002, p. 2.) 5 August 2002: [Georgia and Abkhazia] have agreed to initiate joint patrolling of the Kodori Gorge… The patrols will be carried out with UN observers serving as intermediaries… Kodori is the only part of… Abkhazia where Georgians live and to which official Tbilisi’s jurisdiction extends. (CDSP, 2002, vol. 54, no. 32, p. 16) 23 August 2002: Georgia accused Russia of an ‘explicit act of aggression’ yesterday [23 August], saying it had launched its fifth bombing raid on Georgian territory in a month. At least one civilian died…as a result of the forty-minute raid on the Pankisi Gorge area. Moscow’s defence minister, Sergei Ivanov, denied the claim, despite independent confirmation that aircraft had flown into Georgia from the direction of Russia and apparently dropped bombs… The incident was the first

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to be independently verified by OSCE, which has observers in the gorge… Eduard Shevardnadze declared that he would ‘use all methods to stop such bombings’… Mr Ivanov repeated the allegation that ‘large numbers’ of Chechen terrorists were using the gorge as their base. (Guardian, 24 August 2002, p. 15) ‘Georgia’s state security minister said ten Russian helicopter gunships had bombed villages close to the Pankisi Gorge…[This was the] sixth reported incursion on Georgian territory in six months’ (The Times, 24 August 2002, p. 20). 24 August 2002: The United States said on Saturday [24 August] it was ‘deeply concerned’ by Friday’s attack and ‘deplored the violation of Georgia’s sovereignty’. It cited ‘credible reports’ by observers from OSCE that the aircraft came from Russia… The target of the alleged bombing was an area close to the Pankisi Gorge, bordering the Russian republic of Chechnya. (FT, 27 August 2002, p. 6) 25 August 2002: Georgia sent 1,000 troops yesterday [25 August] to crack down on the fighters who are thought to number several thousand. ‘The main purpose of the anticriminal operation is to restore order in the Pankisi Gorge and to eliminate criminals and terrorists if they are present there,’ Eduard Shevardnadze said. (The Times, 26 August 2002, p. 13) ‘Georgian tanks rolled into the Pankisi Gorge’ (Independent, 26 August 2002, p. 8). ‘Interior ministry troops set up ten checkpoints’ (Guardian, 26 August 2002, p. 12). 26 August 2002: ‘Yesterday [26 August] the Georgian parliament called for the country’s withdrawal from the Russian-dominated CIS’ (FT, 27 August 2002, p. 6). ‘Mr Shevardnadze…has promised to veto the bill’ (Telegraph, 28 August 2002, p. 12). 28 August 2002: [Georgian spokesmen say] ‘There could be a few criminal groups in the gorge— a total of a few dozen at the most… Reports that there are large numbers of armed terrorists in the region are untrue’… Russian defence ministry officials believe there are currently several hundred Chechen rebels and foreign mercenaries in the Pankisi Gorge—including Ruslan Gelayev’s detachment. (CDSP, 2002, vol. 54, no. 35, p. 4) 29 August 2002: ‘Yesterday [29 August] the Georgian leadership categorically rejected… Vladimir Putin’s offer of assistance…in fighting terrorists in the Pankisi Gorge’ (CDSP, 2002, vol. 54, no. 35, p. 5). 30 August 2002: ‘Interior ministry troops were conducting a security sweep through the

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Pankisi Gorge yesterday [30 August], with freeing the kidnapped British banker Peter Shaw one of their “primary goals”. Mr Shaw was seized [in Tbilisi on 19 June]’ (Independent, 31 August 2002, p. 13). 31 August 2002: The presence of American troops on Georgian soil had a significant calming presence on a dispute [between Georgia and Russia] over Moslem Chechen rebels hiding in the Pankisi Gorge, President Shevardnadze said… [He said] it had had an ‘enormous political and stabilizing influence’ …Just under 100 US troops are stationed in Georgia to train the Georgian army in counter-terrorist operations… US officials say that al-Qaeda terrorists could be hiding in Pankisi. Mr Shevardnadze said, however, that there was no concrete evidence to confirm that allegation…[He] said that Georgia’s recent operation in the gorge had seen off all but a few dozen militants. (The Times, 2 September 2002, p. 11) 5 September 2002: President Vladimir Putin demanded Thursday [5 September] that the Georgian authorities destroy Chechen rebels in the Pankisi Gorge region, telling the Georgian president it was unacceptable simply to push terrorists out of the area…[President Putin] expressed the hope that the operation was ‘directed at a real result—that the terrorists will be blocked, disarmed and handed over to the world community’…[Georgia says] that Russian pushed the militants on to Georgian territory in the first place when it launched its second war in Chechnya… ‘In theory, the possibility that one or more al-Qaeda representatives is in the Pankisi Gorge cannot be ruled out,’ Shevardnadze’s spokesman said Thursday… The Georgian police have detained seven people in the gorge, including a man described as an Arab carrying a French passport…on Thursday…[a spokesman for the interior ministry] pronounced the operation a success and said that, in addition to making arrests, the police were confiscating weapons. (IHT, 6 September 2002, p. 4) 6 September 2002: Russia and Georgia yesterday [6 September] agreed to joint border operations against Chechen rebels, according to Russia’s interior minister… [He] said interior ministry troops would ‘seek out international terrorists [and members of groups hiding]’ with their Georgian colleagues in the Pankisi Gorge… He said 500 fighters were based in the gorge, although Georgia, which has up until now refused Russian involvement, has identified only a handful in recent operations. (FT, 7 September 2002, p. 8) The Russian interior minister said… ‘We are talking about a joint search. The

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Georgian side will carry out the detentions independently’…[But his] comments contradicted a statement made hours before by a senior Georgian official, who said only his country’s forces should be involved in the operations in the gorge… A Russian foreign ministry spokesman said Georgia’s almost two-week campaign against rebels based in the gorge had not yielded substantial results. (Independent, 7 September 2002, p. 12) ‘The remarks [of Russia’s interior minister were later played down by Georgian officials’ (FT, 12 September 2002, p.12). 11 September 2002: ‘President Vladimir Putin threatened Wednesday [11 September] to order military strikes inside… Georgia, saying that Russia had a right to defend itself from what he called terrorist attacks launched by Chechens from Georgia’ (IHT, 12 September 2002, p. 1). ‘President Vladimir Putin ordered a report “on the feasibility of delivery strikes on established terrorist bases in the course of a pursuit operation”’ (FT, 12 September 2002, p. 12). President Putin: Today no one can deny…that people who were involved in planning the terrorist attacks in the United States a year ago, as well as the direct perpetrators of the [1999] apartment house bombings in the Russian Federation, have found refuge on Georgian territory… If the Georgian leadership is unable to create a secure zone in the area along the Georgian-Russian border…fails to put an end to put an end to guerrilla incursions and attacks on regions of Russia adjacent to Georgia, we reserve the right to act …[I am directing the security forces] to submit proposals for possible strikes against confirmed terrorist bases…[and] for the mounting of special operations to eliminate armed bands…[measures which might possibly be taken] in the event that more attempts are made to illegally cross into Russian territory. (CDSP, 2002, vol. 54, no. 37, p. 1) ‘A source on the Georgian general staff…[said]: “There are no rebels in the Pankisi Gorge at this time; there are only Chechen civilians and Georgian internal troops”’ (CDSP, 2002, vol. 54, no. 37, p. 1). 12 September 2002: President Putin in a letter written to the UN secretary-general and to members of the UN Security Council: If the Georgian leadership does not undertake concrete action to wipe out the terrorists, and if guerrilla attacks continue to be made from Georgian territory, Russia, acting in strict accordance with international law, will take appropriate measures to counter the terrorist threat. (CDSP, 2002, vol. 54, no. 37, p. 3) US officials have asserted that a few dozen terrorists affiliated with al-Qaeda have moved to Pankisi… Shevardnadze sent 1,000 troops into Pankisi to

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reestablish control, though only after giving days of notice so that any renegade fighters could flee first. The Georgian troops have set up more than a dozen checkpoints along the main road in the gorge and arrested a few dozen men described as criminals, but early indications suggest the bulk of the militants have left Pankisi. (IHT, 13 September 2002, pp. 1, 4) ‘Only a handful of Chechen rebels have been arrested’ (IHT, 17 September 2002, p. 3). 13 September 2002: President Shevardnadze (in a letter to President Putin): The problems in the Pankisi Gorge resulted from the military operation in Chechnya because the relevant Russian defence and security forces were unable, or, perhaps, unwilling to contain the hostilities within Russia’s borders and instead allowed the conflict to spill over into a sovereign, friendly neighbouring state. (CDSP, 2002, vol. 54, no. 37, p. 4) 15 September 2002: ‘[The] unrecognized republic of South Ossetia (in Georgia) mobilizes reserves…[and] invites Russia to use its territory to fight “international terrorists”’ (CDSP, 2002, vol. 54, no. 37, p. 4). 16 September 2002: US and Russian special agents have joined Georgia’s hunt for al-Qaeda and Chechen militants believed to be in the Pankisi Gorge, President Eduard Shevardnadze said Monday [16 September]… ‘I can tell you that in the Pankisi Gorge there are Russian special services,’ Shevardnadze said. ‘They are doing their work and their Georgian colleagues are helping them. There are also US representatives’… Georgian officials…said Shevardnadze was referring to Russia’s security agency and US intelligence agents. The US and Russian agents were carrying out separate operations in Georgia, they added… President George W.Bush urged Russia on Saturday [14 September] not to invade Georgia, but made it clear that he expected the Georgian authorities to act against suspected members of the al-Qaeda terrorists network who are reported to be hiding in the Pankisi Gorge. (IHT, 17 September 2002, p. 3) President Eduard Shevardnadze…said the latest flare-up in Russian-Georgian relations had been caused not by Russian concern about the Pankisi Gorge problem, but by Russian displeasure over the start of construction of the BakuTbilisi-Ceyhan oil pipeline. The Georgian leader also stated that Russian special services personnel are now operating in the Pankisi Gorge…in conjunction with Georgian special services. However, Russian presidential aide Sergei Yastrzhembsky later questioned that assertion, saying he had no knowledge of such an operation… Mr Shevardnadze …said that ‘Georgia is prepared to turn over to Russia the thirteen Chechens detained on the Georgian-Russian border

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on 3 August and 5 August.’ (Kommersant, 17 September 2002, p. 10: CDSP, 2002, vol. 54, no. 38, p. 15) 20 September 2002: ‘[Russian] foreign minister Igor Ivanov…said he had provided “clear proofs” to [US President] Bush that some officials in the republic of Georgia have ties to terrorists’ (IHT, 21 September 2002, p. 6). ‘Sergei Ivanov, Russia’s defence minister, said in Washington yesterday [20 September] that… Russia provided the United States with “clear proof that a number of Georgian authorities have direct ties to the terrorists”’ (FT, 21 September 2002, p. 7). 25 September 2002: Georgia yesterday [25 September] agreed to hand over to Russia thirteen alleged Chechen rebels… The move represented the second conciliatory gesture this week to Moscow by the Georgian administration, following an offer on Monday [23 September] by President Eduard Shevardnadze for Russia to send military observers to its Pankisi Gorge border area. (FT, 26 September 2002, p. 9) 27 September 2002: Russia has become increasingly adamant in demanding that Georgian forces kill or hand over rebels who shelter in remote areas and stage cross-border raids into Chechnya… Georgia said Friday [28 September] that it had cleared rebels from the Pankisi Gorge, after identifying only a handful of guerrillas… ‘Our jurisdiction has been fully restored over the Pankisi Gorge. There is no one there now with illegal arms’…[said] the Georgian interior minister…[He] said that security forces had rounded up ‘five or six guerrillas’, though Russia said that there had been hundreds of fighters sheltering in the area. Russia says the guerrillas had simply moved from the gorge to other areas after the arrival of troops became imminent… The Russian foreign minister…[said] that Georgia’s avowed policy of expelling the guerrillas back into Russia amounted to abetting terrorism. (IHT, 28 September 2002, p. 2) 5 October 2002: The European Court of Human Rights asked that the Georgian ministry of justice suspend extradition of the detained Chechen rebels to Russia pending a study of all the materials received from Moscow in support of its allegations that the men were involved in criminal activity…[But] the letter containing the recommendation arrived in Tbilisi…[only] after five of the thirteen Chechens detained on the border in August had already been sent [to Russia]. (CDSP, 2002, vol. 54, no. 41, p. 15) 6 October 2002: ‘[President] Putin and President Eduard Shevardnadze agreed on Sunday

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[6 October] that their countries’ security would be strengthened by joint border patrols’ (Guardian, 8 October 2002, p. 14). 7 October 2002: President Putin…after meeting [Eduard Shevardnadze in Chisinau at a CIS summit]…[lifted] a threat of cross-border strikes as long as… [Georgia] fulfilled pledges to fight Chechen guerrillas alongside Moscow… ‘My 11 September statements will not be carried out if yesterday’s agreement [6 October] with the Georgian president is implemented.’ (IHT, 8 October 2002, p. 4) 22 October 2002: Special forces in Georgia have captured fifteen Arab militants linked to alQaeda in recent weeks and turned them over to the United States, Georgian officials said…[The fifteen] were seized during a series of raids in the Pankisi Gorge, where US intelligence agencies have said a small al-Qaeda cell operated in recent years alongside hundreds of Chechen separatists… ‘There were several Arabs who were detained and extradited to the United States and the investigation continued in the United States. It turned out some of them had connections to al-Qaeda, or probably all of them’… [the] press secretary for President Eduard Shevardnadze said…[He said] the Georgians left it to the United States to determine their relationship to al-Qaeda… US intelligence agencies have estimated that as many as 100 al-Qaeda militants joined hundreds of Chechen fighters who set up base in 1999 in Pankisi…where 3,000 Chechen refugees had fled the latest war… Some of the Arabs worked on charitable projects and constructed a mosque. Others built a militant operation. (IHT, 23 October 2002, p. 3) 6 November 2002: A British banker makes a remarkable escape from those who kidnapped him on 18 June in Tbilisi. He was director of Georgia’s Agro-Business Bank as part of an EU development programme. He was taken by a gang posing as policemen and then held captive in the Pankisi Gorge. Peter Shaw feared that he was going to be executed when he was taken from his cell and no ransom had been paid. But he managed to elude his captors. In gunfire that followed one of the captors was killed by mistake (all, including Peter Shaw, wore army dress). ‘Georgia will make a formal application to join Nato at the alliance’s summit in Prague this month [November], Eduard Shevardnadze…said yesterday [6 November]’ (FT, 7 November 2002, p. 11). December 2002–January 2003: After the armed conflict between Tbilisi and Sukhumi in 1992–3 train traffic along the Abkhaz section of the Georgian railroad was halted. The section is about 300 kilometres long, extending from the Abkhaz-Russian border…to the administrative border with western Georgia… On Georgia’s initiative the CIS

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countries decided seven years ago to isolate the separatist regime in Abkhazia, hoping that economic sanctions would force Abkhazia to negotiate … Georgia set the following condition: train travel could be restored only after the return of Georgian refugees to Abkhazia. Until 25 December 2002 the rail blockade was strictly enforced. The railroad between Russia and Abkhazia was used only twice a year, when the peacekeeping contingent was being rotated. But then, according to Georgian officials, a private shipping company based in Sochi leased four trains in Tuapse and opened up the Adler-Sukumi section. After completing two rail runs an electric train has been making daily runs since 15 January 2003… Private traders [are using the train]… Almost everyone in Abkhazia is a Russian citizen, so border controls and customs inspections are simplified…[Abkhazia says] that it is incorrect to say that the 1996 CIS decision is being flouted, because traffic has been resumed only at the level of commercial entities. The Russian ministry of railroads takes a similar position. (CDSP, 2003, vol. 55, no. 3, pp. 17–18) 23 January 2003: [Georgia has confirmed] that there were training bases for Chechen and Arab fighters in the Pankisi Gorge and that the Arabs had ties to al-Qaeda … There were about 700 Chechen fighters and 100 Arabs in the Pankisi Gorge… [Georgia] also gave the names of all field commanders who had ever been in the Pankisi Gorge. Among them was Ruslan Gelayev, whom Russia has asked Georgia to arrest and extradite on several occasions… A large number of the Chechen fighters and Arabs left the Pankisi Gorge in August 2002…[Georgia says] that a few crime groups with absolutely no connections to the Chechen and Arab fighters still remain in the Pankisi Gorge…[but Georgia] continues to take operational measures to uncover individual fighters who, analysts say, might still be hiding in Pankisi. (CDSP, 2003, vol. 55, no. 3, p. 18) 20 February 2003: [Georgia] extended the mandate of the Russian peacekeeping force in Abkhazia for another six months until July…[President Vladislav Ardzinba of Abkhazia] confirmed once again just a few days ago [that] Abkhazia seeks to establish an associate relationship with Russia, meaning that the republic would enter into a currency and customs union with Russia and would co-ordinate its foreign policy and its defence and security policy with Russia. (CDSP, 2003, vol. 55, no. 7, pp. 16–17) March 2003: Talks [were] held late last week…[between] the Russian and Georgian presidents… With regard to the Russian peacekeepers stationed in the Abkhaz-

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Georgian conflict zone…from now on their mandate will no longer have to be renewed every six months; Eduard Shevardnadze said they will remain in the conflict zone until one of the sides requests their withdrawal. (CDSP, 2003, vol. 55, no. 10, p. 16)

THE ECONOMY Economic background ‘The Soviet Union left Georgia with an energy-intensive industrial sector, and dependent on imports for 87 per cent of all its energy requirements in 1990… In 1995 81 per cent of all energy used was imported’ (GET, Third Quarter 1996, p. 7). President Eduard Shevardnadze has announced [6 June 2000] that Georgia has its own major oil resources… The first 120 tonnes of oil have been extracted from the Taribansky field in Kakhetia. The field is being developed by Frontera Eastern Georgia, a Georgian-American company. Commercial development of the field got under way last year [1999]…. The Georgian president said that the country could be producing 3.5 million tonnes of oil three years from now… For Georgia, which lacks raw materials of its own, even such a token amount would be a strategic accomplishment. By comparison neighbouring Azerbaijan produces twenty times that much oil, and even Turkmenistan, despite its emphasis on natural gas, produced 8 million tonnes of petroleum last year [1999]. Tbilisi, which had been the poor relation in the family of fossil fuel-rich Caspian neighbours and could only capitalize on its key geostrategic location astride the westbound transportation routes, will now be able to uphold its interests as a Caucasian crossroads more vigorously… The country will become self-sufficient in oil… Other reports coming out of Tbilisi [concern] the opening of oil fields on the Black Sea shelf… American exploration engineers had discovered roughly 580 million tonnes of oil there… Georgian oil also means that Abkhazia can be enlisted in joint projects—there are oil fields there, too. (CDSP, 2000, vol. 52, no. 24, p. 19) The economic system Most of the formal economy remains subject to a system of state orders (EBRD 1994:24). The state order system was completely phased out on 1 June 1995 (EBRD 1995b:43). Peter Nasmyth (FT, Weekend, 4 March 1995, p. ii) portrayed the situation thus: Georgia was once the Soviet Union’s wealthiest per capita republic with flourishing wine, mineral and film industries. Geographically, it is in the centre of the Caucasus; economically, it lies between the free market and a free mafia. Georgia lacks a solid legal structure for commerce, although moves are being made… Georgians continue to base much of their trade system on the old

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Caucasian tradition of ‘friendship’. Insurance, personal investment, even policing remain heavily dependent on personal or family contact… Three years of an unregulated free market have spawned a chaos of new enterprises. Inevitably there have been casualties… Most big businesses pay for the ‘friendship’ of the mafia. The system has grown from the huge black economy built in the Soviet period. The government has appointed Poland’s veteran reformer and former finance minister Leszek Balcerowicz as its economic adviser. He told them … Georgia needs to do something about corruption… According to economy ministry research, 9 per cent of company turnover and half of all profits are paid in bribes. (Business Central Europe 2000:44) Financial policy On 5 April 1993 coupons were introduced as a supplement to the rouble. The Russian currency reform of late July 1993 speeded up Georgia’s plans. On 2 August 1993 coupons officially became the only legal tender. But, while coupons are accepted in state shops and to pay rent and bills for fuel and services, roubles and dollars are used to buy other goods. The coupon has dramatically plummeted in value against the dollar and even the rouble (IHT, 11 August 1994, p. 9). The coupon is used only to buy rationed staple goods and for rent, water and electricity (Deutsche Bank, Focus: Eastern Europe, 1994, no. 113, p. 6). In April 1993 there was talk of eventually introducing a new currency (the lari). The lari was to be introduced in the first half of 1995 (Transition, 3 March 1995, vol. 6, no. 3, p. 17). Exchange of old for new money began on 25 September and the lari became the sole legal tender on 2 October 1995. Restrictions on the convertibility of coupon deposits into cash were removed in September 1994. In November 1994 the general rate of VAT was raised from 14 per cent to 20 per cent and certain VAT exemptions were eliminated (EBRD 1995a:56). Mohammad Shadman-Valavi of the IMF, in a letter to the Financial Times (8 March 1995, p. 24), depicted a much improved outlook. He said that decisive steps had been taken in late 1994 to stabilize and restructure the economy in the form of a comprehensive programme developed in close consultation with the IMF and the World Bank. These measures halted hyperinflation and led to a sharp nominal appreciation of the exchange rate of the coupon against the US dollar. The IMF had disbursed about $40 million under the systemic transformation facility. In mid-December 1994 the IMF approved a $40 million systemic transformation facility loan. The aim of the government’s programme was to reduce the monthly rate of inflation to 1 per cent by the end of 1995 (Transition, January–February 1995, p. 23). In September 1995 the government began implementation of a comprehensive stabilization and reform package (EBRD 1995b:43). The fiscal programme agreed with the IMF aimed to reduce the budget deficit to 3 per cent of GDP by 1998 and under 1 per cent of GDP by 2004 (GET, Second Quarter 1996, p. 12). On 9 February 1996 the 1996 state budget was passed by parliament, envisaging a deficit of 4 per cent of GDP, an inflation rate of 29 per cent and a growth rate of 8 per

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cent (GET, First Quarter 1996, p. 62). A law on bankruptcy has been in place since 1991 but without any significant enforcement (EBRD 1996b:152). A new law took effect in January 1997 (EBRD 1997b:171). The new law has not yet resulted in a liquidation (EBRD 1998b: 168). Bankruptcy legislation is relatively advanced but largely unenforced (EBRD 1999b:223). On 25 June 1996 parliament adopted a law on bankruptcy, effective 1 January 1997 (GET, Second Quarter 1996, p. 77). So far there have been no forced bankruptcies (GET, Third Quarter 1996, p. 62). There have still been no forced bankruptcies even though the new bankruptcy law has been in effect since the beginning of 1997 (GET, First Quarter 1997, p. 64). The law on bankruptcy has still not been tested in the courts (GET, Second Quarter 1997, p. 52). The law on bankruptcy has still not been tested despite the many enterprises which are in arrears with creditors (GET, Third Quarter 1997, p. 8). In September 1998 the government suspended trading in Treasury bills and halted new issues. New Treasury bill issues did not resume until August 1999. At 9 per cent of GDP tax revenues are among the lowest in all transition economies and the main cause of persistent fiscal deficits. In seeking to improve revenue performance, in 1999 the government tendered out customs revenue collection to a British company and introduced excise stamps on alcohol and tobacco. After suspending its ESAF facility in November 1998 the IMF released the last tranche in August 1999, albeit after expressing concern (EBRD 1999b: 222–3). Efforts have been made to deal with corruption among customs officials by subcontracting their work to an international operator. However, this attempt failed as some incumbent officials were still able to undermine the work of the international operator… But…several steps have been or are being taken to improve revenue collections. (EBRD 2001b:150) ‘Following improved tax collection in the second half of 2001, the IMF resumed disbursements in November 2001 under the poverty reduction and growth facility’ (EBRD 2002:60). Prices Price controls were lifted from most goods and services in 1991 and 1992. Price controls continue to apply to goods such as bread and milk (EBRD 1994:25). In the second half of 1994 further steps were taken to raise the remaining controlled prices towards full costrecovery levels (EBRD 1995a:56). Prices are free of administrative control, with the exception of prices for bread (which continues to be rationed), gas, electricity, municipal services, pharmaceutical products, public transport and telecommunications. All direct price subsidies have been eliminated (EBRD 1995b:43). Remaining administered prices were increased to cost-recovery levels in September 1994, effectively eliminating all direct price subsidies (EBRD 1996b:152). As of March 1997 mainly natural gas, electricity, urban transport and municipal services remained under government regulation (EBRD 1997b:171).

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On 17 September 1994 there were massive increases in the prices of goods and services such as bread (nearly 300 times), transport and electricity. The minimum monthly wage was increased. With prices recently liberalized, massive price increases have occurred, e.g. 1,000 per cent for electricity, 4,900 per cent for a metro ticket and 19,000 per cent a loaf of bread (Business Central Europe, March 1995, p. 66). In February 1996 the government raised bread prices by 40 per cent and on 15 June 1996 prices were liberalized completely. Some compensation was provided in the form of increases in state benefits and budget sector salaries (GET, Second Quarter 1996, p. 42). The initial rise in the price of bread after 15 June was an average 27 per cent (p. 76). The only prices still subject to control are for gas, electricity, municipal services, medicines and bus/metro tickets, while all these are now closer to cost-recovery levels (GET, Third Quarter 1996, p. 38). Parliament has passed amendments to the old law on prices which seeks to ensure the protection of consumer interests relating to goods sold under monopoly conditions. Responsibility for control rests with the ministry of the economy. Prices which are to be regulated by the ministry include almost all forms of transport as well as energy. The ministry also has the right to set limits on profits made. In addition, the law enables the ministry to control prices in areas of the economy which are not in the hands of a monopoly, e.g. minibus taxis have upper pricing limits on their routes (GET, Third Quarter 1997, p. 33). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 15 per cent; 1991, 15 per cent; 1992, 15 per cent; 1993, 20 per cent; 1994, 20 per cent; 1995, 30 per cent; 1996, 50 per cent; 1997, 55 per cent; 1998, 60 per cent; 1999, 60 per cent; 2000, 60 per cent; 2001, 65 per cent (EBRD 1999b:24, 224; and 2002b:20, 156). The government plans to use a voucher programme to privatize most medium-sized or large enterprises. So far three of the over 900 enterprises have been privatized. By April 1994 about 22 per cent of the almost 5,000 small enterprises had been privatized. No property restitution has taken place (EBRD 1994:24). The private sector (defined to include only enterprises with over 50 per cent private ownership) may account for about a third of GDP. A programme for large privatization started in May 1994 with a presidential decree, on the basis of which about 750 of the 900 large enterprises have been corporatized. By mid-1995 about 30 per cent of the shares in these joint stock companies had been sold or, in some cases, given away to employees. A voucherbased programme for large privatization was adopted in March 1995 with the aim of selling at least 35 per cent of the total shares of corporatized enterprises at voucher auctions. Cashbased sales methods will continue to be used as well. The first auction took place in June 1995 with shares in twenty-five enterprises on offer. The voucher programme was to be completed by 1 July 1996. Land on which the enterprises are situated cannot be bought by private entities but can be leased. By mid-1995 about 50 per cent of the almost 10,000 small state enterprises had been privatized, mainly in the retail and trade sector. The intention was to sell off all the remaining 5,000 small enterprises by the end of 1995

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(EBRD 1995b:43). Large privatization began in 1994 and has accelerated over the past year. Around 880 medium-sized and large enterprises out of 1,189 identified for privatization had been corporatized by June 1996. Of these 407 had been privatized in the sense that more than half their shares had been sold to private entities or individuals. The plan was to complete the process by mid1997. Privatization methods include the following: a donation of 5 per cent of the shares to employees; a management-employee buy-out option at a 20 per cent discount for 51 per cent of the shares in each enterprise; a public offering at voucher-based auctions for a minimum of 35 per cent of shares; cashbased auctions and/or tender for the remaining shares. A few larger enterprises may be sold in full through cash-based auctions. Foreign investors can participate in cash auctions. (Because many employees have faced difficulties in meeting payment deadlines a number of delays have been authorized. But the final deadline was July 1996.) Under the voucher programme started in March 1995 vouchers have been distributed to the population. By June 1996 almost 10,000 small enterprises had been privatized. There is no stock exchange. A significant share of housing was already in private hands before independence. Privatization of housing is now virtually complete. Enterprises have been faced with relatively hard budget constraints since the autumn of 1994, as government subsidies and directed credit to enterprises have been almost eliminated. But some (gradually declining) degree of ‘hidden subsidization’ still exists in the form of tolerance of payment arrears on energy bills (EBRD 1996b:152–3). Around 1,000 medium-sized and large-scale enterprises out of 1,189 enterprises identified for privatization had been corporatized by December 1996. Of these over 400 had been privatized with more than half of their shares sold to private entities or individuals. The voucher-based privatization programme is now complete. Cash auctions of remaining shares began in October 1996. Small privatization is now virtually complete (EBRD 1997a:29). A new privatization law was passed in May 1997. Foreigners are free to participate in the privatization process. So-called ‘strategic’ properties, such as hydroelectric, oil, gas and coal production, and metal mining will not be privatized (EBRD 1997b:171). Only 4 per cent of vouchers have been invested in investment funds (p. 172). The May 1997 law was introduced to speed up the privatization process. At that time about half of the 1,115 mediumsized and large enterprises earmarked for privatization had been sold, mostly through management and employee buy-outs and voucher auctions. However, the privatized enterprises accounted for only about 10 per cent of the total book value of these enterprises. Cash auctions were introduced at the end of 1996, but failed to attract bidders due to high minimum prices. The new law allows for auctions without floor prices (‘zero price auctions’). Two such auctions in July 1997 and March 1998 sold over 300 of the remaining enterprises. In August 1997 the president abolished a decree suspending the privatization of so-called ‘strategic’ enterprises—a group of around fifty enterprises mostly in heavy industry. They are being privatized on a case-by-case basis owing to their significant restructuring and investment requirements. Some were sold at the zero price auction in early 1998 and others were sold through tenders and specialized auctions. Tenders for ten-year management contracts with a buy-out option for management at the end of the term have also been used. These contracts include quantitative targets for investment (EBRD 1998b:168).

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About 80 per cent of the medium-sized and large enterprises have been sold to date, but major challenges in large-scale privatization will have to be addressed before Georgia is able to finalize the process. Privatization in infrastructure is progressing well, however. The sale of the largest power distribution company (Telasi) in late 1998 marked the beginning of privatization in the energy sector. (EBRD 1999a:37) In November 1998 a 75 per cent stake in Telasi was sold to a US company. As of June 1999 an estimated 1,292 medium-sized and large enterprises had been transferred to majority private ownership, representing 80 per cent of the initial total of state enterprises (EBRD 1999b:222–3). Although large-scale privatization is well advanced, the lack of transparency, unattractive terms and difficult economic conditions have slowed activity… A new law on non-agricultural land will provide for private ownership of land and for its use as collateral… Privatization of generation and distribution should mostly be completed this year [2000]. Several companies have already been sold, notably the Telasi distribution company. Others will be put under private management through management contracts. (EBRD 2000a:56) The sale of privatized land is allowed under the law… Of the 1,300 mediumsized and large enterprises in Georgia, around 80 per cent have been privatized. Large-scale privatization has proceeded mainly through strategic sales. However, progress has been slow, due to a lack of financial viability and high reservation prices, exacerbated by the loss of investor appetite following the crisis in Russia… During 1999 fifty medium-sized and large enterprises were sold through tender, direct sale and public auction or were liquidated. Sales included companies from the cement, tobacco, textiles, construction and mining sectors… Following its purchase of the Telasi power distribution company in 1998, AES reached an agreement with the government to purchase two 300 MW thermal power stations in March 2000… A second tender for a package of generation and distribution assets failed after the winning French consortium had insufficient financial backing. The plan is now to consolidate remaining state-owned companies and then introduce the private sector under management contracts by year-end. In August 2000 two contracts were offered for international tender, one for management of the national grid, and one for management of the wholesale power market. The latter commenced in July 2000… The Georgian stock exchange was established in early 1999… Trading began in March 2000. (EBRD 2000b:166–7) Under the World Bank’s structural adjustment facility, twenty-nine first tier (large) and twenty-nine second tier (medium-sized) companies are to be privatized by early 2001. Among the first tier companies twelve have been

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privatized and five have been placed under bankruptcy. However, four further privatizations were stopped by order of the president, due to political sensitivities related to fallout from post-privatization restructuring. Two first tier companies were sold to foreign investors… Tenders for contracts to manage the national grid and the wholesale power market started in February 2001. Remaining distribution assets are scheduled for privatization in 2001. (EBRD 2001a:66) By September 2001 twelve [large] industrial companies had been successfully privatized, including two sold to foreign investors. However, it is unclear whether the remaining large state-owned enterprises can be successfully privatized under current conditions… The state property minister is currently focussing on privatization of the main utilities, including power and telecommunications, rather than large industrial enterprises… The Telasi power distribution company (serving Tbilisi) has been privatized through sale to AES (a US power company) along with one thermal power plant. (EBRD 2001b:150–1) ‘The large-scale privatization process has moved slowly… Under the World Bank structural adjustment credit twenty-nine large industrial companies were to be privatized by early 2001. However, by July 2002 only fourteen companies had been successfully privatized’ (EBRD 2002b:154). The process of small privatization is almost complete. Some 89 per cent of about 8,000 small enterprises have been privatized. The mass privatization process for medium-sized and large enterprises is in its middle stages. As of 10 April 1996, 880 joint stock companies had been set up. In most of these employees have officially stated their intention of opting to buy a controlling 51 per cent (a 10 per cent limit operates in the case of strategic enterprises), although there were problems in raising enough money to do this. As of 10 April 1996 controlling shareholdings in only 155 enterprises were privately owned (GET, First Quarter 1996, pp. 44–5). ‘Workers and managers were given greater consideration since they both received vouchers as citizens and got free shares and preferential prices for some part of their firm’s shares’ (p. 50). Mass privatization is well over halfway, but many of the largest enterprises have yet to be privatized (p. 3). The first stage of mass privatization, completed by the end of June 1996, ‘consisted of the sale of shares in enterprises for vouchers issued by the government’ (GET, Second Quarter 1996, p. 52). The specialized investment funds, which were intended to be the main means of mobilizing the population’s vouchers, were not a great success… The lack of interest in these funds was apparently largely due to past scandals involving fraudulent investment funds and pyramid schemes’ (p. 53–4). The second stage of mass privatization involves cash sales through tenders and auctions (pp. 57–8). (This involves the sale of some of the large residual state holdings for cash or through lease purchase options: p. 4.) There is a need for greater openness and transparency in how shares are put up for sale. The process where enterprises have been announced and withdrawn from public sale apparently on the basis of insider lobbying does not seem likely

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to lead to the most efficient managers gaining control. (p. 57) A presidential decree of 23 May 1996 listed fifty-one ‘strategic’ enterprises in which the government was to retain majority shareholdings (in metallurgy, heavy machinery, electro-technical industry, mining, chemicals, construction materials, utilities and communications, warehouses and refrigerated stores) (p. 58). As of 1 October 1996, 8,540 small enterprises had been privatized, out of 9,308 approved for privatization. Small privatization has been conducted mainly by auction or tender. The May 1994 decree gave workers and managers the right to buy their enterprises directly and at a discount within a one-year period. ‘The majority of owners after privatization thus appear to be insiders.’ (A figure of 92 per cent is mentioned on page 4.) Under the medium and large privatization programme 24 per cent of the shares issued are now in private ownership. The shares mentioned here do not include those of Poti port and a number of other large enterprises (such as electricity producers). ‘The state thus continues to own well over 80 per cent of the country’s capital stock.’ Nevertheless, 516 enterprises were reported to be over 51 per cent privately owned as of mid-August 1996. The shares in private hands (as of 1 October 1996) were distributed as follows: 59 per cent were sold to the public at special voucher auctions and 1 per cent at ordinary voucher auctions; 3 per cent were given to enterprises that exported goods to Turkmenistan to pay the state’s gas debt; 9 per cent were given away free or sold at a discount to existing workers and managers; 29 per cent were sold directly and, although these sales were open to foreigners, the majority went to enterprise managers. It is likely that insiders increased their share holdings substantially at the public auctions. ‘It seems probable that enterprise insiders are now the dominant shareholders.’ The process of selling off remaining state holdings at cash auctions began on 17 October 1996. ‘The problem is that for the majority of enterprises that remain to be sold the reserve price is too high’ (GET, Third Quarter 1996, pp. 52–6). The privatization process in Georgia has slowed down dramatically…after a successful phase of voucher privatization, medium and large enterprise privatization has largely stalled. Shares have been issued…but 88 per cent of these remain in state hands…1,047 had been valued and established as joint stock companies by the beginning of January [1997]…524 of these have actually been privatized, in that they are more than 51 per cent privately owned…but it is clear that these are overwhelmingly the smaller enterprises… It has been proving very difficult to sell shares in Georgian enterprises for money. (GET, Fourth Quarter 1996, pp. 55–6) Small privatization is largely complete but medium and large privatization is still largely stalled. By the end of April 1997, 524 medium-sized and large enterprises had been privatized (in the sense that over 50 per cent of shares were in private hands). This is the same figure as that for the end of 1996 and a mere eight more than in August 1996. Some 88 per cent of the shares issued in medium-sized and large enterprises remain under state control. The only sectors where more than half of shares are privately held are in trade,

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services, social services and agriculture. In transport and energy over 98 per cent of shares are still state-owned. (These figures do not even include the large energy generators for which a regulatory framework is being drawn up.) Some 20 per cent of the shares bought at voucher auctions were purchased by foreigners. Total foreign ownership of medium-sized and large enterprises is probably less than 4 per cent (GET, First Quarter 1997, pp. 58–61). The private sector now accounts for 74 per cent of GDP at factor cost. ‘Contrary to much received wisdom this private activity is not only in trade: private industrial production already accounts for 62 per cent of this sector’ (GET, Monthly Update, April 1996, p. 1). It has been estimated that about 40 per cent of GDP may be produced in the shadow economy (GET, First Quarter 1997, p. 9). On 27 June 1997 the president issued a decree designed to speed up the second stage of privatization. State-owned shares of 273 medium-sized and large enterprises were to be sold at a special auction with zero reserve price, with sales completed before 1 August 1997 (GET, Second Quarter 1997, p. 72). On 30 June 1997 parliament passed a new law on privatization. The price of the enterprise which attracts no bids in two successive auctions will be automatically reduced by 50 per cent. The process of reduction will continue until the enterprise is sold (p. 51). The third quarter of 1997 saw substantial progress in the privatization of medium-sized and large enterprises. In the zero auctions of 21–31 July 1997 the state shares of 266 enterprises were sold completely (the shares of the other seven being given to a number of companies as a refund for partial coverage of the state debt to Turkmenistan). Three promising enterprises acquired foreign owners (GET, Third Quarter 1997, p. 41). While some enterprises were sold for almost nothing (debt burdens being assumed by the buyer), agricultural enterprises in particular were sold for a good percentage of the nominal price (p. 4). The only major privatization progress in the year to September 1997 had been that of state bakeries (p. 8). On 31 August 1997 the president abolished the presidential decree of 23 May 1996 suspending privatization of the majority share of fifty-one joint stock companies, including the largest considered strategic (p. 62). Many of the larger state enterprises have still not been restructured and are therefore idle or operating at well below capacity (p. 7). Other sources on privatization Some work has been done on a privatization programme, but the details remain sketchy (Business Central Europe, November 1993, p. 60). Around a hundred large industrial enterprises were to be privatized in the first batch of mass privatization. The scheme involves 20 per cent of shares being given to workers, who would be able to buy an additional 10 per cent at a discount. The remaining 70 per cent would be sold for cash or vouchers (Havrylyshyn et al. 1994:385). The State. Property Ministry has confirmed that by the end of 1995, 6,700 small enterprises had been privatized, around 90 per cent of those eligible for privatization (Business Europa, April–May 1996, p. 45). Some 7,000 small enterprises are in private hands, 125 medium-sized and large enterprises have been privatized and the privatization programme will be completed by the end of 1997 (Transition, May–June 1996, vol. 7, nos 5–6, p. 28).

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Foreign trade Import licences are generally not required and there are no significant import quotas. But there is an 8 per cent tax on non-FSU (former Soviet Union) exports and there are significant export licensing requirements (EBRD 1994:111). There is a floating unified exchange rate regime (p. 25). Convertibility is heavily restricted. The rate floats within these parameters. A 32 per cent export surrender requirement was implemented in June 1993 (p. 111). The system of bilateral trade agreements was eliminated by mid-1995. Since then trading arrangements have been substantially liberalized. The export tax has been abolished and a unified import tariff structure has been introduced. Export licensing is being gradually phased out and most other export restrictions are to be eliminated by the end of 1996. The lari is fully convertible for current account transactions. The currency surrender requirement was eliminated towards the end of 1995 (EBRD 1996b:152–3). Most export restrictions were eliminated by the end of 1996. There are no export subsidies. Import licensing applies only when public health, the environment, consumer welfare or national security are concerned (EBRD 1997b:171). Tariffs are low, with a base rate of 12 per cent, a lower rate of 5 per cent and few exemptions. The freely floating exchange rate policy adopted in December 1998 continues (EBRD 1999b:222). In order to establish credibility for the lari, during the first nine months of 1995 a fixed exchange rate was adopted for the coupon against the US dollar. In September 1995 the lari was introduced at a fixed exchange rate against the US dollar. The currency reform was a success (GET, First Quarter 1996, p. 19). The NBG’s exchange rate policy has changed to a managed float system and is not committed to defending a particular exchange rate’ (p. 27). Following the introduction of the lari in October 1995, the monetary authorities moved from a fixed exchange rate system to a managed floating exchange rate system (p. 32). On 15 January 1996 the Georgian government finalized a partnership and cooperation agreement with the EU (p. 62). The general aim of the National Bank of Georgia’s policy is to resist any depreciation of the exchange rate by selling foreign exchange. This allows the exchange rate to work as a nominal anchor by providing a limit on money creation, and is the main instrument of anti-inflationary policy. This policy is backed by borrowing from the IMF. (GET, Third Quarter 1996, p. 34) Licences are still required for the import of many medicines and for the export of wood and historical/cultural goods. The export of raw scrap metal is currently prohibited and export contracts for metals, alcoholic drinks and mineral water still have to be registered (p. 49). Policy is to allow, if necessary, a slight depreciation of the lari, within a range of up to 1.35 to the US dollar (GET, Third Quarter 1997, p. 29). The 12 per cent flat tariff with some exemptions was introduced to encourage free trade. The government is now coming under pressure to raise particular tariffs to protect domestic producers (p. 38). ‘Georgia joined the World Trade Organization [WTO] in October [1999], making it only the fourth member of the former Soviet bloc to be admitted’ (FT, Survey, 22

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November 1999, p. i). Membership came at the start of October (FT, 25 October 1999, p. 8). Foreign aid EU aid accounts for about half the state budget (FT, 28 February 1995, p. 18). On 20 March 1996 agreement was reached on the restructuring of Georgia’s debt with Turkmenistan. The pre-1995 debt of $440 million was to be repaid over eight years, with a three-year grace period. An additional $25 million owed for gas deliveries in 1995 was to be repaid, largely through barter, by September 1996 (GET, First Quarter 1996, p. 63). Georgia yesterday [7 March 2001] received…$55 million in debt relief from the Paris Club of sovereign creditors, which has agreed to reschedule …debt repayments. The deal will reduce Georgia’s foreign debt repayments in the next two years from $88 million to $33 million… Georgia’s total debt is estimated at $1.7 billion, including $482 million to the Paris Club… The IMF has recently approved a $141 million three-year loan to Georgia… The debt relief deal follows an agreement between Georgia and Russia, its largest creditor, under which Georgia agrees not to claim any part of the foreign assets of the former Soviet Union, and in return would not be liable for any of the former Soviet foreign debt. (FT, 8 March 2001, p. 48) ‘By the start of 2001 Georgia had accumulated external debt equal to 54 per cent of GDP… In March this year [2001] Georgia successfully rescheduled its bilateral debt to Paris Club creditors’ (EBRD 2001b:150). Foreign direct investment The volume of foreign direct investment is very limited. (See Table 3.1.) Despite thousands of registered joint ventures, few if any are in operation (Business Central Europe, March 1995, p. 66). The port of Batumi is to become a free economic zone (Moscow News, 3–9 March 1995, p. 7). The conditions for private foreign investment are technically favourable. There are now no effective capital or current account restrictions, although repatriated profits are subject to a 10 per cent tax. A new investment law was to be introduced on 1 January 1997, with the aim of equalizing conditions for foreign and domestic investors. (Currently foreign investment benefits from 50 per cent reductions in profit tax and VAT for between two and five years. These tax holidays were likely to be removed for new investment.) Obstacles to foreign investment include perceived political risk, the legal situation and the lack of a law on the ownership of non-agricultural land (GET, Third Quarter 1996, p. 14). Direct foreign investment in 1997 is likely to surpass $100 million (GET, Third Quarter 1997, p. 10). Foreign investment generally requires no government approval. Profits are freely

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convertible and may be freely repatriated. Foreigners may not own or lease land (EBRD 1996b:153). Incentives for foreign investors were abolished at the end of 1996 (EBRD 1997b:172). Azerbaijan and Georgia signed an agreement on Saturday [29 September 2001] on the transit, transport and sale of natural gas, marking an impor tant step towards a planned gas pipeline running across Georgia to Turkey … Earlier this year Azerbaijan signed an agreement to supply Turkey… Parliaments…[in] Turkey, Georgia and Azerbaijan…must still ratify the host-government and inter-governmental agreements… In July Azerbaijan, thinking it had reached agreement with Georgia, prepared to host a signing ceremony. However, a letter from the World Bank convinced Georgians that they should negotiate a higher tariff. (FT, 1 October 200, p. 14)

Table 3.1 Georgia: selected economic indicators 1995–2002

Economic indicator Rate of growth of GDP (%) Rate of growth of industrial output (%) Rate of growth of agricultural output (%) Inflation rate (consumer, %) Budget surplus or deficit (% GDP)1 Unemployment rate (end of year, %)2 Balance of payments (current account, $ billion) Foreign direct investment (net, $ million)

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

2.4

10.5

10.8

2.9

3.0

2.0

4.5

5.4

–10.0

7.7

2.5

–2.7

3.4

3.2

1.1

4.9

19.9

5.1

3.9

–6.6

6.9

–12.6

8.2

–0.1

162.7

39.4

7.1

3.6

19.2

4.1

4.6

5.6

–5.3

–7.3

–6.7

–5.4

–6.7

–4.1

–2.0

–1.9

3.1

2.8

7.7

12.3

12.7

10.3

11.1

14.3

–0.216 –0.275 –0.375 –0.389 –0.232 –0.165 –0.215

–0.211

6

54

236

221

60

152

100

131

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, Georgia Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe. Note: 1 General government balance: includes the state, municipalities and extra-budgetary funds

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(EBRD) 2 Based on registered unemployment; this series closely matches data based on ILO methodology (EBRD). Registered unemployment (year end) was 3.4 per cent in 1995, 3.2 per cent in 1996, 8.0 per cent in 1997, 4.2 per cent in 1998, and 5.6 per cent in 1999 (United Nations Economic Commission for Europe)

Agriculture More than half of agricultural land has been privatized in small plots via long-term leasing (private land ownership rights have not yet been granted). The government intends to keep approximately 25 per cent of agriculture in state hands (EBRD 1995b:43). The law on the ownership of agricultural land was passed in March 1996. Farmers now have clearer property rights to land transferred in early 1992 (representing 22 per cent of agricultural land) and to land that was used for private gardens before 1992. The law provides for the right of private entities to buy, sell, lease and inherit land. In addition, the law applies to the land on which enterprises reside (EBRD 1996b:152). In 1996 private enterprises accounted for 85 per cent of agricultural output (EBRD 1997b:171). In mid1998 the share of privatized land was 26 per cent (about 60 per cent if Abkhazia and South Ossetia are excluded). The establishment of an active land market is impaired by the lack of a system for land registration (EBRD 1998b:168). The registration of private ownership titles has been slow. The law on the privatization of non-agricultural land was approved in November 1998. It allows investors to acquire ownership rights over land, whereas before non-agricultural land could only be leased (EBRD 1999b: 222). In March 1996 parliament passed the law on the ownership of agricultural land. The law applies to the 22 per cent of agricultural land (668, 500 ha), on which users’ rights had been transferred to farmers in early 1992, and also to private garden plots in use before 1992. Farmers now have clearer ownership rights to this land, provided they have citizenship. Foreigners may only lease land. (The law applies to the whole territory of Georgia except for Abkhazia and the Tskhinvali region, not controlled by the Georgian government. Any decrees of separatists concerning land issues on these territories are declared invalid. The land tenure on the coast and border zones is regulated by a separate law.) Further legislation is due (by August) to regulate land tenure and property relations on the remaining agricultural and other types of land. (GET, First Quarter 1996, p. 44) The vast majority of land is now under private cultivation. A large part of the 35 per cent of cultivated land allocated to remain in the hands of state farms after phase one privatization is currently leased out to private farmers (pp. 7–8). Initially land reform aimed to increase production in the private sector of small household plots. Reform of the large state and collective farms was put to one side. By the end of 1993 land in private hands amounted to 20 per cent of agricultural land and 44 per cent of cultivated land. But ownership rights were not clearly defined. Land was given for inheritable life use but

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buying and selling (or even using land as collateral for credit) was not permitted. As of 1 September 1996, 24 per cent of agricultural land was privatized (with the aim of increasing this to 30 per cent by April 1997). The March 1996 law allowed land ownership and buying and selling by Georgian citizens. In September 1996 laws were passed on the use of land as collateral and on land titling and registration. The aim was to distribute temporary titles to land by the end of 1997. ‘The problem remains, however, that the largest part of the country’s potentially productive land remains under the control of state farms, the majority of which do not operate at all.’ In June 1996 a law was passed laying out the terms for the lease of state land to the private sector, but improvements are in the offing. (‘In common with many transition economies, no progress at all has been made on privatizing commercial land.’) The private farms that have been created are on average extremely small. A survey of 2,000 private farms in April 1996 found an average of 0.9 ha, of which 0.7 ha was privately owned and 0.2 ha was leased (GET, Third Quarter 1996, pp. 52–3). ‘The overwhelming majority of food production now happens on small private plots’ (p. 11). Only about 11 per cent of all land has been privatized. The only area that has been significantly privatized is the 20 per cent of land classified as good-quality arable and perennial. Urban and industrial land has not been privatized at all, although the government has plans in this regard. The majority of house-holds have now received temporary entitlement documents. The majority of agricultural land is at least occupied or used by private farmers. Most state farms collapsed soon after Georgia became independent. Their good-quality land that has not been privatized has been leased out by local authorities. The state is now directly involved in only a few subsectors, such as tea and seed production (GET, Fourth Quarter 1997, p. 60). Some 12.4 per cent of land is now privately owned. Only Georgian citizens may own agricultural land and there has been no privatization of urban and commercial land. By the end of 1996, 24.3 per cent of agricultural land had been privatized and this figure was raised slightly to 25 per cent by the end of the first quarter of 1997. In addition to that privatized, 18.5 per cent of agricultural land has been leased out by local authorities. Land that has not been distributed is generally lying idle or just subject to local grazing arrangements. In addition, much of the land that is nominally privatized has not been claimed or is not being used, often because of problems obtaining inputs and irrigation and sometimes because of hostility to outsiders using land. There is still no effective land market (GET, First Quarter 1997, pp. 65–6). There is no active market in land owing to the lack of proper registration systems (p. 4). As of 1 April 1997, 12.4 per cent of all land was privately owned. The privatization of industrial and commercial land has not yet started. As of 1 April 1997, 1.7 per cent of non-agricultural land had been privatized, covering roads and buildings situated in rural areas. Only 25 per cent of agricultural land had been privatized (GET, Second Quarter 1997, pp. 54–5). On 15 May 1997 parliament passed a law on the ownership of agricultural land. Families which have the right of land ownership but have not received their plots may receive land free of charge before 22 March 1998 (p. 70). As of 1 October 1997, 25.6 per cent of agricultural land had been privatized. The total amount of land privatized was 13.6 per cent (GET, Third Quarter 1997, p. 47). The state will stop the free distribution of agricultural land on 22 March 1998 (p. 48).

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Other sources on agriculture Peasants are granted land free of charge in the mountainous zone (up to 5.5 ha) and in the valleys (1.25 ha). The right to buy and sell is exercised through the Land Bank following a two-year moratorium. All inefficient and unprofitable collective farms have been reorganized as associations, co-operatives, partnerships or small-scale enterprises. More than 20,000 peasant (farmer) holdings are operating (Nikonov 1992:1161). Georgia has rapidly disbanded state and collective farms and transferred land to private farmers (Ash 1993:497). Georgia has achieved virtual privatization under leasehold, but continues to forbid private ownership of land. But mid-1994 over half of agricultural land was under private lease (Kaser 1995:38). New legislation has been approved which will transfer the ownership of land to those who cultivate it, leading to over 670,000 ha being placed under private ownership. The new law permits the selling, buying and bequeathing of land plots, although only by Georgian citizens (Business Europa, June–July 1996, p. 40). Around 47 per cent of cultivated land has been privatized (Transition, May–June 1996, vol. 7, nos 5–6, p. 28). ‘Prior to the disintegration of the Soviet Union a total of 1,029 state farms and 821 collective farms were operating in Georgia, all of which have been liquidated’ (Cemovich 2001:83). Although the state began to transfer agricultural land parcels to Georgian households as early as January 1992, the relevant governmental institutions began to register the land into ownership only in June 1999. Because the [1996] civil code and law on land registration provide that registration is a prerequisite for establishing land rights, registration is an essential legal step in the land privatization process. (p. 84) Georgia has completed its first phase of agricultural land reform, transferring approximately 60 per cent of its state-owned arable agricultural land to rural households… The parliament of Georgia is expected to adopt a law on the privatization of the remaining state-owned agricultural land in late spring 2001… For more than seven years, however, the state had delayed registering full ownership of the transferred land. Without legally registered ownership, according to Georgian law, farmers’ property rights to the agricultural land are not officially recognized, rendering any land ownership either non-existent or restricted. In response to a growing demand for title certificates and speedy registration of land ownership, on 16 May 1999 President Shevardnadze issued [a] presidential decree… Within a relatively short period of time presidential decree no. 327 has effected ownership registration for nearly one million agricultural land parcels and has facilitated thousands of secondary land transactions among private landowners.

Georgia

161 (p. 81)

Without registered land ownership…no known Georgian bank has been willing to accept agricultural land as collateral and few prospective purchasers have been willing to pay appropriate sums of money to acquire a parcel of land to which they would not receive registered ownership. (p. 86) ‘Foreign physical and legal persons are not permitted to own agricultural land, though they may lease it from the state or private persons’ (p. 84). Until October 1998 land designated for commercial use was state-owned, although buildings on the land typically were privatized. This disparity still exists but has been substantially mitigated since passage of the enterprise land privatization law on 28 October 1998, resulting in the privatization of most commercial land plots possessed by private enterprises. (p. 83) The share of peasant farms in agricultural land (including a large share of household plots) was 21.7 per cent in 1996 (Spoor and Visser 2001:888). The share of private plots in agricultural land increased from 12 per cent in 1989 to 54 per cent in 1998 (p. 891). The share of private farms and household plots in agricultural production increased from 35 per cent in 1991 to 65 per cent in 1995 (p. 890). Economic performance GDP growth turned positive in 1995 after a string of highly negative figures: –44.8 per cent in 1992, –25.4 per cent in 1993 and –11.4 per cent in 1994. In 2001 GDP was still only an estimated 37 per cent of the 1989 level (EBRD 2002b:58, 156). The Russian financial crisis of August 1998 adversely affected Georgia, the growth rate falling sharply in 1998. (See Table 3.1.) There was hyperinflation in the period 1992 to 1994, consumer prices rising by 887 per cent in 1992, 3,125 per cent in 1993 and 15,607 per cent in 1993. The inflation rate fell sharply after 1995 and reached single figures in 1997 and 1998. There was a significant increase in 1999, but a marked improvement thereafter. Economic performance has deteriorated in recent months, with a substantial slowdown in growth, rising prices and a sharp depreciation of the currency at the end of 1998. A lack of government control over public finances is adding to inflationary pressures and creating uncertainty. (EBRD 1999a:37) The problem of inadequate tax collection is largely unresolved. Financial difficulties for the government escalated during the second half of 1998, culminating in a severe budget crisis… Persistent fiscal imbalances have caused

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an upsurge in inflationary pressures, mounting state debts and delays in disbursements from the IMF due to non-compliance with targets. (p. 38) An informal poll conducted in May 1995 found that the unemployment rate was about 11 per cent, compared with some 4 per cent reported on the basis of registered unemployment (United Nations Economic Commission for Europe 1996:89). As of 1 April 1996 there were 60,700 unemployed registered at the state labour exchange, with only a little over 2,000 receiving any benefit (paid for only six months). One survey ‘produced a total of 15.5 per cent unemployment, excluding homemakers, and classifying those working on their own land as entrepreneurs’ (GET, First Quarter 1996, p. 59). As of mid-1996, 57 per cent of the potential labour force were officially employed, 6 per cent were full-time students and 2 per cent were registered unemployed. The remaining 35 per cent were thus either not classified as economically active (looking after children, doing military service, in prison, not wanting to work), unemployed but not registered, or working in the informal sector or abroad (GET, Second Quarter 1996, pp. 68–9). Two surveys have produced figures of 14 per cent and 22 per cent of the potential work force unemployed (GET, Third Quarter 1996, p. 62). A previous edition of GET reported on the extraordinary degree of inequality of monetary incomes. ‘If non-cash incomes are included this picture is very slightly improved, but with the richest 20 per cent of the population having 65.5 per cent of the income, inequality is still horribly high’ (GET, Second Quarter 1996, p. 65). ‘The proportion of people below the official poverty line increased from 43 per cent in 1997 to 58.5 per cent in 1999’ (EBRD 2000b:167). ‘Over 50 per cent of the population live below the official poverty line’ (EBRD 2001b:151). The health service has been disastrously affected by the economic collapse, e.g. the infant mortality rate increased from 17.8 per thousand live births in 1990 to 21.4 per thousand live births in 1994 (GET, Second Quarter 1996, p. 71).

Part II The Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan

4 Kazakhstan POLITICS The political and demographic background Most of the people who inhabit Central Asia today, the speakers of mutually intelligible Turkic languages like Uzbek and Kazakh, are the descendants of nomad invaders who originally came from the depths of Siberia. They often collided, and sometimes melded, with Persianspeaking peoples who had moved up into the region from their original settlements in South Asia. Many of these early Iranians were either absorbed by the Turkic peoples or moved on to points west. The Persian speakers who remained behind in the high mountains of the Pamirs or in the valleys of northern Afghanistan became the people we know today as the Tajiks. (Christian Caryl, The New York Review of Books, 2002, vol. XLIX, no. 6, pp. 27–8)

‘The word Kazakh means “free rider”’ (The Times, T2, 31 July 2002, p. 2). Kazakhstan is well endowed with natural resources (Deutsche Bank, Focus: Eastern Europe, 1993, no. 70, pp. 1–9, and 1995, no. 126, p. 8; FT, 8 April 1993, p. 6). There is, for example, oil, natural gas, coal (25 per cent of Soviet production in 1991), gold, nickel, copper, lead and zinc. It inherited about 20 per cent of the Soviet Union’s arable land, and grain, meat and wool are important. (In 1991 agriculture accounted for 37 per cent of national income.) There is a relatively diversified industrial base compared with the other Asiatic republics. There are large oil reserves, but the country is heavily dependent on Russian pipelines for oil exports. ‘President Nazarbayev says that an international consortium has found what could be one of the world’s largest oil deposits off the Caspian coast’ (The Times, 12 May 2000, p. 20). ‘This week…prime minister Kasymzhomart Tokayev confirmed reports of a major oil find in the Kazakhstan sector of the Caspian Sea’ (IHT, Friday 12 May 2000, p. 15). The petroleum reserve found [called the Kashagan field] recently by a consortium of Western oil companies in the northern Caspian Sea may well be the largest oil discovery in twenty years, according to US officials and industry sources… The last oil find of comparable size [at Tengiz] was in 1979, also in

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Kazakhstan, when it was part of the Soviet Union… Industry sources warned that it could take another five years before the Kashagan field begins producing oil… In 1997 oil exports were valued at $1.5 billion, a quarter of total exports… The Clinton administration has been promoting the building of a…pipeline running from Baku, the capital of Azerbaijan on the western side of the Caspian through Georgia to the Turkish port of Ceyhan on the Mediterranean. US officials want to prevent any Caspian pipeline from running south through Iran and to keep Russia from dominating all export routes. But the proposed Bakuto-Ceyhan… needs more Caspian oil to make it commercially viable. US officials are hoping that Kazakhstan will solve this problem by exporting more of its crude to Azerbaijan across the Caspian by barges or under it through a pipeline. (IHT, 17 May 2000, p. 7) Okioc finds large oil reserves in the Kashagan oil field in the northern part of the Caspian Sea (KET, Monthly Update, May 2000, p. 4). The Okioc [Offshore Kazakhstan International Operating Company] multilateral consortium, Kazakhstan’s offshore drilling project, said it had discovered oil in its Kashagan East test well in the north-east Caspian Sea … Okioc consists of subsidiaries of BP Amoco, Exxon, Mobil, Inpex [Japan], Philips Petroleum, Royal Dutch/Shell, Statoil, TotalFinaElf, Eni and BG. (FT, 25 July 2000, p. 38) [On 7 June 2002 Kazakhstan and Russia] signed an agreement on Kazakh oil through Russia… The previous agreement expires in the summer of 2002… Kazakhstan would not have enough oil to export via both routes [the other being the Baku-Ceyhan pipeline]… Experts attributed…[an earlier] evasive approach to Kazakhstan’s desire to reorient its oil exports toward the Baku-Ceyhan pipeline (and to bypass Russia) if its transit fees were to prove lower than Russia’s. But by May of this year [2002] it became clear that construction of the Baku-Ceyhan pipeline was being postponed for an indefinite period of time. So Nursultan Nazarbayev yesterday [7 June 2002] agreed to Vladimir Putin’s conditions… The transit agreements will be in force for fifteen years and will utilize the Atyrau-Samara and Makhachkala-Tikhoretsk-Novorossiisk oil pipelines, with a volume of at least 17.5 million tonnes a year… The second document signed yesterday [7 June 2002] was the founding agreement between Gazprom…and KAK Munaigaz National Company on the creation of the Kazrosgaz joint venture. An agreement on the transit of Kazakh natural gas through Russia was signed [by the prime ministers of both countries]…in November 2001. But Vladimir Putin’s presence was needed in order to work out the details. The president announced yesterday that he has managed to secure guaranteed shipments of 3.5 billion cubic metres of natural gas via Russian pipelines, a quantity that could eventually rise to 30 billion to 50 billion. (Kommersant, 8 June 2002, p. 2: CDSP, 2002, vol. 54, no. 23, p. 17)

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The population was 15.5 million at the end of 1998, down from 16.9 million at the end of 1992. In 1989 the ethnic composition of the population was as follows: Kazakhs, 42 per cent; Russians, 38 per cent; Ukrainians, 5.4 per cent; other, 14.6 per cent (Economic Bulletin for Asia and the Pacific, 1991, vol. XLII, nos 1 and 2, p. 2). Kazakhs are of mixed Turkish and Mongol descent. In 1992 Kazakhs accounted for 41 per cent of the population and ethnic Russians 38 per cent (FEER, Asia 1994 Yearbook, 1994, p. 108). In 1990–3 the share of Russian residents decreased from 40.8 per cent to 36.4 per cent (CDSP, 1994, vol. XLVI, no. 13). The Economist (12 March 1994, p. 77) put the figures at 43 per cent and 36 per cent respectively. Today (October 1996 source) Kazakhs make up more than half the population. Russians are about 30 per cent of the total (CDSP, 1996, vol. XLVIII, no. 42, p. 22). Some 350,000 ethnic Russians have left the Central Asian republics over the past three years (FT, 9 April 1994, p. 3). An estimated 300,000 went to Russia in 1993. In 1994, 254,500 Russian-speakers moved to Russia, mostly from the Central Asian states (The Economist, 21 May 1994, p. 53). Altogether nearly 3 million Russians had emigrated to Russia from the other countries of the former Soviet Union during the previous three years (IHT, 8 February 1995, p. 11). As many as 3 million ethnic Russians have fled the former Soviet republics since 1991. A survey has shown that economic concern is far more important than human rights, the latter rating only 9 per cent (Independent, 19 April 1995, p. 8). In 1993 over 920,000 people moved to Russia from other successor states of the Soviet Union (United Nations Economic Commission for Europe 1995:228). Some 2 million ethnic Russians (out of 25 million) have returned to Russia from the other countries of the former Soviet Union (Independent, 5 April 1996, p. 21). In 1993, 365,000 Russian-speaking people left Kazakhstan and moved to Russia (Moscow News, 20–6 May 1994, p. 3). In 1993, 222,100 emigrated (CDSP, vol. XLVI, no. 24, p. 13). Since 1989 the number of Russians has decreased by more than 800,000. Of Kazakhstan’s total population of 16.46 million at the beginning of 1996, about 48.1 per cent were Kazakhs and 34.1 per cent were Russians. More than 570,000 Germans have emigrated in the past eight years, leaving 387, 500 behind (CDSP, 1997, vol. XLIX, no. 27, p. 2). More than a million have already emigrated (mostly Slavs, Jews and ethnic Germans), the bulk of them in the first years of independence. A second wave began in 1997, pushing the total exodus to over 1.5 million, close to 10 per cent of the total population (FT, Survey, 17 June 1998, p. iii). Some 1.5 million Slavs, mostly Russians, have already emigrated since independence in 1991 (FT, 1 July 1999, p. iv). While 1.5 million ethnic Russians have emigrated since Kazakhstan became independent in 1991, they still account for 30 per cent of the population, mostly living in the north (FT, 23 November 1999, p. 14). During the past five years (October 1996 source) about 2 million people have left Kazakhstan, including over half a million who have emigrated to Germany. During the Second World War 800,000 Volga Germans and 600,000 members of various Caucasian nationalities were deported to Kazakhstan. In the past few years more than 200,000 descendants of Kazakhs have returned to Kazakhstan. About 3 million Kazakhs live in

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Central Asia, Russia and Mongolia and a number of other countries. There are another 1.5 million in China (CDSP, 1996, vol. XLVIII, no. 42, p. 22). Two-thirds of the 1 million Germans who once lived in Kazakhstan have departed since 1989. At least half the remaining 300,000 are expected to leave over the next two or three years. The majority of Kazakh Germans are descendants of the Germans who emigrated to the Volga region of Russia some 200 years ago and were deported by Stalin during the Second World War. ‘Kazakh Germans are now valued as well-educated and hard-working citizens. The Kazakh government is anxious not to lose any more’ (The Economist, 28 June 1997, pp. 85, 88). A preliminary population census was held in April 1999 (FEER, Asia 2000 Yearbook, p. 101). The total population of Kazakhstan has fallen from 16.4 million in 1989 to 15.6 million at present. The proportion of ethnic Kazakhs in the population has risen from 39 per cent in 1991 to 52 per cent at present. Only about 60 per cent of the ethnic Kazakh population can speak their own language. About 4.5 million ethnic Kazakhs live outside Kazakhstan, including 1.7 million in Uzbekistan. 1.5 million in China and 740,000 in Russia. Between 1989 and 1998 the proportion of ethnic Russians in the population fell from 37 per cent to 31 per cent. The number of ethnic Germans had fallen from almost 1 million in 1989 to about 220,000 today (The Economist, 3 April 1999, pp. 69–70). About half of [ethnic] Kazakhs…are unfamiliar with their own language or can manage only conversational Kazakh’ (The Economist, 26 June 1999, p. 99). The German government will give them a ticket ‘home’. But it does so ever more reluctantly. Both the German and the Kazakhstani government would like the remaining ethnic Germans to stay… A few months ago the German authorities…ended the offer of free flights… Most of the 1 million Germans who used to live in Kazakhstan went while the going was good, by air. The German government reckons that only about 170,000 remain, although more people claimed German ancestry during the 1999 national census. For its part, Kazakhstan has seen its population shrink by almost 8 per cent, from 16.2 million in 1989 to 14.95 million in 1999… In addition to the ethnic Germans it has lost 1.6 million Russians, 300,000 Ukrainians and 70,000 Tatars… To encourage people to stay on Germany has spent about DM 100 million ($50 million) over the past ten years supplying coal, flour and medicine to ethnic Germans and promoting small businesses in Kazakhstan. (The Economist, 15 April 2000, p. 77) There has been an outflow of 1.5 million people from Kazakhstan over the last ten years—mostly Russians and Germans returning to their homelands … President Nursultan Nazarbayev’s big idea has been to invite home all those Kazakhs, with their families, who left the country when it was part of the Soviet Union, or whose ancestors left even earlier in Tsarist times. It is reckoned that about 4.5 million Kazakhs live abroad, in China, Mongolia, Russia, Turkey, Uzbekistan, Iran and Afghanistan… So far, there has not been a great rush to accept the president’s invitation, now several years old. About 182,000 Kazakhs have returned.

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169

(The Economist, 6 January 2001, pp. 56–7) Over the past decade Kazakhstan has lost approximately 2 million nonKazakhs… In the wake of the economic upturn that began in late 1999 and early 2001, the dynamics of population have begun changing in a palpable way. Many of those who left Kazakhstan in earlier years have begun returning. As of the end of 2000 more than 100,000 immigrants had arrived in the country (most of them former citizens of Kazakhstan who had sought but failed to find a better life in other countries)… According to the Republic of Kazakhstan Statistics Agency, the country has 4,479,618 ethnic Russian citizens. The Russian diaspora accounts for 30 per cent of the republic’s total population, which stood at 14,953,126 as of early 1999. (CDSP, 2001, vol. 53, no. 21, pp. 1, 3) Kazakhstan is home to more than 120 ethnic groups… The ethnic Kazakh population…today constitutes 53.4 per cent of the total population. Other ethnic groups include Russians (30 per cent), Ukrainians (3.7 per cent), Uzbeks (2.5 per cent), Germans (2.4 per cent), Tatars (1.7 per cent), Uighurs (1.4 per cent)… [Some] 56 per cent of the population live in urban areas and 44 per cent in rural regions. The Kazakh ethnic group is spread all over the world… Worldwide the total number of Kazakhs is estimated to be 10.8 million. Kazakhstan is officially a secular state, but Sunni Islam is the major religion… The official state language is Kazakh, a Turkic language closely related to Uzbek, Kyrgyz, Turkmen and Turkish. Russian is the language of inter-ethnic communication, widely spoken in urban areas, whereas people from rural regions tend to speak more Kazakh. (IHT, Survey, 24 April 2002, p. 21) It is clear that the evolving political system of Kazakhstan is characterized by the absolute dominance of the executive branch of power, vested in the president and in the cabinet, which is appointed by him and responsible solely to him… Titular nationality accounts for only 40 per cent of the population… Preservation of ethnic tranquillity has been one of the greatest achievements of his [Nazarbayev’s] presidency so far. (Nourzhanov and Saikal 1994:226–7) ‘Having endorsed a transition to a market economy, the government of Kazakhstan has in reality been reluctant to decentralize the national economy, fearing the political decentralization that would inevitably follow’ (p. 227). The name of the capital city, Alma Ata (in the south of the country), was changed to Almaty. Then on 10 December 1997 there took place the official inauguration of the new capital city of Akmola (in the north of the country). But on 6 May 1998 the name Akmola was changed to Astana (IHT, 3 June 1998, p. 26). Akmola means ‘white tombstone’, while Astana means ‘capital’. In the Soviet era the name was Tselinograd (which received a boost during the Virgin Lands Campaign of the 1950s). A festival to present Astana

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officially as the capital was held on 10 June 1998 (IHT, 11 June 1998, p. 4). Despite repeated explanations that the word Akmola means ‘gleaming prosperity’, many people took its literal meaning of ‘white grave’. Hence the presidential decree to use Astana, which translates as ‘capital’ (CDSP, 1998, vol. 50, no. 19, p. 21). Reasons for the move include the large number of ethnic Russians in the north, the closeness of Almaty to the Chinese border and the location of Astana in terms of transport links and the northern industrial and agricultural belts (FT, Survey, 17 June 1998, p. iv). The rationale for moving Kazakhstan’s capital to the northern city of Astana at great expense is to neutralize the ethnic faultline of the Slavic north and Kazakh south, especially in the prospect of Russia without Boris Yeltsin after 2000’ (FT, Survey, 1 July 1999, p. iv). Political developments 8 December 1993: parliament votes to dissolve itself and calls for early elections. 10 December 1993: parliament votes to allow President Nursultan Nazarbayev to rule by decree until the new parliament is elected on 7 March 1994. 13 December 1993: parliament ratifies the Nuclear Non-proliferation Treaty. 7 March 1994: the general election takes place for the 177 parliamentary seats. The turnout is 73.8 per cent. President Nazarbayev (controversially) fills forty-two seats by appointment. While the Nazarbayev-sponsored Union of People’s Unity of Kazakhstan wins only twenty-five seats, the majority of the sixty ‘independent’ candidates are believed to be pro-president because they hold state or government positions. Eleven seats are won by the official federation of trade unions. Parties opposed to Nazarbayev on at least some issues may have won less than thirty seats. The Lad (Harmony Slavic) Party (backed by ethnic Russians) wins four seats. Observers from the CSCE declared that the election did not meet internationally acceptable standards. The allegations included, for example, ‘arbitrary and capricious’ disqualification of some candidates, incidents of ballot-stuffing, the casting of perhaps more than one-third of votes by proxy (an individual was allowed to cast multiple ballots provided the relevant passports were brought along) and distortion in the media. Ahmed Rashid (FEER, 16 March 1995, p. 24) said that Nazarbayev had vetted all the candidates. 29 March 1994: Nazarbayev supports the idea of transforming the CIS into a ‘EuroAsian Union’, with a single parliament and currency. 6 July 1994: it is announced that before the year 2000 the capital will move from Almaty (Alma Ata) to Akmola (farther north, nearer the border with Russia). 11 October 1994: the government resigns when President Nazarbayev criticizes it for the slow pace of reform: ‘The government is not capable of fulfilling the obligations placed upon it.’ 12 October 1994: a new government is confirmed. The new prime minister, Akezhan Kazhegeldin, is reportedly pro-market. 23 November 1994: the USA discloses that it has purchased and transported to the USA highly enriched (weapons grade) uranium. (Russia approved the deal.) 20 January 1995: Presidents Yeltsin and Nazarbayev agree to unite the armies of Russia and Kazakhstan. Beginning in 1995, the two sides will start work on forming joint armed forces.

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11 March 1995: President Nazarbayev dissolves parliament and announces plans to rule by decree pending new parliamentary elections. This action is the result of the constitutional court ruling that the 1994 general election was illegal: the authorities had violated the principle of ‘one citizen, one vote’ in counting ballots and had set up a voting system that favoured the winning party (e.g. constituency boundaries had been tampered with). Parliament had earlier voted against measures (supported by the president) to allow the privatization of land and to give the Russian language equal status (The Economist, 18 March 1995, p. 80). 14 March 1995: the constitutional court’s ruling is contested by 130 members of parliament, who claim that the irregularities were confined to only one electoral district. 15 March 1995: some of the deputies begin a hunger strike and about a hundred of them form an alternative ‘people’s parliament’. 25 March 1995: Nazarbayev announces that a referendum is to be held on 29 April on the question of postponing for four years the presidential election scheduled for 1 December 1996. 29 April 1995: the turnout for the referendum is 91.3 per cent and the ‘yes’ vote is 95.4 per cent. 30 August 1995: there is a 90 per cent turnout for the referendum on the constitution. The ‘yes’ vote is 89.14 per cent. Under the constitution the president is able to dissolve parliament if it holds a vote of no confidence or twice rejects his nominee for prime minister. The constitution also allows the president to rule by decree and to call a state of emergency. Parliament is able to oust the president only if he is incapacitated by illness or is found to have committed treason (FT, 31 August 1995, p. 3). 9 December 1995: elections for the new sixty-seven-seat lower house of parliament (Mazhilis or Majlis) take place. Candidates are not allowed to declare their parties on the ballot paper. Despite a 78 per cent turnout, only forty-three seats were filled (three short of the necessary two-thirds quorum). Western observers noted violations such as multiple voting. The new two-chamber parliament can neither initiate legislation nor impeach the president (FT, 11 December 1995, p. 4). The upper house or Senate was formed after elections on 5 December (p. 4). Thirty-eight senators were elected on 5 December 1995. Fresh elections were needed in two cases (CDSP, 1995, vol. XLVII, no. 49, p. 23). The Senate was elected in June 1995 when two leaders from each region became senators. In the elections for the Majlis there is a property qualification (a hundred times the minimum wage) for each candidate. Only the Respublika opposition bloc (which includes democratically and patriotically oriented parties) has managed partly to overcome the barrier. The rest of the opposition will only partly participate by nominating individual candidates (Moscow News, 17–23 November 1995, p. 7). 30 January 1996: the new session of parliament begins. 26 April 1996: a border treaty is signed with Russia, China, Kyrgyzstan and Tajikistan. 4 March 1997: a presidential decree establishes two new agencies, which are to be directly subordinate and accountable to the president: (1) the Agency for the Control of Strategic Resources, and (2) the Agency for Strategic Planning. Twelve ministries and committees are to be abolished and the main ministries and administrative bodies are to

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be reorganized (KET, First Quarter 1997, p. 70). ‘A dramatic decimation of the country’s bureaucracy cut the number of ministries and state committees from forty-seven to twenty-five almost overnight… Kazakhstan’s legion of squabbling corrupt ministries was a major stumbling block to policy formation and business growth’ (Business Central Europe 1997:49). July 1997: the law on languages is passed, concerning some 120 languages spoken in Kazakhstan. Kazakh is the official language, but Russian can be used as a parallel one (called ‘official language’ in the law) (KET, Monthly Update, July 1997, p. 1). 15 September 1997: joint peacekeeping exercises involve troops from Kazakhstan, Russia, the USA, Turkey and four other countries. 10 October 1997: Nurlan Balgimbayev (the former president of Kazakhoil) replaces Akezhan Kazhegeldin as prime minister. There were a number of interpretations of this event: 1 The political demise of Kazhegeldin and his government was most immediately the result of a payments crisis. President Nazarbayev has said that the top priority in 1998 would be the prompt payment of wages and pensions by budget organizations. ‘Kazakhstan’s tax collection shortfall is caused primarily by the oil industry withholding taxes in a tit-for-tat struggle with the government over control, as Mr Kazhegeldin’s government has proceeded with plans to privatize it. Already most of Kazakhstan’s oil assets have been sold off, against the wishes of Mr Balgimbayev (FT, 14 October 1997, p 5). 2 According to a report in CDSP (1997, vol. XLIX, no. 41, p. 18), many people regarded the new appointment as reflecting the president’s desire to have an obedient prime minister. Many observers believed that the president’s decision was influenced by successful talks with Russia on a Caspian pipeline, talks in which Kazakhstan had been represented by Balgimbayev. 3 ‘The reformist prime minister Akezhan Kazhegeldin was fired last month and his successor, Nurlan Balgimbayev, a former Kazakhoil chairman, has indicated that he does not yet want portfolio investment in the oil industry The resignation in November of the national securities commission chairman Grigori Marchenko, in many ways the father of the Almaty exchange [opened in October 1997], also concerned investors, especially since he cited the government’s failure to draft adequate legislation to protect equity investors as one reason for his departure’ (IHT, 13 December 1997, p. 15). 4 ‘Kazhegeldin, the prime minister and champion of economic reform, was relieved of his post for “health” reasons. Mr Nazarbayev was known to consider Mr Kazhegeldin his only credible rival… Although highly regarded as an administrator, Mr Balgimbayev shares Mr Nazarbayev’s mistrust of radical IMF-style reform and is an unlikely rival. Nevertheless, economic reform—gradual as is it—is so well-advanced as to be irreversible. Meanwhile, Mr Kazhegeldin’s strong economic reputation may be overblown, particularly as the corruption charges against him seem highly credible’ (Business Central Europe 1997:49). 5 July 1998: China and Kazakhstan sign a treaty demarcating their border. 6 July 1998: Russia and Kazakhstan sign an accord to divide their claims to the

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(northern) part of the Caspian Sea bed into separate sections. This means that Russia has accepted the idea that the Caspian Sea is a sea rather than a lake. The concept of a lake means that littoral states share equally in its resources (FT, 8 July 1998, p. 19). The agreement concerns the division of the northern sector of the Caspian Sea bed while leaving the water itself in common use (KET, Monthly Update, July 1998, p. 2). 19 July 1998: the wedding takes place in Kyrgyzstan of the son of President Akayev of Kyrgyzstan (whose wife is a Kazakh) and the daughter of President Nazarbayev of Kazakhstan. 8 October 1998: it is announced that there will be an early presidential election on 10 January 1999. The 8 October is the effective date of a law the parliament has passed on constitutional amendments. The new law increases the president’s term from five to seven years. Members of the upper house will henceforth be elected for six years and members of the lower house for five years (up from four) (CDSP, 1998, vol. 50 no. 41, p. 20). The lower house of parliament schedules presidential and parliamentary elections for 10 January 1999. A joint session of parliament extends the terms of deputies of the lower house from four to five and of the upper house from five to six years. The president’s term is increased from five to seven years (KET, Monthly Update, October 1998, p. 1). 20 October 1998: a court finds Akezhan Kazhegeldin guilty of taking part in the founding meeting of the unregistered For Fair Elections movement. No person punished for an administrative offence may run for public office (CDSP, 1998, vol. 50 no. 43, p. 11). 24 November 1998: the supreme court upholds a ruling barring Akezhan Kazhegeldin from challenging Nazarbayev in the forthcoming election. He was recently held in contempt of court for failing to answer charges that he had attended an illegal political meeting (IHT, 25 November 1998, p. 8). 10 January 1999: the presidential election takes place. The presidential election…[is] marred by the absence of foreign observers who have declined to monitor the elections after serious violations in the run-up to the poll… OSCE said that events leading up to the election were so marred by unfairness that there was little point in observing the actual voting. OSCE member states have all refrained from sending official observers and the small team of OSCE officials in Kazakhstan refused to do any monitoring… The deputy head of the OSCE mission…said the main criticisms were the sudden calling of elections that gave opponents no time to organize, the exclusion of two candidates from the race and the sharp imbalance of media coverage in favour of the president. It was the first time OSCE had refused to observe national presidential elections of a member state [he] said… The incumbent’s nearest rival [is] Gani Kasymov, head of the state customs committee. (FT, 11 January 1999, p. 6) ‘OSCE concluded that Mr Nazarbayev… “staged a flagrantly flawed election”’ (IHT, 6 January 2001, p. 11). The turnout is officially given at 86.28 per cent.

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Nazarbayev wins 81.75 per cent of the vote and thus remains head of state for eight more years (until 3 December 2006). Serikbolsyn Abdildin (leader of the Communist Party) is second with 12.08 per cent. Gani Kasymov (chairman of the customs committee) only comes third with 4.72 per cent. The fourth and last place goes to Engels Gabbasov (a member of the upper house), with 0.78 per cent of the vote. March 1999: [There is] a long-standing dispute over their 1,700 km border… Parliament in March [1999] ratified a tentative agreement giving 57 per cent of the disputed 944 sq km to China and 43 per cent to Kazakhstan… The final demarcation should be completed by the end of 2000… Kazakhstan last August [1998] deported three Uighurs who were seeking political asylum out of fear of upsetting Beijing. (FT, Survey, 1 July 1999, p. iv) 27 August 1999: Diplomats say a Kazakh company agreed to provide North Korea with thirty to forty MiG-21s [jet fighters]… What Kazakhstan officials describe as a rogue group that included senior government officials had already delivered an undisclosed number of the jets to North Korea before the deal was discovered last month [July] and further shipments were halted. (IHT, 28 August 1999, p. 4) The government admitted for the first time that an unspecified number of MiG21 fighter planes from the country had been sold to North Korea, but denied it was involved… A ‘group of people’ had…bypassed Kazakh export controls. The scandal is the second involving MiG fighters this year. In March six Kazakh MiGs were seized in Azerbaijan’s capital, Baku, on suspicion they were bound for Yugoslavia despite an international arms embargo. (FEER, 23 September 1999, p. 14) 1 October 1999: Nurlan Balgimbayev resigns as prime minister and returns to his former position as head of Kazakhoil, the state oil monopoly. ‘Mr Balgimbayev, who joined the government in 1997, has criticized governments for selling off hydrocarbon assets cheaply to the West. He also opposes the privatization of Kazakhoil’ (FT, 2 October 1999, p. 6). 10 October 1999: the election for the new lower house of parliament, the Majlis. It will provide Kazakhs with their first taste of multi-party politics. In the last parliamentary elections, held four years ago, the candidates were not allowed to name their party affiliations on the voting slip. This time the voters will know which candidate is attached to which of the ten registered parties. There are sixty-seven constituency seats, with an average of eight candidates fighting for each seat, and another ten to be filled by proportional representation… With few

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exceptions, notably the Communist Party, the registered parties are less than a year old. They were formed either during the presidential election campaign or shortly afterwards. (The Economist, 2 October 1999, p. 86) Otan (Fatherland): led by the former prime minister Sergei Tereshchenko. His deputy is Marat Ospanov, the speaker in the Majlis. ‘Mr Ospanov…says the party will push for a new government to carry out economic reforms’ (The Economist, 2 October 1999, p. 86). The party is pro-president (CDSP, 1999, vol. 51, no. 43). Communist Party: led by Serikbolsyn Abdildin. The party wants to give more power to parliament, greatly reducing the president’s role (The Economist, 2 October 1999, p. 86). Republican People’s Party: led by former prime minister Akezhan Kazhegeldin. He was barred from running for president on a technicality. He has also been barred from taking part in the parliamentary elections because of a contempt-of-court charge against him. On 28 September his party said it was boycotting the elections for the Majlis, although some of its members will stand as independents. (The Economist, 2 October 1999, p. 86) In the first round of voting the turnout was about 60 per cent. ‘A statement issued by the OSCE mission in Almaty the day after the first round of the elections mentioned a number of factors that had marred the democratic image of the voting’ (CDSP, 1999, vol. 41, no. 19). OSCE suggests that more than thirty-eight of the seventy-seven deputies in the Majlis, or lower house, were unfairly elected… The report concluded that, while marking a ‘tentative step’ towards democracy, OSCE’s commitments to universal, equal, fair, transparent and accountable elections were severely marred by widespread interference by executive authorities in the electoral process. (FT, 21 February 2000, p. 8) Parliamentary elections in October were marred by official obstruction of opposition parties and bias by ballot counters, according to OSCE. Ethnic Russians had tried to organize an election bloc out of Russkaya Obshchina [a Russian cultural association in Kazakhstan]… It was not registered as a political party due to Kazakhstan’s law on organizations, which forbids parties organized on ‘national’ principles. The members of Russkaya Obshchina ran as individual candidates instead, though none won seats. (FT, 23 November 1999, p. 14) The first round filled only 30 per cent of the seats in the Majlis. The second round on 24 October was to allocate the remaining forty seats (CDSP, 1999, vol. 51, no. 43, p. 18). 20 November 1999: The arrest [has taken place] of what Kazakhstan’s authorities claim is a group of armed Russian separatists… On Saturday [20 November] twenty-two people,

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including twelve Russian citizens, were arrested in the north-eastern industrial city of Ust-Kamenogork on suspicion of preparing a separatist coup. Authorities said…they had planned to seize regional governors’ offices and security and police buildings in the city. Their apparent aim was to establish a “Russian land” in the area, separate from Kazakhstan,’ said…[a member] of the national security committee. (FT, 23 November 1999, p. 14) Officials in Kazakhstan said Monday [22 November] that three ethnic Russians had been charged with trying to overthrow the government after separatists were arrested for plotting a coup in the north… A group of twenty-two people, including twelve Russian citizens, were arrested…on suspicion of preparing dramatic separatist attacks. Three of the twelve Russians have been charged with illegal possession of weapons, establishing a criminal organization, seeking to overthrow the government by force and attempting to alter the constitutional structure. (IHT, 23 November 1999, p. 10) Ust-Kamenogork is the capital of the province of East Kazakhstan. The aim was to proclaim a Russian republic in a province where ethnic Russians account for more than 85 per cent of the population (CDSP, 1999, vol. 51, no. 48, p. 21). Eleven Russians, one Moldovan and two citizens of Kazakhstan went to trial, the charges including organizing a criminal group and making public calls for the violent seizure of power. The verdicts were announced on 9 June 2000. The three leaders were given long prison sentences and there were fines and property confiscations. The rest received suspended prison sentences (CDSP, 2000, vol. 52, no. 24, p. 20). 27 June 2000: Parliament adopts a law granting lifelong powers to President Nazarbayev. These powers include speaking at parliamentary and government sessions, advising on personnel appointments, heading the Assembly of Peoples of Kazakhstan, and membership in the National Security Council. (KET, Monthly Update, May 2000, p. 6) Parliament approved a draft law submitted by the pro-Nazarbayev Civic Party, which gives the incumbent president special powers for life. Upon retirement, the draft proposes, Mr Nazarbayev will have a permanent seat in Kazakhstan’s Security Council and the right to address the people, parliament, government and future presidents. (The Economist, 22 July 2000, p. 80) President Nursultan Nazarbayev has signed a law bestowing on himself life-time privileges once he leaves office, including immunity from prosecution, a spokesman said yesterday [21 July]. He will have lifetime immunity from prosecution from anything he did in office, except for high treason.

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The Kazakh leader has signed a law on the legal status of Kazakhstan’s first president both during and after his term of office as head of state. The document gives the first president a lifetime right to present initiatives to the Kazakh people and to government bodies and officials on important issues of nationbuilding, security and domestic and foreign policy, initiatives that will be subject to mandatory consideration; to address parliament and speak at meetings of the republic’s government during discussions of important national issues; and to head the Assembly of Peoples of Kazakhstan and sit on the Security Council. (CDSP, 2000, vol. 52, no. 30, p. 13) 13 July 2000: former prime minister Akezhan Kazhegeldin is arrested in Rome on an international arrest warrant after a request from the Kazakh authorities through Interpol. The following day the Italian authorities received an extradition request by Kazakhstan. (But he was soon released on the orders of an Italian court of appeal.) ‘Mr Kazhegeldin, who lives in London, has been an outspoken critic of the Kazakh president, Nursultan Nazarbayev, since a January 1999 election campaign from which Mr Kazhegeldin, head of an opposition party, was barred’ (IHT, 15 July 2000, p. 2). Mr Kazhegeldin led the government from 1994 to 1997 and is wanted in his home country on a range of charges, including tax evasion, money-laundering and illegally holding property abroad. Republican People’s party officials say that a charge of terrorism has been added to the list. Party officials maintain that the arrest is motivated by Mr Kazhegeldin’s outspoken criticism of President Nursultan Nazarbayev. (FT, 15 July 2000, p. 7) The Kazakh authorities have charged Akezhan Kazhegeldin with violations of several articles of the criminal code: money-laundering, transferring large sums of money abroad and abetting terrorism. The Interpol warrant was issued at the Kazakh government’s request… The warrant for Kazhegeldin’s arrest was rejected some time ago by both Washington and London. (CDSP, 2000, vol. 52, no. 29, p. 18) (Kazhegeldin was arrested at Moscow airport on 10 September 1999. He was wanted for alleged tax evasion and financial intrigues, but on 15 September Kazakhstan cancelled the arrest warrant: CDSP, 2000, vol. 51, no. 37, p. 17). 21 May 2001: President Nursultan Nazarbayev has signed a decree legalizing illicitly acquired capital. The decree will remain in effect for just twenty days, starting on 14 June. During that time people with ill-gotten gains…secretly stashed away within the republic…and foreign exchange that has found refuge abroad…will

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be able to legalize them without fear of prosecution by law-enforcement agencies. The operation will be a first in the CIS…Funds returned to the country will not be taxed. (CDSP, 2001, vol. 53, no. 21, p. 14) From 14 June to 14 July 2001 Kazakh residents could repatriate capital into special accounts at twenty qualified domestic banks without fear of legal reprisal or investigation of the source of this money. The scheme resulted in about $480 million in capital repatriations. Proponents of the scheme said it had reversed earlier capital flight and had drawn money from ‘under the mattresses’ into the banking system. Opponents pointed out that the absorptive capacity of the real economy is limited and the funds would, therefore, be likely to leave the country again once they had been ‘legalized’. To date $265 million has remained in the banking system. Critics also viewed the measure as self-serving for senior officials. (EBRD 2001b:158) [On 13 July 2001] Kazakhstan…concluded its campaign, begun on 14 June, to legalize shadow-economy money. Over the thirty-day campaign a total of $480,217,001 was deposited in special accounts… Bank officers emphasized that their projections before the campaign got under way ranged from $300 million to $500 million, so the results were quite in keeping with the forecasts, in the bankers’ view…[However, this] is nothing compared with what was taken out of the country during the mass privatization of Kazakhstan’s biggest enterprises, mines and oil and gas fields. According to the most conservative estimates, anywhere from $10 billion to $12 billion was moved out of Kazakhstan and into Western bank accounts during those years… Only about $55 million of that sum was transferred back to Kazakhstan during the monthlong campaign; by contrast, 88 per cent of the funds that were legalized was in the form of cash, which means it had been in the republic all along. (Nezavisimaya Gazeta, 19 July 2001, p. 5: CDSP, 2001, vol. 53, no. 29, p. 18) July 2001: ‘The government of Kazakhstan [has] won praise for abolishing exit visas’ (The Economist, 4 August 2001, p. 6). ‘Exit visa requirements for Kazakh citizens were abolished in July 2001’ (EBRD 2001b:158). 6 September 2001: The supreme court…yesterday [6 September] sentenced…in absentia… Akezhan Kazhegeldin…to ten years in prison… The ex-premier is currently living abroad…[He was] head of government…from 10 October 1994 to 10 October 1997. It was during that period, investigators say, that the defendant took large bribes and abused his official powers. After leaving office he is said to have possessed weapons illegally, evaded taxes and committed other legal offences.

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11 September 2001: there are terrorist attacks on the USA. (For details, see the entry for 11 September in the chapter on Tajikistan.) 22–5 September 2001: Pope John Paul II visits Kazakhstan. Kazakhstan has a tiny number of Roman Catholics, accounting for less than 1 per cent of the population… However… Kazakhstan is the first of the former Soviet republics with a largely Moslem population to have given full legal rights to the local Catholic population. (FT, 19 September 2001, p. 11) ‘Around 300,000 Roman Catholics live in Kazakhstan, most being Volga Germans, Poles or Ukrainians’ (FT, 22 September 2001, p. 13). ‘Ethnic Germans, Poles and Ukrainians [were] originally deported there by Stalin’ (FT, 24 September 2001, p. 14). ‘Kazakhstan…is divided roughly equally between Moslems and Christians …The country’s Catholics make up 2 per cent to 3 per cent of Kazakhstan’s population of 16.8 million’ (IHT, 21 September 2001, p. 5). ‘Less than 2 per cent of Kazakhstan’s population is Catholic’ (IHT, 24 September 2001, p. 2). Moslems [are] in a slight majority… Russian Orthodox Church officials continue to oppose the Pope’s plan to visit Moscow someday. The Orthodox Church in Kazakhstan is under the canonical jurisdiction of Moscow, where church officials see this trip as another papal invasion of their territory. (IHT, 22 September 2001, p. 2) ‘Its population is about 55 per cent Moslem and 45 per cent Christian’ (CDSP, 2001, vol. 53, no. 39, p. 20). 15 November 2001: On 15 November a political earthquake began… The president…stripped … Rakhat Aliyev, his son-in-law…of his post as deputy head of the KNB secret police, before appointing him to a lesser and more controllable job as deputy head of his personal security. The president decided to act after complaints by powerful business interests that Mr Aliyev was using his position to blackmail them into giving up majority stakes in their companies or face ‘inspections’ by armed tax police… The clincher was evidence that he had also been circulating on his internet kompromat material allegedly implicating the president himself in corrupt deals and paybacks… Rakhat Aliyev… [was] widely feared and disliked… Three days after disgracing his son-in-law the president faced an unprecedented public display of political dissent from a group of young private businessmen and young politicians whom he himself had placed in high positions. Uraz Dzhandosov, a deputy prime minister and former central bank governor, was the highest ranking member of the sixteenman political committee which called a press conference in the capital to launch a new

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political and social movement called Democratic Choice of Kazakhstan… The biggest political personality in the new movement is Galymzhan Zhakianov, the Akim or governor of the largely ethnic Russian inhabited northern industrial region of Pavlodar. Zhanat Yertlesova, the deputy defence minister, who is the only woman in the group, is another… Mr Zhakianov argues the case for the separation of owners and democratization… ‘For good laws you need a freelyelected powerful parliament and an independent judiciary,’ he argues… Under the current system the regions are run by non-elected Akim [appointed by the president]. (FT, Survey, 17 December 2001, pp. iii-iv) 20 November 2001: Prime minister Kasymzhomart Tokayev yesterday [20 November] asked President Nursultan Nazarbayev to dismiss deputy prime minister Uraz Dzhandosov, minister of labour and social protection Alikhan Baimenov. Pavlodar province governor Galymzhan Zhakianov and deputy defence minister Zhanat Yertlesova… Over the weekend [18 November] all the aforementioned officials joined to create a public movement called Kazakhstan’s Democratic Choice… Democratic Choice declared: ‘Democratic reforms in Kazakhstan have come to a standstill and therein lies the chief threat to the country’s future. The concentration of control over information resources and security and lawenforcement agencies in a single pair of hands is extremely dangerous.’ The latter comment was an obvious reference to the president’s son-in-law, Rakhat Aliyey, who until recently had been the number two man in the republic’s national security committee and had controlled a well-known Kazakh media holding company that includes the KTK channel and the popular newspaper Karavan. Last Thursday [15 November] he unexpectedly tendered his resignation, apparently hoping his father-in-law would refuse to accept it. But the president signed it… KTK went off the air and Karavan ceased publication. But on Saturday [17 November] the president appointed his son-in-law to the post of deputy chief of the presidential security service, saying there were no complaints regarding General Aliyev’s job performance. Channel KTK went back on the air… Law enforcement agencies began investigating the activities of firms close to Democratic Choice members… Rakhat Aliyev and his wife… have lately been regarded as Mr Nazarbayev’s most likely successors. (Kommersant, 21 November 2001, p. 1: CDSP, 2001, vol. 53, no. 47, pp. 1–2) Rakhat Aliyev…attributed his decision [to resign] to a conflict with… [the] chairman of the national security committee and his immediate successor, who had forbidden Aliyev to deliver a report to parliament on corruption in the country’s top echelons of government… In recent months Rakhat Aliyev had come under attack from certain news media outlets and deputies to parliament. But his chief accuser was… Zhakianov. The president’s son-in-law was accused of trying to use his status…to attain a privileged position not only professionally

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but also in business, and of exploiting his position for personal gain. (Nezavisimaya Gazeta, 21 November 2001, p. 5: CDSP, 2001, vol. 53, no. 47, p. 2) 21 November 2001: The president accepted three [resignations]…dismissing Mr Dzhandosov, Mr Zhakianov and Ms Yertlesova…[The] members [of Democratic Choice] do not oppose the president; they are only against the policies of the prime minister and against a number of figures in the president’s inner circle. And President Nazarbayev accepted the resignations of the aforesaid officials ‘with deep regret’, his press secretary reported… The press secretary said that the president believes it [Democratic Choice] was created within the law and is fully in keeping with his overall policy of democratizing society. (Kommersant, 22 November 2001, p. 11: CDSP, 2001, vol. 53, no. 47, pp. 3–4) 22 November 2001: Nursultan Nazarbayev…sacked three top officials yesterday [22 November], carrying into a second day a purge of politicians who joined a group calling for democratic political reforms. The labour minister, a deputy finance minister and the head of the natural monopolies regulator were dismissed, just a day after the sackings of a deputy prime minister, a deputy defence minister and a regional governor… The six officials were all members of a group called Kazakhstan’s Democratic Choice formed over the weekend [18 November] with a call for decentralization of power and a more independent judiciary and parliament. (FT, Friday 23 November 2001, p. 14) [On 18 November] the deputy prime minister, Uraz Dzhandosov announced the creation of a new movement called Democratic Choice and declared the halting of democratic reforms…was threatening the future of the country. Its leaders called for the decentralization of political power and the election of regional governors, now appointed by the president. They were supported by a number of other ministers, the heads of two commercial banks and other notables… Mr Dzhandosov…[is] a former banker with a reputation as a political and economic liberal… The grip of Mr Nazarbayev’s political machine has grown steadily tighter. (The Economist, 24 November 2001, p. 72) 8 December 2001: ‘President Nursultan Nazarbayev replaced his defence minister…for reasons of age’ (CDSP, 2001, vol. 53, no. 50, p. 17). 10 December 2001: The leaders of the Azamat Democratic Party, the People’s Congress of Kazakhstan and the Republican People’s Party of Kazakhstan (RPPK) have

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announced in Almaty that they are forming the United Democratic Party (UDP). The decision to merge the three parties was made on 10 December …in Washington…[This was] the only way that the RPPK leader, former Kazakh prime minister Akezhan Kazhegeldin, could take part in the meeting…He faces arrest in his homeland… The UDP will have a collective leadership. (CDSP, 2001, vol. 53. no. 52, pp. 16–17) Late December 2001: After six years in existence the Central Asian Economic Community (CAEC) is no more. It is being replaced with a new organization: Central Asian Cooperation (CAC)… In recent times the Central Asian presidents had more and more often described their brainchild as a stillborn organization, acknowledging that bilateral agreements are far more effective… Relations among the region’s countries had long since moved beyond purely economic ties… Proposals to revive the moribund GAEC were put forward in January last year [2001] at an Almaty meeting… Meeting in Tashkent in late December the Central Asian leaders at last made a final decision to transform the CAEC into the CAC…[The presidents of Kyrgyzstan, Tajikistan, Uzbekistan and Kazakhstan] held their own Central Asian summit in Almaty, where they signed a treaty establishing the CAC… The new organization elected as its chairman the president of Uzbekistan, who is known as being the most open to military co-operation between the Central Asian nations and the USA… The CAC is the second organization in the CIS that operates quite independently of Russia (the first is GUUAM—Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova). (CDSP, 2002, vol. 54, no. 10, p. 14) 20 January 2002: ‘Democratic Choice…held a rally in Almaty on 20 January attended by several thousand people’ (The Economist, 26 January 2002, p. 64). 28 January 2002: ‘Kazakhstan’s government was dismissed yesterday [28 January] after Kasymzhomart Tokayev, the prime minister, resigned… He was replaced by the deputy prime minister, Imamgali Tasmagambetov… Under Kazakh law the entire cabinet was required to resign along with the prime minister’ (FT, 29 January 2002, p. 7). ‘Last week Nursultan Nazarbayev dismissed his son-in-law, Rakhat Aliyev, as deputy chief of the president’s security service’ (CDSP, 2002, vol. 54, no. 5, p. 18). Politicians here [in Kazakhstan] said there were rumours that Aliyev and others might have been plotting against Nazarbayev, though no hard evidence of a plot has emerged… Aliyev is [now] Kazakhstan’s ambassador in Vienna… Reports of corruption involving Nazarbayev’s family have circulated for years. The president’s daughter Dariga and both his sons-in-law have been active in business here. According to diplomats, local journalists and politicians, Dariga Nazarbayev openly and secretly owns most of the country’s news media, including the state television channel. But [President] Nazarbayev denies that adamantly… She was, he said, simply the board chairman of one television

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company. (IHT, 24 July 2002, p. 2) 22 February 2002: ‘A platoon of American special forces is covertly training Kazakh troops in counter-terrorism techniques… Twelve US specialist soldiers …started instructing last month [22 February]’ (The Times, 30 March 2002, p. 20). 21 March 2002: ‘Eight television companies and several national newspapers have been closed…in the recent past. Opposition parties’ websites are being blocked’ (CDSP, 2002, vol. 54, no. 13, p. 13). 27 March 2002: One of the founders of the Kazakhstan’s Democratic Choice movement, Mukhtar Ablyazov, a former minister of energy, industry and trade, was arrested…charged with abuse of power and unlawful business activity… Last November [2001] Mr Ablyazov, several ministers and the governor of Pavlodar province announced the formation of Kazakhstan’s Democratic Choice. (CDSP, 2002, vol. 54, no. 13, p. 14) 31 March 2002: Officials…called yesterday [31 March] for the arrest of Galymzhan Zhakianov, a former senior government official and now opposition leader. Mr Zhakianov fled on Friday [29 March] to the French embassy in… Almaty… Kazakh officials…accused him of abuse of office and illegal sales of state-run companies to ‘suspicious’ companies at low prices… Mr Zhakianov is a member of the Democratic Choice of Kazakhstan… Mukhtar Ablyazov, another Democratic Choice leader and former energy minister, was arrested on similar charges last Wednesday [27 March]. (FT, 1 April 2002, p. 6) [On 3 April] Galymzhan Zhakianov, the former head of Pavlodar province, left the building that houses the French, German and British embassies. He had been there since 29 March… The leader of the opposition movement known as Kazakhstan’s Democratic Choice left the embassy after the ambassadors of the USA, France, Germany and Great Britain, plus officials representing Kazakhstan, signed a memorandum guaranteeing that…[he] would not be arrested…[He] is now under house arrest in Almaty. (CDSP, 2002, vol. 54, no. 14, p. 16) ‘Galymzhan Zhakianov, leader of the newly formed Democratic Choice of Kazakhstan party, seeks shelter in the French embassy, but is later arrested as the government breaks an agreement with the EU not to detain him’ (FEER, 9 May 2002, p. 15). The emergence this year of Kazakhstan’s first serious political opposition movements, Democratic Choice and Ak Zhol (Bright Path), was tolerated at

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first. When, however, the leaders of Democratic Choice demanded the election of provincial governors, who are appointed by Mr Nazarbayev…the establishment moved rapidly… Last month [April] Mr Zhakianov sought protection in the embassy premises shared by Britain, France and Germany. With forceful American backing, the French ambassador obtained a written government promise that if Mr Zhakianov left the embassy voluntarily he would only be confined to his house pending legal proceedings. That undertaking was broken almost immediately; on 10 April interior ministry police seized him… He is now in prison in Pavlodar. (The Times, 9 May 2002, p. 22) In March Mukhtar Ablyazov, a former energy minister and businessman with substantial media interests, was jailed on vaguely formulated corruption charges. Another opposition figure, Galymzhan Zhakianov, took refuge in the French embassy after being accused of similar offences. He left the embassy after Western ambassadors won an assurance that he would be kept under house arrest in Almaty. But the authorities broke their promise and moved him to more remote Pavlodar—a move that drew diplomatic protests from several Western countries… America has obtained permission for its aircraft to fly over Kazakhstan and to use Kazakh airfields for stopovers. (The Economist, 4 May 2002, pp. 66–7) Galymzhan Zhakianov…is said to be at death’s door after government officials prevented his doctors from seeing him and then interrogated him for hours in hospital… OSCE issued a statement this week that said the Kazakh officials bore ‘full responsibility for the life and integrity of Mr Zhakianov’ and reminded the government of its commitment to human life. (FT, 13 June 2002, p. 11) The political climate…has taken a decidedly ominous turn in recent weeks, ever since the revelation that… Nursultan Nazarbayev secretly stashed $1 billion of state money in a Swiss bank account six years ago. As the scandal blossomed opposition leaders were suddenly arrested, newspapers and television stations shut down and critical journalists beaten… What inspectors and regulators have not accomplished, mysterious vandals have… [Nazarbayev’s] relationship with oil companies has prompted investigations in Switzerland and the United States as prosecutors in both countries probe whether an American lobbyist helped steer millions of dollars in oil commissions to him and other Kazakh leaders… In April…prime minister Imamgali Tasmagambetov…admitted to parliament that the president diverted $1 billion to a secret Swiss bank account in 1996. The money came from the sale that year of a 20 per cent stake in the valuable Tengiz oil fields to Chevron… The prime minister…said that Nazarbayev sent the money abroad because he worried that such a large infusion of cash into Kazakhstan would throw the economy into a tailspin…[and that] Nazarbayev used it twice to help stabilize the country during financial crises … The deputy

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minister of information [said that] ‘There was a special reserve account set up by the government. It is a normal account that can be managed by officials appointed by the government. It is not managed by individuals. The money that goes into it is state money and it is supposed to be used to meet the needs of the state’… The disclosures have coincided with an escalating series of troublesome incidents for those who do not defer to the government… The government insisted that it was pursuing embezzlement charges against [Mukhtar Ablyazov and Galymzhan Zhakianov]. (IHT, 11 June 2002, p. 9) The money from the Tengiz sale was deposited in a Swiss account and used to pay off $480 million of pension arrears in 1997 and to stabilize the tenge …after the Russian default of August 1998… Mr Nazarbayev said: ‘I was not involved day-to-day but I supervised where the money went… Everything was clean. Not one kopek disappeared; it all went into the state budget… What little remained [was transferred to the governmentcontrolled National Fund, set up in 2001 and modelled on the Norwegian stabilization fund].’ (FT, 16 April 2002, p. 12) ‘Article 318 of the Kazakh criminal code…criminalizes “offences against the honour and dignity of the president”’ (IHT, 24 July 2002, p. 2). 10 May 2002: In Beijing [the] Kazakh foreign minister…signed a protocol demarcating the state border…[with China]… Kazakhstan has thus become the first of the CIS states contiguous with China to have signed all the documents necessary to codify its existing border with [China]… Neither Kazakhstan nor China ceded any territory to each other. (CDSP, 2002, vol. 54, no. 19, p. 15) 9 June 2002: see the entry in the chapter on Azerbaijan for Caspian Sea negotiations. 25 June 2002: ‘Opposition groups in Kazakhstan have said the government is creating a “dictatorship of one party”. The opposition MP Valerian Zemlyanov sounded the warning as the government passed a law making it much harder to register political parties’ (Guardian, 26 June 2002, p. 11). Prosecutors accused… Mukhtar Ablyazov…of embezzling $3.7 million from the state-run power grid and illegally charging the company for personal cell phone calls… Mukhtar Ablyazov…one of two leading members of Kazakhstan’s Democratic Choice…insisted that he was innocent at his trial… ‘The reasons I am here are political,’ he said. (IHT, 26 June 2002, p. 3) 18 July 2002:

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Mukhtar Ablyazov…was sentenced yesterday [18 July] to six years in jail for abuse of office while energy minister…of inflicting damage…on the state by ‘illegal entrepreneurial activity and abuse of power’ as head of the national power grid Kegoc and energy minister in 1997–9. (FT, 19 July 2002, p. 7) In an interview… Nursultan Nazarbayev…rejected all criticism of his policies. He said Mukhtar Ablyazov and Galymzhan Zhakianov…were ‘the most ordinary corrupt figures’ who ‘used their stolen money to create a political party’ in hopes this would protect them from prosecutors. In fact, both men had been the subject of corruption investigations earlier, but the cases had come to nothing until Democratic Choice was announced in November [2001]… Parliament hastily passed a law this month [July] that will make it virtually impossible for opponents to register political parties. The law requires a party to have 50,000 registered members spread across the entire country. The United States criticized the law and OSCE denounced it… Nazarbayev signed the measure into law last week… Alikhan Baimenov, a former minister of labour and social security, an original backer of Democratic Choice…has now helped to form Ak Zhol, the Democratic Party of Kazakhstan… Bulat Abilov…[is] another founder member of Ak Zhol… Baimenov was fired from his ministry and Abilov was expelled from parliament by the pro-Nazarbayev Otan faction to which he belonged. (Robert Kaiser, IHT, 24 July 2002, p. 2) [A law] has gone into effect that makes it all but impossible (by requiring a very high number of signatures) for independent political movements to register. Of the nineteen parties that now exist, only three pro-presidential ones are expected to survive… Political authority is concentrated in the hands of the presidential family and a handful of advisers. (The Economist, 27 July 2002, p. 13) October 2002: An opposition party, Ak Zhol (White Path), was believed to have been the target of a law that raised the minimum membership requirement for a party from 3,000 to 50,000 members…[The party] has defied the odds by managing to come up with 65,000 members and to be the first party to apply for reregistration. Ak Zhol is relatively moderate in outlook, with a focus on economic reforms, and appeals to Kazakhstan’s growing middle class and new business elite. Its leaders, two former senior government officials and a successful businessman, continue to believe that the country’s autocratic system can be changed through reforms. President Nursultan Nazarbayev is believed to hold a personal grudge against them for not toeing the government line… Although Ak Zhol’s membership drive was directed at Kazakhstan’s multi-

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ethnic population of 16.7 million as a whole (of which barely half are Kazakhs), the overwhelming majority of the delegates at the party’s congress last weekend were Kazakhs, not known for their political activism… Uraz Jandosov, Ak Zhol’s co-chairman and a former deputy prime minister, says that Kazakhs are becoming aware that it is up to them to do something to reform the system or be stuck with what they have … The Ak Zhol leaders were among the co-founders of Democratic Choice. (The Economist, 19 October 2002, p. 74)

THE ECONOMY Financial policy Inflationary pressures are aggravated by a generous social policy and heavy subsidization of state enterprises (FT, 8 April 1993, p. 6). (Wages are officially adjusted to compensate for 70 per cent of the inflation rate: Deutsche Bank, Focus: Eastern Europe, 27 September 1994, no. 115, p. 4. There is no insolvency law: p. 5.) Kazakhstan had debated whether to introduce its own currency, but after the Russian currency reform of late July 1993 agreement was reached with Russia (on 7 August 1993) that the country would remain in the rouble zone. But the tougher conditions imposed by Russia in late September for the supply of new rouble notes led to the introduction of the tenge on 15 November 1993. Roubles could be exchanged for the tenge at the rate of 500 to one and each Kazakh citizen could exchange up to 100,000 roubles. Cash amounts exceeding the limit could be put into special bank accounts and special commissions would establish whether the sums had been legally earned. According to the FT (11 January 1995, p. 3), a presidential decree made the tenge the only means of commercial payment. In January 1995 the use of hard currency in retail trade was prohibited (KET, Third Quarter 1996, p. 44). Following the introduction of the tenge, the aim became the reduction of the monthly rate of inflation to 3 per cent by the end of 1994 and the restriction of the budget deficit to 4 per cent of GDP in 1994. In late January 1994 the IMF agreed to lend SDR 185 million, the first SDR 62 million being made available immediately (as the second drawing on the ‘systemic transformation facility’) and the rest subsequently on the usual terms. In addition Japan agreed to provide $145 million in aid. The agreements followed a meeting of donor countries two weeks earlier at which aid pledges totalled $1 billion (FT, 28 January 1994, p. 6). The IMF has granted $1.3 billion to support the tenge (FT, 15 February 1994, p. 6). The IMF-inspired target for the budget deficit is 4.6 per cent of GDP (Deutsche Bank, Focus: Eastern Europe, 27 September 1994, no. 115, p. 4). There has been extremely cautious and often unco-ordinated gradualism as well as neglect of monetary and budgetary policy requirements (p. 2). One positive feature is the creation of a so-called ‘rehabilitation fund’ with whose help thirty to thirty-five enterprises are to be restructured and made competitive (p. 6). In June 1994 a fifteen-month stabilization programme was announced, much in line with IMF recommendations. The programme included measures to reduce inflation to 10

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per cent a month by the end of the year (Nourzhanov and Saikal 1994:227). On 19 July 1996 Kazakhstan announced that the IMF had offered a $450 million loan, a three-year extended fund facility. Pledges included a reduction in the annual inflation rate to 26 to 28 per cent by the end of 1996. The budget deficit was to be reduced to 2.8 per cent of GDP, of which the central bank was to finance only 0.8 percentage points. The central bank promised not to finance any bailouts of struggling commercial banks. The government pledged to raise tax revenues from 13 per cent to 20 per cent of GDP, mainly by improving tax collection and by taxing oil and gas products (FT, 20 July 1996, p. 3). A new bankruptcy law was submitted to parliament in late 1994 (EBRD 1995a:58). This was approved in April 1995 (EBRD 1995b:45). In 1995 the budget deficit amounted to 3.9 per cent of GDP, with about 30 per cent of that deficit financed by means of Treasury bills. Directed credits were abolished in early 1995 and limits were placed on the amount of central bank net credits to the government (EBRD 1996b:156). External loans financed 36 per cent of the consolidated budget deficit in 1994, rising to 67.2 per cent in 1996 (KET, Fourth Quarter 1996, p. 135). In 1998 the deficit of the consolidated state budget amounted to 3.6 per cent of GDP, which nearly corresponds to the level of 1997. However, the structure of the state budget’s deficit financing has changed. In comparison to the previous year, in 1998 the government financed the deficit without using direct credits of the NBK. Foreign lending remained the main source of deficit spending. Its share amounted to 77.4 per cent of total deficit financing in 1998. (KET, Quarterly Issue, October–December 1998, p. 154) Macroeconomic stabilization has been achieved by stopping supplies of central bank credit to the economy, but nothing resembling a private banking sector has developed in its place. This has resulted in enterprises generating their own credit by simply not paying their workers and suppliers. (FT, Survey, 17 June 1998, p. 11) In January 1998 the first comprehensive pension scheme in the CIS was launched. It transformed the existing pay-as-you-go system into a fully funded system. Employees make mandatory payments of 10 per cent of their wages into a personal retirement account, in addition to contributions for existing pension liabilities financed through a 15 per cent payroll tax—to be reduced to 5 per cent over the next ten years. Mandatory contributions can be made to public or private pension funds and may be topped up through voluntary savings (EBRD 1998b:173). Kazakhstan yesterday [19 September 2002] became the first country in the CIS…to reach an investment grade status. Moody’s, a credit rating agency, upgraded the republic by two notches to Baa3—the same rating as Saudi Arabia and Bahrain… Russia is still rated Ba3, three notches below investment grade… [Investors] are interested in a country’s ability and willingness to pay back its debt. Kazakhstan has little reason to borrow.

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Prices In January 1992 most prices were freed. By mid-1994 only the prices of transport and communication services, bread and bakery products, baby food, some energy products and imported medicine remained subject to control (EBRD 1994:27). Substantial progress was made in late 1994 in liberalizing the prices of a number of sensitive products, including bread (EBRD 1995a:58). In October 1994 administered prices for bread and bakery products were liberalized and all related budget subsidies eliminated. Only utility tariffs, including electricity, remain regulated, although prices of a number of other products are subject to anti-monopoly regulations. As part of the implementation of these regulations all fixed prices for domestic crude oil and oil-related products were abolished in December 1994. Ceilings on the margins of oil refiners were removed in April 1995 (EBRD 1995b:45). Utility prices have yet to be raised to cost-recovery levels (EBRD 1996b:156). Price legislation has been virtually eliminated, except for the regulation of natural monopolies (EBRD 1997b: 177). The new reform programme involved the following: the prices of consumer goods were freed on 1 January 1994; the budget deficit for 1994 was set at 4 per cent of GDP; state salaries were frozen (FT, 8 February 1994, p. 4). A proposal to free the price of bread and flour has been rejected by parliament on fifteen occasions (The Economist, 15 October 1994, p. 88). The government resigned on 11 October 1994 and the prime minister immediately pushed through the liberalization of bread prices (Business Central Europe, November 1994, p. 11). In April 1999 a decree was introduced ‘regulating tariffs and prices for services provided by monopolists’ (KET, Quarterly Issue, January–March 1999, p. 88). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 5 per cent; 1991, 5 per cent; 1992, 10 per cent; 1993, 10 per cent; 1994, 20 per cent; 1995, 25 per cent; 1996, 40 per cent; 1997, 55 per cent; 1998, 55 per cent; 1999, 60 per cent; 2000, 60 per cent; 2001, 65 per cent (EBRD 1999b:24, 232; and 2002b:20, 164). Privatization has been in three major phases: housing privatization in 1991–2 (via coupons, allocated according to number of years worked); mass privatization (via investment coupons); and individual projects. The first privatization programme foresaw that the rest of the coupons which the population had left over after purchasing the flats and houses where they lived would be transferred during the second stage. Unfortunately, the programme for the second phase completely omitted the role of flat coupons and announced the introduction of new investment privatization coupons and investment privatization funds. (KET, Quarterly Issue, April–June 1999, p. 28)

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A law on privatization came into effect in January 1996. The preferential treatment of workers was abolished, only two privatization methods would remain (direct sales and auctions) and there would be no social guarantees for the employees of privatized enterprises. In February 1996 the government passed its programme for privatization and restructuring for the period 1996–8. The main features were the auction sale of remaining state shares and the auctioning of enterprises already offered for sale but not yet sold. Special programmes were devised for electricity, oil and gas, metallurgy and ore mining, transport and communications, agriculture, health, education, science and culture (KET, Third Quarter 1996, pp. 48–9). In November 1996 the government revealed a list of assets which were not to be privatized, including the main railways, the main high voltage electricity transmission lines and water facilities (KET, Monthly Update, December 1996, p. 1). With the exception of the agricultural sector, privatization gained momentum in the first quarter of 1997— state shares in seven large enterprises (50–70 per cent of total shares) and assets of three large enterprises were sold to individual investors within the framework of the case-by-case privatization programme (KET, First Quarter 1997, p. 151). Small privatization is virtually complete (KET, Quarterly Issue, July–September 1997, p. 145). Within the ‘blue chip’ privatization programme, four of the ten planned privatization projects were suspended… SSGPO (mining company), Aluminii Kazakstana, TNK Kazrom and Korporatsia Kazakhmys…In the first quarter of 2000 state shares amounting to 16.7 per cent of the charter capital of Halyk Savings Bank were sold. Of the remaining five ‘blue chip’, privatization seems realistic only in two cases, namely Mangistaumunaigas and Kazakhtelecom… [In March 2000 an agreement on the acquisition of 30 per cent of the shares of Kazakhtelecom was reached with the EBRD. The Kazakh government would retain a block of 35 per cent of shares: KET, Monthly Update, February 2000, p. 5]… The Kazakh government determined which properties will not be privatized in 1999–2000…[But] this time a different approach has been chosen. The properties not to be privatized at all will be determined by the president, while the properties of strategic importance that in principle should be privatized are determined by the government. (KET, Quarterly Issue, January–March 2000, pp. 181–2) One of the largest power stations in northern Kazakhstan (Ekibastuz GRES-2) has been sold at auction to Ekibastuski Energocentr (KET, Monthly Update, April 2000, p. 3). The government of Kazakhstan has acquired 100 per cent of the shares of Almaty Power Consolidator and 45 per cent of the shares of Intergas Central Asia from the company Tractebel. The government is expected to buy the remaining 55 per cent of Intergas in the near future. The shares of both companies are now owned by the state company Kaztransgas (KET, Monthly Update, May 2000, p. 3). The large privatization programme for 1993–5 involved the auction sale of shares to private investment funds. The first funds were created in July 1993 and vouchers were distributed to citizens during the second half of the year (who placed their vouchers with the funds). The privatization of the largest enterprises started in July 1993 and proceeds

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on a case-by-case basis. By mid-1994 about one-fifth of small service entities had been privatized. The aim is to privatize all enterprises in the wholesale trade, in retail trade, in storage and in distribution in the near future. There has been no property restitution to date (EBRD 1994:26). By the end of 1994 at least 55 per cent of small enterprises had been privatized. In late 1994 the government announced its intention to increase the number of large state enterprises to be sold on a case-by-case basis from ten to 170. Medium-sized enterprises have been privatized by selling shares for vouchers in auctions. It remains unclear whether the target of privatizing 20 per cent of all medium-sized enterprises in the mass privatization programme by the end of 1994 was achieved (EBRD 1995a:58). The private sector is defined to exclude enterprises with minority private ownership and its share of GDP is likely to be between 20 per cent and 30 per cent. Following the sale of shares of some 530 joint stock companies in coupon auctions by the end of 1994, the shares of a further 260 enterprises were offered for sale in the first quarter of 1995. The government has finalized a list of about 130 large enterprises to be privatized. By early 1995 five large transactions had been completed (EBRD 1995b:45). A total of 1,700 enterprises were earmarked for privatization through the 1993–5 mass privatization programme. Between 51 and 90 per cent of shares in each enterprise was offered for sale: employees received 10 per cent and the state could retain up to 39 per cent. By early 1996, 60 per cent of the total equity of the 1,700 large enterprises had been transferred into private hands in twenty-two auctions, with private owners having a majority of voting stock in 43 per cent of the enterprises. Overall, one-third of these shares had been exchanged against vouchers, one-third against cash and the remainder given to employees. Virtually all of the agro-industrial enterprises have been formally transferred into private hands, albeit often into co-operative ownership. (By mid-1996 over half the 1,700 medium-sized and large enterprises had been sold: p. 23.) But only five (out of 180) of the very large enterprises (over 5,000 employees) have been privatized. The most important objectives of the third stage of the privatization programme covering the 1996–8 period are the following: the completion of small privatization; the cash sale of further shares in medium-sized and large enterprises; and the sale of very large enterprises on a case-by-case basis. In February 1996 the government started to divest the remaining state-held shares, including the 39 per cent stakes that had been excluded from the auctions as well as all the shares that had failed to be sold. By early 1996 about 70 per cent of small (less than 200 employees) enterprises had been sold and the programme was expected to be completed by the end of that year. There has been no property restitution. Overall, restructuring of large loss-making enterprises has been difficult and slow. Forty-four enterprises (mainly related to extractive industries) have been subjected to outside management under ‘management contracts’, whereby an enterprise is placed under the management of an interested outside party (usually a potential investor and one implicitly often assumed to hold the option of buying the enterprise later on). Twelve of these outsiders are foreign managers. Thirty of the biggest loss-making units have been placed under the control of the rehabilitation bank for restructuring or liquidation (EBRD 1996b:156). The Investment Privatization Funds have been permitted to increase the maximum ownership share that each fund is permitted to hold in a single enterprise from 10 per cent to 31 per cent. The privatization of large enterprises on a case-by-case basis continued in 1996. Especially targeted were

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enterprises in the power, energy and communications sector and this attracted considerable foreign investor interest. Outside this group of large and attractive entities, however, privatization has remained well behind target. ‘The success of “management contracts” in fostering industrial restructuring…has been very limited’ (EBRD 1997a:29). Forty-seven of the largest enterprises were placed under ‘management contracts’. The authorities have increasingly emphasized their desire to replace management contracts with direct privatization on a case-by-case basis. A presidential decree established June 1997 as the date for finalizing small privatization. But this target was not completely met (EBRD 1997b:176). Small privatization was officially completed in 1997, with more than 13,000 enterprises sold through cash auctions and vouchers. Following an early focus on voucher auctions large privatization has progressed rapidly through cash auctions encompassing 1,600 enterprises by mid1998. There are still 400 state enterprises to be sold through this method. Case-by-case sales of strategic enterprises have attracted considerable foreign participation, especially in the power and utility sectors. In 1997 two oil companies, a copper plant, a manganese plant and a 40 per cent stake in Kazakhtelecom were sold to strategic foreign investors. Though official estimates report that over 70 per cent of enterprise assets have been privatized, only 30 per cent of large enterprises are in majority private ownership and the state continues to retain large stakes in privatized enterprises. In addition, 330 very large enterprises, accounting for an estimated 35 per cent of GDP, remain fully state-owned. Considerable progress has been made in privatizing utilities, e.g. more than 80 per cent of generating capacity in the power sector. An initial reliance on management contracts has been effectively abandoned in favour of state-led restructuring (EBRD 1998b: 172–3). Several management contracts have been cancelled and a consolidation process has started, with stakes resold to large foreign investors or bought out by state concerns. The planned sale of state stakes in large companies through public offerings on the stock market (the blue chip programme) has been revived. Around 5,000 medium-sized and 1,000 large enterprises (51 per cent and 33 per cent of the total in their respective categories) remain in majority state ownership. A further 8 per cent and 14 per cent in these categories are under mixed ownership. Three hundred and thirty very large enterprises (accounting for a third of GDP, according to the World Bank) remain fully state-owned, including the state oil company, the domestic pipeline system, the national power grid and the railways. A new programme foresees the transfer of assets of the largely defunct investment funds created during mass privatization to private brokerages and the new pension funds. Bankruptcy implementation is sluggish (EBRD 1999b:230–1). The blue chip programme, envisaging the sale of minority government stakes to portfolio investors, has been revived, but the first offers have not been made. A closed tender for a minority stake in the Savings Bank and a quasi-loans-forshares deal with Samsung for 30 per cent of shares in Kazakhmys have effectively taken two of the most attractive assets out of the programme… Kazakhstan plans to privatize regional power distributors over the coming year or two… Kazakhtelecom is to be privatized over the next three years, following the sale of a 30 per cent equity stake to EBRD as part of a pre-privatization package… The government has cancelled a number of management contracts

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with foreign investors and has consolidated its ownership stake. However, given investor concerns over the sanctity of property rights and the quality of the investment climate, the authorities are finding it difficult to attract new strategic investors. (EBRD 2000a:6) The blue chip privatization programme is effectively stalled… The limit of total foreign equity in the banking system was raised to 50 per cent from 25 per cent… In August 2000 the government sold off a 5 per cent stake in the Tengiz oil field for $450 million (plus $210 million in up-front bonus payments) to Chevron. The money is to be paid into a new National Oil Fund. According to government proposals, the fund would mainly invest contributions in safe assets abroad and withdraw resources only to cushion against oil price volatility or for strategic public investment projects… In May 2000 Tractebel sold its assets in the gas distribution network and Almaty’s power sector back to the government… Tractebel’s exit followed repeated difficulties to gain the antimonopoly committee’s approval for tariff increases. (EBRD 2000b:174–5) In December 2000 a National Oil Fund was created. Subsequently, the first $660 million was transferred to the fund from the sale of the government’s stake in the Tengiz oil field. The fund is to be managed by the central bank, under the supervision of a government advisory council headed by President Nazarbayev. (EBRD 2001:70) Privatization revenues fell in 2000. A higher revenue target has been set for 2001, ‘with planned sales to strategic investors in regional power distribution and several blue chip companies’ (EBRD 2001:70). In August 2000 the government established a National Fund to be used for fiscal stabilization and to safeguard national wealth for future generations… Blue chip privatization—the sale of residual government stakes in several large domestic enterprises through the stock market—has failed to accelerate. The government now appears to favour direct sales of its residual stakes to strategic investors… The government retains control over key assets, such as oil and gas transportation, telecommunications and the railways… In April 2001 the oil and gas transportation networks were combined under a single state-owned holding, Kaztransneftgaz. (EBRD 2001b:158–9) The state still holds sizeable residual stakes in some large domestic enterprises… Recent policy moves have strengthened the role of state companies in infrastructure… In February 2002 the state oil company Kazakhoil and pipeline operator Kaztransneftgaz were merged to form Kazakhmunaygaz, an integrated state-owned energy company.

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The new government’s privatization policy remains unclear after the announcement to end privatizations was followed by preparations to sell stakes in four blue chip companies. All four companies are in the metallurgical sector and government stakes range from 15 per cent to 39 per cent ... The wideranging business interests of public officials give rise to conflicts of interest and undermine the impartiality of the authorities in relation to private businesses. (EBRD 2002b:162) Other sources of information on privatization About 5,000 small enterprises were privatized in 1992. The programme envisaged the privatization of more smaller enterprises (with up to 200 employees and fixed assets of up to 5 million roubles) by the end of March 1993 and the conversion of medium-sized and large enterprises into joint stock companies in readiness for their sale to their employees and private companies (Central Asia Newsfile, February 1993, no. 4, p. 4). Privatization was suspended for six months from May to September 1993. Under current legislation half the value of sales must be made up of privatization housing vouchers; these were issued to all citizens, on the basis of length of service, to pay towards privatized housing, but in many cases they remained unused (Moscow News, 24 September 1993, p. 8). According to Business Central Europe (September 1993, p. 51), a slow approach is favoured, with the emphasis on pre-privatization restructuring. Details of the March 1993 programme are to be found in the November 1993 issue (p. 61): (1) 51 per cent of the shares of enterprises were to be given to forty investment funds, 10 per cent were to go to employees and the balance was to stay in state hands; (2) all citizens would receive vouchers (those in very poor regions would get 20 per cent more), but the vouchers would have no set value and would not be tradable; the public would have indirect access to shares by placing their vouchers with the funds (managed by stateapproved professionals), in which they would have voting rights; (3) foreigners would not be allowed to participate (note that this ban was lifted later on: Moscow News, 12 November 1993, p. 8); (4) sectors omitted from the scheme (and sold, if at all, on a caseby-case basis) include defence, construction enterprises of ‘national importance’, energy production and distribution, mining, metallurgy, commercial banking and foreign trade. Most of Kazakhstan’s 1,500 largest enterprises (those employing at least 5,000 people) would be restructured before being sold and foreigners would be encouraged to bid for them. In 1993 the US tobacco company Philip Morris became the first private owner of a large Kazakh enterprise. The government has now issued a list of thirty-eight more state enterprises to be auctioned to foreigners. The government also promised that, at a later date, about 7,500 state enterprises would be auctioned to Kazakh citizens under a voucher scheme (FT, 8 February 1994, p. 4). A mass privatization programme was to begin on 29 April 1994. Over the following fifteen months about 3,500 medium-sized enterprises (accounting for around 70 per cent of businesses and 30 per cent of the entire economy) were to be auctioned off to

Kazakhstan

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investment funds. Citizens were to be allowed to buy into these funds with their (free) vouchers. Foreigners would be excluded from the auctions, but would be able to buy shares in and assets of privatized enterprises at a later stage once trading began. State enterprises employing fewer than 500 people were already being sold off. In 1994 thirtyeight large industrial enterprises of more than 2,000 employees were due to be sold (The Economist, 30 April 1994, p. 81; Telegraph, Survey, 21 March 1994, p. 28). The first auction sale of enterprises in the mass privatization programme was held in May 1994. Fifty enterprises were offered to the 140 licensed investment funds (Business Central Europe, June 1994, p. 49). A figure of thirty-nine was mentioned later (Business Central Europe, July–August 1994, p. 15). Almost 4,000 small and medium-sized enterprises have already been privatized. But the government generally retains a 39 per cent share, to be sold off for cash in the future (Business Central Europe, September 1995, p. 70). The privatization scheme had sold off most small businesses and targeted 3,500 medium-sized enterprises by the end of 1995 (Business Central Europe 1995:52). The government has contracted foreign companies to prepare a number of large enterprises for privatization. The contractor is required to pay off the enterprise’s unpaid wages and its debts to the state, particularly for raw materials and utilities. But the contractor is entitled to a share of net profits (between 2 per cent and 10 per cent in most cases) and gains the right to purchase a percentage of shares when the enterprise is eventually privatized (Business Central Europe, March 1996, p. 34). A survey in the IHT (16 December 1995, p. 12) provides some further details. Previously shares in the former state enterprises were sold to Privatization Investment Funds for coupons issued to all Kazakh citizens. The coupons were to be invested in the funds and the coupons were to be exchanged for shares in enterprises sold at special ‘coupon auctions’ (scheduled to be completed by the end of 1995). Under the new stage of auctions, which were to continue in conjunction with the coupon auctions, anyone would be able to bid for the shares on offer. The state privatization committee is just embarking on a new stage of cash auctions to dispose of thousands more state companies. This follows the introduction of recent legislation that allows foreign investors from both the CIS and other countries to take part in the cash auctions on the same terms as Kazakh citizens. (IHT, 16 December 1995, p. 12) More than twenty major enterprises in the metal and chemical manufacture and processing fields are being prepared for total or partial privatization and restructuring. In 1994, 4,100 enterprises were privatized under the previous programme, compared with 8,900 enterprises in 1992 and 1993. Over half were sold through auctions and commercial tenders. More than 90 per cent of all the enterprises disposed of to date have been in retail trade, public catering and consumer services, including laundries and bath houses. (By last August about 5,000 small business had been sold: p. 13.) In addition, 162 farms were sold, of which 137 were exchanged for housing coupons. Kazakhstan is trying to revive its privatization programme by inviting bids for a refinery and two oil enterprises.

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Officials have called the tender a test case that could revive the privatization of large enterprises, which has been suspended in favour of a series of management contracts. Such contracts give investors an option to buy shares without any competing bids, a scheme that has been tainted with corruption scandals and contract cancellations. (FT, 30 April 1996, p. 29) Over the past two years sixty-five of the country’s largest enterprises, including virtually all of the metal industry, have been placed in trust to domestic and foreign investors. For example, in return for pledges to invest in and pay off the debts and overdue wages of a copper mine and smelter, Samsung of South Korea is to receive 2 per cent of profits, a variable margin on copper sales abroad and first option in any privatization. The scheme is controversial because of the ability to delay payments to creditors and to suspend existing contracts (FT, 4 July 1996, p. 3). The government has opted for a controversial alternative to privatization, called trust management. The government has handed over the management of sixty-five of its largest enterprises, including most of its metal industry, to domestic and foreign investors. The investor signs a contract for two to ten years, pledging to boost production and pay off debts and overdue salaries in return for full management control, a margin on the profits or sale revenues and first choice in any privatization. The government has the right to cancel the contract at any time it feels the obligations have not been met. But even its architects admit that four out of ten contracts have been a failure and the new management has usually demanded and got the right to suspend existing contracts and debt payments on contracts they deemed unfair (FT, Survey, 11 July 1996, p. iv). Kazakhstan has sold off thirty of its largest state enterprises in the past year, including prime oil producers and metal smelters, coal mines and power plants. Another handful of big oil and gas enterprises, two mines and a dozen other enterprises are to be sold in the next few months. ‘The sales have been marked as much by speed as by scandal.’ There have been ‘accusations that additional sums passed hands under the table’. Some deals have come undone as quickly as they have been made, and even transparent tenders have fallen victim to a political tug-of-war, leaving investors frustrated and suspicious… The biggest drawback for Kazakhstan has been the lukewarm interest among foreign investors. (FT, 25 October 1996, p. 6) At the end of 1994 management contracts were taken out by offshore companies for some of the largest metal plants. Pledges to invest and revive output were made in return for a share of revenue. Within months moves were made to exercise options allowing the offshore companies to buy majority stakes in plants and mines. Kazakh opposition leaders claim officials have sold assets cheap because they are silent partners in the offshore companies. But cash payments have been brought back into an economy ‘paralysed by a total lack of liquidity’. The new managers have been able to pay wages and bargain for prompt supplies at prices at least 30 per cent cheaper than even the most honest barter deals (FT, 20 December 1996, p. 6).

Kazakhstan

197

‘The country’s privatization programme not only saved the budget but also many of the factories which had been standing idle.’ Nurlan Balgimbayev, the former oil minister, was appointed prime minister after Akezhan Kazhegeldin left office in September 1997. Starting in 1996 Balgimbayev led the oil industry in a campaign against privatization. The speed of the [privatization] process was practically its downfall… Tenders, when they were held, were haphazard and enterprises were sold for a song… The companies…attracted were not often the most reputable. Some were simple trading companies, registered in tax havens, which used transfer pricing and offshore accounts to hide their earnings from the government… Some leading figures were also accused of benefiting personally from some of the privatization deals. (FT, Survey, 17 June 1998, p. ii) In March 1997 the state property fund was abolished and folded into the finance ministry. A new entity, Kazakhoil, was created to be the holding company for all state-owned shares in the oil industry. Since becoming prime minister in October 1997 Balgimbayev has generally slowed down the pace of privatization and has shown determination to confront foreign investors whom he feels have not fulfilled their obligations. He emphasizes that he favours privatization but prefers local investors to foreigners (FT, Survey, 17 June 1998, p. ii). In late 1994 the government introduced a management contract scheme for large state enterprises, with the aim of bringing in the management and technological expertise of foreign investors while limiting their financial risk. Foreign firms were given the right to manage enterprises for a limited period of time. In exchange for bonuses or shares in profits, or both, and, in most cases, a priority right to purchase the majority of the enterprise’s shares at the end of the contract, management companies were obliged to redeem, up front, outstanding arrears of the enterprise, implement pre-privatization restructuring or carry out specified investment projects. Starting at the end of 1994 about sixty of the largest enterprises, including most of those in heavy industry, were put under management contracts. The Kazakh experience with management contracts has been a mixed success. Management contracts were often awarded without competitive procedures, on the basis of incomplete and vague legal contracts and with insufficient safeguards against short-term opportunistic behaviour; a number of contracts were cancelled because of poor performance. On the other hand, in a number of cases these contracts have facilitated more efficient operations and restructuring in preparation for privatization. The contracts should therefore be seen as a temporary solution for the period until uncertainty has been reduced to a degree where foreign investors are willing to commit financial resources. (IMF, World Economic Outlook, May 1997, p. 109) During 1996 the monitoring of contracts was enforced and direct sales of large enterprises were accelerated. At the end of 1996 the government ceased awarding new

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contracts. By early 1997 most of the large metal mines and smelters, a number of coal mines, oil producers and power plants and the giant steel enterprise had been sold off, mainly to foreign investors. The government also initiated the partial sale of the infrastructure, telecommunications and utilities sectors to foreign investors (IMF, World Economic Outlook, May 1997, p. 109). Kazakhstan intends to hold cash auctions of state shareholdings in over 2,000 enterprises in 1996 (Business Central Europe, June 1996, p. 15). Under a programme due to start in 1998, large parts of major enterprises were to be marketed to portfolio investors through international banks (Business Central Europe 1997:49). In February 1996 the government announced a third industrial privatization programme, focusing on the energy sector. Prime minister Akezhan Kazhegeldin reckons that almost half of GDP comes from private enterprises. The economy, he says, should be in the hands of entrepreneurs, ‘with government responsible only for regulations, tariffs and administration’ (IHT, 22 June 1996, p. 17). ‘The government gave 50 per cent of its stake in the Ekibastuz power plant to Russia in January [2000], in lieu of its $239 million debt for energy supplies’ (FEER, Asia 2001 Yearbook, December 2000, p. 101). Foreign trade Though the foreign trade system was streamlined in 1994, state-owned trading continues to be prominent and the taxation of imports and exports (mostly at low rates) remains somewhat discretionary (EBRD 1994:27). There are few quantitative restrictions on imports. There are no export subsidies. There are export taxes on many products, but such taxes were cut substantially in 1994. Exporters outside the state-order system have to be licensed. There are restrictions on the export of certain (mainly strategic) products. The tenge floats, but there is intervention. There is current account convertibility for enterprises, but there are restrictions on capital account. There is a 50 per cent surrender requirement for export proceeds to the inter-bank market (p. 111). Some progress has been made in reducing the number of commodities covered by export quotas (now seven) and there are plans to reduce the number of products requiring export licences (EBRD 1995a:58). Substantial trade liberalization had been achieved by the first half of 1995, following the abolition of most import and export licences (EBRD 1995b:46). During the course of 1995 all export quotas and most export and import licensing requirements were abolished and barter trade was prohibited. The 50 per cent surrender requirement for export proceeds (introduced in January 1995: KET, Third Quarter 1996, p. 44) was abolished in August 1995. The tenge (introduced in November 1993) is convertible for foreign trade. Official and commercial exchange rates are unified, with rates determined on the inter-bank currency exchange (with the rate floating). In July 1996 all obligations under Article 8 of the IMF Agreement were accepted (EBRD 1996b:156). On 18 April 1996 tariffs were reduced on a wide range of products, including cars, furniture and factory and farm machinery. These unilateral cuts caused consternation among Kazakhstan’s fellow members of the new customs union (Russia, Belarus and Kyrgyzstan). Export tariffs on gas, oil and most metals were reduced by 50 per cent (FT, 17 April 1996, p. 5). Oil export quotas, introduced earlier in 2000, have been abolished

Kazakhstan

199

(EBRD 2000a:60). ‘Kazakhstan continues to intervene in domestic markets in ways that are not compatible with WTO rules, for example, by imposing export bans on fuel products and more recently timber’ (EBRD 2002b:162). On 1 July 1996 all export tariffs were abolished (on 1 August 1996, according to KET, Fourth Quarter 1996, p. 20). These were introduced a few years ago to halt a rapid outflow of subsidized commodities. Export tariffs never did much to stem that flow, however, and turned into unnecessary barriers to trade with the rise in prices to close to world levels (FT, Survey, 11 July 1996, p. iv). In August 1996 the government acted to eliminate the competitive disadvantages experienced by domestic producers that arose from differing VAT rates within the CIS. Imports from CIS countries, where VAT rates are below 20 per cent, were to be taxed at the difference between the foreign and domestic VAT rates (KET, Monthly Update, September 1996, p. 1). In 1994 other CIS countries accounted for nearly 60 per cent of foreign trade, with Russia alone responsible for 45 per cent of total trade (Deutsche Bank, Focus: Eastern Europe, 1996, no. 147, p. 3). In 1995 metals accounted for 44.9 per cent of exports and oil products for 27.3 per cent. In the first quarter of 1996 the share of exports accounted for by other CIS countries was 56.7 per cent and in the second quarter it was 51.7 per cent (of which Russia accounted for 42.0 percentage points). In 1995 the share of imports was as follows: machinery, 27.8 per cent; energy, 26.4 per cent; food 11.8 per cent; chemicals, 10.5 per cent. Intensive oil trade between Russia and Kazakhstan is the consequence of the inherited pipeline infrastructure. Equally, metal trade between Russia and Kazakhstan is determined by the historical division of labour to a large extent… The most striking feature of the regional structure of imports to Kazakhstan is the growing share of imports from the FSU [the other countries of the CIS], especially Russia.’ In the second quarter of 1996 Russia accounted for 56.1 per cent of total imports. (KET, Third Quarter 1996, pp. 119–25) In 1996 Russia took 45.8 per cent of exports (the CIS countries as a whole took 47 per cent), while Russia accounted for 56.1 per cent of imports (KET, Fourth Quarter 1996, pp. 20–1). In 1998 the main destinations of exports were Russia (29.6 per cent; the CIS as a whole 39.9 per cent) and the EU (31.1 per cent) (KET, Monthly Update, 2000, p. 37). In 1998 the main sources of imports were Russia (39.4 per cent; the CIS as a whole 47.4 per cent) and the EU (24.0 per cent) (KET, Monthly Update, April 2000, p. 39). In 1998 fuel and oil products accounted for 38.1 per cent of exports. Other important exports were ferrous metals (14.2 per cent) and copper and copper products (10.7 per cent) (KET, Monthly Update, April 2000, p. 36). In 1999 the main destinations of exports were Russia (19.8 per cent; the CIS as a whole 26.1 per cent) and the EU (22.9 per cent) (KET, Monthly Update, April 2000, p. 37). In 1999 the main sources of imports were Russia (36.7 per cent; the CIS as a whole 43.3 per

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cent) and the EU (25.3 per cent) (KET, Monthly Update, April 2000, p. 39). In 1999 fuel and oil products accounted for 40.0 per cent of exports. Other important exports were ferrous metals (15.8 per cent) and copper and copper products (10.3 per cent) (KET, Monthly Update, April 2000, p. 36). Kazakhstan and the Asian/Russian financial crisis In November 1998 the IMF announced that it was to allocate a loan worth some $400– 440, with the first tranche expected to be received by the end of the year and the next tranches by June-July 1999 (KET, Monthly Update, November 1998, p. 1). In December 1998 the IMF released the regular tranche of $217 million within the framework of the extended fund facility approved in 1996 (KET, Quarterly Issue, October–December 1998, p. 101). The government acted fast and decisively after the Russian crisis broke last August [1998] and brought in Western bankers for consultations within fortyeight hours. The IMF has also expressed satisfaction with the government’s handling of the international crisis and in December [1998] released $217 million, the first tranche of an extended fund facility. (FT, 21 January l999, p. 3) The economy is feeling a significant impact from the crisis in Russia, with which it conducts around 30 per cent of its foreign trade. GDP declined by 2.5 per cent in 1998 and may record a similar fall this year [1999], while pressure on the currency has led to substantial central bank intervention of the foreign exchange market. The Russian crisis has prompted the adoption of protectionist measures. On 11 January 1999 a temporary six-month ban was imposed on the import of twenty-one Russian foodstuffs, including meat, milk and milk products, grain, flour and eggs. This was followed in March by the introduction of tariffs of 200 per cent for imports of selected foodstuffs from Kyrgyzstan and Uzbekistan (including also cement in the latter case) and by general tariff hikes (to be introduced in April 1999) on sugar, meat, tea and rice of between 10 per cent and 30 per cent… The government introduced a new employment law on 30 December 1998, containing a number of controversial provisions that allow direct interference with enterprise employment decisions. Particularly sensitive are clauses in the law giving the government the right to regulate the number of expatriate staff and the right to fix enterprise level employment quotas for vulnerable groups. (EBRD 1999a:38) In February 1999 a special import duty of 200 per cent was imposed on all imports from Kyrgyzstan and Uzbekistan. Customs duties on some finished products, electrical appliances and on foodstuffs were increased by 10 per cent (KET, Monthly Update, January 1999, p. 2). But in April 1999 restrictions on imports from Russia, Kyrgyzstan and Uzbekistan were abolished (KET, Quarterly Issue, January–March 1999, p. 87). From

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24 June 1999 onwards the temporary import restrictions imposed on Russian goods were abolished. Restrictions imposed on alcoholic drinks, tobacco and cigarettes remained (KET, Monthly Update, May 1999, p. 2). 5 April 1999: the tenge is allowed to float. Foreign currency reserves…[fell] from around $1.9 billion at the end of 1998 to $1.6 billion by the end of March [1999]… The tenge had remained relatively stable over the past few months, but at a very high cost. Since last August [1998] more than $700 million had been spent propping it up. The IMF granted a $217 million loan in December… Immediately after the [January 1999 presidential] election trade restrictions were put in place against certain food products from Russia. A tariff of 200 per cent was also imposed on imports from Kyrgyzstan and Uzbekistan. But these measures proved to be ineffective due to a lack of control along the country’s long borders and an increase in smuggling. The restrictions and tariffs have now been removed… A temporary order requiring exporters to sell half of their hard currency proceeds [has been implemented]… The drop in prices for oil, metals and grain—Kazakhstan’s major exports—have also hit the economy. (The Economist, 17 April 1999, p. 86) The managed floating exchange rate regime of the tenge is replaced by a floating exchange rate… Although the National Bank does not intend to systematically intervene in the domestic currency market, the NBK is prepared to prevent unreasonable fluctuations of the tenge… The monetary policy of the NBK continues to be tight… For a limited period enterprises are required to sell 50 per cent of their hard currency income to the NBK at the market exchange rate… To broaden the range of instruments for the financing of the state budget deficit the ministry of finance starts issuing Treasury bills denominated in foreign currency with a maturity of three, six, nine and twelve months. (KET, Quarterly Issue January–March 1999, pp. 87–8) As part of the April 1999 devaluation, a 50 per cent currency surrender requirement was introduced. Exporters can freely reconvert the obtained tenge on the forex market, which remains free of government distortions. Investors who entered the county after the abolition of currency surrender in August 1996 are exempt from the new restrictions. The April devaluation also included an offer to convert all household bank deposits and 30 per cent of enterprise deposits into dollars at the pre-devaluation exchange rate, if they were kept frozen for nine and six months respectively. The Savings Bank, holding 80 per cent of private tenge deposits, reported that less than 10 per cent had been converted (EBRD 1999b:230–1). The 50 per cent surrender requirement on current account transactions was lifted in November 1999 (EBRD 2000b:174). After spending $500 million to defend the tenge since August [1998] the central bank in April and May of this year [1999] allowed the currency to fall from eighty-eight to 130 to the dollar, where it has remained for the past few weeks…

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Kazakhstan…never had the chance to over-borrow. Its Treasury bill debt to nonresidents never topped $50 million, while the central bank last August [1998] had gross reserves of more than $2 billion … Nurlan Balgimbayev, who took over as prime minister in September 1997, has displayed a growing weariness of foreign investors and of free market economics. He has largely halted privatization, experimented with protectionist tariffs and quotas to defend domestic industries and has been tightening screws on foreign investors to fill gaps in tax revenue… Tax collection has fallen steadily as a percentage of GDP since privatization and tight monetary policy started… Kazakhstan has instituted a system of monitoring on a weekly basis its ninety-eight largest enterprises, most of which are foreign-owned, for tax evasion. (FT, Survey, 1 July 1999, p. 11) 25 September–25 December 1999: a temporary ban is placed on the export of fuel oil, owing to a critical shortage in the country (KET, Monthly Update, August 1999, p. 3). Following the temporary introduction of oil export quotas between December 1999 and April 2000, new delivery quotas to domestic refineries were adopted in August 2000 (EBRD 2000b:174). 27 September 1999: ‘Kazakhstan yesterday [27 September] became the first country from the CIS…to launch an international bond issue since last year’s Russian financial crisis’ (FT, 28 September 1999, p. 27). November–December 1999: the former prime minister Nurlan Balgimbayev is appointed head of the national company Kazakhoil. The regulation stipulating that exporters are obliged to sell 50 per cent of their hard currency revenue to the central bank is abolished. The regulation was among the measures accompanying the transition to a floating exchange rate regime. The IMF approves the government’s new economic policy for the period 2000–2. To support the programme the IMF provides financial assistance of 329.1 million SDR. The tax on individual purchasing of foreign currency is abolished. The tax was introduced in connection with the transition to a floating exchange rate regime and amounted to 1 per cent of the exchanged currency (KET, Monthly Update, November 1999, pp. 1–2). 2000: In 2000 Kazakhstan and Russia were committed to preventing the currency from appreciating in an attempt to preserve the competitiveness of domestic production. Interventions by the central banks, aimed at absorbing large, exportrelated foreign currency inflows, led to an expansion of the domestic money supply (United Nations, World Economic and Social Survey 2001, p. 89) Foreign direct investment The encouraging volume of foreign direct investment can be seen in Table 4.1. Kazakhstan is now second only to Russia among the countries of the former Soviet

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Union in attracting foreign investment; favoured sectors include oil and tobacco (FT, 15 February 1994, p. 6). Foreign investment is estimated to be about $500 million (Telegraph, Survey, 21 March 1994, p. 28). By the end of 1993 commitments amounted to about $9 billion, of which only $500 million had been disbursed (Business Central Europe, April 1994, p. 46). Foreign direct investment amounted to $400 million in the period 1990–3 (EBRD 1994:123). Foreign direct investment increased by about 40 per cent in 1996 to $1.22 billion. Some 80 per cent of foreign direct investment for 1993–6 was for oil, gas, and ferrous and non-ferrous metals (EBRD 1997b:176). According to a United Nations survey released in late March 1995, Kazakhstan has attracted more long-term foreign investment than any other country in the former Soviet Union or Eastern Europe. More than $46 billion in foreign investment commitments had been attracted over the previous five years (39 per cent of the region’s total) (Transition, 1995, vol. 6, no. 3, p. 17). Since 1992 foreign investors have projected more than $45 billion for schemes that run up to twenty-five years, including $35 billion for oil and gas. But up to mid-1995 barely $1.5 billion had entered the country (80 per cent of which was for oil). The unstable legal situation until the beginning of 1995 acted as a deterrent. Other obstacles include the number of authorities whose approval must be obtained and the frequent turnover of officials. The creation of a special authority for foreign investment initially added to the uncertainty, while agreed terms of contract have not always been adhered to. The country’s geographical location, especially its dependence on Russia for pipeline capacity, is a major hindrance. Under a 26 December 1995 decree, non-residents are permitted to buy land (Deutsche Bank, Focus: Eastern Europe, 1996, no. 147, pp. 4–5).

Table 4.1 Kazakhstan: selected economic indicators 1995–2002

Economic indicator

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

Rate of growth of GDP (%)

–8.2

0.5

1.7

–1.9

2.7

9.8

13.5

9.5

Rate of growth of industrial output (%)

–8.2

0.3

4.0

–2.1

2.2

14.6

13.5

9.8

Rate of growth of agricultural output (%)

–24.4

–5.0

–0.8

–18.9

21.6

–3.2

16.9

2.7

Inflation rate (consumer, %)

176.3

39.1

17.4

7.3

8.3

13.2

8.4

5.9

Budget surplus or deficit (% GDP)1

–3.4

–5.3

–7.0

–8.0

–5.2

–1.0

–0.9

0.0

Unemployment rate (annual average, %)2

13.0

8.6

7.3

6.6

6.3

12.2

11.0

9.4

–0.213 –0.750 –0.799 –1.225 –0.169 –0.675 –1.093

–0.596

Balance of payments (current account, $

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billion) Foreign direct investment (net, $ billion)

0.964

1.137

1.320

1.143

1.584

1.278

2.796

2.138

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, Kazakhstan Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe. Note: 1 General government balance: includes the state, municipalities and extra-budgetary funds; the government balance includes quasi-fiscal operations (zero after 1995); the balance excludes privatization revenues and transfers to the National Fund (EBRD) 2 EBRD figures. The United Nations Economic Committee for Europe figures for registered unemployment (year end) were as follows: 1995, 2.1 per cent; 1996, 4.1 per cent; 1997, 3.9 per cent; 1998, 3.7 per cent; 1999, 3.9 per cent; 2000, 3.7 per cent; 2001, 2.8 per cent

‘Kazakhstan has been fairly successful in attracting FDI compared with other CIS countries.’ According to the state development agency, $7.854 billion were invested in the period 1993–8. The USA accounted for 29.3 per cent of the total, South Korea for 19.9 per cent and the UK for 13.5 per cent. Oil and gas accounted for 47.9 per cent of the total and non-ferrous metallurgy for 24.3 per cent (KET, Quarterly Issue, April–June 1999, p. 18). The Tengiz oil field was to be developed under a joint venture with Chevron (with a 50 per cent stake) and Mobil (which bought a 25 per cent stake on 3 May 1996, reducing Kazakhstan’s share to a quarter). In January 1997 Chevron reduced its share to 45 per cent, having sold 5 per cent to Lukoil. On 27 April 1996 a protocol was signed on the building of a pipeline to transport the oil to the Russian port of Novorossiisk on the Black Sea. The original (1992) Caspian Pipeline Consortium founders (Russia, Kazakhstan and Oman) were to have their combined share reduced to 50 per cent, 24 per cent, 19 per cent and 7 per cent respectively (Oman’s original share being 25 per cent). The remaining 50 per cent was to be divided among eight oil companies/joint ventures as follows: Chevron, 15 per cent; Mobil, 7.5 per cent; Oryx Energy, 1.75 per cent; Lukarco (a joint venture between Lukoil and Atlantic Richfield), 12.5 per cent; Rosneft-Shell, 7.5 per cent; Agip of Italy, 2 per cent; British Gas, 2 per cent; Kazakhoil-Amoco, 1.75 per cent. A formal signing ceremony was held on 6 December 1996. On 16 May 1997 Russia, Kazakhstan and Oman signed an agreement with the eight oil companies/joint ventures as regards their financing of the pipeline. The final go-ahead was given on 24 November 1998. (‘Chevron buys a further 5 per cent of the shares in TengizChevroil… Currently, the shareholders are Chevron Overseas with a share of 50 per cent, Exxon Mobile, 25 per cent, Kazakhoil, 20 per cent, and Lukarco, 5 per cent: KET, Monthly Update, May 2000, p. 3) In June 1997 the China National Petroleum Corporation signed a $4.3 billion contract to exploit three separate oil fields in Kazakhstan over the following twenty years. On 25 September 1997 China signed a $9.5 billion contract, giving the CNPC the right to exploit the Ozen oil field in south-west Kazakhstan and to build a pipeline into China

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(IHT, 26 September 1997, p. 13). President Nazarbayev is quoted as saying that ‘this year much of our economic legislation has been modified. Foreign companies now have the same rights as local investors to purchase land, factory buildings and capital equipment and also to repatriate profits’ (IHT, 16 December 1995, p. 13). Most foreign investment proposals must be registered with the relevant authorities and may require government approval. Profits are freely convertible and may be freely repatriated. Foreigners may, subject to restrictions, own or lease land (EBRD 1996b:157). The law on free-trade areas was introduced in January 1996. No customs would be levied and tax benefits could be granted (KET, Third Quarter 1996, p. 48). In August 1996 a free-trade area was established within the administrative territory of Lisatovsk City for the period up to 2010 (p. 54). In September 1996 two additional free-trade areas were established (p. 56). In June 1997 a Belgian company became the owner of the gas transportation networks in the south and west, the most important feature of the deal being the right to control the transportation of gas from Turkmenistan to Kazakhstan. The Chinese National Oil and Gas Company acquired 60 per cent of the joint stock company Aktubinskneft, the Chinese side being obliged to build a 3,000 km long oil pipeline from Aktubinsk in Kazakhstan to Xinjiang in China (KET, Second Quarter 1997, p. 70). ‘[April 1999] In order to protect domestic producers and to restrict unfair competition, three of the four special economic zones are abolished: those of Lisakovsk, Kyzylorda and Zhairem-Atasui (KET, Quarterly Issue, January–March 1999, p. 89). The mining sector in 1999 accounted for a third of exports, almost as much as fuel and oil products. Nevertheless, foreign investment in the sector… was a fraction of inflows into oil and gas. During earlier periods many companies acquired licences under non-transparent conditions and allegations of transfer pricing and corruption have since plagued the sector. Attempts at attracting new strategic investors have been stymied by onerous tax treatment, the lack of public availability of necessary geological survey data and the apparent reluctance of the government to offer mineral deposits for open international tenders. (EBRD 2000b:175) Kazakhstan has the highest stock of foreign investment per head in the CIS … Yet the investment climate remains unfriendly in many ways. In July [2000] the government renationalized an oil refinery owned by CCL Oil, a US investor, after lobbying from local competitors… Belgian utility Tractebel has pulled out of the country because artificial price caps make it impossible to turn a profit. (Business Central Europe 2000:45) TotalFinaElf SA agreed [on 2 February 2001] to pay about $400 million in cash and assets for BP Amoco plc’s 9.5 per cent stake in…the Kashagan oil field… raising Total’s stake to 25 per cent… The sale confirms BP’s strategy to quit projects where it cannot exercise control. Earlier this week BP sold its 7 per cent

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stake in OAO Lukoil Holding. (FT, 3 February 2001, p. 13) BP made clear that it was quitting…the Caspian Sea’s Kashagan oil field … thought to be one of the most significant recent finds…because it stood no chance of being selected as sole project operator from among the nine members of the Offshore Kazakhstan International Operating Company (OKIOC). (FT, 3 February 2001, p. 21) A consortium of international oil companies chose Agip SpA of Italy on Monday [12 February] to be sole operator of…the Kashagan field… The Kazakh government has sold its stake in the consortium… Statoil said Monday that it had agreed to sell its 4.76 per cent stake to TotalFinaElf. BP Amoco also recently announced that it had agreed to sell its 9.5 per cent stake in the project to TotalFinaElf. The purchase of Statoil’s interest would make Total the biggest shareholder in the Kashagan field, with 28.6 per cent… Under a shareholder agreement, each partner has right of first refusal on its share of any stake that comes on the market. (IHT, 13 February 2001, p. 15) ‘The Kashagan field…appears…[to be] the world’s fifth-largest’ (IHT, 12 March 2001, p. 11). Last week the governments of Azerbaijan, Georgia, Kazakhstan and Turkey signed a memorandum of understanding in… Astana on a proposed 1,739kilometre (1,075-mile) pipeline, to run from… Baku via … Tbilisi to Turkey’s Mediterranean port of Ceyhan… The document itself was far from a final agreement… But it was an indicator of the growing momentum of American plans for a pipeline bypassing both Russia and Iran…[It was] once on the verge of collapse…[One factor] has been the discovery of oil in the Kazakh sector of the Caspian Sea last summer [2000]… It is the world’s largest oil find in thirty years. (The Economist, 10 March 2001, p. 84) Oil began flowing into the first major export pipeline linking Kazakhstan’s Caspian oil fields to world markets as prime minister Kasymzhomart Tokayev opened a valve at a ceremony [on 26 March]… The 1,460-kilometre (910-mile) pipeline [runs] from the Tengiz field to the Russian port of Novorossiisk on the Black Sea… Chevron…has a 15 per cent stake in the pipeline consortium… Others with stakes in the pipeline are the Russian government with 24 per cent, the Kazakh government with 19 per cent and Lukarco—a venture of the Russian oil company Lukoil…and a unit of BP Amoco—with 12.5 per cent. (IHT, 28 March 2001, p. 20) [In April 2002 the minister of state revenues announced that] the government

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planned to revise the tax terms in some of the long-term contracts with foreign investors…[He said these were] designed strictly to offset the benefits investors had received as the government had implemented tax changes that had resulted in higher profits… Foreign investors warned that making changes in long-term contracts, some of which have a lifespan of twenty-five years or more, would send a worrisome message to potential future investors… Investors say the new [investment] law would inhibit their right to appeal to international arbitration. IHT, Survey, 24 April 2002, p. 24) In 2001 total net foreign investment was about $2.8 billion, or 2.2 times that of the previous year… The oil and gas sectors received most of the FDI (74 per cent) followed by mining (10 per cent), manufacturing (7 per cent) and pipeline transportation (3 per cent). (p. 19) A Kazakh court has fined a consortium led by ChevronTexaco $70 million for environmental violations as it sought to develop a potentially vast oil field in the west of the country. Analysts said the fine was another sign that relations between the government and Western oil companies have deteriorated. The consortium, TengizChevroil, recently decided to delay indefinitely a planned expansion that would have doubled production from the Tengiz oil field. (FEER, 12 December 2002, p. 13) Kazakhstan officials say they have reached agreement with TengizChevroil, a multi-billion-dollar consortium led by the US oil group ChevronTexaco, in a dispute that had halted $3 billion expansion plan… The energy minister said a compromise had been reached which would allow the consortium to go forward with its second stage of development in the Tengiz oil field in western Kazakhstan… A spokesperson for the TCO consortium, however, said terms were still being discussed among consortium partners. (FT, 10 December 2002, p. 13) A consortium led by ChevronTexaco Corp. said Thursday [14 November 2002] that it was calling off a $3 billion expansion of production at the Tengiz oil field… The official announcement cited an inability among the partners to agree on financing. But people close to the negotiations and analysts…said Friday that the problem was the Kazakhstan government’s escalating efforts to rewrite its 1993 agreement with the consortium to develop the field… The TengizChevroil consortium has disagreed with the government in the past. An argument over tax payments was resolved last year [2001]. A $73 million fine imposed for storing sulphur near the field is being disputed in local courts… The friction with the government began after the discovery of a huge reserve called Kashagan in the Kazakh portion of the Caspian Sea. Since then, analysts say, the Kazakh government has been trying to reopen the oil development agreements that it signed in the early 1990s to get better terms… The government has drafted

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legislation that would toughen conditions for foreign investors, including removing a clause in current law that specified tax and royalty rates for years into the future. (IHT, 18 November 2002, p. 11) A consortium…halted a long-planned $3.5 billion expansion at the largest oil development project in Kazakhstan in a standoff with the government over the terms of the contract… The consortium, which is known as TengizChevroil and which also includes ExxonMobil, Lukarco of Russia and a Kazakh company, Kaz-Munaigaz, suspended a long-planned expansion of the project when the government insisted on an accounting method that would have brought in more for state coffers but was not, the consortium contended, part of the 1993 contract… Signs of tougher conditions began to appear more than a year ago when the government drafted a law to level the playing field between foreign and local investors that critics say worsens conditions for foreigners… Kazakh officials said the dispute with the consortium has been resolved, though the oil industry group has said that is not so… Despite all the difficulties foreign companies are showing no signs of abandoning the rich reserves…in Kazakhstan. (IHT, 4 January 2003, p. 9) ‘The disagreement arose in November [2002] when the consortium’s Western companies sought to finance a $3.5 billion expansion…with oil revenue. Kazakhstan protested, saying the move would bite into tax receipts’ (IHT, 28 January 2003, p. 11). ‘TengizChevroil…is set to embark on a $3 billion second phase of development after government and foreign oil officials reached agreement over the weekend [25 January]’ (FT, 27 January 2003, p. 5). Last autumn [2002] the Western partners proposed financing the expansion out of reinvested profits, which, according to their PSA [production-sharing agreement] depreciation schedule, would not be taxed. The Kazakh government…said this was out of the question…telling the Western companies they should fund Tengiz expansion with commercial loans… In January [2003] a compromise was reached. The Western companies did not appear to give way on the principle of depreciation, but agreed to compensate the Kazakh Treasury by paying an extra $600 million over the 2003–2005 period. But they also agreed to carry Kaz-Munaigaz’s share of Tengiz expansion by raising commercial loans. In addition, ChevronTexaco agreed to pay the Kazakhs the $210 million it owed for its 1993 purchase of Tengiz assets. (FT, Survey, 29 April 2003, p. v) Under the terms of the agreement the consortium will pay $810 million to the Kazakh government, of which $600 million is tax payments to be paid in instalments through 2005. In addition, the consortium will take a loan to finance the Kazakh government’s portion of the expansion, according to Kaz-Munaigaz,

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Kazakhstan’s national oil company. (IHT, 28 January 2003, p. 11) At issue was an investment write-off provision allowing the company to avoid some $600 million in taxes. In the settlement the company agreed to give the government $600 million. The company calls the money a loan, which is technically true. But analysts say the settlement is conspicuously silent on the tax issue and some Kazakhstan officials call the deal a triumph for the country. Foreign investors have grumbled about Kazakhstan efforts to change oil contracts and some analysts say the ChevronTexaco settlement will embolden it further. (FEER, 13 February 2003, p. 8) In June 2002 the government passed a new law on investment, replacing the 1994 foreign investment law. The new legislation makes investment incentives available to both domestic and foreign firms and partially abolishes the earlier protection of foreign investors against legislative changes. Major obstacles to investment…[continue to be] bureaucratic harassment and corruption. (EBRD 2002b:163) CNOOC Ltd…the publicly traded subsidiary of the state-owned China National Offshore Oil Corporation…said Friday [7 March 2003] that it would buy a $615 million stake in a vast oil field in the Caspian Sea…one-twelfth, or 8.33 per cent, of the North Caspian Sea Project… ENI SpA of Italy is the operator [of the project], while Exxon Mobil Corporation, Royal Dutch/Shell Group, TotalFinaElf SA, ConocoPhillips and Impex Corporation all have large stakes… Chinese National Petroleum Corporation purchased two oil fields in west-central Kazakhstan in 1997, with the goal of piping oil over the Tian Shan mountain range to China. But reserves in those fields proved too small to make the pipeline economical. (IHT, 8 March 2003, p. 16) A second China state-owned enterprise agreed Tuesday [11 March] to buy a stake in a huge oil field in the Caspian Sea… Sinopec Group announced a deal identical to CNOOC Ltd’s transaction. Each company will spend $615 million to buy a twelfth, or 8.33 per cent, of the North Caspian Sea Project from BG Group of Britain… With the CNOOC and Sinopec deals BG is selling its onesixth stake in the field… The Sinopec and CNOOC purchases are China’s largest efforts so far to limit its fast-growing depen-dence on oil from the Gulf… CNOOC is China’s offshore oil company and Sinopec is mainly an oil refiner and petrochemical producer that also operates gasoline stations in China. (IHT, 12 March 2003, p. 12) Kazakhstan authorities…have confronted Agip Kazakhstan North Caspian Operating Company (Agip KCO), which was set up by seven international oil

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and gas companies to develop the Kashagan field in the Caspian Sea… But Agip KCO…could face much higher operating costs than expected. At issue is a government decree passed in February [2003]… [which] revokes Agip’s exclusion from 16 per cent to 20 per cent value-added taxes on field development, such as drilling, according to a translation. And it is retroactive to the beginning of exploration in 1999… Agip’s dispute is bound to become more vocal if it is not settled soon. (FEER, 1 May 2003, pp. 10–11) (‘Middle Eastern oil…accounts for 60 per cent of China’s imports’: FT, 12 March 2003, p. 18. ‘BG’s partners…[have] rights of first refusal and buy the stake themselves… Consortium rules give participants sixty days to match any offer from an outside party’: IHT, 2 April 2003, p. 18. The shareholders in the project…[have exercised] their right to buy for themselves the 8.33 per cent stake offered to CNOOC by the UK’s BG International… Project shareholders …are also expected to preempt a bid for a matching 8.33 per cent…by Sinopec’: FT, 13 May 2003, p. 33.) Agriculture Nikonov (1992:1161) said that private land ownership was then not legally recognized in Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan (see the country profiles for more recent developments). These states never had private ownership of land. The land was allotted to extended families and they were nomads within the boundaries of the area owned by their tribe. The transition to settled life was completed in the 1920s. Lifelong possession of land with the right to inherit is recognized in law. Note that the previous nomadic way of life makes privatization more difficult than usual. An Itar-Tass report of mid-December 1994 said that the prime minister was to propose legislation allowing individuals to own land (Business Europa, February–March 1995, p. 32). (See the entry for 11 March 1995.) By the end of 1992 there were 8,500 private farms, with an average size of 400 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for only 1.72 per cent of total agricultural land (United Nations Economic Commission for Europe 1993:206). As of 1 April 1993 there were 11,100 private farms, with an average size of 531 ha. More than 20 per cent of the collective and state farms and interfarm and other agricultural production enterprises have been privatized. Almost 800 collective enterprises (including thirtyseven joint stock companies), about 100 agricultural co-operatives, 400 small enterprises and 800 private farms have been formed in their place (CDSP, 1993, vol. XLV, no. 21, p. 20). Private farms and plots account for 35–70 per cent of the major agricultural outputs (EBRD 1994:26). The privatization scheme has been extended to the agricultural sector on a (non-tradable) lease basis, since private land ownership is prohibited (EBRD 1995a:17). By the end of 1994 over 1,450 state farms (about 66 per cent of the total) had been privatized or were undergoing privatization. This has involved providing farm workers with long-term leases to land and then distributing shares in non-farm assets to

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those with land rights (EBRD 1995b:45). In June 1994 compulsory grain deliveries were terminated. By the summer of 1996 about 90 per cent of all farms and about 80 per cent of the farmland had been privatized. Privatization has involved providing farm workers with long-term leases and buy-out options to land and then distributing shares in non-land farm assets to those with land rights. Farm privatization has often led to co-operative ownership structures. Land reform suffers from a lack of clarity as to the rights applicable to different types of agricultural land. While farmland appears to be almost completely privatized, restructuring has been slow. Co-operative farm ownership coupled with monopoly holdings in ‘agribusiness’ still dominate this sector (EBRD 1996b:156). The Kazakh leadership supports private land ownership. The draft constitution containing the clause was to be circulated for discussion (CDSP, 1995, vol. XLVII, no. 27, p. 21). On 26 December 1995 Nazarbayev issued a decree entitled ‘On Land’ that had the force of law, legislatively establishing for the first time the right to private ownership of land (although parliament has to ratify it). About a year before that a presidential decree introduced the institution of long-term leasing of land (for up to ninety-nine years), with the right to sell and bequeath it. The December 1995 decree stipulated the following: (1) land could be transferred to private ownership (i.e. possession, use and disposal) only if it is earmarked for one of two purposes—for personal, dacha and garden plots or for the construction of residential buildings, facilities and complexes; (2) land may not be used for purposes other than those for which it is earmarked (CDSP, 1996, vol. XLVIII, no. 2, p. 26). The law on private ownership of land was introduced in December 1995. Selling prices for agriculturally productive land would be subject to restrictions. In June 1996 the government defined the procedures for the transfer of land ownership and granting of rights for the use of land. Land could be given to state enterprises, some private legal entities and citizens free of charge (KET, Third Quarter 1996, pp. 47, 53). As of 1 September 1997 only 6.3 per cent of large agricultural enterprises remained state-owned, while 93.7 per cent were either private or corporate enterprises. The figure for state ownership in medium-sized enterprises was 16.9 per cent and that in small enterprises 1.9 per cent (KET, Quarterly Issue, July–September 1997, pp. 144–6). In 1998 agriculture employed around 18 per cent of the labour force. Of the 52,700 agricultural units in existence at the beginning of 1997, 84.4 per cent were peasant farms. Of these, nearly 75 per cent were smallholdings employing up to five people, with the remainder employing up to twenty-five. Peasant farms account for less than 5 per cent of grain production but for 75 per cent of meat, 86 per cent of milk and 47 per cent of eggs. In 1998 the shares taken by peasant farms (plus households) in potatoes and vegetables were 87 per cent and 76 per cent respectively. ‘Peasant farms have proved to be generally inefficient. Their rapid growth in number has not been matched by their share of overall agricultural production. For example, North Kazakhstan’s 11,600 peasant farms have 6.7 per cent of the area’s total agricultural land, 7.5 per cent of its arable area and 4.9 per cent of livestock, but account for 4.0 per cent of agricultural production. The formal reform of property did not lead to the restructuring of enterprises. For example, in many joint stock ventures the shares were not produced, and in co-operatives the principles of co-operation were not implemented’ (KET, Quarterly Issue, April–June 1999, p. 38).

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After political resistance forced the government to reconsider a draft new law in 1999, the revised draft no longer provides for the possibility of full private ownership over agricultural land. While the existing ninety-nine-year long-term leases are transferable and can be used as collateral, with low land values and remaining legal uncertainty, a rural land market has failed to develop. (EBRD 2000b:174) Land reform is back on the political agenda. The new draft land code provides for private, tradable land titles, although individual holdings would initially be restricted in size and owners would not be able to resell land for five years. Foreigners would remain excluded from private land ownership. (EBRD 2002b:162) ‘In… Kazakhstan only private ownership of household plots is allowed’ (Mancours and Swinnen 2002:377). The share of peasant farms in agricultural land increased from 0.3 per cent in 1992 to 12.9 per cent in 1999 (Spoor and Visser 2001:888). ‘In countries like Uzbekistan (and Kazakhstan) the comparison should be with arable land, as large tracts of agricultural land are desert (or steppe)’ (p. 889). The share of private farms and household plots in agricultural production increased from 32 per cent in 1991 to 73 per cent in 1998. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890). Economic performance Negative GDP growth characterized the period 1992 to 1995, but the picture was not as bad as in some of the other CIS countries as the following figures for Kazakhstan show: – 2.9 per cent in 1992, –9.2 per cent in 1993, –12.6 per cent in 1994 and –8.2 per cent in 1995 (EBRD 2001a:15). GDP growth turned positive in 1996, but was not too impressive until 2000 and thereafter. (See Table 4.1.) Negative growth again made an appearance in 1998. Within the CIS developments in 1999 were dominated first by the Russian crisis, then by the unexpected strength of recovery in Russia and the rise of many commodity prices… The best placed have been countries with large natural resource sectors… In Kazakhstan the oil price recovery and the devaluation of the currency in April 1999 have helped alleviate the negative economic conditions after the Russian crisis. (EBRD 2000a:5–6) GDP in 2001 was an estimated 84 per cent of the level in 1989 (EBRD 2002b:58). There was hyperinflation in the period 1992 to 1994, consumer prices rising by 1,381 per cent in 1992, 1,662 per cent in 1993 and 1,892 per cent in 1994 (EBRD 2000a:61). The inflation rate fell sharply in 1995 and was in single figures in 1998 and 1999. It has

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been estimated that the inflation rate moved into double figures again in 2000 before returning to single figures thereafter.

5 Kyrgyzstan POLITICS The political, demographic and geographical background The name of the country means ‘Land of Forty Girls’, a reference to a group of maidens who supposedly came here from Siberia, settled around Lake Issyk-Kul and founded the forty traditional Kyrgyz clans (IHT, 6 October 1999, p. 2). The population at the end of 1998 was 4.7 million. In 1989 the ethnic composition of the population was as follows: Kyrgyz, 52.4 per cent; Russian, 21.5 per cent; Uzbek, 12.9 per cent; Ukrainian, 2.5 per cent; Tatar, 1.6 per cent; other, 9.1 per cent (Economic Bulletin for Asia and the Pacific, 1991, vol. XLII, nos 1 and 2, p. 2). Ian Pryde (The World Today, November 1992, pp. 208–11) points out that the president, Askar Akayev, has a policy of national harmony (the 4.5 million population comprising 52 per cent Kyrgyz, 21 per cent Russians, 13 per cent Uzbeks and the rest numerous other nationalities). A June 1994 report stated that over the previous four years the number of Russians had decreased by almost 200,000 and so the proportion of ethnic Russians in the population had fallen to 17 per cent (CDSP, 1994, vol. XLVI, no. 24, p. 13). Kyrgyz now comprise 56 per cent of the population (The Economist, 10 September 1994, p. 76). Between 1989 and 1998 the proportion of ethnic Russians in the population fell from 21 per cent to 14.6 per cent. The number of ethnic Germans has fallen from 100,000 in 1989 to 13,000 at present (The Economist, 3 April 1999, p. 70). There were 100,000 ethnic Germans in 1991, but only 11,000 remain. About threequarters of the nearly 4 million ethnic Germans who were living in the Soviet Union in 1991 have moved to Germany (IHT, 12 October 1999, p. 4). A national census (the first in the CIS) was held on 24 March–1 April 1999. The preliminary results showed that the population had risen by 13 per cent over ten years to stand at 4,856,000 (CDSP, 1999, vol. 51, no. 31, p. 13). The situation regarding water resources in Central Asia is getting worse by the day… Nature put all of the water in Kyrgyzstan and Tajikistan, while the water users are concentrated mainly in Uzbekistan and Kazakhstan. The past two years have been unusually dry in Central Asia. [Disputes have arisen.] (CDSP, 2001, vol. 53, no. 34, p. 15)

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Political developments 13 December 1993: the government resigns when prime minister Tursun Chyngyshev is accused of corruption (involving gold mining). 30 January 1994: president Askar Akayev wins a national vote of confidence in his economic reform programme. The referendum turnout was 95.3 per cent and the ‘yes’ vote was 96.3 per cent. President Akayev is reported as saying that the country is doomed by its backwardness to return to Russia’s economic orbit. Kyrgyzstan could not attract ‘serious’ foreign investment and would remain ‘on the sidelines of economic progress’ for at least ten to fifteen years (FT, 13 June 1994, p. 4). 5 September 1994: the government resigns and the president calls an early general election (on 24 December 1994; it will be preceded by a referendum on a constitutional amendment specifying a bicameral government). 22 October 1994: two questions were asked in the referendum, which attracted a turnout of at least 87 per cent: 1 whether changes in the constitution could be decided by referendum. Approved by nearly 75 per cent. 2 whether the present single-chamber parliament of 350 members should be changed to a bicameral parliament of 105 members. One chamber would consist of thirty-five fulltime deputies, while the other would comprise seventy deputies elected on a regional basis and sitting less frequently. Approved by nearly 73 per cent. 5 February 1995: the first round of the general election takes place, for seats in the thirtyfive-member Legislative Assembly and the seventy-member People’s Assembly (which will meet only twice a year). The turnout was variously estimated at 43 per cent and 62 per cent. Some 1,400 candidates took part, mostly independents or ones nominated by various social and workers’ organizations. One estimate was that only about 160 candidates represented viable political parties, while another was that something over 20 per cent of the candidates were members of the twelve registered political parties. Only sixteen candidates gained the required 50 per cent or more of the vote in the first round, leaving eighty-nine seats to be decided in the second round on 19 February (only the top two candidates from the first round competing). After the 19 February round a total of seventy-eight candidates were successful (twenty-eight in the Legislative Assembly and fifty in the People’s Assembly), so at least one more round would be needed. Some concern has been expressed. Some adults had more than one vote; though illegal this was allowed in order to ensure a 50 per cent turnout (Telegraph, 14 February 1995, p. 21). President Akayev has allowed a political opposition, but he has enhanced the power of the presidency in order, it is alleged, to control the economy better and stamp out corruption. The government has genuinely tried to encourage democratic participation, but the political process itself is in chaos, with frequent cabinet changes and intense power struggles within the ruling elite (Ahmed Rashid, FEER, 16 March 1995, p. 24).

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Ian Pryde (The World Today, June 1995, pp. 115–16) states that in the previous parliament there emerged two factions ‘divided less by political orientation than by their attitude to the endemic corruption among official and public figures who had taken advantage of their position and privileges to line their own pockets’. At the time of their election nearly 30 per cent of the new deputies were being investigated for illegal financial dealings. Parliamentary privileges, notably immunity from further investigation and criminal prosecution, gave corrupt businessmen a strong incentive to seek election to parliament…large sums of black money [were spent] in often bitter campaigns, and numerous cases of vote-rigging and outright physical intimidation were reported. (ibid.) The election brought about a crucial change in the balance of power in the country: 1 The Islamic south managed to get many of its own candidates elected, showing that it was no longer prepared to accept traditional northern dominance. 2 The twelve largest parties were able to win only a few seats. 3 The new parliament consists almost entirely of ethnic Kyrgyz, leaving other nationalities with virtually no representation. Pryde is critical of the OSCE observers, who concluded that, despite the massive number of irregularities and violations, the voting had on the whole been free and fair. Pryde also presents in detail the arguments of those who disagree with the generally favourable impression given in the west of the Akayev regime. Huskey (1995:828–9) argues as follows: Akayev began to employ methods of rule in mid-1994 that had more in common with authoritarian than liberal regimes… The reasons for the turn to the right in Kyrgyz politics remain a subject for debate…[Political parties] have not yet succeeded in making the transition from groups of notables to mass-based organizations capable of generating electoral support… The most formidable blocs in the new parliament will include central and local executive officials, as well as directors of factories and business organizations… They are drawn largely from the ranks of the old nomenklatura. 9 February 1995: Kyrgyzstan and the EU sign a ten-year partnership and co-operation deal, to come into force within two months of ratification. Elements include the mutual granting of ‘most favoured nation’ status and the abolition of quantitative trade restrictions. 24 December 1995: the presidential election takes place. Parliament refused to conduct a national referendum on the prolongation of Akayev’s term as president. Akayev responded by declaring a presidential election (Moscow News, 17–23 November 1995, p. 7). The supreme court ruled that three of the six candidates could not run because the local

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election authorities failed to sign the candidates’ lists of signatures. One of the three was one of Akayev’s most serious opponents, Jumgalbek Amanbayev (The Times, 15 December 1995, p. 12). Preliminary estimates of the turnout varied from 73 per cent to 84 per cent. Askar Akayev expected to receive at least 60 per cent of the vote. Absamat Masaliyev also ran. He is a former first secretary of the Central Committee of the Communist Party and chairman of the Supreme Soviet. Medetkan Sherimkulov was also a candidate. He became speaker of parliament in the sovereign state and also used to be a Central Committee secretary. 10 February 1996: a referendum is held on the question of granting the president expanded powers. The turnout is 96.5 per cent and the ‘yes’ vote is 94.5 per cent. The additional powers give the president the right to appoint members of the government without the consent of parliament. Parliament will be able to confirm only the candidate for prime minister and if three proposed candidates are turned down the president has the right to dissolve parliament (CDSP, 1996, vol. XLVIII, no. 6, p. 20). 26 April 1996: a border treaty is signed with Russia, China, Kazakhstan and Tajikistan. 1997: Akayev, the mildest of Central Asian leaders, is resorting to ever harsher measures to juggle the conflicting demands of the small but vocal Russian minority and the strident nationalist opposition. Freedom of speech, until recently exemplary, has been the first casualty… The arrest of opposition figures shows no signs of abating. (Business Central Europe 1997:49) 13 July 1998: the constitutional court rules that Askar Akayev has the right to run in the presidential election in 2000. According to the basic law, the same person can be elected president only twice. Akayev has been elected twice, but the first time was in 1990 when he was elected by parliament under the old (1978) constitution. The second time was under the new constitution in 1995 (CDSP, 1998, vol. 50, no. 28, pp. 17–18). The cornerstone of Mr Akayev’s strategy in 1998 was a referendum which, alongside worthy reforms such as liberalizing land sales, transferred the balance of constitutional power from the elected parliamentary chamber to a standing chamber. It also sharply reduced deputies’ legal immunity. Passed by a whopping majority the proposals allow Mr Akayev to circumvent and manipulate parliamentary opposition, making 1999 legislative elections virtually meaningless… An earlier court decision allowed him to run for a third term. (Business Central Europe 1998:44) 19 July 1998: the wedding takes place in Kyrgyzstan of the son of President Akayev (whose wife is a Kazakh) of Kyrgyzstan and the daughter of President Nazarbayev of Kazakhstan. 23 December 1998: the government is forced to resign by the president owing to

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economic problems (CDSP, 1999, vol. 50, no. 52, p. 17). 5 May 1999: Russia and Kyrgyzstan have reached a decision in principle that Russian border troops will be withdrawn from Kyrgyzstan. Of what was once an operational group of nearly 2,000 border troops, only slightly more than a hundred officers will stay on as advisers (CDSP, 1999, vol. 51, no. 18, p. 16). (The withdrawal of Russia’s border troops from Kyrgyz territory ‘is now virtually complete’: Kommersant, 26 August 1999, p. 4: CDSP, 1999, vol. 51, no. 34, p. 21.) 22 August 1999: gunmen cross the border from Tajikistan, seize several villages in the southern regions of Osh and Batken and take hostage seven people—four Japanese geologists, their interpreter and two Kyrgyz soldiers. (‘Japan is the largest bilateral aid donor… Japan has reportedly offered a ransom in excess of $1 million for the hostages’ (IHT, 19 October 1999, p. 4). ‘The guerrillas who had penetrated into this area from Tajik territory in early August [1999] once again made their presence felt. The core of these units is made up of Uzbek Islamists led by… Juma Namangani’ (CDSP, 1999, vol. 51, no. 34, p. 20). A presidential spokesman…said that the small Central Asian state had only just succeeded in flushing out another armed group that entered the same region in late July [1999], took local officials hostage and released them shortly afterwards. The infiltrators were driven back into Tajikistan late last week by Kyrgyz forces and were said to have suffered losses. Officials in Kyrgyzstan suspect that both bands of kidnappers include members of the Tajik Islamic opposition. (IHT, 24 August 1999, p. 5) ‘The armed men…held four Kyrgyz hostage. The hostages were released on Friday [13 August] and Kyrgyzstan launched a hunt for the kidnappers, who are thought to be of Tajik, Uzbek and Kyrgyz nationality’ (FT, 18 August 1999, p. 6). The region they control is adjacent to eastern Tajikistan and the Ferghana Valley of Uzbekistan, which are considered as bastions of fundamental Islam in the Central Asian region… Gunmen who invaded southern Kyrgyzstan this week have taken control of two more settlements, widening their control in the remote region to five sparsely populated villages. (FT, 26 August 1999, p. 4) Early in August twenty-one armed Islamists crossed into southern Kyrgyzstan from where several of them originally came. When that was refused they took hostage four Kyrgyz officials. reportedly extracting a $100,000 ransom before releasing them. The Uzbek air force bombed the group, as well as their bases in Tajikistan, but to little effect… Now the insurgents, grown to at least 750, control several Kyrgyz villages… Many of the militants, like their leader, Juma Namangani, are Uzbeks from the Ferghana Valley, who fled to Tajikistan during the breakup of the Soviet Union… Mr Namangani’s group has ties with the Islamic Movement of Uzbekistan… In Tajikistan Mr Namangani’s men

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fought alongside the Islamic opposition during the 1992–7 civil war… The Uzbek Islamists, along with those armed Tajik gangs whose interests are illserved by peace [in Tajikistan], have been impelled to seek some safer haven. (The Economist, 4 September 1999, pp. 73–4) The leader is a warlord from Uzbekistan, Juma Namangani, who in the mid1990s fought alongside Islamic rebels in Tajikistan’s civil war, and later with the Taleban in Afghanistan. His force includes Tajiks, Afghans, Arabs and Uzbeks, according to Kyrgyz authorities. Many come from the Ferghana Valley, which straddles three countries and is a hothouse of Islamic fundamentalism… Kyrgyzstan has only a small army and was forced to call upon Russia, Uzbekistan and Kazakhstan for military help. (Ahmed Rashid, FEER, 9 September 1999, p. 28) In mid-August a band of about 1,000 religious fighters marched from their bases in neighbouring Tajikistan…into Kyrgyz territory. Kyrgyzstan is no great military power and President Askar Akayev, a physicist, once even suggested that the army be abolished as a gesture towards world peace… [There is now a] 12,000-man army… Precisely what the insurgents want is unclear. At first they demanded free passage to Uzbekistan, where their leaders said they wanted to launch a holy war… Some foreign diplomats in Bishkek speculate that the militants may have fled Tajikistan to avoid complying with a recent peace accord there… Others believe they staged their action to show their paymasters, said to include Osama bin Laden, the refugee Saudi millionaire, that they are active enough to deserve continued support. (Stephen Kinzer, IHT, 19 October 1999, p. 4) (On 15 August 1999 Tajikistan claimed that Uzbekistan had bombed Tajikistan’s remote northern territory: FT, 17 August 1999, p. 3. On 17 August Uzbekistan said that it may have bombed the area by mistake when its jet fighters strayed over the border while helping Kyrgyzstan flush out a group of armed kidnappers who had crossed from Tajikistan in July: FT, 18 August 1999, p. 6.) 24 August 1999: the defence minister is dismissed. 26 August 1999: Military forces of the Kyrgyz Republic in Central Asia launched an operation Thursday [26 August] aimed at crushing an armed band holding at least twentyfive people hostage… The Kyrgyz defence ministry said a state of emergency had been declared in the southern Batken region… The ministry said planes from Uzbekistan…struck guerrilla positions on Wednesday [25 August]… In Moscow the defence ministry also reported that air strikes were under way against rebel positions. (IHT, 27 August 1999, p. 5) ‘Five days into the kidnapping crisis the identity and demands of the gunmen remain a

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mystery, though Kyrgyz officials believe they are linked to radical Islamic groups in neighbouring Uzbekistan or Tajikistan’ (FT, 27 August 1999, p. 6). 27 August 1999: Kyrgyzstan says that 1,000 gunmen holding hostages are Islamic guerrillas from Uzbekistan. Nine policemen have also been taken hostage (IHT, 28 August 1999, p. 3). 30 August 1999: Kyrgyzstan said Monday [30 August] that jets from neighbouring Uzbekistan had mistakenly attacked a Kyrgyz village and killed three people … Uzbekistan’s air force was supporting Kyrgyzstan’s small and poorly equipped forces in trying to flush out up to 750 guerrillas, hiding with sixteen hostages… The guerrillas are believed to be part of the radical Moslem opposition in Uzbekistan. (IHT, 31 August 1999, p. 5) 2 September 1999: Gunmen holding hostages…released a policeman during the night, bringing to eight the number of captives freed… Up to 750 guerrillas, believed to be part of Uzbekistan’s radical Moslem opposition, are holding several more hostages, including four Japanese geologists and a senior Kyrgyz military official. Reports of how many people were kidnapped vary … The Kyrgyz government says they [the gunmen] appear to be trying to get to Uzbekistan, where they plan a campaign of terror. Their leader is believed to be an Uzbek rebel…who fled his country in 1992 and who is accused by President Islam Karimov of Uzbekistan of trying to assassinate him in a series of bomb blasts in February… A man claiming to represent the Islamic Movement of Uzbekistan…said the group wanted to swap Japanese hostages for its members held in Uzbekistan. (IHT, 3 September 1999, p. 5) 25 October 1999: the last of the hostages seized in August 1999 by Islamic guerrillas in southern Kyrgyzstan are released. Negotiations with the guerrillas, who had returned to Tajik territory with their hostages, were conducted by representatives from Dushanbe [the capital of Tajikistan]. The guerrillas from the Islamic Movement of Uzbekistan were given safe conduct to Afghanistan. The guerrilla leaders sent President Askar Akayev of Kyrgyzstan a message in early October explaining the reasons for their incursion. The Islamists said that their ‘holy war is in no way directed against the Kyrgyz people. The aim is to topple the anti-Moslem Karimov regime’ (CDSP, 1999, vol. 51, no. 43, p. 19). The four Japanese geologists and their interpreter have been released. Japan has denied paying a ransom (FEER, 4 November 1999, p. 17). 20 February 2000: a parliamentary election is held. There are two houses of parliament, the lower house (Legislative Assembly) and the upper house (Assembly of the People’s Representatives). There are sixty deputies in the Legislative Assembly, of which fifteen are allocated on the basis of party lists. There are forty-five deputies in the Assembly of the People’s Representatives.

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‘OSCE expressed concern over a court’s decision this month [February] to ban a political party from the vote on a technicality, reducing the chances that Felix Kulov, the opposition leader, will win a seat’ (IHT, 21 February 2000, p. 8). Three opposition parties were barred from the contest on technicalities. ‘One of them was the Ar-Namys Party, the country’s third largest. It was founded in July 1999 by Felix Kulov, a former mayor of Bishkek, the capital. He is seen as a strong opponent of President Askar Akayev. Mr Kulov resigned last April [1999] after accusing the president of condoning undemocratic practices by government officials. The People’s Party, the largest political group after the Communist Party, was also excluded. Its chairman, Daniyar Usenov, has already declared that he will run against Mr Akayev in the presidential election due next December. Mr Kulov is reckoned to have similar plans. Many think this was the real reason the opposition parties were disqualified. Both opposition leaders were able to compete as independent candidates in singleseat constituencies but, like most of the other candidates who did so, they failed to secure the 50 per cent needed to avoid a run-off. (The Economist, 26 February 2000, p. 95) Kyrgyzstan’s central electoral commission has removed one-third of the previously registered 750 candidates from the race. The commission chairmen… said that some of the candidates who dropped out of the race did so of their own accord… Nevertheless, many candidates believe they were removed from the race for political reasons… Over 150 supporters of the Democratic Movement who had been denied the right to run in the 20 February elections held a demonstration outside Government House… Because of the central electoral commission’s actions and a sharply escalating smear campaign, a number of opposition parties are proposing that the elections be postponed to October… Felix Kulov, leader of the opposition party Ar-Namys, said that Kyrgyzstan was retreating from the democratic principles enshrined in its constitution. For this reason five of the country’s opposition parties have now announced their intention to form a unified bloc of progressive forces. (CDSP, 2000, vol. 52, no. 7, p. 17) [There were] about 600 candidates for the 105 seats in the two houses of parliament, a proportion of which were being contested for the first time by political parties. Of those seats the Communists led with 27 per cent of the vote and the pro-government Union of Democratic Forces came second with 18 per cent. (The Economist, 26 February 2000, p. 95) According to preliminary returns, the following showed the share of vote regarding the fifteen seats allocated by proportional representation: Party of Communists, 27.8 per cent; the centrist Union of Democratic Forces, 18.6 per cent; Democrat Party of Women (led by the president’s wife), 12.7 per cent; Party of Veterans, 8 per cent; the socialist-

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orientated Ata-Meken Party, 6.5 per cent. Only three of the ninety single-seat contest were decided in the first round. ‘Today’s Kyrgyz Communists are very different from their Russian counterparts. They are far more loyal to their president’ (Kommersant, 22 February 2000, p. 9: CDSP, 2000, vol. 52, no. 8, p. 18). The final results of the first round and, in particular, the fate of the fifteenth and final deputy’s seat decided by nationwide [party-list] voting became known only a week before the scheduled second round [on 12 March]. That seat went to…a rightist party known as My Country… The party officially polled 5.01 per cent [there is a 5 per cent threshold]. (CDSP, 2000, vol. 52, no. 10, p. 22) The elections proved highly controversial with victory going to Akayev’s bloc in parliament. Out of twenty-seven parties only nine were allowed to put up candidates, with the opposition communists winning 27 per cent of the vote because of the worsening economic crisis. (FEER, Asia 2001 Yearbook, December 2000, pp. 101–2) 12 March 2000: The second round of parliamentary elections…which took place on Sunday [12 March] ended very awkwardly for the authorities. Observers from OSCE, followed by the US State Department, announced that international democratic norms had been violated… Within Kyrgyzstan itself protests continued… OSCE released a report the day after the elections… [which] said observers had recorded an unprecedented number of violations. The authorities are accused of interfering in the election process, barring political opponents from participating in the elections, intimidating voters and skewing the results… The OSCE observers believe that Felix Kulov, leader of the Ar-Namys (Dignity) Party and a former deputy prime minister of Kyrgyzstan and ex-mayor of Bishkek, was defeated in the second round on account of illegal actions by the authorities. He led all his rivals by a wide margin in the first round… Yesterday’s protest [15 March] was organized by the opposition coalition For Democracy and Free Elections, which is made up of Kyrgyzstan’s democratic movement—ArNamys and the People’s Party, whose leader, Daniyar Usenov, was barred from running in the second round. (CDSP, 2000, vol. 52, no. 11, p. 19) ‘Kyrgyzstan…carried out parliamentary elections US officials called seriously flawed’ (FT, 17 April 2000, p. 6). 22 March 2000: Felix Kulov is arrested. Among other things he is charged with abuse of official position, the instigation and abetting of official fraud and abuse of office for personal gain. Some of those demonstrating in support of Kulov are also arrested. It is reported that Daniyar Usenov (another presidential candidate) has also been arrested (CDSP, 2000, vol. 52, no. 12, p. 20).

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The case against him [Felix Kulov] was dismissed [by a judge] in August for lack of evidence… But last week a military court annulled the acquittal and a retrial may follow… Even if he disentangles himself from the courts he will have to pass a mandatory Kyrgyz language exam [see below] before his candidacy [for the presidency] is accepted. Mr Kulov is a Russian-educated ethnic Kyrgyz with only a limited knowledge of the local language. (The Economist, 16 September 2000, p. 94) The closed military trial of former Kyrgyz vice-president Felix Kulov, which began on 27 June of this year [2000], ended yesterday evening [7 August] in Bishkek…[The] judge found Kulov completely innocent of all the charges brought against him in the indictment. Mr Kulov was arrested on 22 March and charged with abusing his official position as Kyrgyz minister of national security, as well as arranging illegal eavesdropping on conversations of parliamentary deputies. (CDSP, 2000, vol. 52, no. 32, p. 15) ‘Felix Kulov…himself has admitted that his knowledge of the state language is not very good. But he has been studying it actively since before the parliamentary elections… Communist Party candidate Iskhak Masaliyev failed his proficiency test in the state language’ (CDSP, 2000, vol. 52, no. 33, p. 21). Kulov: ‘My knowledge of Kyrgyz is indeed at the C level. That is my own, rather objective assessment’ (CDSP, 2000, vol. 52, no. 32, p. 15). A Kyrgyz military court…has…ruled [on 12 September] to reverse his [Kulov’s] acquittal… The case is to be reheard…by different judges. In addition, Kulov is now under a court-imposed travel restriction. The court made no change in the verdict with respect to the other defendants. (CDSP, 2000 vol. 52, no. 37, p. 16) Felix Kulov…has refused to take a test to assess his knowledge of the state language. At the most recent meeting of the language commission [20 September] he declared that the commission has become a tool for removing from the election race candidates whom the government authorities find objectionable. In Felix Kulov’s opinion…the language barrier has become not only a tool for getting rid of political opponents, but also an obstacle to business careers and participation in government on the part of Kyrgyzstan’s Russianspeaking citizens… Of the eleven hopefuls who filed documents with the central electoral commission only four were certified as candidates. (CDSP, 2000, vol. 52, no. 38, p. 17) ‘In Kyrgyzstan President Askar Akayev is disqualifying his potential opponents in the vote this October [29] by orchestrating trumped up charges against them’ (Cassandra Cavanaugh, IHT, 3 August 2000, p. 8).

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24 May 2000: The Kyrgyz parliament passed a law on the official language of the Kyrgyz Republic… Kyrgyz may be the state language, but Russian has become an official one. The adoption of the Russian language law was initiated by President Askar Akayev and was a good way to launch his campaign for the office of head of state (the election is slated for December). The Russian language helped Akayev win the presidency the last time. On the eve of the 1995 election he sponsored a similar bill in parliament… But the country’s legislators, who had been elected under the Soviet regime, rejected the law. At that point many people in Kyrgyzstan expected a repeat of what happened in September 1989, when the Kyrgyz Republic Supreme Soviet passed a law declaring Kyrgyz the state language. That move triggered panic among the republic’s Russian-speaking inhabitants (representing twenty ethnic groups). Their numbers shrank from 1 million to about 600,000 within a short time… Last week Akayev established an interdepartmental commission to stabilize migration trends. The plan is to achieve such stabilization in part by improving Russian language instruction and increasing support for Russian cultural centres. (Kommersant, 25 May 2000, p. 11: CDSP, 2000, vol. 52, no. 21, p. 23) The Legislative Assembly of the Kyrgyz parliament has sent [9 January 2001] the new law ‘On the State Language’, which was supposed to take effect in 2001, back for revision… The deputies voted down an article mandating Kyrgyz language-testing for all officials and employees of government agencies. (CDSP, 2001, vol. 53, no. 2, p. 16) 5 July 2000: The Kyrgyz central electoral commission is introducing [language] testing for presidential candidates… Experts see the introduction of yet another barrier as part of an effort by the authorities to keep candidates they perceive as dubious out of the running. It is well known, for instance, that the chief opposition figure, retired general Felix Kulov, has a very uncertain grasp of the state language… The central electoral commission also recalled one other requirement for presidential candidates. As of election day all of them must have resided in Kyrgyzstan for at least fifteen years. A number of statements suggest that this requirement will be imposed even on candidates who have resided for certain periods outside the country while serving in an official capacity, such as ambassadors. This category would include many of today’s most threatening rivals to the incumbent president [Askar Akayev]—the worldfamous writer Chingiz Aitmatov, ex-speaker of parliament Medetkan Sherimkulov and film director Bolot Shamshiyev. (CDSP, 2000, vol. 52, no. 27, p. 16)

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8 August 2000: ‘According to Uzbek intelligence, the militants now fighting in southern Uzbekistan underwent special training in camps in Afghanistan. Then, in small groups, they slipped into Tajikistan along mountain trails’ (CDSP, 2000, vol. 52, no. 32, p. 14). 11 August 2000: there are clashes between Kyrgyz troops and Islamic militants trying to cross the border with Tajikistan in order to get to Uzbekistan. The fighting continued, both in Kyrgyzstan and Uzbekistan. The three countries agreed to co-operate in countering the militants (Telegraph, 14 August 2000, p. 10; IHT, 16 August 2000, p. 6; Guardian, 16 August 2000, p. 15; FT, 17 August 2000, p. 10; CDSP, 2000, vol. 52, no. 33, p. 19). ‘The militants belong to the extremist Islamic Movement of Uzbekistan, which has its headquarters in the Taleban-controlled areas of Afghanistan. The militants’ ultimate destination is Uzbekistan’s Ferghana Valley’ (CDSP, 2000, vol. 52, no. 33, p. 19). On 11 August…a group of [Islamic] rebels crossed from Tajikistan into… southern Kyrgyzstan… In response to the latest fighting the presidents of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, along with the chairman of Russia’s security council, held a special meeting in the Kyrgyz capital, Bishkek, on 20 August. They pledged to work together… The rebels are widely believed to be Islamic fundamentalists. They are thought to be led by Juma Namangani, the radical leader of the Islamic Movement of Uzbekistan. His organization wants to create an Islamic state in the Ferghana Valley, an area where the twisting borders of Kyrgyzstan, Tajikistan and Uzbekistan meet. (The Economist, 26 August 2000, p. 62) ‘The Islamic Movement of Uzbekistan…appears to be based in Tajikistan or possibly Afghanistan. Its goal is to create a state based on Sharia (Islamic law) in Uzbekistan and the Ferghana Valley’ (FT, 26 September 2000, p. 15). Guerrillas operating from bases in Tajikistan have staged several incursions into the remote mountainous region bordering Kyrgyzstan and Uzbekistan … The Uzbek government says the attacks are organized by the Islamic Movement of Uzbekistan, which it says infiltrated the Ferghana Valley from Tajikistan and Afghanistan… The presidents of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan met on 20 August and issued a statement vowing that ‘terrorist actions will be crushed using the most decisive measures’. President Nursultan Nazarbayev of Kazakhstan has asked for broad new powers to curb religious extremists. The Uzbek government said the guerrillas included fighters from other countries in addition to Tajikistan and Afghanistan and that they had modern arms and communication equipment and good financing. The evidence is strong that the insurgents are Islamic militants trained and armed in Afghanistan, say Kazakh officials and Western diplomats. Some officials said the rebels wanted to create havoc to keep the borders open for the heroin flow, which the authorities said was increasing. Other officials speculated that the intent was to spread Islamic fundamentalism… The first substantial battle was reported in early August. Government officials in Uzbekistan said guerrillas

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from Tajikistan had clashed with troops… Officials in Kyrgyzstan said in August that militants had entered the country and engaged in a pitched battle with government troops… Since then there have been sporadic clashes… Kazakhstan joined its neighbours in sending military reinforcements to the borders in the region. (IHT, 7 September 2000, p. 2) The militants serving in Namangani’s detachment believe in all sincerity that they are fighting to recreate an Islamic caliphate in Central Asia… But without heroin money they scarcely would have been able to fight government troops for years or upgrade their equipment and weapons every year. (Vremya MN, 18 August 2000, pp. 1, 3: CDSP, 2000, vol. 52, no. 33, p. 20) Uzbekistan has asked Russia for military and technical help (The Times, 30 August 2000, p. 15). [Details have been given] about the early September delivery of Chinese military aid to Uzbekistan to fight Islamic extremists. The $365,000-worth of equipment flown into the Uzbek capital, Tashkent, by Chinese aircraft… represents the first confirmed Chinese military aid to a Central Asian state. Tashkent’s request came as its security forces battle small groups of rebels from the Islamic Movement of Uzbekistan…[which] has also sent guerrilla units to Tajikistan and Kyrgyzstan. (FEER, 21 September 2000, p. 10) ‘Kyrgyz and Uzbek officials accuse Tajikistan of allowing the militants to slip across the borders, a claim the Tajiks deny’ (FT, 26 September 2000, p. 15). (Note also the point that the Tajik government is unable to control certain areas.) 29 August 2000: it is reported that Uzbekistan has asked Russia for ‘military-technical assistance’. This involves deliveries of arms and equipment and visits by specialists who can train personnel in their use… ‘Military aid’, which would entail the dispatching of a military contingent…has not been requested or offered… Moscow offered military-technical assistance to Tashkent immediately after the guerrillas from the Islamic Movement of Uzbekistan invaded the republic in early August. (CDSP, 2000, vol. 52, no. 35, p. 18) 27 September 2000: President Islam Karimov of Uzbekistan ends a visit to Kyrgyzstan by signing a bilateral agreement on military and military-technical assistance. ‘The agreement envisions joint operations against guerrilla units and extensive exchanges of information and intelligence data…[President Askar Akayev of Kyrgyzstan] noted that prior to this the republic [Kyrgyzstan] had such an agreement only with Russia’ (CDSP, 2000, vol. 52, no. 39, p. 18). 29 October 2000: President Askar Akayev is re-elected, winning 74.5 per cent of the

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vote. Omurbek Tekebayev came second with 13.5 per cent of the vote. He is deputy speaker of the legislative assembly and leader of the Ata-Meken (Fatherland) Socialist Party. Almazbek Atambayev (a businessman) came third with just over 6 per cent. ‘None of the other [three] presidential candidates garnered even 1 per cent of the vote’ (CDSP, 2000, vol. 52, no. 44, p. 17). ‘The opposition charged fraud and international observers called the vote undemocratic’ (IHT, 31 October 2000, p. 4). OSCE, which monitored the election, said the Kyrgyz presidential election failed to comply with its standards for democratic elections, condemning the process in even harsher terms than it used for the country’s dubious parliamentary elections in February and March. The registration of candidates was restrictive and excluded prominent candidates; local and regional authorities interfered in the election process, and media coverage was extremely biased in favour of the incumbent, OSCE said… The creation of a special commission in June charged with testing the candidates’ knowledge of the Kyrgyz language as a prerequisite for being registered turned out to be a helpful tool to get rid of inconvenient opponents… Most people in Kyrgyzstan still speak mainly Russian. But even seasoned Kyrgyz speakers were tripped up by the arbitrary judgements of the commission. As a result, seven potential candidates failed the language exam. Mr Akayev’s strongest rival, Felix Kulov, declined to take the test and was barred from standing. Even those who passed then found it pretty much impossible to get their message across. The European Institute for Media found that Kyrgyzstan’s television stations devoted 90 per cent and print media 70 per cent of their election coverage to [Askar Akayev]. (The Economist, 4 November 2000, p. 105) (‘In January [2001]… Felix Kulov…was sentenced to seven years for abuse of office after a private trial by a military court. He had been acquitted of the same charges in August 2000’: IHT, 21 February 2001, p. 7. The Bishkek garrison military court yesterday [22 January 2001] convicted Felix Kulov, former vice-president and minister of national security and now leader of the opposition party Ar-Namys…[He was sentenced] to seven years’ incarceration in an intensified-regime penal colony, with confiscation of his property and forfeiture of the rank of lieutenant general… Mr Kulov had been charged with illegally conferring a military rank on a subordinate, failing to register special equipment and unlawfully entering the office of a deputy to the republic’s Legislative Assembly… Kulov was arrested on 22 March 2000… He was acquitted by a military court on 7 August 2000 and released. On 11 September, however, the military court collegium ordered that the case be retried’: CDSP, 2001, vol. 53, no. 4, pp. 18–19.) 5 January 2001: Islamic Uzbek warlord Juma Namangani has returned from his northern Afghanistan base to prepare for a fresh offensive in Central Asia’s Ferghana Valley, prompting regional leaders to hold an emergency meeting. Namangani,

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military commander of the Islamic Movement of Uzbekistan, or IMU, crossed the Amu River into Tajikistan in late December [2000] with a force of 300 fighters… He set up camp at Tavildera, over which the Tajik government has no control. The officials say Namangani, who fought the armies of Uzbekistan, Tajikistan and Kyrgyzstan in 1999 and 2000, is preparing to launch a third bid to take Ferghana, which straddles Uzbekistan, Tajikistan and Kyrgyzstan. Namangani’s return signals the failure of recent talks between Afghanistan’s ruling Taleban and the Uzbek regime, which wanted the IMU to be turfed out of Afghanistan. His arrival in Tajikistan apparently prompted an emergency meeting on 5 January of the presidents of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan in the Kazakh capital Almaty… China has meanwhile provided Kyrgyzstan with three cargo planes full of military equipment. (FEER, 18 January 2001, p. 10) (‘Most analysts say that at its peak the movement had about 1,500 guerrillas’: IHT, 10 October 2002, p. 2.) 27 April 2001: The states that are party to the Collective Security Treaty (CST) have officially confirmed their intention to create a joint ‘mini-army’ this summer [2001]. At a meeting of CST countries’ security council secretaries that ended Friday [27 April] in Yerevan, final agreement was reached on the political aspects of establishing a Collective Rapid Deployment Force (CRDF) in the Central Asian region. The idea is to organize a coalition expeditionary corps with a total strength of 1,500 to 1,700 servicemen…to carry out counter-terrorist cooperations in Central Asia… The presidents of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan, the parties to the CST, will have to sign the CRDF agreement at a summit scheduled for 26–7 May. (CDSP, 2001, vol. 53, no. 18, p. 6) (‘The Collective Security Council of the Collective Security Treaty member states held a jubilee session yesterday [14 May 2002] in Moscow on the occasion of the treaty’s tenth anniversary. At the session the presidents of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan adopted a decision to form an international politico-military organization based on the treaty… The outcome was a decision to form an international regional structure known as the Collective Security Treaty Organization…[It] is supposed to acquire a charter by the end of the year… A single military command will also be formed… It would be premature, however, to talk about the imminent formation of a fullfledged politico-military alliance… Uzbekistan…[withdrew] from the Collective Security Treaty in 1999’: CDSP, 2002, vol. 54, no. 20, pp. 6–7.) May 2001: Islamic Movement of Uzbekistan fighters have been steadily infiltrating back into Central Asia from Afghanistan in the last two weeks of May and are preparing for another spring—summer assault on the strategic Ferghana

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Valley… In April Juma Namangani constituted a new pan-Central Asia party, Hizb-i-Islami Turkestan, or Islamic Party of Turkestan, which plans to create an Islamic republic out of the five Central Asian states and north-west China’s Xinjiang province. Namangani is said to have large numbers of Uighur Moslem recruits from China in his force. However, the IMU has not announced the creation of a new party. At the end of May Russia and six former Soviet republics agreed to form a rapid deployment force of some 1,500 men which will be based in Kyrgyzstan to counter terrorist threats. (FEER, 7 June 2001, p. 10) The main event of a meeting of the Collective Security Council in Yerevan yesterday [25 May] was the signing of protocols on the creation and composition of a rapid deployment force in Central Asia. The documents apply directly to Russia, Kazakhstan, Tajikistan and Kyrgyzstan. The rapid deployment force may be used in the event that one of these four countries requires assistance in combating extremists… According to unconfirmed official information, the force could consist of approximately 1,500 men… The coordinating staff of the Central Asian force will be located in Bishkek. (CDSP, 2001, vol. 53, no. 21, p. 14) August 2001: President Askar Akayev…[has] signed a pardon for human rights advocate Topchubek Turgunaliyev. Eleven months ago Turgunaliyev was sentenced to sixteen years in prison…later reduced to six years…on charges of attempted assassination of the head of state… The ‘group of conspirators’, as they were called at the time, applied for pardons from the country’s president, and those who received the maximum terms—from fourteen to seventeen years’ incarceration—were released… Turgunaliyev still refuses to admit guilt and denies he was party to any kind of conspiracy… Human rights advocates point out that the republic still has over 100 political prisoners…[including] Felix Kulov, who was once Akayev’s closest associate but later became a steadfast opponent of the president. (CDSP, 2001, vol. 53, no. 34, pp. 16–17) 11 September 2001: there are terrorist attacks on the USA. (For details, see the entry for 11 September in the chapter on Tajikistan.) The Central Asian regimes launched repeated crackdowns against Islamic activities, in which not only militants but also thousands of ordinary practising Moslems were jailed, tortured and sentenced to long prison terms in new gulags set up in remote corners of their countries… The refusal of the leadership to consider democratic or economic reforms, combined with their repression of religion, pushed moderates and political reformers into the camps of the radicals… The Islamic Movement of Uzbekistan has thus become the most

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powerful militant Islamic group operating in Central Asia today. Formed in 1998 by extremists who were determined to topple the government of… Islam Karimov, the IMU launched attacks against the regime from bases in Tajikistan and Afghanistan in 1999, 2000 and 2001… When an American-led military alliance began bombing Taleban and al-Qaeda training camps on 7 October few reports of the defenders mentioned that the man who was reputedly commanding the Taleban forces in Taloqan, in north-eastern Afghanistan, was Juma Namangani, the military leader of the IMU… In November [2001] Northern Alliance soldiers reported that Namangani, a close associate of Osama bin Laden, had been killed in the battles around Mazar-i-Sharif, but his death has not been confirmed. In September 2000 the Clinton administration declared the IMU a terrorist group… The IMU has extended its jihad to the whole of Central Asia… The IMU is still growing. (Ahmed Rashid, Telegraph, 22 January 2002, p. 15) An even more widespread Islamic Movement [than the IMU] is the Hizb-utTahrir al-Islami (the Party of Islamic Liberation) [which] has taken root in Central Asia… The HT has become the most widespread popular underground movement in Uzbekistan, Kyrgyzstan and Tajikistan… The HT… seeks to unite Central Asia, the Xinjiang province in China and, eventually, the entire Islamic world community under a caliphate… A caliph [is a] civil and religious leader… The HT…does not advocate a violent overthrow of Moslem regimes. (Ahmed Rashid, Telegraph, 23 January 2002, p. 19) Hizb-ut-Tahrir was founded in Saudi Arabia and Jordan in 1953 by diaspora Palestinians… But it is in post-Soviet Central Asia that Hizb-ut-Tahrir has really made its mark, growing rapidly since the mid-1990s… The party has a vision of uniting Central Asia, Xinjiang province in China and eventually the entire Islamic world community under a caliphate that would establish the Khilafat-iRashida, which ruled the Arab Moslems for a short time after the Prophet Muhammad’s death in 632… One option, which Central Asian regimes have so far refused to consider, is legalizing Hizb-ut-Tahrir and allowing it to operate as an above-ground political party. The group has never advocated the overthrow of the regimes through violence … But no Central Asian regime except Tajikistan allows any Islamic parties to operate openly… The situation has become worse since…[11 September 2001]…[The] governments [of Uzbekistan and Tajikistan have] intensified their suppression of Hizb-ut-Tahrir, clearly hoping that their new-found alliance with the United States would mean less Western criticism of their crackdown on Islamic groups. (Ahmed Rashid, FEER, 7 March 2002, pp. 42–5) Until recently the international radical Islamic party known as Hizb-ut-Tahrir alIslami, whose goal is to unite all the world’s Moslems in a single caliphate, was also active in the Ferghana Valley… It appears that Islam Karimov has succeeded in suppressing the activity of Islamic radicals in the region.

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December 2001: Both houses of the Kyrgyzstan parliament have finally passed a law giving Russian the status of an official language…[President Akayev] signed the law on 24 December… Almost 70 per cent of the population is able to speak both Kyrgyz and Russian. (Vremya, 11 December 2001, p. 5: CDSP, 2001, vol. 53, no. 50, p. 17) Russian [has] essentially gained equal status with Kyrgyz… For all practical purposes Kyrgyzstan is now a bilingual country. From now on official documents may be drawn up in Russian… Most Kyrgyz (who make up 61 per cent of the population) speak their native language at home…[Ethnic] Russians…accounted for 21.5 per cent of the population in 1989… Today they make up barely 15 per cent…[But] Russians are still widely represented in the republic’s political, business and military elite. Moreover, many Kyrgyz, especially in the capital, prefer to send their children to Russian schools…[In addition] Russian is the language of inter-ethnic communication… For instance, [ethnic] Uzbek, who make up just under 15 per cent of the population, are by no means always willing to learn Kyrgyz. Relations between the two peoples have historically been tense…[There were] bloody Uzbek-Kyrgyz clashes in Osh province… But the Kyrgyz and Uzbeks can freely communicate with each other in Russian without losing face. (Izvestia, 25 December 2001, p. 2: CDSP, 2001, vol. 53, no. 53, p. 17) 7 February 2002: The well-known Kyrgyz economist and human rights advocate Sheraly Nazarkulov…died yesterday [7 February] in Bishkek after a twenty-two-day hunger strike. He began the strike to protest the arrest in early January [5 January 2002] of Azimbek Beknazarov, chairman of the parliamentary committee on legality… Nazarkulov was a member of a non-governmental commission set up to study border demarcation issues and he spoke out against a Kyrgyz-Chinese agreement to turn several tens of thousands of square kilometres of Kyrgyz territory over to China. Beknazarov was arrested for doing the same thing. He was officially charged with a criminal offence, but no one inside or outside the republic has any doubt that he was actually being persecuted for his harsh criticism of President Akayev—he even went so far as to suggest impeachment—for making illegal territorial concessions to China… Besides the late Sheraly Nazarkulov about 400 other people throughout Kyrgyzstan have been fasting in support of Beknazarov. (Vremya Novostei, 8 February 2002, p. 5: CDSP, 2002, vol. 54, no. 6, p. 15) 17–18 March 2002:

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Four protesters died and sixty-one demonstrators and police were hurt in weekend riots in southern Kyrgyzstan…[the] interior minister…calling the unrest an opposition coup attempt…[He] said about 2,000 protesters had gathered…on Sunday [17 March] demanding the release of Azimbek Beknazarov, opposition member and parliamentary deputy. An interior ministry official said 6,000 demonstrators had gathered in one of the villages yesterday evening [18 March], although there were no reports of any fresh incidents… Mr Beknazarov, the cause of the unrest, is in prison, accused of abuses as an investigator in a district prosecutor’s office. (FT, 19 March 2002, p. 14) ‘The disturbances resulted in five deaths’ (CDSP, 2002, vol. 54, no. 13, p. 15). Five people are dead and dozens have been injured as a result of two days of violence this week, the worst in Kyrgyzstan’s ten years of independence. For the first time too the authorities…kept order by firing into the crowd. The demonstrations, involving more than 2,000 people…were over the trial [which started on 12 February] of a member of parliament, Azimbek Beknazarov, who had been charged with abusing his office seven years ago as a regional investigator… Some are suspicious that Mr Beknazarov is really being persecuted for daring to criticize the government for ceding too much territory to China in a border agreement. Others say the underlying reason for the riots was people’s exasperation with corruption and the government’s failure to provide key services. (The Economist, 23 March 2002, p. 71) (‘Tajikistan said it agreed to cede a chunk of its territory to China, days after Kyrgyzstan made a similar handover of land to China. Tajikistan signed a treaty to give 1,000 square kilometres to China. Kyrgyzstan earlier ratified a pact ceding 1,270 square kilometres’: FEER, 30 May 2002, p. 25.) Having been in custody since 5 January… Azimbek Beknazarov was released [on 19 March] after signing a written undertaking not to leave the area… He will continue to stand trial… Parliamentary deputies from the opposition see the bloody conflict in Kerben as proof of the authorities’ utter inability to solve pressing social and political problems. (CDSP, 2002, vol. 54, no. 12, p. 7) ‘The Kyrgyz president…has already announced that he will not be a candidate in the next election in 2004’ (CDSP, 2002, vol. 54, no. 12, p. 7). 8 May 2002: Felix Kulov…will spend not seven years in prison—the sentence he received at last year’s trial—but…ten… A new trial…opened late last year [2001]…

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[Kulov] was charged with ‘entering into a criminal conspiracy’ with…the director of a construction company, and appropriating a large sum of money from the government during his tenure as governor of Chui province in 1993– 7…[Kulov is sentenced to] ‘ten years’ incarceration at a strict-regime institution with confiscation of property…[and] barred from holding senior positions in government bodies for a period of three years after completing his sentence’. (CDSP, 2002, vol. 54, no. 19, p. 13) 10 May 2002: The lower house of parliament…[ratifies] a border demarcation agreement with… China under which Kyrgyzstan will cede 90,000 hectares of land to China… The agreement…[was] signed in 1999… Opposition deputies from the so-called leftist group…walked out of the hall before the voting began. In the opinion of representatives of the Elkomsots deputies’ group, the territories being ceded have never been in dispute and have always belonged to Kyrgyzstan and President Akayev acted illegally in signing the agreement… Protest actions have been held…[Some] 300 to 500 people have taken part in them… Ratification of the agreement…[is to be considered by] the upper house…on 14 May. (CDSP, 2002, vol. 54, no. 19, p. 15) 14 May 2002: The upper house of the Kyrgyz parliament…refused to ratify a decision to cede disputed territory to China… The document has been sent back to the lower house for further work… Large numbers of protest demonstrations…are still going on. The participants are supporters of a number of opposition parties that oppose ceding Kyrgyz territory to China. According to the Kyrgyz deputy internal affairs minister…about 2,500 people in the southern part of the republic have taken part in these demonstrations. He said that some 1,800 demonstrators began blocking highways on Sunday [12 May] and about 300 picketed the government administration building in the district centre of Kerben. In Bishkek approximately 100 people tried to break into the parliament building to convey their demands to the deputies… The demonstrators are demanding the nullification of an agreement…that would cede 30 per cent of a border sector near the Uzengi-Kuush River to China…[An] agreement on demarcation of the border…was signed by President Askar Akayev and Chinese President Jiang Zemin in 1999…[with some] 95,000 hectares of Kyrgyz territory to be ceded to China… The first agreement, ceding 30,000 hectares to China, was signed by President Akayev in 1996…[A] governmental department head…said that until recently in some regions there were no clearly drawn borders, so it makes no sense to say that Kyrgyzstan is giving up any territory to China. (CDSP, 2002, vol. 54, no. 20, p. 16) 16 May 2002:

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[In Bishkek] riot police kicked protesters and dragged them away…on Thursday [16 May]… Opposition activists blockaded the country’s main north—south highway and picketed government buildings all week, voicing anger at what they say are politically motivated charges against… Azimbek Beknazarov. They are also angry over police actions in March in which five people were killed. Those protests marked the worst public violence in the post-Soviet era in Kyrgyzstan. IHT, 17 May 2002, p. 3) Kyrgyzstan faces the threat of civil war. This was stated openly in the republic’s parliament for the first time yesterday [16 May]. Thousands-strong rallies have been going on in various parts of the republic for several days now. The opposition estimates that approximately 17,000 are taking part in them. The strategic Bishkek-Osh highway has been blocked. According to internal affairs ministry figures, the road is being blocked by 3,500 people; the opposition claims that about 8,000 protesters are involved in that effort… Yesterday morning police cadets arrested several dozen demonstrators outside the building (according to the ministry of internal affairs, forty people; according to the opposition, ninety-seven). They included the well-known Kyrgyz human rights advocates Tursunbek Akunov and Ramazan Dyryldayev, opposition activists and reporters… [Some] 8,000 demonstrators [from the south] were heading for Bishkek… to deliver an ultimatum…to release the arrestees…the protesters are also making political demands: the resignation of the country’s leaders, including the president; an end to the criminal prosecution of opposition leaders; and the punishment of those responsible for the…deaths of six civilians [on 17– 18 March]. (CDSP, 2002, vol. 54, no. 20, p. 17) 17 May 2002: The upper house of the Kyrgyz parliament has ratified an agreement with China concerning the Uzengi-Kuush section of the border… It took intervention by Askar Akayev to change the deputies’ minds’ (CDSP, 2002, vol. 54, no. 20, p. 17). 22 May 2002: ‘The Kyrgyzstan government resigned after a state commission ruled that senior officials were to blame for civilian deaths when police opened fire on demonstrators in March’ (The Times, 23 May 2002, p. 18). ‘In response President Askar Akayev sought “co-operation” with opposition politicians’ (The Economist, 1 June 2002, p. 68). A state commission…[was set up to investigate] the events of 17–18 March … The parties responsible were identified by the state commission’s chairman, first deputy prime minister Nikolai Tanayev…[who said that] ‘Officials showed a lack of political foresight and an inability to predict how the social and political situation in the country would develop’… He accused internal affairs ministry personnel of using firearms inappropriately and the prosecutor’s office of being too quick to institute criminal proceedings and making unjustified use of

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repressive administrative measures. He pointed out that the prosecutor general’s office had ignored numerous requests to [release deputy Azimbek Beknazarov from custody], and this had ultimately ‘produced a negative response and evoked popular indignation’. The commission recommended that the president consider holding ‘specific heads of central government structures’ personally responsible… It was decided… that first deputy prime minister Nikolai Tanayev would temporarily head the government…[Since 12 May] somewhere between 3,000 and 6,000 people had been blocking the strategic Bishkek-Osh highway, which connects the northern and southern parts of the republic… On 21 May a group of deputies to the legislative assembly managed to calm people down somewhat and restore the unimpeded flow of traffic on the highway. (CDSP, 2002, vol. 54, no. 21, pp. 16–17) (‘[A district court] sentenced Deputy Azimbek Beknazarov to a year of incarceration… [But] the court judged his two-and-a-half months in a pretrial detention centre to have fulfilled his sentence and he was released right in the courtroom. Under Kyrgyz law, however, an elected official with a conviction on his record cannot sit in parliament’: CDSP, 2002, vol. 54, no. 22, p. 17.) ‘The upper house…quickly voted to approve Akayev’s choice for prime minister, Nikolai Tanayev. Meanwhile, Akayev pledged he would not seek another term in office—a move from which he is constitutionally prohibited. His term ends in 2005’ (FEER, 13 June 2002, p.13). For the first time in the history of independent Kyrgyzstan, the job [of prime minister] has gone to a member of a non-native group [Russian, in the case of Tanayev]… President Akayev…[said Tanayev] ‘has no clans behind him’, he is a ‘strong economic manager’ and is ‘far removed from politics’. (CDSP, 2002, vol. 54, no. 22, p. 17) 17 June 2002: some 4,000 demonstrate in Dzhalal-Abad (CDSP, 2002, vol. 54, no. 25, p. 18). 24 June 2002: Kyrgyzstan’s government said the country was on the verge of civil war and accused the increasingly bold opposition of trying to overthrow the leadership. Thousands of opposition supporters have been holding rallies in the rebellious south for days, calling for President Akayev to resign. (The Times, 25 June 2002, p. 118) Prime minister Nikolai Tanayev yesterday [24 June] declared that the events in the southern part of the republic, where protests have been under way for several months now, mask ‘an attempt to dismember the country’. He said there are forces in the country that want to upset stability in order to change Kyrgyzstan’s system of government. The prime minister also acknowledged that the country is ‘on the brink of a clash between people’. Commentators are already substituting

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the term ‘civil war’ for the last three words of that statement. (CDSP, 2002, vol. 54, no. 26, p. 17) 28 June 2002: Kyrgyzstan yesterday [28 June] freed jailed opposition protestors and policemen in an amnesty… Nikolai Tanayev, the new prime minister, whose government says the Central Asian state could slide into civil war, urged deputies in parliament’s upper house to absolve both sides involved in the violence in March. Deputies voted in support of the amnesty, but the opposition quickly denounced it as a sham. (FT, 29 June 2002, p. 6) ‘Parliament yesterday [28 June] passed a law granting amnesty to people involved in the [events of 17–18 March]… The case against… Azimbek Beknazarov was dismissed and he can continue to perform his duties as a deputy’ (CDSP, 2002, vol. 54, no. 26, p. 17). 29 June 2002: [The Chinese] consul in the Chinese embassy [in Bishkek]…was gunned down… Kyrgyz officials quickly raised the possibility that the act might have been committed by Uighur separatists, who hope to create an independent homeland in China’s north-west frontier region of Xinjiang… A Chinese Uighur businessman…was also killed in the attack, possibly underlining the Uighur connection, or else indicating a gangland-type contract murder… The Uighurs are a Turkic-speaking Moslem ethnic group living mainly in China, but are also dotted around Central Asia, including at least 50,000 in Kyrgyzstan… In recent years [Kyrgyzstan] has acceded to Chinese demands to limit their activities. Four Uighur separatists were sentenced to death for an attack which killed two Chinese businessmen in 2000. (FT, 2 July 2002, p. 9) ‘Investigators told Kommersant…this crime was linked to a feud between local crime bosses…[and] to say that it was politically motivated is out of the question… One of the suspects [of the two thought to be involved]…was arrested [on 2 July]’ (Kommersant, 3 July 2002, p. 7: CDSP, 2002, vol. 54, no. 27, p. 19). 3 July 2002: ‘Parliament approved a bill to grant amnesty to demonstrators and police involved in bloody clashes in March, including officers who reportedly fired on protesters, killing five’ (The Times, 4 July 2002, p. 17). 20 July 2002: The founding of an Islamic Democratic Party has been announced… The new party, which for the most part consists of people living in the squatters’ shacks that have sprung up around Bishkek, elected as its leader Narkas Mulladzhanov, a former state television commentator and now independent journalist… Kyrgyzstan is a Moslem country. A total of 80 per cent of the population

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considers itself Moslem by birth. (Vremya, 24 July 2002, p. 2: CDSP, 2002, vol. 54, no. 30, p. 15) 21 July 2002: President Askar Akayev…has publicly admitted that a member of his family is involved in a million-dollar business at his country’s US-run air base… Mr Akayev conceded that his son-in-law…a Kazakh national… sells jet fuel to Manas air base… Two companies split the fuel trade…[A] European official has seen documents linking the president’s oldest son… and [the president’s son-inlaw]…to the two companies—suggesting a family monopoly… The president’s family is said to control large parts of the economy. (FT, 22 July 2002, p. 6) 15 August 2002: The opposition in Kyrgyzstan has made its first real attempt to consolidate. Representatives of twenty-two parties and public organizations have announced the formation of an association called ‘For Akayev’s Ouster, For Reform for the People’… Those who intend to seek the president’s ouster … ‘by peaceful, constitutional means’…include the political parties Erkindek [Free] and Asaba [Banner], one of the factions in the Kyrgyz parliament, a human rights organization called Prisoners of Conscience Guild, and two parties with communist leanings. Ismail Isakov, a deputy to the lower house of parliament and chairman of its committee on state security, has been elected to serve as the movement’s co-ordinator and chief of staff. (CDSP, 2002, vol. 54, no. 33, p. 15) (‘[A member of the opposition]…has died on hunger strike’: The Economist, 7 September 2002, p. 29.) 6–7 September 2002: On 6 September an attempt was made on the life…[of] secretary of the Kyrgyz security council, Misir Ashirkulov, who is considered one of the president’s closest aides…[On] 7 September the Kyrgyz government hastily endorsed a bill imposing a three-month ‘moratorium on assemblies, rallies, demonstrations, street marches and other public events’. The emergency measure was said to have been necessitated by ‘stepped-up activities on the part of the extremist religious organization Hizb-ut-Tahrir’, the discovery of a ‘cache of weapons’ in the southern part of the country, and the terrorist attack on Misir Ashirkulov. The lower house is scheduled to debate the bill. (CDSP, 2002, vol. 54, no. 37, p. 17) 24 September 2002: President Akayev ends his visit to the United States. October 2002: ‘Beijing said more than 10,000 soldiers from China and Kyrgyzstan

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would take part in a military exercise in a border area in October. It is the first such exercise by both countries’ (FEER, 26 September 2002, p. 30). China held its first joint war exercises with a foreign country—two days of exercises with Kyrgyzstan involving helicopters, troops and armoured vehicles. The exercises, which took six months to plan, simulated the entrapment and annihilation of terrorists operating along their mountainous border. (FEER, 24 October 2002, p. 30) 30 November 2002: Russia has begun deploying a squadron of fighter jets and other aircraft to Kyrgyzstan…at a military airfield in Kant, east of Bishkek… The deployments are the vanguard of a force that will ultimately include more than twenty Russian aircraft and more than 700 troops… The deployment is one of the most significant outside of Russia’s borders since the collapse of the Soviet Union… The Russian squadron would provide the air power for a contingent of ground forces that could total more than 5,000 troops from Russia, as well as from Kyrgyzstan, Kazakhstan and Tajikistan. They are all members of…the Collective Security Treaty Organization… Member countries agreed in November to establish the rapid-deployment force. (IHT, 5 December 2002, p. 5) Central Asia’s dominant military power [Uzbekistan] is worried about a new Russian military build-up in Kyrgyzstan, where the United States enjoys the use of an air base for flights into Afghanistan. ‘If they are doing this in a competition, I think this competition is absolutely unproductive,’ President Islam Karimov told reporters in early December. He was reacting to President Vladimir Putin’s announcement days earlier that Russia will base warplanes…at Kant airport near the Kyrgyz capital of Bishkek… The United States has more than 1,500 troops, in addition to warplanes, stationed at Manas, which is also near Bishkek. (FEER, 26 December 2002, p. 8) 2 February 2003: a referendum is held. An amended version of the country’s constitution was adopted and the people consented to President Askar Akayev remaining in office until his term expires… Preliminary returns show that, in responding to the second question on the ballot, 78.7 per cent of the voters confirmed the powers of the country’s president…and affirmed their desire to see him continue as head of state until the end of his term, which expires in December 2005. As for the first question— adopting the amended version of the country’s Basic Law—75 per cent of the participants in the referendum voted to approve the document. (CDSP, 2003, vol. 55, no. 5, p. 15)

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THE ECONOMY The economic background Natural resources are not so much limited as needing time to develop, e.g. mercury, gold, coal, uranium, marble, oil and gas. Only 7 per cent of Kyrgyzstan is arable, of which 72 per cent is irrigated. The emphasis in agriculture is on livestock. The country accounted for only 0.6 per cent of Soviet industrial production in 1990 (Deutsche Bank, Focus: Eastern Europe, 1993, no. 70, pp. 1–9). On 18 February 1993 Kyrgyzstan became a member of the International Finance Corporation, the first of the Central Asian republics to do so. In May 2001 the government announced the discovery of a field estimated to contain 70 million barrels of oil. A senior cabinet minister said: ‘There is enough for twenty years’ supply for our country, and there could well be even more’ (Guardian, 16 May 2001, p. 28). ‘Kyrgyzstan mines and processes the following minerals: antimony, coal, gold, mercury, molybdenum, tin, tungsten and uranium. It is the third largest gold producer… [in the] CIS and the country’s immediate prospects very largely depend on the gold industry’ (United Nations, World Economic and Social Survey 2001, pp. 176–7). Financial policy On 10 May 1993 the som (‘catfish’) replaced the rouble and was allowed to float. The new currency is supported by $400 million from the IMF, the World Bank and Japan (FT, 22 May 1993, p. 2). The som was allowed to float, although there is some state intervention. The som is in principle convertible for transactions related to foreign trade of the enterprise sector. But there are restrictions on the capital account (EBRD 1994:29, 111). The exchange rate is determined in a managed float. In March 1995 the authorities formally accepted obligations under Article 8 of the IMF’s Articles of Agreement regarding full current account convertibility (EBRD 1996b:158). The value of the som has been relatively stable, helped by the independence of the central bank (CDSP, 22 June 1994, vol. XLVI, no. 21, pp. 21–2). With IMF and World Bank support the som has remained at about eleven to the US dollar for a year (FT, 10 May 1995, p. 3). Moldova and Kyrgyzstan have implemented successful stabilization programmes, reducing monthly inflation to 2–5 per cent in May–June 1994 in the wake of tough fiscal and credit policy adjustments over the previous six months (Economics of Transition, 1994, vol. 2, no. 3, p. 405). The monthly inflation rate fell from 3 per cent in July 1994 to 0.2 per cent in September (Transition, 1994, vol. 5, no. 8, p. 16). The World Bank has reported: The liberalization programme has been largely completed.’ But Kyrgyzstan is still struggling to control the budget deficit (FT, 1 June 1995, p. 4). In mid-February 1996 Kyrgyzelbank (the successor to the Soviet savings bank

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Sberbank) was declared insolvent. The central bank promised to pay back deposits in full but would compensate only part of the lost interest. Kyrgyzelbank ‘had been sliding towards insolvency ever since inflation soared in 1992, rendering the population’s savings virtually worthless’ (FT, 22 February 1996, p. 4). The central bank has worked out a deposit coverage plan for individual placements up to 3,000 som (about $250) (EBRD 1996a:11). Prices There are few direct controls on prices. Significant adjustments were made to administered prices for bread, rents and other items during 1993. The maximum retail margins imposed on all goods after the introduction of the som were lifted on imported goods in August 1993 and on most domestically produced goods in November 1993. In March 1994 all retail margins were eliminated except for that on bread (EBRD 1994:29). Bread prices were freed in November 1994 (EBRD 1995b:47). Utility prices remain controlled at highly subsidized prices. Since 1994 domestic prices for oil, gas and coal have been close to world market levels (EBRD 1996b:158). Electricity prices are being raised to cost-recovery levels over the next year (EBRD 2000a:62). ‘Heating and power tariffs are to be raised to cost-recovery levels by the end of 2001’ (EBRD 2001a:72). ‘The extent of liberalization of prices, trade and capital account transactions in Kyrgyzstan continues to exceed that of its neighbours. For example, the country is still the only WTO member in Central Asia’ (EBRD 2001b:162). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 5 per cent; 1991, 15 per cent; 1992, 20 per cent; 1993, 25 per cent; 1994, 30 per cent; 1995, 40 per cent; 1996, 50 per cent; 1997, 60 per cent; 1998, 60 per cent; 1999, 60 per cent; 2000, 60 per cent; 2001, 60 per cent (EBRD 1999b:24, 236; and 2002b:20, 168). Since relatively few ethnic Kyrgyz live in towns they are given interest-free loans to allow them to participate in purchases. The 9 August 1991 decree laid down that every adult citizen would be given a voucher. Large privatization involves 50 per cent of the shares being retained by the state, 30 per cent being sold to employees of the affected enterprises at a 30 per cent discount and the remaining 20 per cent being sold to the public (who may use their vouchers), to foreigners (with special permission) or to other related enterprises (e.g. a longstanding supplier). The privatization process was initiated by the 10 January 1992 decree (Kaser and Mehrotra 1992:41–2). Interest-free loans are available to encourage private purchases of small and mediumsized enterprises (Deutsche Bank, Focus: Eastern Europe, 1993, no. 70, p. 5). Eleven per cent of state property, mainly in retailing and services, has been privatized. The aim is to privatize over a third of industry, agriculture and services by the end of 1993 and two-thirds by the end of 1994 (FT, 16 February 1993, p. 4). The voucher scheme involves distribution according to salary and years of work (The Economist, 20 February 1993, p. 75).

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An article published on 9 July 1994 reported that the first stage of privatization had been concluded. But although some 230,000 people had participated, only a few thousand people had become owners of major enterprises, property, land and other state-owned facilities. Deputies, government members and the heads of provinces and districts became major landowners and businessmen; the lion’s share of capital is now concentrated in their hands. A parliamentary commission was set up to investigate the issue (CDSP, 1994, vol. XLVI, no. 27, p. 20). Most small businesses are private (FT, 16 September 1994, p. 4). The predominant method of large privatization has been the transfer of shares to work collectives, with the state usually retaining a significant proportion of the shares. No voucher auctions have taken place and competitive bidding has been used for only 1.4 per cent of total privatized assets. At the end of 1993 the government significantly accelerated the pace of privatization. By January 1994 about 4,450 enterprises (accounting for 33 per cent of total fixed enterprise assets) were privatized. New provisions in January 1994 involved the privatization of all small enterprises through auctions and/or competitive bidding with the use of cash and vouchers. The main methods for the privatization of medium-sized and large enterprises were to be competitive cash bidding (by individual investors for up to 70 per cent of the equity) and voucher auctions (open to individuals and investment funds for 25 per cent of the equity), while 5 per cent of the equity would be preserved for the labour collectives. The privatization of small trade outlets, retail and service establishments is largely complete, comprising 80 per cent of fixed assets in these units. There is no property restitution programme (EBRD 1994:28). By the end of 1994 some 45 per cent of all enterprises had been privatized under the new privatization programme, up from a third in mid-1994. The distribution of vouchers had started in February 1994 and by November 75 per cent had been distributed. By November 1994 cash auctions involving eighty-four enterprises and voucher auctions involving 185 enterprises had taken place and 1,000 enterprises were to be privatized by the end of 1996. Twenty-three licensed specialized investment funds were created in the second half of 1994, taking 50 per cent of the shares in the voucher auctions. Some trading in privatization vouchers began in September 1994 and a full stock market was set to start trading in early 1995 (EBRD 1995a:59). Between April 1994 and August 1995 cash auctions for 322 enterprises and voucher auctions for 634 enterprises were held. A total of 914 enterprises were to be privatized in the 1994–5 mass privatization programme. As of August 1995 state ownership had been reduced to less than 1 per cent in 287 of these enterprises, to less than 50 per cent in a further 287 and to less than 70 per cent in yet another 114. Privatization of the roughly 4,600 previously state-owned small trade outlets, retail and service establishments was largely completed by the end of 1994 (EBRD 1995b:47). By the end of 1995 a total of 836 enterprises had passed through voucher auctions and state shares were entirely divested in 434 of these (EBRD 1996a:9). As of March 1996, 900 medium-sized and large enterprises had been put up for voucher auctions and the state’s share of ownership had been sold completely. The government has approved the 1996–7 privatization programme, which covers the 320 remaining medium-sized and large enterprises and includes the sale of shares in some of the major utilities through coupon auctions. International tenders are being initiated for some of the large enterprises. But in the first international share auction of

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thirteen enterprises held in November 1995 shares in only one enterprise were sold. In May 1994 an agency was established for a period of four years to oversee the restructuring of the twenty-seven largest loss-making state enterprises. Five are being fully liquidated, while others have undergone massive downsizing and restructuring. The restructured enterprises have been given working capital and a period of six to nine months to demonstrate their financial liability, after which they are to be privatized. There have been only a few cases of bankruptcy (EBRD 1996b:157–8). The stock exchange commenced operations in May 1995 (p. 159). Mass privatization was essentially completed by late 1996. Residual state shares are sold in cash auctions and a programme of sales of companies not covered by the 1994–5 mass privatization programme has been drawn up. This foresees the sale of shares through coupon auctions in some of the major strategic companies, including energy, mining, infrastructure, tourism and the media. The government has published a list of seventy-six large industrial companies in which controlling stakes will be offered to foreign investors in 1997 (EBRD 1997a:30). Twenty-eight of the largest state enterprises have been subjected to restructuring. Twenty of the enterprises have been successfully restructured, of which fourteen have been privatized and six are being marketed to strategic investors (pp. 21, 30). According to official statistics, the share of the state in manufacturing output only decreased from 53 per cent in 1994 to 47 per cent in 1996. Significant progress has been made with privatization over the last few years. But in May 1997 the government suspended the privatization programme temporarily, pending an investigation into price rigging, and set up a commission to investigate corruption. The Enterprise Reform and Resolution Agency was expected to cease operations in 1997. The sale of the twenty restructured enterprises (one being split in two) was completed in June 1997 (EBRD 1997b:179). Large privatization (including utilities) experienced delays in 1997. The programme to privatize large public monopolies was suspended in May 1997 after allegations of price-rigging and collusive bidding. The head of the privatization agency was replaced in November 1997. A new privatization law was passed in early 1998. But major impediments remain, especially in rescheduling company debt. There has been little restructuring even in privatized enterprises, which are mostly controlled by insiders and lack financial discipline. The privatization of small businesses in the retail and service sector has been quite successful (EBRD 1998a:23–5, 37). The privatization process has led to ownership structures dominated by managers and employees of privatized companies. In early 1997 minority stakes in some large public monopolies were included in the voucher programme and controlling stakes were to be offered to foreign investors. However, the privatization process was suspended in May 1997 pending investigations into price rigging and corruption. The government has resumed the programme and formulated a new plan for the privatization of about 300 mediumsized and large enterprises by the year 2000, including public monopolies in telecommunications, energy, mining, railways and the national airline. The liquidation of large loss-making state enterprises under the enterprise reform and resolution agency is nearing completion (EBRD 1998b:174). Small privatization is largely complete, with nearly 97 per cent of all small and medium-sized enterprises placed in private hands by the beginning of 1999. Large privatization, based on a combination of voucher auctions and investment tenders for strategic stakes in the largest companies, has proceeded much

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more slowly. During 1998 parliament approved a new strategy for the privatization of about 300 enterprises. Tenders for a number of them were held, but interest among investors was limited. A cement enterprise has been sold to part of the Siemens group. Implementation of the bankruptcy law has been slow (EBRD 1999b:234). ‘Large-scale privatization continues to advance slowly… Privatization priorities for 2000 include the sale of the national airline, as well as several enterprises in the energy and telecommunications sectors’ (EBRD 2000a: 62). ‘Large-scale privatization has proceeded very slowly since 1997… There is little sign of active restructuring’ (EBRD 2000b:178– 9). Sales of strategic stakes in telecoms, energy and transport are scheduled for 2001… The ambitious privatization programme for 2001–2003 includes four large strategic companies—Kyrgyzenergo, the National Airlines, KyrgyzTelekom and Kyrgyzgas… Despite ambitious plans the restructuring of public utilities has progressed at a slow pace… The banking sector restructuring programme, launched in early 1999, made further progress in 2000. (EBRD 2001a:72) The government has divested most of its company holdings. The state still holds stakes in some 350 companies. State companies are concentrated in the construction…transportation…and in the energy and telecommunications sectors. In February 2001 the government approved a new state property privatization strategy for 2001–3… However, there have been no significant privatization transactions this past year… An attempt to privatize 40 per cent of…the national telecommunications company JSC KyrgyzTelekom…by international tender failed last year [2000]… About one-half of the capital in the banking sector is now foreign-owned. (EBRD 2001b:162–3) At the end of December 2001 the government passed a new privatization programme for 2002–3. In February 2002 parliament passed a law on the privatization of state property that takes precedence over earlier legislation that had prohibited the sale of certain enterprises classified as strategic. The authorities plan to sell 400 enterprises, including KyrgyzTelekom, Kyrgyzgas, the national airline and the four energy distribution companies. (EBRD 2002b:166) The World Bank has said that ‘The privatization programme is progressing well,’ while the prime minister has reported that ‘More than 64 per cent of our firms have been privatized and there is no such thing as a state-owned farm’ (FT, 1 June 1995, p. 4). By late 1995, 5,000 enterprises had been privatized and over 40,000 people had become shareholders. Half of industrial output was in the private sector (Business Central Europe 1995:53). ‘Recent attempts to privatize some of the country’s biggest companies have been frustrated by blatant nepotism’ (Business Central Europe 1997:50). The aim was to privatize nearly a hundred large enterprises in 1997, including ones

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involved in gold-mining and machine-building. But the proposed sale of large energy enterprises is meeting resistance from the parliamentary opposition. Foreign investors are able to buy shares (Deutsche Morgan Grenfell, Focus: Eastern Europe, 3 March 1997, p. 78). President Akayev signed a decree whereby 8 per cent of shares in leading enterprises were to be distributed free of charge among pensioners, invalids, Second World War veterans and low-income families. Included in the scheme were shares in leading enterprises scheduled to be privatized (Transition, August 1997, vol. 8, no. 4, p. 25). Foreign trade After a first wave of reforms, when restrictions on imports, quotas for exports and foreign exchange surrender requirements were abolished, some momentum was lost in 1993. The government moved to reintroduce compulsory state orders, export licences and prohibitive export taxes. These measures, together with the continued dominance of trade and distribution by the ministry of industry, trade and material resources and the ministry of agriculture, created a system whereby about 70 per cent of output became subject to direct or indirect state control. In external trade the state’s direct involvement has been mainly through clearing agreements which allow goods to be exchanged between republics on a barter basis. In early 1994 the trade system was substantially liberalized. Remaining import and export licensing agreements were lifted and export taxes reduced. The state order system for exports has been replaced by voluntary supply contracts (EBRD 1994:29, 111). Since mid-1994 the central bank has been de facto pursuing a policy of a fixed exchange rate (at ten to eleven som to the US dollar) (EBRD 1995a:59). In March 1995 the authorities introduced full current account convertibility (EBRD 1995b:47). A 30 per cent export duty on grain was introduced in August 1996 (EBRD 1996b:158). In February 1997 a new policy towards foreign exchange auctions was adopted. Instead of the official exchange rate being determined as the lowest rate of all valid bids, it was to be determined as an average rate of all valid bids (EBRD 1997b:180). The central bank discontinued its weekly auction of foreign currency to commercial banks in July 1998. In line with IMF recommendations the central bank was henceforth to intervene directly in the inter-bank market for foreign exchange (EBRD 1998b:174). Kyrgyzstan continues to maintain one of the most liberal trade regimes in the region (EBRD 1999b:234). There is a managed floating exchange rate regime (p. 236). Kyrgyzstan has a very liberal trade regime and no capital account restrictions. The top customs duty was reduced by 10 per cent at the beginning of the year [2000] and the average tariff is now 5.2 per cent. Nevertheless, according to a World Bank study, trade is considerably hampered by corruption in the customs service. (EBRD 2000b:178) Foreign aid In May 1993 Kyrgyzstan agreed a programme with the IMF and received $23 million as

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the first slice of an $85 million aid package (FT, 21 May 1993, p. 5). On 14 May 1993 the World Bank approved a credit of $60 million, the first of its kind to any Central Asian state (Ahmed Rashid, FEER, 17 June 1993, p. 30). Kyrgyzstan has been promised more than $680 million in foreign aid (including some previously committed funds) by the end of 1995 after winning the approval of international financial institutions for its reform programme (FT, 1 June 1995, p. 4). The foreign debt is $365 million (IHT, 15 April 1995, p. 10). ‘Kyrgyzstan remains heavily indebted and highly dependent on external assistance’ (EBRD 1999b:234). International assistance as a percentage of GDP was as follows: 1992, 0.2 per cent; 1993, 2.2 per cent; 1994, 5.5 per cent; 1995, 8.6 per cent; 1996, 12.9 per cent; 1997, 14.0 per cent; 1998, 13.8 per cent (United Nations, World Economic and Social Survey 2001, p. 192). ‘In March 2002 Kyrgyzstan obtained a rescheduling of debt service to the Paris Club during the period 2002–4, from $101 million to $5.6 million’ (EBRD 2002a:66). Foreign direct investment The volume of foreign direct investment is very small. (See Table 5.1.) In early September 1994 the president signed a decree allowing foreign investors to take all their profits out of the country in hard currency or goods they have produced. The decree also cancelled a 5 per cent tax on profits taken abroad (Transition, 1994, vol. 5, no. 7, p. 19). Most foreign investment proposals must be registered with the relevant authorities and may require government approval. Profits are freely convertible and may be freely repatriated. Foreigners may not own or lease land (EBRD 1996b:159). A notable joint venture is the Kumtor gold mine, which is one-third owned by a Canadian company and two-thirds owned by the state. The mine dominates the manufacturing sector. In 1997 the mine contributed nearly 30 per cent of exports and about 11 per cent of GDP (EBRD 1998b:174). Agriculture The 19 April 1991 decree forbids the buying and selling of land, although every citizen has the right to enjoy the use of and to bequeath a plot (albeit not to be divided); equal rights are granted to different forms of land management; inefficient state and collective farms should be disbanded (Kaser and Mehrotra 1992:41). The transfer of land for fifty years has been confirmed. But a law has recently been adopted on the possibility of selling the right to the use of land (CDSP, 22 June 1994, vol. XLVI, no. 21, pp. 21–2). Ian Pryde (The World Today, November 1992, p. 208) reports how the traditionally nomadic Kyrgyz lost much of the best land in the north to Russian and Ukrainian settlers in the nineteenth century. In the south the Uzbeks have been working the land for generations. (A similar situation prevails in industry, which is dominated by Russians and Ukrainians.) In consequence, many Kyrgyz have been demanding a halt to the privatization programme. But although the privatization of land has been postponed the

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president is intent on pushing ahead with privatization in the not-too-distant future.

Table 5.1 Kyrgyzstan: selected economic indicators 1995–2002

Economic indicator Rate of growth of GDP (%)

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

–5.4

7.1

9.9

2.1

3.7

5.4

5.3

–0.5

–24.7

3.9

39.6

5.3

–4.3

6.0

5.4

–13.1

Rate of growth of agricultural output (%)

–2.0

15.2

12.3

2.9

8.2

2.7

7.3

3.0

Inflation rate (consumer, %)

43.5

31.0

23.4

10.5

35.9

18.7

6.9

2.1

–17.3

–9.5

–9.2

–9.5

–11.9

–9.6

–5.1

–5.1

5.7

7.8

5.7

5.6

7.2

5.6

– – – – – – – 0.2347 0.4248 0.1385 0.3640 0.1839 0.0795 0.0505

–0.0365

Rate of growth of industrial output (%)

Budget surplus or deficit (% GDP)1 Unemployment rate (end of year, %)2 Balance of payments (current account, $ billion) Foreign direct investment (net, $ million)

96.1

46.8

83.2

86.6

38.3

–6.9

–1.1

10.7

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, United Nations Economic Commission for Europe, Economic Survey of Europe. Note: 1 General government balance: includes the state, municipalities and extra-budgetary funds (EBRD) 2 Registered unemployed. The true rate of unemployment is unofficially estimated to be around 20 per cent (EBRD 2002a:67)

See the comments by Nikonov under ‘Agriculture’ in the chapter on Kazakhstan. By the end of 1992 there were 8,600 private farms, with an average size of 43 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for 3.7 per cent of total agricultural land (United Nations Economic Commission for Europe 1993:206). As of 1 April 1993 there were 16,700 private farms, with an average size of 23 ha (CDSP, 1993 vol. XLV, no. 21, p. 20). Land leases of up to forty-nine years have been introduced, which can be used as collateral and are inheritable (thus mitigating the constitutional prohibition of private land ownership). Obligatory state purchase of agricultural produce was largely phased out in

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1994 (EBRD 1995a:59). The remaining state-owned collective farms were to be privatized by the end of 1995 (EBRD 1995b:47). In 1991–2, 165 (out of around 500) state and collective farms were liquidated and replaced by some 17,000 peasant farms (10 to 30 ha) and new agricultural cooperatives. In January 1994 the government recommended privatizing all remaining small state agricultural enterprises (up to a hundred employees) through cash auctions. By the end of 1995 most state farms had been corporatized into joint stock companies. But a significant number of the corporatized farms continue to operate as co-operatives. In 1995 only around 10 per cent of agricultural output was produced by private farmers. Land legislation is still inadequate. In November 1995 a presidential decree extended the period of land-use rights to ninetynine years. These rights can be sold (though only to Kyrgyz citizens), exchanged, rented or used as collateral. But the 1991 law still gives state land-use agencies broad powers to terminate land-use rights after one year of non-use (EBRD 1996b:158). A presidential decree of November 1996 apparently introduced private land ownership. But the details of the decree were unclear (EBRD 1997a:30). The constitutional prohibition on full private land ownership is unlikely to be lifted before 1999. Leaseholds were extended to ninety-nine years in 1995 and, following a 1996 decree, 50 per cent of all existing leases were to be sold to private investors by March 1998. But for the remainder only short-term leases would be extended. The state contributed around 3 per cent of agricultural production in 1996 (EBRD 1997b:179). Over half of all land has been distributed to the public with land rights of up to ninety-nine years. In 1997 more than 80 per cent of agricultural output was produced by private farms. Until October 1998 full private land ownership had been prohibited by the constitution. But a referendum held at that time approved a constitutional amendment introducing private land ownership (EBRD 1998b:174). A referendum in October 1998 introduced private land ownership (EBRD 1999a:25). All collective farms were supposed to be dissolved by the end of 1994 and all state farms by the end of 1995. It was stated that by mid-November 1994, 17,000 of the 21,700 farms were privately owned (Kaser 1995:38–9). The prime minister has said that ‘there is no such thing as a state-owned farm’ (FT, 1 June 1995, p. 4). Violent conflicts have occurred between ethnic Kyrgyz and Uzbek and land privatization contributed to further inter-ethnic tension in 1992. Around 11,000 small private farms had been established by then. With a collapse of marketing the privatization programme was suspended until the beginning of the 1993 agricultural season. Land reform made modest progress during 1993, especially the (mostly formal) transformation of state farms into joint stock companies. In early 1994 a new impulse was given to the reform process, reducing the quota that private farms needed to sell to the state (Spoor 1995:52). During 1992 and 1993 output marketing was still heavily state controlled. For commodities such as cotton, wool, wheat and tobacco the state order system remained in force, with prices paid to domestic producers being far below international market levels. In early 1994 obligatory state procurement was abandoned and replaced by ‘domestic supply agreements’. But prices were not freed, since several monopolies still remained and prices were being negotiated. Most minimum shares to be sold to the state were established at a level between 20 per cent and 30 per cent of producer’s output (the share

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for tobacco being substantially higher) (p. 55). The number of state farms increased to around 21,000 small and medium-sized farms (on 11.3 per cent of total farm area, including pastures, but only 7.8 per cent of arable land). With land still state-owned, private farms received usufruct rights for 49 years. (There were plans to change the constitution after the parliamentary elections of February 1995 in order to make private land titling possible: p. 52.) ‘A viable private farming sector is still far from being formed. Where peasant farmers started to produce, problems arose because of the near total collapse of support services’ (p. 53). ‘With an over-emphasis on privatization, the importance of support services for farmers is underestimated’ (p. 56). ‘President Askar Akayev…has repeatedly promised to sell land, a policy which goes down well with farmers, who are fed up with leasing land off the government. But so far he has failed to deliver the goods’ (Business Central Europe 2000:46). The share of peasant farms in agricultural land increased from 0.9 per cent in 1992 to 8.6 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 38 per cent in 1991, to 47 per cent in 1992 and to 87 per cent in 1998. ‘In the Central Asian states “peasant cooperatives” are most likely included, over-representing “private production”’ (p. 890). Economic performance GDP growth turned positive in 1996 after a string of dismal figures: -19 per cent in 1992, –16 per cent in 1993, –20.1 per cent in 1994 and –5.4 per cent in 1995. The economy grew rapidly in 1997, fuelled by a more than 30 per cent increase in net exports (gold making a major contribution)’ (EBRD 1998a:37). The growth rate slumped in 1998. ‘The Kyrgyz economy has been adversely affected by events in Russia. Growth in 1998 was only 2 per cent, both inflation and the current account deficit increased sharply and the currency has lost about half its value since September 1998’ (EBRD 1999a:39). (See Table 5.1.) GDP in 2001 was an estimated 71 per cent of the 1989 level (EBRD 2002b:58). The consumer inflation rate saw a dramatic improvement in 1994, with a figure of 228.7 per cent compared with 855 per cent in 1992 and 772.4 per cent in 1993. In 1998 the figure was only 12 per cent, but there was a significant increase in 1999. There was an improvement thereafter. An unemployment rate of nearly 5 per cent was estimated for April 1995, according to the ILO definition. This was some three times higher than the officially reported rate (United Nations Economic Commission for Europe 1996:90). ‘The true rate of unemployment [as opposed to merely considering registered unemployed] is unofficially estimated to be around 20 per cent’ (EBRD 2000a: 63, and 2002b:169). About half the population live at subsistence level (EBRD 1998b:174).

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According to the World Bank, 18 per cent of the population lived in extreme poverty in 2000 (food only poverty line), while 84 per cent were below the more general poverty line (absolute poverty rate)…[It is] in rural areas where poverty is concentrated. (EBRD 2002b:167)

6 Tajikistan POLITICS The political and demographic background At the end of 1998 the population was 6.1 million. In 1989 the ethnic composition of the population was as follows: Tajiks 58.8 per cent; Uzbeks 22.9 per cent; Russians and Ukrainians; 10.4 per cent; and others 7.9 per cent (Economic Bulletin for Asia and the Pacific, 1991, vol. XLII, nos 1 and 2, p. 2). In 1992 Tajiks accounted for 58.8 per cent of the population, Uzbeks 23 per cent and Russians 11 per cent (FEER, Asia 1994 Yearbook, 1994, p. 110). According to incomplete data, 778,500 people have left Tajikistan (CDSP, 15 June 1994, vol. XLVI, no. 20, p. 12). Nearly 150,000 Russian-speakers (including ethnic Ukrainians, German and Koreans) have left Tajikistan; this is well over a quarter of the pre-independence total and the exodus has led to skill shortages (Central Asia Newsfile, February 1993, no. 4, p. 1). Of the 380,000 Russian-speakers who lived in Tajikistan before the troubles began about 300,000 have left, the bulk going to Russia (CDSP, June 1993, vol. XLV, no. 22, p. 1). The Russian community is now down to about 180,000, from 350,000 in 1991 (Anthony Hyman, The World Today, November 1993, p. 207). In August 1996 Russia’s ambassador to Tajikistan stated that over 450,000 Russians had left since 1991. About 70,000 Russian-speakers were left in Tajikistan, mainly pensioners and other needy people. The bulk of people leaving were in the highly skilled category (CDSP, 1996, vol. XLVIII, no. 32, p. 14). Between 1989 and 1998 the proportion of ethnic Russians in the population fell from 7.6 per cent to 6 per cent (The Economist, 3 April 1999, p. 70). Around 70 per cent of the state budget comes from Russia, there are 25,000 Russian troops protecting the border with Afghanistan and the defence minister is a Russian general. Forty observers authorized by the UN Security Council in December 1994 were due to arrive in Tajikistan in early 1995 to monitor the ceasefire (IHT, 3 January 1995, p. 4). There is now an OSCE mission in Tajikistan. Diphtheria was all but wiped out in the Soviet era, but has now made a big comeback. The worst case is Tajikistan, where the number of cases recorded in 1995 so far has increased to 2,705 (compared with only fourteen in 1993). In 1995, 866 cases have been recorded so far in Kazakhstan, 500 in Kyrgyzstan, 335 in Uzbekistan and fifty in Turkmenistan (IHT, 14 November 1995, p. 2).

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The war toll There are a number of estimates of the effects of the civil war by the time it had begun to quieten down around about February 1993: as many as 15,000 people had been killed since May 1992 (IHT, 1 April 1993, p. 5); official sources said that at least 20,000 had been killed and 600,000 made homeless since spring 1992 (Guardian, 1 April 1993, p. 9); about 7 per cent of the population, or 350,000 people, had been displaced, about a quarter of them fleeing to Afghanistan (FT, 19 February 1993, p. 3). Another source puts the number who died in 1992 at 20,000–50,000 (The Economist, 7 August 1993, p. 58). The conflict has resulted in 50,000 dead and 500,000 homeless people (Ahmed Rashid, FEER, 16 September 1993, p. 24. Rashid has also talked of more than 30,000 dead: FEER, 3 February 1993, p. 16); the civil war since 1992 has claimed 30,000 dead (FEER, 16 March 1995, p. 24). The FT (16 November 1993, p. 3) talked of up to 100,000 dead, as did The Times (plus 350,000 home-less) (7 March 1994, p. 17). Later estimates of the number dead were more modest: over 30,000 (IHT, 7 January 1997, p. 4; The Times, 28 June 1997, p. 16); over 40,000 (FT, 1 July 1997, p. 9). The civil war, which ended in 1997, left more than 50,000 dead (IHT, 10 May 2000, p. 10). A report of early November 1993 talked in terms of 778, 500 refugees outside Tajikistan, e.g. 339,000 in Turkmenistan, 144, 750 in Russia and 100,000 in Afghanistan (CDSP, 1993, vol. XLV, no. 44, p. 44). Around 600,000 live as refugees in Tajikistan while another 95,000 have fled to Afghanistan. There was heavy fighting around the capital Dushanbe in February and March; the Islamic forces say they are in no position to launch a major offensive, but will continue to keep the regime under pressure (Ahmed Rashid, FEER, 3 June 1993, p. 24). There are frequent opposition raids across the border with Afghanistan and Russian involvement in support of the government has increased. The war has taken perhaps 50,000 lives and forced more than 650,000 to flee. Clan and regional loyalties have played an important role in the fighting (Andrew Meier, IHT, 3 January 1995, p. 4). ‘The War, a struggle for power among competing clans, killed between 65,000 and 150,000…[and] created more than a million refugees’ (Robert Kaiser, IHT, 2 August 2002, p. 6). ‘[The] civil war…cost an estimated 60,000 lives’ (The Economist, 27 July 2002, p. 59). Political developments 29 July 1993: the government offers the ‘rebels’ an amnesty to hand in weapons up to 9 September 1993. 7 August 1993: Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan meet in Moscow (the others have helped Tajikistan militarily). (Note that Turkmenistan did not attend the meeting.) They appeal to the UN to mediate with Afghanistan and to send UN observers to the border. Yeltsin appeals for talks between the government of Tajikistan and the opposition. 17 August 1994: Russia, Tajikistan, Turkmenistan and Uzbekistan sign a border security treaty, formalizing the presence of Russian troops in all three Asiatic states. Tajikistan is forced to give shares in its industry in return for Russian loans (Ahmed

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Rashid, FEER, 15 September 1994, p. 17). 7 September 1994: the presidential election (and a referendum on the new constitution), set for 25 September, is postponed until 6 November to allow opposition candidates to take part. 17 September 1994: a temporary ceasefire is arranged (until the election), to come into force when UN observers arrive. 20 October 1994: the first day of the ceasefire (extended for three months on 6 November). Prime minister Munavarsho Nazriev is killed when his car runs over a landmine. 6 November 1994: Imamali Rakhmonov wins the presidential election. According to official figures, the turnout was 95 per cent and Rakhmonov won 60 per cent of the vote compared with Abdumalik Abulajanov’s 35 per cent. (Abulajanov is the ambassador to Moscow: IHT, 3 January 1995, p. 4.) There were claims of irregularities in the election, e.g. ballot-stuffing and intimidation. 3 January 1995: six Russian troops are killed in a border clash with guerrillas. 24 February 1995: the People’s Unity Party headed by Abdumalik Abulajanov withdraws from the general election. 26 February 1995: the general election takes place. There are 181 seats in parliament. Ahmed Rashid (FEER, 16 March 1995, p. 24) was scathing in his criticism: Tajikistan…held a farce of an election for a new 181-member parliament. The only candidates allowed to stand were those who supported President Imamali Rakhmonov. The turnout was reported to be 85 per cent, even though Rakhmonov’s writ only runs in about half the country. Western countries refused to send observers to the Tajikistan elections, saying they could not be fair. The Islamic opposition…refused to take part. The only opposition party allowed to stand—and that to just five seats—was the People’s Unity Party led by former prime minister Abdumalik Abulajanov. But it too pulled out of the polls, because of what it called ‘anti-democratic practices by the Rakhmonov regime’. 7 April 1995: at the start of a major offensive, more than twenty CIS soldiers are killed in a border clash. (By 13 April thirty-five CIS troops had been killed, although opposition forces suffered far greater casualties.) 13 April 1995: Yeltsin promises more military aid to Tajikistan. 14 April 1995: six more CIS troops are killed. 21 August 1995: the ceasefire is renewed until the end of February 1996. 2 February 1996: a part of the army of Tajikistan rebels. While loyal to the president, the rebels demand the resignation of what they consider to be a corrupt and incompetent government. The rebel force retreat without fighting when confronted by government forces, camping some twenty miles outside Dushanbe (Guardian, 3 February 1996, p. 11). According to another source, rebellions led by former commanders broke out simultaneously on 26 January 1996 in two towns. The rebels issued almost identical demands: the resignation of the government and the withdrawal of CIS peacekeeping forces and of Russian border guards (CDSP, 1996, vol. XLVIII, no. 5, p. 15).

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253

4 February 1996: the president forces the first deputy prime minister, the presidential chief of staff and the leader of the southern region to resign as an inducement for the rebels to disarm by 7 February. 6 February 1996: the rebels agree to the proposals. 8 February 1996: prime minister Jamshed Karimov is replaced by Yakhyo Azimov. 9 March 1996: the opposition agree to extend the ceasefire agreement (which ended on 26 February) until 26 May. 26 April 1996: a border treaty is signed with Russia, China, Kazakhstan and Kyrgyzstan. 19 July 1996: an armistice memorandum is signed, but fighting soon breaks out again (CDSP, 1996, vol. XLVIII, no. 30, p. 18). 18 August 1996: Islamist rebels claim to have retaken the strategic town of Tavildara (FT, 19 August 1996, p. 4). 11 December 1996: a ceasefire is signed, to last at least until 19 December 1996 when it is hoped that a peace accord will be signed (Guardian, 12 December 1996, p. 18). 23 December 1996: two peace accords are signed in Moscow by President Rakhmonov, Said Abdullo Nuri (leader of the United Tajik Opposition) and a UN envoy. A peace agreement is signed, which includes the following: (1) a national reconciliation commission (one of whose aims is to bring opposition politicians into government); (2) a deadline of eighteen months for a final negotiated settlement; (3) a ceasefire; (4) a general amnesty and exchange of prisoners (CDSP, 1996, vol. XLVIII, no. 51, p. 20). 30 April 1997: President Rakhmonov is wounded in an assassination attempt. 27 June 1997: President Rakhmonov and Said Abdullo Nuri sign a power-sharing pact in Moscow. The agreement specifies that the government will retain 50 per cent of its seats, 30 per cent are to go to opposition representatives and 20 per cent are to go to independents (FT, 1 July 1997, p. 9). 9–11 August 1997: a section of the government’s armed forces rebels. (On 19 August the government claimed that the rebels had been finally defeated.) 11 September 1997: Said Abdullo Nuri returns to Dushanbe. 16 October 1997: rebel gunmen attack the presidential guard and kill fourteen soldiers (IHT, 17 October 1997, p. 6). 15 January 1998: opposition representatives walk out of the national reconciliation commission. 10 March 1998: the first deputy head of the United Tajik Opposition is appointed first deputy prime minister of the Tajik government (CDSP, 14 April 1998, p. 17). 24 March 1998: government troops are attacked by rebels. 4 November 1998: anti-government rebels against the peace pact seize parts of Khodzhent. (It takes several days for the rebels to be defeated.) 11 November 1998: it has taken a week to put down the third rebellion (CDSP, 1998, vol. 50, no. 45, p. 15). 3 August 1999: A special statement on the disbanding of armed formations of the United Tajik Opposition (UTO) was read out on 3 August by Said Abdullo Nuri, the UTO’s leader and chairman of Tajikistan’s national reconciliation commission, in the

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presence of ambassadors of the general peace agreement serving as guarantors of the general peace agreement in Moscow on 27 June 1997… That marked the conclusion of the second stage of the Tajik peace process, namely the conversion of the UTO from a military-political organization to an exclusively political one. The former mujahadin are holding government posts… The authorities are required to lift the ban they imposed on the parties and movements making up the UTO in the spring of 1993, at the height of the civil war. That, in turn, will allow the opposition to legally commence preparations for the upcoming presidential and parliamentary elections… Those who fail to surrender their weapons voluntarily within twenty days will be declared outlaws and will be dealt with by special units made up of both government troops and former ‘holy warriors’. (CDSP, 1999, vol. 51, no. 32, p. 19) The government of Tajikistan reached an agreement with the United Tajik Opposition on disbanding all unofficial armed units and placing opposition detachments under the authority of the ministry of defence… The field commanders who originally came from Uzbekistan refused to accept it… One such detachment tried to break out of Tajikistan and make its way to Uzbekistan across Kyrgyz territory…[Kyrgyzstan] asked Uzbekistan for military assistance… On 15 August four aircraft bearing Uzbek Air Force markings bombed villages in Tajikistan’s Garm and Dzhirgatal districts near the borders with Kyrgyzstan. (CDSP, 1999, vol. 51, no. 33, p. 17) 22 August 1999: see entry on Islamic insurgents for this date in Chapter 5, ‘Kyrgyzstan’. 26 September 1999: a controversial referendum is held on changes to the constitution, including the following: ‘Citizens shall have the right to take part in establishing political parties, including parties of a democratic, religious or atheist nature.’ It is also proposed that the president’s term of office be seven instead of five years (CDSP, 1999, vol. 51, no. 39, p. 20). 6 November 1999: a presidential election is held. Official figures give Imamali Rakhmonov 96.9 per cent of the vote in a turnout of over 98 per cent. The term of office is seven years (CDSP, 1999, vol. 51, no. 45, p. 19). The UN and OSCE turned down invitations to observe the election. The sole challenger, economics minister Davlat Usmon, is the representative of the Islamic Revival Party (CDSP, 1999, vol. 51, no. 44, p. 16; and no. 45, p. 19). Mr Rakhmonov’s sole challenger, Davlat Usmon, said he would not recognize the results and called for the election to be invalidated. Mr Usmon said he believed that the election had been rigged and estimated that only 20 per cent to 30 per cent of eligible voters had cast ballots. Opposition members and some international human rights monitors claimed that the election campaign was neither free nor fair, and international organizations refused to send observers. (IHT, 8 November 1999, p. 10)

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Opposition officials said both turnout and support for the former state farm boss were suspiciously high. ‘This vote was falsified in the tradition of the Soviet Union. The 98 per cent figure speaks for itself,’ said Davlat Usmon, the opposition candidate. (FT, 8 November 1999, p. 8) Davlat Usmon himself did not vote and announced shortly before the election that he was withdrawing his candidacy [not enough signatures were collected for registration: CDSP, 1999, vol. 51, no. 44, p. 16]. However, he failed to serve written notice of that fact, and so his name remained on the ballot. Now Usmon says that the results of the election were falsified. According to his figures, no more than 20 per cent to 30 per cent of the voters cast ballots, which means that the election cannot be considered valid (under the constitution more than half of all registered voters have to take part in an election)… On the eve of the election Tajik opposition leader Said Abdullo Nuri reached a compromise with the authorities. He agreed to call off an election boycott and to resume participation in the national reconciliation commission in exchange for the release of ninety-three imprisoned supporters of his and concessions from the authorities with respect to the law on parliamentary elections, which are scheduled for February 2000… About 100 foreign observers from both the former Soviet republics and other countries monitored the election. There were no serious criticisms. (CDSP, 1999, vol. 51, no. 45, p. 19) 16 February 2000: the mayor of Dushanbe is uninjured in a car bomb attack. But the deputy security minister is killed. Both were known to be candidates in the forthcoming general election. 27 February 2000: parliamentary elections are held for the sixty-three seats in the lower house of the Tajik National Assembly. The turnout was 87 per cent. President Rakhmonov’s party is the People’s Democratic Party. (Elections for the thirty-three-seat Senate are to be held on 23 March 2000.) Preliminary returns…[show that] the victor, with 70 per cent of the vote, was the ‘party of power’ led by President Emomali [Imamali] Rakhmonov. This was the first election in which the Islamic opposition party took part, but it did not fare particularly well. In terms of the number of seats won the Islamic Revival Party came in third, behind the Communists… The voting confirmed predictions by political analysts that the Islamists’ voter base would not exceed 12 per cent. (CDSP, 2000, vol. 52, no. 9, p. 19) Parliamentary elections were held in February [2000] with six parties competing, including former Islamic rebels in a coalition. President Imamali Rakhmonov’s People’s Democratic Party swept the polls with 64.5 per cent of

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the vote, the communists came second with 20 per cent and the Islamic Renaissance Party scored 7.5 per cent. However, there were charges of ballotbox stuffing as an 87 per cent turnout was recorded. Islamic Renaissance Party leader Abdullah [Said Abdullo] Nuri said the results would be accepted and the peace process was irreversible. (FEER, Asia 2001 Yearbook, December 2000, p. 102) ‘International monitors said it fell short of minimum standards’ (The Economist, 4 March 2000, p. 82). ‘The election was deemed pretty fair by regional standards’ (Business Central Europe 2000:47). 21 June 2000: CIS leaders meet in Moscow. The collective peacekeeping forces in Tajikistan have accomplished their mission and will now be disbanded… CIS heads of state signed a resolution establishing the collective peacekeeping force at a meeting in November 1993. Besides Russia three other countries—Uzbekistan, Kazakhstan and Kyrgyzstan—undertook to send one battalion each to Tajikistan… This was the first attempt by the former Soviet republics at real military co-operation within the CIS for peacekeeping purposes… However, the disbandment of the collective peacekeeping force in Tajikistan…will have absolutely no impact on the region’s military potential, which is utterly and completely bound up with the Russian armed forces, (Izvestia, 22 June 2000, p. 3: CDSP, 2000, vol. 52, no. 25, p. 15) Russian troops, perhaps 25,000 of them, are now in Tajikistan… Last month [July] it was agreed that Moscow will also set up a Russian military base in Tajikistan, partly for bilateral training and manoeuvres… It is the first such accord in the region since these countries gained their independence after the Cold War. (IHT, 9 August 2000, p. 4) 22 August 2000: Fighting broke out when a group of armed men attempted to cross the TajikAfghan border in the area guarded by the Russian border group’s Kalai-Khumb detachment… Preliminary investigation revealed that the captured intruders were fighters from the Islamic Movement of Uzbekistan … From… Tajikistan…armed bands have been attempting to enter Uzbekistan and Kyrgyzstan. Meanwhile Tajik border troops in northern Tajikistan repelled an attempt by a group of armed terrorists to enter Tajikistan from a mountain gorge in… Kyrgyzstan… At the same time Russian border troops on Tajikistan’s borders are having to stave off a tidal wave of drugs… Attempts to bring heroin across the border from Afghanistan are becoming increasingly frequent. (CDSP, 2000, vol. 52, no. 34, p. 20)

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April 2001: Tajik president Emomali [Imamali] Rakhmonov and [Russian president] Vladimir Putin finally reached an agreement in Moscow on establishing a Russian [air] base in Tajikistan… For the first time since the Soviet Union broke up… Russian frontline aviation is to be stationed in Khodzhent, a city near the border with Uzbekistan. But in order to reach the theatre of military operations in the Ferghana Valley and in Kazakhstan, the attack aircraft will have to fly through Uzbek territory, something that President Karimov strongly opposed in the past. Kommersant has learned that after his talks with Anatoli Kvashnin [chief of the Russian general staff] those objections were withdrawn. (Kommersant, 27 April 2001, p. 3: CDSP, 2001, vol. 53, no. 18, pp. 5–6) 22 June 2001: ‘Government forces launched a military operation on Friday [22 June] to free a group of hostages seized outside… Dushanbe… The hostages were believed to be held by gunmen led by rebellious warlords’ (IHT, 23 June 2001, p. 2). 24 June 2001: A military crackdown on gunmen loyal to former guerrilla chiefs continued for a third day near… Dushanbe on Sunday [24 June]… The crackdown which began on Friday [22 June] with artillery and rifle battles in the suburbs, was still under way’ (IHT, 24 June 2001, p. 7). 11 July 2001: Russia rejected a demand yesterday [11 July] to extradite an opposition journalist who had disclosed close links between Tajik leaders and gangs smuggling heroin out of Afghanistan. Dodojon Atovulloyev [is] the editor of … [a] Tajik newspaper in Moscow… According to Anton Surikov, a Russian official with close links to military intelligence…some 60 tonnes of heroin a year pass through Tajikistan, helped by part of the Tajik political elite and senior Russian military officers stationed on the border. (Independent, 12 July 2001, p. 13) 11 September 2001: there are terrorist attacks on the USA. (For details, see the section below.) 9 October 2001: ‘Tajikistan…said yesterday [9 October] it had allowed in US “specialists” for “humanitarian” work in Afghanistan, but not US troops’ (FT, 10 October 2001, p. 2). ‘The USA said yesterday [10 October] it was giving Tajikistan $3 million to help private farmers. Two successive droughts have hit the country’s grain harvest’ (FT, 11 October 2001, p. 2). ‘There certainly seems little sympathy anywhere [in Tajikistan] for the Taleban’ (The Economist, 20 October 2001, p. 76). May 2002: Tajikistan said it agreed to cede a chunk of its territory to China, days after Kyrgyzstan made a similar handover of land to China. Tajikistan signed a treaty to give 1,000 square kilometres to China. Kyrgyzstan earlier ratified a pact

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ceding 1,270 square kilometres. (FEER, 30 May 2002, p. 25) The 11 September 2001 terrorist attacks on the United States and the reactions of CIS countries 25–6 August 1999: the presidents of Russia, China, Kazakhstan, Kyrgyzstan and Tajikistan meet in Bishkek (the capital of Kyrgyzstan). The five countries are called the ‘Shanghai Five’, named after the Chinese city where a treaty on easing border tension was signed in 1996. A declaration is signed: The importance of fighting international terrorism, the illegal drugs trade, arms trafficking, illegal migration and other forms of transborder crime, separatism and religious extremism [is stressed]… The signatories also consider that creating a multi-polar world is the common path for development and will ensure long-term stability. (IHT, 26 August 1999, p. i) ‘Under pressure from Jiang Zemin, the following clause was inserted in the final Bishkek document: “Human rights should not be used as a pretext for interfering in a state’s internal affairs”’ (CDSP, 1999, vol. 51, no. 34, p. 15). [On 14 June 2001] leaders met in Shanghai to kick off a six-nation meeting aimed at combating Islamic militancy in Central Asia…[The meeting comprised] China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan and the group’s new member, Uzbekistan… The group said in a statement it had admitted Uzbekistan as a sixth member of the forum, which would change its name to the ‘Shanghai Co-operation Organization’ [from the ‘Shanghai Five’]. (IHT, 15 June 2001, p. 3) The leaders of China, Russia and four Central Asian nations agreed Friday [15 June] to band together to fight Islamic terrorism…issued a joint statement opposing US plans to create a missile defence system…[and] agreed to promote trade and investment… Last year [2000] the Shanghai Five agreed to create a centre in the Kyrgyz capital, Bishkek, to fight terrorism. In a joint statement Friday the group committed again to establishing the centre. (IHT, 16 June 2001, p. 4) ‘The leaders…agreed to establish an “anti-terrorism centre” in Bishkek, but played down suggestions that it would operate as a permanent military base’ (FT, 16 June 2001, p. 10). ‘Leaders agreed to curb “extremism, terrorism and separatism”’ (FEER, 28 June 2001, p. 12). ‘The grouping…was renamed the Shanghai Co-operation Organization in June last year [2001] when Uzbekistan was admitted’ (The World Today, 2002, vol. 58, no. 7, p. 15). A summit meeting of the Shanghai Co-operation Organization was held in St

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Petersburg on 6–7 June 2002, attended by the heads of Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. The summit ended with the signing of several fundamental documents: a charter for the organization, a political declaration and an agreement on a regional antiterrorism centre…[The] charter…was not made public… [But] will enable the Shanghai Co-operation Organization to officially register with the UN as a regional organization. (CDSP, 2002, vol. 54, no. 23, pp. 6–7) ‘The leaders of Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan have signed the security pact that China once envisaged as a counterweight to Nato. However, Western diplomats said that the pact had become irrelevant after 11 September’ (The Times, 8 June 2002, p. 23). 11 September 2001: there are terrorist attacks in the United States on the World Trade Center in New York and on the Pentagon in Washington. (The USA took the war on international terrorism to Afghanistan. Bombing started on 7 October and on 19 October US special forces began the ground phase of the war in Afghanistan. The USA considered the Taleban regime to be harbouring terrorists, notably the Moslem fundamentalist Osama bin Laden and his al-Qaeda [‘the base’] forces. The combination of US bombing and the ground attacks of anti-Taleban forces, especially the Northern Alliance, was successful in a surprisingly rapid fashion. The Taleban regime was essentially beaten by November 2001 and a new temporary Afghan government of national unity was in place by December 2001.) President Bush (21 October): President Putin was the first person to call [after the 11 September terrorist attacks]. That’s what a friend does, calls in a time of need…[Russia] came to stand in solidarity with the United States… Russia is sharing valuable intelligence on terrorist organizations, providing overflight clearance for humanitarian missions, and helping out diplomatically. (The Times, 22 October 2001, p. 2) ‘Within hours of the [11 September] attacks, Mr Bush told a joint press conference, Mr Putin had cancelled a Russian military exercise to “simplify our situation”’ (Guardian, 22 October 2001, p. 2). Vladimir Putin (11 September): Today the United States was confronted with an unprecedented act of aggression on the part of international terrorism… What happened today underscores once more the urgency of Russia’s proposal that the international community join forces to combat terrorism, the plague of the twenty-first century. Russia knows first hand what terrorism is. And for that reason we understand the feelings of the American people more than anyone… You have our support.

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(CDSP, 2001, vol. 53, no. 37, p. 4) 13 September 2001: ‘Moscow agreed Thursday [13 September] to work with Nato in seeking to “unite the entire international community in the struggle against terrorism”’ (IHT, 14 September 2001, p. 4). ‘Russia has officially pledged co-operation in fighting what President Vladimir Putin called a “common enemy”’ (IHT, 15 September 2001, p. 1). Nato and Russia issued an unprecedented statement yesterday [13 September] denouncing the [terrorist] attacks in America… The Nato-Russian Permanent Joint Council in Brussels said both parties would ‘intensify their co-operation to defeat this scourge’… The show of solidarity came a day after Nato ambassadors agreed this week’s terrorist atrocity was an attack on all nineteen members and triggered Article 5, the collective defence clause of the Nato treaty. (Telegraph, 14 September 2001, p. 4) Russia and Nato said they were ‘united in their resolve not to let those responsible for such an inhuman act to go unpunished’…[On 12 September Nato invoked] for the first time Article 5 of its charter, which says an attack against one is an attack against the alliance. (FT, 14 September 2001, p. 8) 14 September 2001: Russia on Friday [14 September] rejected participation in any US-led retaliatory strike against terrorists and said the United States should not use countries in Central Asia as a staging ground for an assault against neighbouring Afghanistan… Tajikistan and several other countries in former Soviet Central Asia are among the few obvious launching pads against Osama bin Laden’s haven in Afghanistan. Defence minister Sergei Ivanov said during a meeting in Armenia that the United States and its allies should not rely on Central Asia to stage an assault. ‘I see absolutely no basis for even hypothetical suppositions about the possibility of Nato military operations on the territory of Central Asian nations,’ Mr Ivanov said. At the same time Russian military leaders made it clear that Russia would most likely not take part in ‘the retaliatory acts’ planned by the United States, said General Anatoli Kvashnin, head of the Russian General Staff… General Kvashnin said: The United States armed forces are powerful enough to deal with this task alone’… A day earlier Mr Ivanov also expressed scepticism about an active role in the US response: ‘Russia is not planning any kind of military actions or strikes’… But these statements Friday did not rule out far more extensive co-operation than in the past between Russia and the United States. Both Western and Russian sources in Moscow said that high-level talks were continuing between the two countries aimed at ‘constructive’ co-operation that could well go beyond sharing intelligence

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information… In recent days Mr Putin and Mr Ivanov have both asserted that Mr bin Laden has given aid to the Chechen rebels… Russia’s allies in Tajikistan did not reject the possibility that the United States could use its air space as part of an operation against Mr bin Laden… The Tajik prime minister said [on Friday] only that he would ‘definitely’ consult with Russia before agreeing to such a step. (IHT, 15 September 2001, p. 1) Osama bin Laden [is] the prime suspect in the terrorist attacks… Russia… on Thursday [13 September] offered Nato unsolicited support for a global struggle against terrorist groups… The Russian foreign minister, Igor Ivanov…said the attacks…justified ‘all possible means’ in the fight against terrorism. But within hours the Russian military pulled back from those positions. The Russian defence minister, Sergei Ivanov, ruled out ‘even hypothetical assumptions’ that Russia and other former Soviet states would lend troops or bases to any Nato military action. Russian officials also warned the United States that any retaliation that caused civilian suffering would only provoke a greater terrorist response. (IHT, 17 September 2001, p. 4) ‘Prime minister Akil Akilov [of Tajikistan] has said he might consider allowing Westernled forces to use its air bases against Afghanistan. But by the weekend [16 September] a spokesman for the foreign ministry said such reports had been “groundless”’ (p. 6). (‘Tajikistan…has 20,000 or more Russian troops on its soil’: FT, 3 October 2001, p. 20.) ‘Russian defence minister Sergei Ivanov yesterday [14 September]…[said there are] “absolutely no grounds, not even hypothetically, for speculating that some sort of Nato military operations could be undertaken on the territory of the Central Asian countries of the CIS”’ (CDSP, 2001, vol. 53, no. 37, p. 5). 15 September 2001: ‘We must weigh up our decisions and make them on the basis of proven facts,’ said President Vladimir Putin on Saturday [15 September]. Russia fears the instability in Central Asia that a strike on Afghanistan may provoke …and also reaction in the Arab world where it has traditional allies. (FT, 17 September 2001, p. 2) 17 September 2001: Uzbekistan said yesterday [17 September] it had not ruled out offering the USA its facilities or airspace for an attack. A foreign ministry spokesman said Tashkent has received no formal request from the USA yet, but stood ready to discuss ‘all possible forms of co-operation’… Turkmenistan’s insular government has been most successful in keeping the Taleban at arm’s length. President Saparmurad Niyazov’s policy of ‘positive neutrality’ keeps Turkmenistan mostly isolated, but at the same time keeps channels with Kabul

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open. (FT, 18 September 2001, p. 4) ‘Uzbekistan…blames…the Taleban…for supporting armed Islamic rebels who have crossed into Uzbekistan in the last few years’ (Independent, 18 September 2001, p. 9). 18 Septmber 2001: The Kazakh foreign minister…[said that] ‘Kazakhstan is prepared for the strongest possible co-operation with the United States and the world community in combating international terrorism’… Uzbekistan has already offered to make its territory and airspace available to the United States, although it says that America has not taken up its offer. Kyrgyzstan…[said] that ‘information support’ and help to the FBI were…on offer. Tajikistan says that it will coordinate any help to the USA with Russia, while Turkmenistan…has ruled out an active role… Turkmenistan signalled its readiness to be an active part of the front line yesterday [18 September]… The country supplies the Taleban with gas and electricity. (The Times, 19 September 2001, p. 10) 19 September 2001: ‘The [Russian] foreign minister hinted yesterday [19 September] that US forces might be allowed to use bases in Central Asia’ (Telegraph, 20 September 2001, p. 11). ‘The Pentagon let it be known Wednesday [19 September] that US combat planes were headed toward… Uzbekistan and Tajikistan’ (IHT, 22 September 2001, p. 4). 22 September 2001: ‘US military transport aeroplanes landed [in Uzbekistan] on Saturday [22 September]… Comments last week by Igor Ivanov, Russian foreign minister, echoed by President Vladimir Putin, that each country could decide for itself, seemed to signal a change’ (FT, 24 September 2001, p. 2). ‘Over the weekend several news organizations reported that up to three American transport planes had landed…[but] Uzbekistan has not confirmed these reports… Tajikistan has formally denied reports that American aircraft and troops have been stationed [there]’ (IHT, 25 September 2001, p. 4). President Nursultan Nazarbayev of Kazakhstan: ‘Kazakhstan has resolutely spoken out against terrorism and is ready, in a coalition of other states, to fight it jointly because we believe that a single state, however big, cannot defeat terrorism alone’ (The Times, 24 September 2001, p. 9). 24 September 2001: President Putin: Needless to say, we remain prepared to make our contribution to the war on terrorism… We support active international co-operation through intelligence services. Russia has shared information in its possession regarding the infrastructure and whereabouts of international terrorists and terrorist training camps and will continue to do so. We are prepared to open Russian Federation airspace to aircraft carrying humanitarian cargo to the region in which the antiterrorist operation is to be carried out. We have co-ordinated this position with

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our allies in Central Asia. They share this position and do not rule out the possibility of allowing the use of their airfields. Russia is also willing, if need be, to take part in international search-and-rescue operations … We will expand our co-operation with the internationally recognized government of Afghanistan, led by Mr Rabbani, and will provide its armed forces with additional assistance in the form of arms and military hardware … Russian co-operation with the countries participating in the counter-terrorist operation could also assume other, more in-depth forms. The extent and nature of this co-operation will be directly dependent on the overall level and quality of our relations with these countries and on mutual understanding in combating international terrorism… In order to co-ordinate efforts in all the aforementioned areas I have established a group headed by defence minister Sergei Ivanov. (CDSP, 2001, vol. 53, no. 39, p. 1) (‘The Northern Alliance [is] the largest opposition movement to the ruling Taleban in Afghanistan. The alliance is composed largely of ethnic Tajiks and Uzbeks who are not represented in the Taleban’: FT, 1 October 2001, p. 28. ‘Russia…has armed [the Northern Alliance] covertly since 1996’: FT, 3 October 2001, p. 20.) President Putin on Monday [24 September] offered the United States broad support for anti-terrorist operations in Afghanistan, including access to its airspace for humanitarian missions, direct participation in some search-andrescue operations and weapons shipments to forces opposing the ruling Taleban movement inside Afghanistan. (IHT, 25 September 2001, p. 1) President Nazarbayev: ‘We are ready to support an action against terrorism with all means at our disposal [including the use of airfields, airspace and military bases]’ ‘We have so far received no concrete requests for such help, but if they come Kazakhstan will consider them positively’ (IHT, 25 September 2001, p. 4; Independent, 25 September 2001, p. 5). ‘Ukraine yesterday [24 September] cleared the way for US military cargo planes…to fly through Ukrainian airspace’ (FT, 25 September 2001, p. 5). ‘Turkmenistan…has no domestic fundamentalist opposition threat to worry about’ (Independent, 25 September 2001, p. 5). ‘The Turkmen government has insisted on remaining neutral’ (The Times, 25 September 2001, p. 11). ‘Turkmenistan, Tajikistan and Uzbekistan [have] closed their borders to Afghanistan’ (The Times, 26 September 2001, p. 4). ‘Turkmenistan…proclaims a policy of “positive neutrality”, which generally translates into Turkmenistan avoiding any initiatives on a regional basis and preferring to negotiate with other countries individually’ (FT, 26 September 2001, p. 4). ‘Turkmenistan has declared itself a neutral state… Though retaining its reservations, it has also been the closest to the Taleban of all five governments, hoping to use Afghanistan one day for pipelines to export its energy resources’ (FT, 1 October 2001, p. 28). 25 September 2001: ‘Yesterday [25 September]…President Saparmurad Niyazov [of

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Turkmenistan] said that…he had agreed to open an air corridor for US aircraft to deliver “humanitarian goods” such as food to Afghanistan, but not military supplies’ (FT, 26 September 2001, p. 4). ‘Turkmenistan made its territory available for the trans-shipments of UN humanitarian aid to neighbouring Afghanistan and offered its airspace to the United States, but Niyazov’s foreign policy—“permanent neutrality”—precluded any direct participation in the war’ (IHT, 11 July 2002, p. 2). President Saparmurad Niyazov was reported to have said he would open air and ground corridors to humanitarian aid. Kyrgyzstan said it had agreed to an American request to grant air corridors for aircraft involved in military operations in Afghanistan… The airport at Dushanbe, the capital of Tajikistan, ‘may be offered to the US air force to carry out a retaliatory strike if the need arises’…the Russian defence minister, Sergei Ivanov, [was quoted] as saying. (Guardian, 26 September 2001, p. 6) US co-operation with Uzbekistan is not new and has included joint military exercises. According to some officials, the country has also been used to base intelligence and other assets for US covert efforts over the last three years to track down Osama bin Laden. In his 20 September speech to Congress President George W.Bush named just two international groups linked to al-Qaeda: the Egyptian Islamic Jihad and the Islamic Movement of Uzbekistan (IMU), which wants to overthrow the autocratic government of President Islam Karimov and set up Islamist states elsewhere in the region. (FT, 1 October 2001, p. 28) 2 October 2001: For the first time in its fifty-two-year history Nato invoked Article 5 of its treaty, obliging the alliance to give the USA assistance ‘for such action as it deems necessary, including the use of armed force’. The article states that an armed attack on one or more of the allies… ‘shall be considered an attack against them all’… But to invoke it Nato insisted on 12 September …that Article 5 could come into play only ‘if’ the USA could prove the attack was directed from abroad. Yesterday [2 October] that ‘if’ was removed… Lord Robertson (Nato secretary-general): ‘The facts are clear and compelling. We know that the individuals who carried out these attacks were part of the worldwide terrorist network of al-Qaeda, headed by Osama bin Laden and his key lieutenants and protected by the Taleban.’ (FT, 3 October 2001, p. 3) President Putin is in Brussels for talks with Nato and the EU. He again condemns terrorism (The Times, 3 October 2001, p. 8). ‘[On 2 October] Russia signed a military co-operation agreement with Iran … “Russia and Iran have been the most active supporters of the Northern Alliance, which is

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opposing the Afghan Taleban movement”…defence minister Sergei Ivanov said’ (IHT, 3 October 2001, p. 2). 5 October 2001: Islam Karimov, Uzbek president, agreed during a visit by… Donald Rumsfeld, US defence secretary…to Tashkent to allow the use of an air base for cargo aircraft, helicopters and troops, though not as a launchpad for attacks by special forces on Afghanistan… Mr Karimov said the base could be used for humanitarian and search and rescue operations. (FT, 6 October 2001, p. 2) President Islam Karimov: ‘We are against the usage of our territory or the land operations against Afghanistan and we are against air strikes executed from the territory of Uzbekistan. Special operations forces will not be deployed in the territory of Uzbekistan’ (IHT, 6 October 2001, p. 1). ‘Most military and diplomatic observers believed such lines would be blurred in the coming weeks, or for the duration of America’s campaign against the Taleban, and that US operations will be significantly more extensive’ (The Times, 6 October 2001, p. 2). ‘The United States deployed its first ground troops in the war against terrorism Friday [5 October], sending 1,000 soldiers to Uzbekistan… The troops were en route from the United States’ (IHT, 6 October 2001, p. 1). 7 October 2001: the USA and the UK start bombing targets in Afghanistan. 8 October 2001: ‘President Vladimir Putin yesterday [8 October] strongly backed the US strikes’ (FT, 9 October 2001, p. 9). Vladimir Putin: ‘Humankind has matured after the horrible tragedy on 11 September. I think their arrogance and self-assurance has been the terrorists’ undoing. They did not expect the international community to show such cohesion in the face of a common threat’ (IHT, 10 October 2001, p. 9). ‘Yesterday [8 October] Kyrgyzstan said it could accept no more than 10,000 refugees from Afghanistan, in addition to the 1,500 it already has’ (FT, 9 October 2001, p. 9). ‘Sergei Ivanov, Russia’s defence minister, [has been] named…as the country’s antiterrorist co-ordinator’ (FT, 10 October 2001, p. 2). ‘Tajikistan…said yesterday [9 October] it had allowed in US “specialists” for “humanitarian” work in Afghanistan, but not US troops’ (FT, 10 October 2001, p. 2). ‘The USA said yesterday [10 October] it was giving Tajikistan $3 million to help private farmers. Two successive droughts have hit the country’s grain harvest’ (FT, 11 October 2001, p. 2). ‘There certainly seems little sympathy anywhere [in Tajikistan] for the Taleban’ (The Economist, 20 October 2001, p. 76). 12 October 2001: Yesterday [12 October]… Uzbekistan agreed to allow US troops and aircraft to launch missions from a key Uzbek base [Khanabad]… In yesterday’s statement the Uzbek government said it agreed to provide the use of its airspace and ‘necessary military and civilian infrastructure of one of its airports which could

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be used in the first instance for humanitarian purposes’. In return the Uzbek government has won a pledge from the USA to support the country if it faced direct threats… The Americans would ‘urgently discuss’ appropriate security arrangements if Uzbekistan’s territorial integrity was threatened… The USA has also a pledged from the government in Tajikistan for its bases to be used for military operations if required. (The Times, 13 October 2001, p. 14) The USA and Uzbekistan said yesterday [12 October] they had signed an agreement under which Washington agreed to urgent discussions if the former Soviet republic came under threat. The joint statement referred to a classified agreement between the two sides signed on 7 October, which it said had established ‘a qualitatively new relationship based on a long-term commitment to advance security and regional stability’… Co-operation against terrorism would include ‘the need to consult on an urgent basis about appropriate steps to address the situation in the event of a direct threat to the security of territorial integrity of the Republic of Uzbekistan’ … A US official said…‘It is the first time something like this has been done with any country that was part of the Soviet Union.’ (FT, 13 October 2001, p. 2) In the [12 October] statement…offensive operations were not explicitly ruled out, with the deal stipulating only that the Uzbek military base would be used ‘in the first instance’ for non-military aid purposes… The United States and Uzbekistan have quietly conducted joint covert operations aimed at countering Afghanistan’s ruling Taleban government and its terrorist allies since well over a year before the 11 September attacks, according to officials from both nations. The most significant advance came more than a year ago with stepped-up intelligence co-operation between the two countries in an effort to track and undermine… Osama bin Laden. At the same time special forces began to work more overtly with the Uzbek military on training missions…[The] chief spokesman for President Islam Karimov… said significant military and intelligence joint efforts extended back ‘two or three years’… In 1998…[there were] terrorist attacks on the US embassies in Kenya and Tanzania. (IHT, 15 October 2001, p. 4) 21 October 2001: Presidents Putin and Bush met during the APEC (Asia-Pacific Economic forum) meeting in Shanghai. President Putin: I fully agree with the position of President Bush and his action, which is measured and adequate to the threat that the United States was confronted with. If we start fighting terrorism it must be completed, otherwise terrorists would get the feeling that they are not vulnerable. (The Times, 22 October 2001, p. 2)

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President Bush: President Putin was the first person to call [after the 11 September terrorist attacks]. That’s what a friend does, calls in a time of need…[Russia] came to stand in solidarity with the United States… Russia is sharing valuable intelligence on terrorist organizations, providing overflight clearance for humanitarian missions, and helping out diplomatically. (The Times, 22 October 2001, p. 2) ‘Within hours of the [11 September] attacks, Mr Bush told a joint press conference, Mr Putin had cancelled a Russian military exercise to “simplify our situation”’ (Guardian, 22 October 2001, p. 2). A statement was issued after the APEC meeting concluded: Leaders consider the murderous deeds [of 11 September]…as a profound threat to the peace, prosperity and security of all people, of all faiths, of all nations. Terrorism is also a direct challenge to APEC’s vision of free, open and prosperous economies. (FT, 22 October 2001, p. 11) ‘The statement issued by the APEC leaders promised co-operation to block funds for terrorists, step up security at ports and airports, and limit the economic fallout from the attacks’ (Telegraph, 22 October 2001, p. 9). ‘Leaders…agreed to step up efforts to cut off funding for terrorists. They also called for efforts to improve aviation, maritime and energy security and to co-operate to bring the perpetrators of the 11 September attacks to justice’ (FT, 22 September 2001, p. 11). ‘[The statement] pledged economic and financial measures to prevent “all forms of terrorist acts” in the future’ (Guardian, 22 October 2001, p. 2). The statement itself committed the nations to: ‘Bring the perpetrators to justice…[to take] appropriate measures to prevent the flow of funds to terrorists…[and to develop] a global electronic customs network and electronic movement records’ (IHT, 22 October 2001, pp. 1–6). ‘[At the APEC meeting President Bush said that] “No government should use our war against terrorism as an excuse to persecute minorities within their borders”’ (Guardian, 22 October 2001, p. 2). 25 October 2001: ‘Uzbekistan has agreed to open part of its border to allow humanitarian aid into northern Afghanistan…to allow the UN for the first time since 1998 to use the Termez river port and barges’ (FT, 26 October 2001, p. 2). 5 November 2001: Tajikistan and the United States have reached a tentative agreement on military co-operation that could lead to American air strikes against the Taleban forces from the territory of the Central Asian republic. An American inspection team has arrived in Tajikistan to examine three former Soviet bases to see whether they are usable… The US inspection team also plans to look at bases in

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Kyrgyzstan and Kazakhstan… The Tajik foreign minister said a final decision about co-operation between his country and the United States would be made after the team’s assessment was complete … Donald Rumsfeld, the US secretary of defence, stopped in Moscow [on 3 November] for talks with his Russian counterpart, Sergei Ivanov. A US defence department official said that the bases in Tajikistan were discussed and the Russians supported the use of the airfields by the United States. (IHT, 6 November 2001, p. 5) 11 November 2001: ‘President Putin said yesterday that Russian forces would take part in the rescue of American aircrews brought down over Afghanistan’ (The Times, 12 November 2001, p. 7). 25 November 2001: ‘Juma Namangani…the head of the Islamic Movement of Uzbekistan…[was] reported yesterday [25 November] to have been killed [while fighting] in Afghanistan’ (FT, 26 November 2001, p. 8). 26 November 2001: Russia has sent twelve transport aircraft with diplomats, humanitarian workers and de-mining experts to Kabul… President Vladimir Putin… [said] that the aid workers and experts had been sent at the request of Burhanuddin Rabbani, head of the internationally recognized Islamic State of Afghanistan now installed in Kabul… Russia’s health ministry said it would be opening a field hospital in the near future at an unspecified location within Afghanistan. (FT, 27 November 2001, p. 10) More than 200 personnel, including support and security staff, were deployed to establish a ‘humanitarian centre’… The teams deployed yesterday [26 November] were part of a…humanitarian programme to help feed and house Afghans. They would ensure a safe route from Bagram airport to Kabul before establishing a base in the capital. The humanitarian presence will be increased… Mr Putin said the latest move was taking place ‘at the request of President Rabbani and the Islamic State of Afghanistan’ and in ‘close co-operation with US representatives’. (The Times, 27 November 2001, p. 6) Russians armed with kalashnikovs returned here Tuesday [27 November], twelve years after the manhandled Soviet army retreated from Afghanistan in defeat, but this time they vowed only to help. A contingent of eighty-eight men from the Russian ministry of emergency situations set up a small camp on a patch of dirt…in central Kabul… Although officially not soldiers, the Russians dressed the part… Russian officials said they came at the invitation of the Northern Alliance, the coalition of Afghan guerrillas now in charge of Kabul, and planned to build a medical facility and rehabilitate their long-abandoned embassy. The unexpected move made the Russians the first foreign power to publicly send armed forces into the Afghan capital since the Taleban

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surrendered Kabul and retreated on 13 November. When a small troop of British soldiers flew into the Bagram air base north of Kabul the Northern Alliance expressed their displeasure… US marines established a base near Kandahar in southern Afghanistan this week… The Soviet Union invaded Afghanistan in December 1979 to ensure a friendly communist regime on its southern border, only to find itself mired in a devastating war that left 15,000 soldiers dead… The last Soviet troops withdrew in disgrace in 1989, leaving behind a chaotic political situation and a civil war that has not ended…[Russia plans to] rebuild the old embassy, which Moscow abandoned in 1992 after the fall of the communist government. The embassy has been decimated by warfare since then and now serves as home to thousands of refugees living in the rubble. (IHT, 28 November 2001, pp. 1, 4) [US] secretary of state Colin Powell spoke to Russia's foreign minister by phone earlier this week and urged Moscow to avoid diplomatic or military moves in Afghanistan that might undermine trust between the United States and Russia… General Powell also said that Russia should avoid doing anything to promote its long-time ally, the Northern Alliance leader Burhanuddin Rabbani, as the official leader of a post-conflict Afghanistan. (IHT, 30 November 2001, p. 3) 6 December 2001: ‘[The Kyrgyz] parliament voted Thursday to let the US-led coalition in Afghanistan use air bases in Kyrgyzstan in military and humanitarian operations for one year’ (IHT, 7 December 2001, p. 3). 9 December 2001: the Friendship Bridge over the Amu-Darya river is opened for the first time since 1997 for aid deliveries to Afghanistan. Uzbekistan was very cautious about reopening the bridge. 14 December 2001: ‘US defence secretary Donald Rumsfeld left Friday [14 December] to visit Azerbaijan, Armenia and Georgia for talks on the war on terrorism… The three countries have offered Washington use of their airspace for military action in Afghanistan’ (IHT, 15 December 2001, p. 4). ‘During his swing through Central Asia last week Colin Powell, the US secretary of state, was offered the use of Kazakh military bases as well as overflying rights for forces involved in the military and humanitarian operations in Afghanistan’ (FT, 17 December 2001, p. 8). 22 December 2001: in Afghanistan a new, interim government, headed by Hamid Karzai, is sworn in. 25 December 2001: By 25 December 200 US servicemen had arrived at Manas airport outside … Bishkek… The initial agreement for America’s presence [in Kyrgyzstan] was for one year… In March [2002] it was estimated that approximately 1,500 US or coalition troops were based at Manas… The degree of US military involvement in Kazakhstan remains somewhat in mystery, but it was reported in March [2002] that a special forces unit had been training [Kazakh] soldiers…in

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counter-terrorist techniques since February [2002]. (Dillon 2002:14) January 2002: The United States and its allies are building an air base in Kyrgyzstan…as a ‘transportation hub’ to house up to 3,000 soldiers and to accommodate warplanes and support aircraft. Engineers are also improving runways, lighting, communications, storage and housing at bases in Uzbekistan… [The United States is] looking to expand US military engagement by increasing technical support and training exercises with their counterparts in the region… The [US] deputy defence secretary, Paul Wolfowitz…said bases and exercises would ‘send a message to everybody, including important countries like Uzbekistan, that we have the capacity to come back and will come back in—we’re not just going to forget about them’. The willingness of the Pentagon to put a long-term footprint in Central Asia underscores a broader shift by President George W.Bush…[about] overseas troop deployments… But too large or too long-term a US military presence could alarm Russia and China. (IHT, 10 January 2002, p. 1) Washington does not plan to maintain a permanent military presence in former Soviet Central Asia…the general commanding the US-led Afghan campaign said Wednesday [23 January]…[He] said that even without a troop presence the United States would remain involved in the region as it continued its campaign against violent militants. (IHT, 24 January 2002, p. 6) (‘Tajikistan offered an air base to the United States last autumn [2001], but the Pentagon decided at the last moment to use instead the Manas air base in neighbouring Kyrgyzstan’: IHT, 2 August 2002, p. 6.) The American government’s decision to deploy 3,000 American and allied troops in Kyrgyzstan, at a time when the war in Afghanistan has almost come to a close, has been unpleasant news for the Russians. It will be three times the number of American soldiers based in Uzbekistan… Kyrgyzstan has agreed to a one-year deployment of the troops near the airport of its capital Bishkek. (The Economist, 19 January 2002, p. 61) ‘Turkmenistan…is [simply] allowing overflights of [US] military aircraft’ (Guardian, 10 January 2002, p. 14). ‘Turkmenistan…has allowed humanitarian aid cargoes to use its roads and air space’ (FT, 22 January 2002, p. 10). 6 March 2002: French Mirage 2000-D fighter jets participated for the first time in military

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operations in Afghanistan this week, taking off from an air base in… Kyrgyzstan… The sorties were a first for France and Kyrgyzstan… Kyrgyzstan is a signatory to the CIS’s collective security agreement, which in part requires a country to gain approval with the other members—former Soviet republics— before allowing foreign troops on its soil…[Kyrgyzstan] says that Bishkek consulted with all members of the collective security agreement, as well as the Shanghai Co-operation Forum, which includes China, and encountered ‘no problems’. (FT, 7 March 2002, p. 12) July 2002: ‘The United States signed an agreement with Kazakhstan this month [July] to allow use of this country’s [Kazakhstan’s] major airport for emergency landings by US warplanes operating over Afghanistan’ (IHT, 24 July 2002, p. 2). ‘An agreement [has been reached that] allows stop-overs by American fighters at the country’s [Kazakhstan’s] military airports; this should be a useful backup to the new Western base in nearby Kyrgyzstan’ (The Economist, 26 July 2002, p. 13). [The events of 11 September 2001] enabled President Imamali Rakhmonov to carry out some long-overdue housekeeping. For example, around 15 per cent of the commanders in the powerful border control forces were recently sacked… The role of law enforcement organizations, the militia and judges are all now under review… Russia continues to keep its 201st motor rifle division in… Dushanbe and has agreed to set up a military base in the country … Relations with Uzbekistan, through which Tajikistan’s railway runs before reaching Kazakhstan and Russia, remain particularly difficult. In the past few years the Uzbeks have accused Tajikistan of endangering their security by permitting drug trafficking from Afghanistan and failing to prevent Islamists from attacking Uzbek territory. As a result of this, Uzbekistan decided to plant mines along its border, without informing the Tajikistan authorities of their location. To date they have killed at least fifty-five Tajik civilians. (The Economist, 27 July 2002, p. 59) 27 August 2002: Tajikistan has signed an agreement giving US troops there immunity from prosecution in the new International Criminal Court… Tajikistan is the fourth government to sign such a pact known as an Article 98 agreement with the United States… The others are Israel, Romania and East Timor. (IHT, 28 August 2002, p. 3) March 2003: Central Asia has become a major route for Afghan opium and heroin travelling to Europe… According to the United Nations Office on Drugs and Crime, the trade in opium through Central Asia started in the early 1990s and heroin first

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appeared in 1995. Today the UN estimates that about one kilo in four goes through Central Asia. In 2002 drug trafficking of Afghan opiates generated $2.2 billion in Central Asia—equivalent to 7 per cent of the area's GDP… Tajikistan is affected far more than any other Central Asian country …[In 2002] the country’s authorities intercepted…almost 80 per cent of the total seized in the region… The fight against the growing drug plague is one of the few things on which Central Asian countries have brought themselves to co-operate… According to the UN, heroin addiction in Central Asia has been one of the fastest growing in the world since the late 1990s. (The Economist, 29 March 2003, pp. 64–5)

THE ECONOMY The economic background The civil war has caused much economic damage and held back economic reform. Since only 6 per cent of the land is arable (of which 74 per cent is irrigated), grazing predominates. Tajikistan is dependent on food imports. There are deposits of lead, zinc, wolfram, uranium and gold, but they have yet to be developed. In 1991 industry accounted for 19.6 per cent of national income (Deutsche Bank, Focus: Eastern Europe, 1993, no. 69, pp. 1–9). Tajikistan has substantial gold reserves, one of the world’s biggest silver deposits, hydro-electric power and commercially exploitable amounts of oil (Guardian, 6 March 1995, p. 10). On 4 June 1993 Tajikistan became the last of the republics of the former Soviet Union to join the World Bank (Business Central Europe, July–August 1993, p. 45). ‘Annual per capita income is less than $200, by far the lowest of all transition economies’ (EBRD 1998b:193). The economic system Movement towards a market system has remained largely on paper; more retail prices remain controlled and subsidized than elsewhere in the CIS (Kaser and Mehrotra 1992:48–9). Enterprises still operate under the system of state orders and state instructions to enterprise management (EBRD 1994:38). By mid-1996 the state order system had been abolished, with the exception of the 1995 cotton harvest. Later the government decided that mandatory sales to the cotton complex would not be applied to the 1996 cotton crop (EBRD 1996b:177). Tajikistan has reverted to a barter economy, with huge flea markets stretching along the roadsides… Corruption is pandemic… Financial aid from abroad seems likely to be limited, given the slow pace of market reform, as well as qualms about the lack of democracy.

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(Jonathan Rugman, Guardian, 6 March 1995, p. 10) ‘With the conclusion of a peace agreement in June 1997 the government has adopted an ambitious reform programme under a recently approved three-year IMF programme’ (EBRD 1998b:192). Financial policy On 7 September 1993 Tajikistan agreed (subject to ratification) to remain in the rouble zone. The conversion from old to new roubles was completed on 6–8 January 1994, with the aid of a credit from Russia. If Tajikistan meets all the conditions laid down within six months (such as subordination to the Russian central bank, the co-ordination of tax, customs and budget policies and the implementation of economic reforms) the credit need not be repaid (CDSP, 1994, vol. XLVI, no. 2, p. 28). According to Business Central Europe (July–August 1994, p. 74), in May 1994 a transitional currency (coupon) replaced the new rouble. But the goal is still monetary union with Russia. In January 1994 monetary reform was implemented which aimed to introduce the new rouble as the main means of payment. But the supply of new roubles was inadequate to support full conversion along these lines and all deposits remained inconvertible into new roubles. The monetary reform effectively cut the currency in circulation by two-thirds. In response the price level halved in January 1994 and rose only slowly thereafter as new credits became available from Russia (EBRD 1995a:11–12). After the failure to introduce the new Russian rouble as legal tender in 1994 it was planned to introduce an interim Tajik rouble in 1995. But monetary union with Russia remains the ultimate policy goal (p. 65). An independent national currency was introduced on 10 May 1995, Tajikistan being the last republic in the former Soviet Union to do so. In early 1996 the government embarked on a renewed effort at stabilization and structural reforms. A law on bankruptcy was passed in June 1992 but few enterprises have been forced into bankruptcy. At the end of 1995 interenterprise arrears equalled about 20 per cent of estimated GDP. Wages in the state sector are tied to the minimum wage through set norms, but outside the budgetary sphere centralized wage setting no longer exists (EBRD 1996b:177). A new economic programme aimed at macroeconomic stability and structural reform was launched in October 1997 with the assistance of the IMF (EBRD 1998a:42). Tajikistan introduced its own currency (the Tajik rouble) on 10 May 1995. The currency shortage has forced Tajikistan to use barter and IOUs. The introduction of the [new] currency is part of a new economic recovery programme that includes a 250 per cent increase in state-subsidized bread prices next week and is aimed at ensuring the rescheduling of $731 million of foreign debt. (Steve LeVine, FT, 10 May 1995, p. 3) A report published in December 1995 stated that the government had belatedly adopted measures to curb inflation, lift most trade controls and liberalize bread prices (Business

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Central Europe 1995:54). About 40 per cent of the budget is spent on defence (Guardian, 6 March 1995, p. 10). In May 1996 the IMF announced a $22 million loan conditional on an austerity programme (FT, 16 May 1996, p. 4). The Russian crisis and the sharp decline of cotton prices have had an adverse effect on the economy… In a move to increase the range of monetary policy instruments at its disposal and tap non-monetary means of budget financing, the central bank introduced limited Treasury bill auctions in 1998. However, in January 1999 these auctions were temporarily suspended, due to a lack of demand from commercial banks. (EBRD 1999a:44) ‘Banks have been reluctant to hold government paper given the precarious fiscal situation… In July 2000 the central bank established an inter-bank foreign exchange market, replacing earlier foreign exchange auctions’ (EBRD 2000b:214–15). ‘Since the introduction of the new currency, the Somoni, in late October [2000], the exchange rate has stabilized. The IMF’s new poverty reduction and growth facility is based on ambitious money supply targets for 2001’ (EBRD 2001a:90). ‘The government has committed to restrictive monetary policy in the framework of a new three-year programme with the IMF’ (p. 28). ‘The Tajik rouble had been set at fifty to the US dollar in 1995 when it was introduced; its exchange value fell to 2,400 in 2000. The new currency [the Somoni] was worth 1,000 Tajik roubles’ (United Nations, Economic and Social Survey of Asia and the Pacific, 2001, p. 69). Tajikistan had its programme with the IMF suspended because of nonperformance on certain criteria and had to make repayments to the IMF due to irregularities over the external arrears of two state-owned companies. Talks are ongoing about the resumption of IMF funding during 2002. (EBRD 2002:34) ‘In mid-2001 the IMF poverty reduction and growth facility went off-track and disbursements stopped. Moreover, following several misreporting incidents concerning the external arrears of two state-owned enterprises, the authorities were asked to repay around $30 million in earlier IMF credits’ (p. 84). ‘The IMF approved a new three-year poverty reduction and growth facility worth $87 million in December 2002’ (EBRD 2003a:86). Prices In January 1992 the government lifted price controls on 80 per cent of all goods. Further liberalization of prices has reduced the number of goods under price controls to about 2 per cent of the total. Price controls apply mostly to staple consumer goods such as flour and milk (EBRD 1994:39). In 1993 some price controls were reintroduced. Prices in

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industry were regulated under the monopoly law by maximum markups, while seventeen basic consumer items (including bread, milk, rents and public transport) were controlled by executive order. In June 1995 the prices of these goods were liberalized, except for bread and flour. Bread subsidies to consumers and producers accounted for 75 per cent of the government budget deficit in 1995. On 1 March 1996 bread and flour prices were completely freed. Currently prices are controlled on agricultural commodities (cotton, grains and silk), electricity, fuel, telecommunications and transport. Utility tariffs fall far short of covering costs (EBRD 1996b:177). With the removal of the last remaining price controls on agricultural goods (grain and bread) in 1996, most prices have been liberalized with the exception of water, rents, communal services and transportation. In 1997 some water usage charges were increased. But electricity tariffs still fall below recovery levels (EBRD 1998b:192). ‘Despite gradual tariff adjustments since 1996, the tariff system in the power sector remains inadequate. The government has committed itself to cut off non-payers and to increase tariffs towards cost recovery by 2001’ (EBRD 2000a:80). ‘Under an ADB energy sector rehabilitation project loan, energy prices are to be raised to cost-recovery levels over the next two years’ (EBRD 2001a:90). Bread prices were freed on 20 August 1995, with the poor to be compensated for the price rise (FT, 23 August 1995, p. 4). Cotton prices are still controlled. In 1995 cotton producers had the right to dispose of 30 per cent of the crop, but in 1996 the entire crop was to be at their disposal (Transition, 1995, vol. 6, nos 9–10, p. 23). Privatization Although a law on divestment and privatization became effective on 21 February 1991 and a state property committee was created in August that year, virtually all transfers were a leasing to or buy-out by employees. In principle equity not so taken up can be sold to foreigners or offered to the public at auction, but the IMF mission in February 1992 found no actual purchases under these provisions (Kaser and Mehrotra 1992:50). Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 10 per cent; 1993, 10 per cent; 1994, 15 per cent; 1995, 25 per cent; 1996, 30 per cent; 1997, 30 per cent; 1998, 30 per cent; 1999, 30 per cent; 2000, 40 per cent; 2001, 50 per cent (EBRD 1999b:24, 272; and 2002b:20, 204). At least 10–20 per cent of GDP is generated in the private sector, including informal sector activity. By mid-1994, 152 out of a total of 1,304 medium-sized and large enterprises had been privatized in the agriculture, trade, transport and construction sectors. The 1993–5 programme proposes to add seventy-nine such enterprises to the list. There has been no property restitution to pre-communism owners (EBRD 1994:38). Privatization has stalled since 1993 (EBRD 1995a: 65). The share of the private sector in GDP is likely to be 10 per cent to 20 per cent. Of the enterprises subject to the privatization law, 159 (out of 1,304) had been privatized by mid-1995. As of May 1995, 1,156 small enterprises (less than 7 per cent of the total number of enterprises) had been privatized at the local level. Both employee buy-outs and sales to outsiders have been used, the latter method being applied mainly to enterprises in the trade and services

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sectors. A further 675 enterprises were to be privatized by the end of 1995 (EBRD 1995b: 59). The share of the private sector in GDP is likely to be about 15 to 20 per cent. Among the enterprises that are subject to the privatization law, 380 relatively small enterprises (out of a total of 1,304 enterprises) had been privatized by the end of 1995. Privatization has mainly taken the form of ownership transfers to labour collectives or leasing arrangements. The government launched a new programme in May 1996, which aimed to privatize 40 per cent of the total of state enterprises by the end of 1997. The programme foresaw the privatization of 280 large enterprises, of which twenty had been sold by the end of June 1996. The programme introduces a ‘privatization cheque’, which will be paid out for government arrears on wages and pensions and used to purchase shares. By the end of June 1996 about 1,800 small enterprises (about 10 per cent of the total number of enterprises) had been privatized. Most transactions have involved insider privatization. As with privatization, enterprise restructuring began in 1991 but stalled as a result of the war and political instability. Almost all dwellings have been privatized (EBRD 1996b:177). No significant progress has been made in implementing the mass privatization programme (EBRD 1997a:33). The share of the private sector in GDP is estimated at about 20–30 per cent (p. 203). The 1996 privatization programme aimed at privatizing about 40 per cent of all small enterprises and around 10 per cent of all medium-sized enterprises by the end of 1997. Vouchers were meant to compensate for arrears on wages and pensions. As of mid-1997 only 11 per cent of medium-sized and large enterprises had been privatized. Between 1995 and the end of 1996, 20 per cent of all small enterprises were sold to the private sector. There has been no property restitution (EBRD 1997b:203–4). The government is giving a high priority to privatization and the process has been accelerating. Over the past two years more than 20 per cent of state enterprises have been privatized (EBRD 1998a:42). Following a revision of the privatization law in May 1997, small privatization accelerated during 1997 and 50 per cent of units in this category had been privatized by the end of the year. The government’s commitments under the new IMF programme include the completion of small privatization by March 1999. Medium-sized and large enterprises remain predominantly stateowned, with only thirteen enterprises out of a total of over 400 privatized in 1997. But in 1998, 120 of these enterprises were transformed into joint stock companies in preparation for privatization and about thirty enterprises were privatized by auctions. Little restructuring has taken place in large state enterprises. ‘Industry…is plagued by inter-enterprise and wage arrears and large debts’ (EBRD 1998b:192). The privatization programme has been accelerating for both small and mediumsized enterprises… By September 1998 around 65 per cent of small firms were in private hands… The government is planning to increase the share of private ownership in medium-sized and large enterprises to 25 per cent by the end of March 1999, up from 11 per cent at the end of September 1998. (EBRD 1999a:44) By May 1999, 80 per cent of small enterprises had been placed in private hands. By the end of 1998, 16 per cent of medium-sized and large enterprises had passed into private ownership. Twenty-two cotton

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ginneries, for which international tenders were issued in January 1999, were sold by June 1999. Moreover, the domestic cotton trading company was auctioned off to a Swiss investor. But major sectors of the economy (including heavy industry, wholesale trade and transport) remain largely in state ownership. Financial discipline has been tightened significantly during the past fifteen months. Directed credits from the National Bank of Tajikistan to priority sectors have been sharply reduced…the majority of which [remaining directed credits] goes to the cotton sector. Credit auctions have been held regularly since November 1998. State enterprises have been instructed to insist on payment before delivery and utilities to cut off non-paying customers. (EBRD 1999b:270) Private economic activity has displayed remarkable dynamism in recent years (EBRD 1999b:270). ‘Reasonable progress in the privatization of medium-sized and large enterprises has been made. After the first round of tenders for twenty-three ginneries was cancelled, new tenders in November 1990 and April 2000 have been more successful’ (EBRD 2000a:80). Swift progress has been made in privatization. From the total of 9,500 state enterprises registered before privatization 6,150 have been either sold or incorporated as joint stock companies. Small-scale privatization is virtually completed with over 90 per cent of all eligible entities auctioned off by mid2000, predominantly to individual workers or employee collectives. Mediumand large-scale privatization has been slower, partially as a result of unrealistic price expectations, with only 214 of 733 incorporated units sold. In April 2000 the government successfully sold fifteen ginneries through auction… The remaining four ginneries still under state control were successfully auctioned in August 2000… Tajikistan has only a very rudimentary financial system. (EBRD 2000b:214–15) Privatization revenues reached around $15 million in 2000 and 641 enterprises were sold, seventy-eight of which were medium-sized… The sale of all remaining state-owned cotton ginneries [took place] in 2000… Under an ADB energy sector rehabilitation project loan, energy prices are to be raised to costrecovery levels over the next two years. (EBRD 2001a:90) Significant progress has been achieved in enterprise sales ... Small-scale privatization is largely complete and the government is now focussing on larger enterprises… The largest industrial companies, including the aluminium smelter, TADAZ, the power company, Barki Tojik, and all other utilities remain state-owned… Standards of government in enterprises remain weak as a result of insider ownership, significant remaining government influence and conflicts of interest within the public sector itself. The law on bankruptcy, adopted in

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1992 and amended several times since, is largely ineffective… The state property committee has estimated that around 70 per cent of medium-sized and large privatized companies are insider-owned and controlled. Government officials often retain direct stakes in important sectors, such as cotton production and trade. (EBRD 2001b:198–9) ‘The privatization programme has lost momentum as the government focussed on political stability and anti-terrorism activities’ (EBRD 2002a:84). Privatization slowed down in the second half of 2001 as the government focussed on political stability and anti-terrorism activities. However, it regained some momentum in 2002 in a bid to meet targets agreed with the World Bank. A total of 216 companies (eighty-six of which are medium and large-scale) were privatized during the first half of 2002… However, only two large enterprises were sold during this period… Around half of all medium and large-scale enterprises remain state-owned. A new privatization strategy for the next two years was approved in July 2002, which contains commercialization and privatization plans for most medium and large-scale enterprises, including some strategic companies. (EBRD 2002b:202) Only 5 per cent of state enterprises have been privatized (Guardian, 6 March 1995, p. 10). On 25 August 1995 Tajik radio reported that state property was to be 100 per cent privatized in 1996 (Transition, 1995, vol. 6, nos 9–10, p. 23). ‘Reforms such as privatization are still only benefiting small cronyist interest groups rather than the population at large’ (Business Central Europe 2000:47). Foreign trade A command system, based on state orders, quotas, export licences and centralized trading, still dominates production and trade (EBRD 1994:39). There is a 30 per cent export revenue surrender requirement (p. 111). A December 1994 decree introduced further liberalization of currency restrictions, lifting all capital control restrictions on individuals and allowing foreign exchange accounts to be opened locally (EBRD 1995a:65). According to a presidential decree of 27 June 1995, quotas and licences for the exporting of all goods except cotton fibre and aluminium were to be abolished from 1 July. Since the start of 1995 all cotton produced has had to be sold to the directorate for cottonproducing industry, although at international prices. The government planned to remove the state monopoly on cotton from the beginning of 1996. Foreign trade is mainly based on barter agreements, but cotton and aluminium are traded for hard currency (EBRD 1995b:59). In February 1996 the state order systems for all trade effectively ended with the abolition of the state grain fund allocation of cotton and aluminium. Surrender requirements on export receipts had been reduced to 30 per cent from 70 per cent in October 1995 and were replaced with a repatriation requirement on all export earnings in

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February 1996. Export duties were abolished for all goods as of 1 March 1996. New barter trade arrangements were prohibited, with the exception of contracts involving aluminium. But most foreign trade is still handled by state organizations. The exchange rate of the Tajik rouble is in principle floating (the currency exchange beginning its operations in mid-May 1995). In practice, however, the government and the central bank control major foreign exchange transactions in order to channel resources to priority sectors and currency auctions were effectively suspended owing to limited supplies of foreign exchange. From early 1996 onwards foreign exchange transactions through the formal market were resumed. A parallel foreign exchange market is tolerated by the government. In practice the central bank still controls all hard currency earnings and currency convertibility is very limited. Capital transactions require licensing by the central bank, but there are no restrictions on the repatriation of profit and capital by foreigners (EBRD 1996b:177). The foreign exchange market functioned very poorly in 1996. The operation of the official exchange market was characterized by the lack of a predictable schedule, restricted access and administrative allocation of foreign exchange (EBRD 1997a:33). A large share of external trade is still handled by state organizations. A number of administrative regulations are still in place, especially in the cotton sector. In early 1997 export taxes were reintroduced on some selected commodities, primarily grain and scrap metals. Owing to a shortage of foreign exchange the government tightened its controls and only a few auctions took place during the first half of 1997. Weekly auctions have resumed but access is tightly regulated. The administrative setting of the official exchange rate by the national bank is subject to heavy official intervention (EBRD 1997b:204). In the second half of 1997 import duties were increased to as high as 50 per cent from the 5 per cent to 25 per cent range which had been set in 1996. Export duties were scrapped again, shortly after they had been introduced (EBRD 1998a:42). Tajikistan has a liberal foreign trade and exchange regime, with a mainly uniform import tariff of 5 per cent as of 1998 and de facto full current account convertibility. Regular foreign exchange auctions were reintroduced in early 1998 after their cancellation in late 1996. Acceptance of the IMF's Article 8 is planned for late 1998. Temporary protection measures introduced in late 1996 (including controls on cotton exports, new export taxes, high import duties and special excise taxes) have been fully eliminated. Tajikistan has joined the customs union with Russia, Kyrgyzstan, Kazakhstan and Belarus (EBRD 1998b:192). ‘In February 1999 Tajikistan joined a customs union with Belarus, Kazakhstan, Kyrgyzstan and Russia. The implications of this union for Tajikistan’s trade regime are unclear, as the union is riven at present by disputes over import tariffs and duties’ (EBRD 1999a:44). Tajikistan scores the lowest level on the IMF's index of trade restrictiveness among the five members of the Customs Union (including also Belarus, Kazakhstan, Kyrgyzstan and Russia) on account of the lack of non-tariff barriers. Tariff dispersion is low and the average unweighted rate is 8 per cent… In July 2000 the central bank established an inter-bank foreign exchange market, replacing earlier foreign exchange auctions… Aluminium, cotton and mineral exports account for over 80 per cent of export revenues. (EBRD 2000b:214)

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‘Tajikistan has a relatively open trade system’ (EBRD 2001b:198). ‘Import tariffs were unified at 5 per cent in May 2002… However, private importers and exporters continue to face non-tariff barriers, such as import/export licences’ (EBRD 2002b:202). Aluminium and cotton account for 60 per cent of exports (Business Central Europe 1999:46). Foreign direct investment The volume of foreign direct investment is very small. (See Table 6.1.) Capital transactions require licensing by the central bank, but there are no restrictions on the repatriation of profit and capital by foreigners (EBRD 1996b: 177). Most foreign investment proposals require government approval as to the repatriation of profit. Foreigners may lease but not own land (p. 178).

Table 6.1 Tajikistan: selected economic indicators 1995–2002

Economic indicator

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

Rate of growth of GDP (%)

–12.5

–4.4

1.7

5.3

3.7

8.3

10.3

9.1

Rate of growth of industrial output (%)

–13.6

–24.0

–2.1

8.1

5.0

10.3

14.4

8.2

Rate of growth of agricultural output (%)

–25.9

2.0

3.6

6.3

3.8

12.4

11.0

15.0

Inflation rate (consumer, %)

609.0

418.0

88.0

43.2

27.6

32.9

38.6

12.2

–6.1

–5.8

–3.3

–2.7

–2.3

–1.6

–1.1

0.6

2.0

2.6

2.8

3.2

3.0

2.7

2.3

2.7

–0.099 –0.075 –0.061 –0.120 –0.036 –0.063 –0.074

–0.025

Budget surplus or deficit (% GDP)1 Unemployment rate (end of year, %)2 Balance of payments (current account, $ billion) Foreign direct investment (net, $ million)

10

18

18

25

21

24

9

22

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, United Nations Economic Commission for Europe, Economic Survey of Europe; United Nations Economic and Social Commission for Asia and the Pacific, Economic and Social Survey of Asia and the Pacific. Note: 1 Excludes transfers from the state budget to the pension fund and employment funds (EBRD)

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2

Registered unemployed (United Nations Economic Commission for Europe). The World Bank estimates the true unemployment rate in 1998 at about 30 per cent of the labour force (EBRD 2002a:85)

Agriculture The 15 December 1990 Land Code says that the state retains ownership of land, but usufruct on up to a ten-year lease is allocated by local authorities (Kaser and Mehrotra 1992:49). (See the comments by Nikonov under ‘Agriculture’ in the chapter on Kazakhstan.) By the end of 1992 there were about a hundred private farms, with an average size of 10 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for only 1 per cent of total agricultural land (United Nations Economic Commission for Europe 1993:206). As of 1 April 1993 there were only eight private farms, with an average size of 45 ha (CDSP, 1993, vol. XLV, no. 21, p. 20). In 1994 ninety-nine-year leases were introduced, thus mitigating the effects of the prohibition of private land ownership (EBRD 1995a:65). Six per cent of cultivated land, which accounted for an estimated 30 per cent of total agricultural production, had been leased to private farmers by 1994 (EBRD 1995b:59). A November 1995 decree called for all non-irrigated land to be handed over to private farmers as long as the farmers agreed to grow grains (EBRD 1996b: 177). Private ownership of agricultural land is not envisaged. At the end of 1996 nearly 17 per cent of all arable land was in private hands (EBRD 1997b:203–4). The revised land code of December 1996 allows farmers to be granted lifetime leases to farmland with transfer and inheritance rights. Under this type of privatization method the share of agricultural land in private hands has continued to increase. Government commitments under the new IMF programme include the full marketability of land and the sale of sixty (out of 1,200) state farms by early 1999, which would bring the share of privatized agricultural land to around 25 per cent, up from 16 per cent in 1996. The abolition of the state order system for cotton and the entry of private marketing companies contributed to an increase in output of 15 per cent in 1997 (EBRD 1998b:192). Presidential and government decrees of June and July 1998 further extended private ownership rights over farmland to include the right to freely trade land leases. As a result, the share of privately farmed agricultural land is expected to increase from 24 per cent in 1997 to more than 50 per cent at the end of 1999. The land reform committee is preparing for the breakup of large collective farms (EBRD 1999b: 270). Agricultural reforms have progressed, with 50 per cent of total agricultural land transferred to private hands by the end of 1999. However, the ministry of agriculture controls key inputs and a rural credit market does not yet exist’ (EBRD 2000a:80). Over 50 per cent of the population are dependent on agriculture… Land reform has advanced, although not always to the benefit of individual farmers. Around 45 per cent of all agricultural land is estimated to be privately farmed. Moreover, the dissolution of the state cotton trading monopoly Glavkhlopokoprom in January 1999 has opened the market to private financiers

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and input suppliers—notably two large foreign cotton trading concerns. The process of reorganizing previously state-owned and collective farms has not always proceeded smoothly, however, as farmers have remained heavily dependent on the old kolkhoz and sovkhoz management for access to key inputs and use of former collective assets, such as tractors. (EBRD 2000b:214–15) ‘The government plans to privatize 120 state-owned farms by September 2001’ (EBRD 2001a:90). Land reform is progressing, with around 40 per cent of co-operative farm-land converted into dekhan farms (the former household plots of agricultural labourers) by the end of 2001. Land registration was made easier, fees were reduced and a land registry was established. (EBRD 2002:84) The share of peasant farms in agricultural land increased from 0.0 per cent in 1994, to 0.2 per cent in 1995 and to 6.6 per cent in 1999 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 44 per cent in 1992 to 58 per cent in 1998. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890). Economic performance Positive GDP growth was not achieved until 1997:–29 per cent in 1992, –11 per cent in 1993, –18.9 per cent in 1994, –12.5 per cent in 1995 an –4.4 per cent in 1996. (See Table 6.1.) The civil war was one factor that had decidedly adverse effects on economic performance. In August 1996 Russia’s ambassador to Tajikistan stated that over 450,000 Russians had left since 1991. About 70,000 Russian-speakers were left in Tajikistan, mainly pensioners and other needy people. The bulk of people leaving were in the highly skilled category. Industry was operating at only 20 to 25 per cent capacity and many construction projects had been mothballed (CDSP, 1996, vol. XLVIII, no. 32, p. 14). ‘The Russian crisis and the sharp decline of cotton prices have had an adverse effect on the economy’ (EBRD 1999a:44). In 2001 GDP was only an estimated 56 per cent of the 1989 level (EBRD 2002b:58). Annual per capita income is less than $200—by far the lowest of all transitional economies. The government’s limited social transfers are poorly targeted and arrears remain high… An estimated 85 per cent of the population earn insufficient income to buy a basic food basket. (EBRD 1999b:271) ‘According to the Tajikistan Living Standards Survey, 83 per cent of the population live below the official poverty line’ (EBRD 2001b:199). There was hyperinflation in 1992 (1,157 per cent) and 1993 (2,195 per cent) (EBRD

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2001a:16). Valentin Bushkov and Dmitry Mikulsky describe a dire situation (Sevodnia, 16 August 1996, p. 9: CDSP, 1996, vol. XLVIII, no. 33, pp. 13–14): As a result of the civil war that has lasted for five years…e economy has virtually collapsed—not just industry but also agriculture, the Tajiks’ traditional occupation. As a result of the mass emigration, both by physical ejection and by force of circumstance, of the country's Russian-speaking and indigenous population, virtually all skilled specialists, as well as a large number of cultural figures, have left the country… The Tajikistan People’s Front detachments that overthrew the government of national reconciliation in 1992 and eventually brought the current president to power…consist…mainly of natives of… Kulyab [region]… The Kulyab detachments…have turned into a real criminal force. They have occupied Dushanbe, to all intents and purposes, driving out many of the local residents… The manifestations of a criminalized situation are not limited to the seizure of apartments in the capital. Pro-government armed groups have established control over virtually all industrial and agricultural enterprises and are seizing the output they produce and selling it outside Tajikistan… They are also pocketing all kinds of state taxes. The criminalization of society and government is also manifested in the activity of law-enforcement agencies… Everyone who can is leaving Tajikistan. Whereas at the beginning of the Tajikistan crisis the émigrés were mainly representatives of the Russian-speaking population, they were later joined by ordinary Tajiks… and were then followed by representatives of Tajikistan's intellectual elite… The principles which are now being implemented in Tajikistan, according to which representatives of one region dominate in all areas of state and public life, are essentially suicidal. The World Bank estimates that the true unemployment rate in 1998 was about 30 per cent of the labour force (EBRD 2000a:81). Half of the population now faces acute undernourishment, a United Nations report said last month [July 2000]. Already 85 per cent of the 6 million population live below the region’s poverty line, but the food problem has become acute, largely because of mismanagement, according to UN experts… In Tajikistan 35 per cent of the country’s GDP comes from drug smuggling, [according to] a regional official of the United Nations Development Programme. (IHT, 10 August 2000, p. 5) ‘The United Nations estimate that 40 per cent of the population suffers from chronic malnutrition’ (Business Central Europe 2000:47). ‘[On 16 October] the World Food Programme appealed for urgent food aid to assist around 1 million facing starvation in Tajikistan…[which] has suffered consecutive years of drought and civil war’ (Guardian, 17 October 2001, p. 6).

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‘The United Nations reckons that about eight out of ten Tajiks live in poverty. Unemployment is so high that up to 1 million souls out of a population of more than 6 million migrate to Russia for work every year’ (The Economist, 27 July 2002, p. 59). At least 80 per cent of the population of 7 million lives in poverty and a third of the children are malnourished. A million Tajik men have fled to Russia to look for work… Most of the heroin used in Europe passes through Tajik territory. (IHT, 2 August 2002, p. 6)

7 Turkmenistan POLITICS The political and demographic background The population at the end of 1998 was 4.7 million. In 1989 the ethnic composition of the population was as follows: Turkmens, 68.4 per cent; Russians, 12.6 per cent; Uzbeks, 8.5 per cent; Kazakhs, 2.9 per cent; other, 7.6 per cent (Economic Bulletin for Asia and the Pacific, 1991, vol. XLII, nos 1 and 2, p. 2). In 1992 Turkmens accounted for 72 per cent of the population, Uzbeks 13 per cent and Russians 12.6 per cent (FEER, Asia 1994 Yearbook, 1994, p. 111). A more recent figure for Russians is 9 per cent (Anthony Hyman, The World Today, November 1993, p. 206). In 1995 the ethnic composition was as follows: Turkmens, 77 per cent; Uzbeks, 9.2 per cent; Russians, 6.7 per cent; Kazakhs, 2.4 per cent; others, 5.1 per cent (Deutsche Bank, Focus: Eastern Europe, 1996, no. 162, p. 3). At the beginning of February 1996 the population was 4,483,000, with Turkmens accounting for 77 per cent, Uzbeks 9.2 per cent, Russians 6.7 per cent and Kazakhs 2 per cent (CDSP, 1996, vol. XLVIII, no. 7, p. 20). Between 1989 and 1998 the proportion of ethnic Russians in the population fell from 9.5 per cent to 7 per cent (The Economist, 3 April 1999, p. 70). President Saparmurad Niyazov, sixty, likes to be called ‘Turkmenbashi’, a selfbestowed title meaning ‘head of all Turkmen’… Mr Niyazov was educated in Russia and then had a meteoric career in the Soviet bureaucracy, rising to the top job in the Republic of Turkmenistan [in 1985] while holding a seat on the politburo in Moscow… Mr Niyazov converted to Islam in the mid-1990s. (IHT, 8 August 2000, pp. 1,10) The name of the capital, Ashkhabad, derives form an Arabic word for ‘love’ (IHT, 8 August 2000, pp. 1, 10). [A] book published last year [2001] called Ruhnama…roughly translated as ‘spiritual revival’…[is] written by Saparmurad Niyazov… Teachers are being selected and promoted for their mastery of its contents and its systematic study in schools has squeezed out other subjects… In the past few months the propagation of the Ruhnama has become one of the most worrying symbols for outside observers and local residents alike of the insularity and peculiarity of Turkmenistan… Niyazov’s personality cult [is] second only to that of Kim Jong

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II in North Korea…[There are] huge reserves of natural gas…[which] he personally took under his wing at independence. That has allowed him to amass a personal fortune, managed by Deutsche Bank in Frankfurt, said to exceed $2 billion… But satellite dishes across the country allow residents to keep track of the outside world… The sacking of much of the hierarchy of the KNB, the security service, earlier this year [2002]…seems to have slightly eased the apparatus of repression. What worries locals most is the longer-term destruction of Turkmenistan that Niyazov risks engineering through the manipulation of the education system and the reluctance to create any mechanisms for the evolution of the country's political system… Turkmenistan has cut the length of schooling to nine years, compared with ten or eleven in Russia… Greater emphasis [is] on vocationalism. There is no postgraduate education and university study has been reduced from five years to four, with two years earmarked for practical experience. (Andrew Jack, FT, Weekend, 13 July 2002, p. i) Turkmenbashi…means ‘father of all Turkmen’… Turkmenbashi the Great is the glorified identity adopted by Saparmurad Niyazov… Every student in the country studies his book, the Ruhnama. Every government office has a weekly study hour to discuss Ruhnama… Niyazov perceived a nation deprived of a history or a code of its own traditions and values so he included both in his stream-of-consciousness guide to good thinking, the Ruhnama…[The] educational system is in dire straits. There are virtually no textbooks in the schools, according to teachers and foreigners. Niyazov banned all the Soviet-era texts, but new ones have not been produced to replace them… Primary education is being further undermined by using students to harvest and plant cotton… The number of places in Turkmenistan’s colleges and universities has been cut to 3,000, less than half what it was in Soviet times… The important jobs …were filled by ethnic Russians and most Russians left Turkmenistan soon after independence…[But] Niyazov does not routinely terrorize his countrymen. There are fewer political prisoners here than in any other Central Asian states— the [US] State Department could find only one for its annual human rights report in March [2002]. The department found no cases of lives being taken for political reasons in 2001. The Turkmen have a reputation for gentleness and no democratic tradition… A few independent citizens’ groups operate… One is Catena, an environmental group… The KNB [is] a successor to the Soviet KGB… Niyazov fired its long-time leader, Mukhammed Nazarov, in March [2002]… Gas… brings substantial revenues—not to the national treasury, but to Niyazov’s ‘presidential fund’, currently said by Western specialists to hold about $2.5 billion. Only the Great Leader can dispense these funds, which are held offshore. (Robert Kaiser, IHT, 11 July 2002, p. 2)

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Political developments 23 December 1993: Turkmenistan and Russia agree that ethnic Russians in Turkmenistan should have dual citizenship and that Russian troops should guard Turkmenistan’s borders with Iran and Afghanistan. Russian military personnel will help train the army. (The agreement stipulates that Russia will be allowed to intervene militarily if its interests are threatened, including ‘protection of Russian minorities’: Ahmed Rashid, Telegraph, 25 January 1994, p. 13.) Yeltsin is awarded the title of ‘Honorary Citizen of Turkmenistan’. 16 January 1994: President Saparmurad Niyazov claims to have won a 99.99 ‘yes’ vote (turnout 99.9 per cent) in a referendum to extend his term of office to 2002 (Ahmed Rashid puts the official ‘yes’ vote at 98 per cent: FEER, 17 February 1994, p. 30). In celebration of the referendum result the president decreed that gas and electricity would henceforth be free for all Turkmen (Ahmed Rashid, FEER, 17 February 1994, p. 30). (Since the beginning of 1993 only consumption of domestic gas, electricity and water in excess of ‘need’ has been charged for: International Labour Review, 1993, vol. 132, no. 4, p. 427.) 11 December 1994: there was a 99.8 per cent turnout in the general election (according to official figures). Candidates for parliament (the Majlis) were all unopposed and nearly all were members of the one permitted political party, the Democratic Party of Turkmenistan. All of them won. The parliament will be a fifty-member version of the 175-member assembly inherited from Soviet days (The Economist, 17 December 1994, p. 68). ‘There were only fifty candidates from the ruling Democratic Party for the fifty seats. Predictably, all won’ (Ahmed Rashid, FEER, 16 March 1995, p. 24). 12 July 1995: there is a protest march in the capital, demonstrators calling for fresh parliamentary and presidential elections. 13 May 1996: the official opening takes place of a new railway line nearly 300 km long between Mashhad in Iran and Tejen in Turkmenistan. The idea was conceived in 1991 and the new stretch links rail networks connecting the Gulf with the Far East. April 1997: ‘In April he [Niyazov] replaced the head of the large and powerful secret police in a bid to increase control over the one organization with the clout to unseat him. This places him in an increasingly powerful position’ (Business Central Europe 1997:52). 23 April 1998: The president of Turkmenistan, Saparmurad Niyazov, is reputed to rule with an iron hand, tolerate no opposition and encourage a cult of personality. But his country has vast reserves of natural gas and a long border with Iran, which is why President Bill Clinton received him at the White House… Much as they did with China, Mr Clinton and his senior foreign policy advisers decided that the imperatives of doing business with Mr Niyazov outweighed their objections to his domestic repression, administration officials said. US officials are encouraging the former Soviet republics of Central Asia to develop greater political and economic independence from Moscow while trying to discourage them from forming closer ties with Iran… The US Trade and Development Agency agreed to provide $750,000 to finance a feasibility study of a natural

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gas pipeline that would run beneath the Caspian Sea, giving Turkmenistan access to the Turkish natural gas market without having to cross either Russia or Iran. (Thomas Lippmann, IHT, 25 April 1998, p. 5) 18 March 1999: The government of Turkmenistan has announced the introduction of a visa requirement for citizens of Russia and most other CIS member countries as of 9 June [1999]… Turkmenistan is the first CIS member state to opt for such radical measures… The new measures would not affect… Uzbekistan and Kazakhstan… Turkmenistan is not a participant in either the Customs Union or the Collective Security Treaty. (CDSP, 1999, vol. 51, no. 11, p. 18) 12 December 1999: elections are held for the fifty seats in parliament. Nearly all of Turkmenistan’s registered voters turned out to cast ballots for a legislature that will be monopolized by members of President Saparmurad Niyazov’s political party. Election officials said 104 candidates, 99 per cent of them members of the president’s Democratic Party of Turkmenistan, were competing for fifty seats in parliament. The voting did not even have a minimum level of pluralism necessary for a truly competitive election, OSCE said. (IHT, 13 December 1999, p. 4) Mr Niyazov is spinning his existing cult of personality into something approaching a state religion. Drawing upon themes from Islam and Turkmen mythology, the government has put together Rukhname, a book of nationalist spirituality intended to form the basis of a new morality. Add to this a spate of newspaper articles crediting Mr Niyazov with supernatural powers and divine ancestry, and the atmosphere is becoming distinctly heady. (Business Central Europe 1999:47) 20 December 1999: the last Russian border guards leave. A border force was created in March 1994 (CDSP, 1999, vol. 51, no. 16). 28 December 1999: parliament amends the constitution to allow Saparmurad Niyazov to hold the presidency for life (IHT, 29 December 1999, p. 5). ‘Parliament meets for a few days annually to rubber-stamp his decrees… Mr Niyazov’s loyal parliamentarians…at their most recent meeting refused to leave …until he agreed to become president for life’ (The Economist, 8 January 2000, p. 66). [There has been criticism of a] law removing term limits for Mr Niyazov, effectively making him president for life… Observers in Washington and Ashkhabad, the capital, say political repression, harassment of religious organizations and promotion of a cult of personality around Saparmurad

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Niyazov have grown worse over the past year… Only two religions are officially recognized—Sunni Islam and Russian Orthodoxy. (FT, 1 April 2000, p. 7) 11 September 2001: there are terrorist attacks on the USA. (For details, see the entry for 11 September in the chapter on Tajikistan) 1 November 2001: A sensational development occurred in Central Asia yesterday [1 November]. Turkmenistan…suddenly acquired a serious opposition. Former Turkmen deputy prime minister and foreign minister Boris Shikhmuradov made a lengthy statement in which he accused President Niyazov of establishing a police state and creating a black hole inside which ‘monstrous crimes are being committed’… On 30 June…the prosecutor-general’s office…initiated criminal proceedings [for embezzlement] against… Boris Shikhmuradov, who had long been considered the right-hand man of [President Niyazov]… On 2 November… [the] Turkmen prosecutor-general…sent a letter to her Russian counterpart… asking him to detain [Shikhmuradov] and hand him over to Turkmen law enforcement authorities. (CDSP, 2001, vol. 53, no. 44, pp. 15–16) January 2002: Boris Shikhmuradov…[former] foreign minister…fled to exile in Moscow late last year [2001] from his assignment to China. In January [2002] he set up the Turkmenistan Popular Democratic Movement and has been touring Europe and the United States to drum up international support for his aim to topple Niyazov… Niyazov has accused Shikhmuradov of corruption and selling arms abroad, charges he says are completely groundless… In the past three months Shikhmuradov has been joined in exile by other prominent members of the bureaucratic elite—the Turkmen ambassadors to Turkey and the United Arab Emirates, a former deputy prime minister and a senior diplomat from the Turkmenistan embassy in Washington…[In April] Niyazov sacked twenty senior security, intelligence and army officials, fearing more defections and a coup attempt… Turkmens are banned from travelling abroad without government permission. (Ahmed Rashid, FEER, May 2002, pp. 14–16) 5 February 2002: President Saparmurad Niyazov yesterday [5 February] dismissed ambassador to Turkey Nurmukhammed Khanamov… Mr Khanamov stated two days earlier that he was going over to the opposition… People’s Democratic Movement of Turkmenistan [the PDMT]…[owing to] ‘the dictatorial behaviour of President Niyazov, who has instilled fear, hopelessness and poverty in Turkmenistan,

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alienated it from international life, imposed bans on basic attributes in a democratic society and on access to information, and engaged in a practice of deceiving the world community with gross disinformation about the situation in the country’… The PDMT is led by another former high-ranking diplomat: exminister of foreign affairs Boris Shikhmuradov, who openly went over to the opposition last year [2001]… In March or April of this year [2002] the PDMT plans to hold [in three phases] an open international forum of Turkmen democratic forces…in one of the CIS countries…in a European country and…in an Asian country. Mr Shikhmuradov has even said exactly when members of the PDMT and of other democratic opposition groups can be expected to arrive in Turkmenistan—the spring of this year. (CDSP, 2002, vol. 54, no. 6, p. 16) 18 February 2002: A former deputy prime minister… Khudaiberdy Orazov, has announced that he is joining the opposition to Saparmurad Niyazov’s regime… Orazov characterized the situation in the country as a ‘profound systemic crisis’… Orazov has served at various times as chairman of the central bank, deputy and prime minister, his country’s representative to…the IMF, the World Bank and the EBRD. In January 2000 President Niyazov fired [him and he has]… since emigrated… Shortly after… Orazov declared that he was joining the opposition… One of the country’s ‘old’ dissidents, Murad Esenov, announced that he would join the recently established People’s Democratic Movement of Turkmenistan…[He] has published Turkmenistan’s first opposition magazine… since 1994… In 1994 he was arrested in Moscow at the request of Turkmenistan’s national security committee, which had accused him of plotting a coup. But the Russian prosecutor-general’s office later released him on the grounds that no crime had been committed. In 1995 he was granted political refugee status in Sweden. (CDSP, 2002, vol. 54, no. 8, p. 16) A minister-counsellor at the Turkmen embassy in Washington disappeared last month [February]… In late February it was reported that… America’s [oil company] ExxonMobil had announced its withdrawal from…[a] project…in which it was the project operator…[ExxonMobil’s] investments in Turkmenistan could have topped $10 billion. (CDSP, 2002, vol. 54, no. 10, p. 16) March 2002: ‘Several top diplomats have defected recently, including Boris Shikhmuradov, a former foreign minister. He now styles himself leader of the Turkmen opposition…[President Niyazov] has this week been purging his extensive security apparatus’ (The Economist, 23 March 2002, p. 71). Mukhammed Nazarov…[was] chairman of the national security committee…

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Mr Nazarov’s dismissal in mid-March marked the start of a massive purge of Turkmenistan’s security establishment. The main blow was directed against the national security department and the border guards… One of the reasons for his [Niyazov’s] anger with state security chief Nazarov…was, of course, Nazarov’s inability to neutralize members of the new opposition—the former deputy prime ministers, ministers and senior diplomats who have fled the country and launched a vigorous campaign abroad… But…the minister of internal affairs… and the chief of the president’s security service…presented the Turkmenbashi [‘father (or head) of the Turkmen people’, i.e. Niyazov] with documents indicating that General Nazarov…was plotting a coup. (Vremya Novostei, 8 April 2002, p. 5: CDSP, 2002, vol. 54, no. 14, p. 17) 23–4 April 2002: Leaders of the five countries surrounding the Caspian Sea met to breach divisions over the use of its rich resources. The meeting brought together for the first time the presidents of Russia, Iran, Azerbaijan, Kazakhstan and Turkmenistan… It also marked a diplomatic breakthrough for Saparmurad Niyazov…who hosted the summit despite his country’s official neutrality and traditional wariness of international meetings… Mr Niyazov, who disputes a number of oil fields at the centre of the Caspian with Azerbaijan, called for a negotiated settlement, while warning that if the issues were not settled peacefully, the sea could ‘smell of blood’… The breakup of the Soviet Union… threw into question the 1921 and 1940 agreements between Teheran and Moscow… Vladimir Putin…praised the bilateral agreements that his country [Russia] had already reached with Azerbaijan and Kazakhstan, which divide the seabed but leave the waters shared by each state free for fishing and navigation. (FT, 24 April 2002, p. 8) Attempts to demarcate the oil reserves of the Caspian Sea floundered yesterday [24 April] when the leaders of the five surrounding states failed to agree on even the most basic principles…[The presidents] were unable to agree on the wording of a promised declaration of general consensus… [and] left without a document. (FT, 25 April 2002, p. 12) ‘After two years of planning the unprecedented summit…collapsed in disarray… A new attempt to carve up the Caspian cake is to be made next year [2002] in Teheran’ (Guardian, 25 April 2002, p. 16). President Nursultan Nazarbayev of Kazakhstan: As Russia and Kazakhstan have no common border with Iran, we have finally solved this issue between us—Russia and Kazakhstan—by signing an agreement that defines and limits the area… The same kind of agreement was signed between Kazakhstan and Azerbaijan and the same will now be signed between Kazakhstan and Turkmenistan.

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(IHT, 15 June 2002, p. 17) ‘In a meeting on 14 May 2002… Putin and Nazarbayev signed a protocol on the division of three gas fields in the North Caspian region… The fields have been disputed by the two countries for a long time’ (IHT, 15 June 2002, p. 18). 7 May 2002: President Saparmurad Niyazov…yesterday [7 May] dismissed deputy prime minister Seitbai Gandymov, chairman of the central bank, accusing him of corruption and personal immodesty The Turkmenbashi [‘head of the Turkmen people’] has launched a new phase of his purge of the upper echelons of power, which began in March with the defence and security agencies… Officially, the numerous dismissals and arrests are being attributed to a campaign against corruption. However, many observers believe this is simply Saparmurad Niyazov’s way of ridding himself of a ‘fifth column’, so to speak, within the state apparatus. (CDSP, 2002, vol. 54, no. 19, pp. 13–14) 18 June 2002: The supreme court…sentenced Mukhammed Nazarov, former chairman of the national security committee, and his deputy Khayit Kakayev to twenty years’ incarceration. They were found guilty on thirteen counts, among them committing premeditated murder, wilfully inflicting grave bodily injury and harming people’s health, exceeding their authority, unlawfully detaining and arresting citizens, taking bribes, appropriating state property and trafficking in narcotics. (CDSP, 2002, vol. 54, no. 25, p. 19) 8 August 2002: The People’s Council voted unanimously yesterday [8 August] to make Saparmurad Niyazov president for life… He bowed to the will of the people… Proposals by the Turkmenbashi to rename the months of the year and the days of the week were adopted only in part. Only eleven months of the year will be given the names proposed… The leader consented to a different name [for April]… He wanted to call it Ene (Mother), but consented to… Kurbansultan Edzhe (the name of the Turkmenbashi’s mother, who was born in April)…[For example, January is] to become known as Turkmenbashi…[and] September as Ruhnama [Spiritual Revival]. (CDSP, 2002, vol. 54, no. 32, p. 5) 9 August 2002: Saparmurad Niyazov…said he did not intend to remain in office until his dying

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day… It had been announced previously that a presidential election would be held sometime in 2008–2010 and Saparmurad Niyazov confirmed yesterday [9 August] that he intended to stick to that time frame… What prompted…[him] to withdraw the consent he had given the day before to become president for life? Everyone knows that Mr Niyazov has a sole successor: his son Murad, who is currently a businessman. Murad no doubt hoped to replace his father in the foreseeable future, so he could hardly have been pleased with the decision of the People’s Council to make the Turkmenbashi head of state for life. Many observers believe that it was his successor’s displeasure that made Saparmurad Niyazov decline lifelong presidency. (Kommersant, 10 August 2002, p. 4: CDSP, 2002, vol. 54, no. 32, p. 6) Russian newspapers roundly criticized his [Niyazov’s] latest initiative, a new national calendar… Turkmenistan recently announced that…its people would not be getting Russian newspapers or magazines… The president banned Russian newspapers a few years ago, but was forced to relent under foreign pressure… State television stopped broadcasting Russian programmes long ago and now only airs brief, censored clips… Cable television was recently banned. The step was taken because with their satellite antennas, the cable companies were picking up mostly Russian television… The only relief is satellite television. But there are periodic rumours that satellite dishes are going to be banned… Even in the…capital city few families have computers…[to] log on to the internet… Even those who do have computers are paranoid about [state surveillance]. (Nezavisimaya Gazeta, 29 August 2002, p. 5: CDSP, 2002, vol. 54, no. 35, pp. 15–16) 12 August 2002: The Turkmen president issued Directive No. 5928 ‘On establishing specialized troop units in the armed forces and assigning them to national economic sectors’… Young men called up for military service ‘shall perform their labour duty to the state by providing assistance to ministries and all sector-based departments’. (CDSP, 2002, vol. 54, no. 36, p. 14) 21 November 2002: President Saparmurad Niyazov has signed a decree on measures to ‘rationally distribute labour resources’ by relocating them to several of the country’s provinces… Turkmenistan has numerous desert areas where it is virtually impossible to grow any crops… The first to go to these unpopulated areas will be Turkmen citizens under the age of twenty-five, especially if they come from large families. Saparmurad Niyazov declared that this is the only way to solve the multitude of problems facing young people, including drug addiction,

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unemployment and crime… Individuals who engage in immoral behaviour won’t have time for illegal activity either; they too will be sent to the virgin lands… A special commission was set up to compile lists of people who consent to resettlement. Plans call for giving the resettled people long-term leases on plots of land and providing them with loans and construction materials to build their own homes in the new areas … Wide-ranging assistance [is promised] to those who grow cotton, beets and other crops. Those resettled on account of ‘immoral behaviour’ will not receive such benefits. The opposition has offered its own explanation of the resettlement process. As they see it, Mr Niyazov is trying to alter the ethnic structure of the country’s eastern and northern regions, which have traditionally been densely populated by Uzbeks by ‘diluting’ them with ethnic Turkmens. The Turkmenbashi has long been known for his animosity toward representatives of the ‘non-eponymous’ nationality, especially Uzbeks. In Soviet times he had to hide this animosity… The new resettlement will be the second in two years. In the summer of 2001 about 300 young families from Lebap province were resettled to a district of Akhai province. (Kommersant, 22 November 2002, p. 11: CDSP, 2002, vol. 54, no. 47, pp. 20–1) 25 November 2002: A gunman opened fire Monday [25 November] on the motorcade of President Saparmurad Niyazov in what appeared to be an assassination attempt… Two cars and a truck blocked the president’s motorcade in the country’s capital, Ashkhabad… On Monday night he [the president] appeared on national television to accuse four former aides, including two former deputy prime ministers, a former agriculture minister and a former ambassador, of organizing the attack… The attack came on the day Niyazov announced in a decree that his government would grant an amnesty to nearly half of the country’s 17,000 prisoners. (IHT, 26 November 2002, p. 3) [The president’s] motorcade came under sub-machine-gun fire… President Niyazov blamed the assassination attempt on political enemies. He said two exgovernment ministers—the former foreign minister Boris Shikhmuradov and former agriculture official Saparmurad Yklymov had organized the attack… Mr Shikhmuradov, who served as deputy prime minister, foreign minister and ambassador to China under President Niyazov from 1993 to 2000, is wanted on suspicion of stealing more than $25 million in state funds and for illegal arms smuggling. Now living in exile, he has accused the president of isolating Turkmenistan, turning it into a police state and taking part in crimes ranging from human rights violations to drug dealing and corruption. President Niyazov’s rule began in 1985 when he became Communist Party boss of the then Turkmen Soviet Socialist Republic… In May 2001 he attracted international attention by closing down the local ballet and opera companies. ‘One cannot implant a form of art that arose in another place,’ he said. ‘One

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should develop one’s own national art. I do not understand ballet. What use is it to me?’ (Independent, 26 November 2002, p. 17) Mr Niyazov…accused political opponents living abroad of orchestrating the attack… The ringleaders, he said, included Boris Shikhmuradov… Khudaiberdy Orazov, former head of Turkmenistan’s central bank. Saparmurad Yklymov, exdeputy agriculture minister, and Nurmukhammed Khanamov, an ambassador to Turkey. However, analysts believe the attack could have been carried out by security officials removed from their posts earlier in the year. (FT, 27 November 2002, p. 11) Saparmurad Niyazov accused Boris Shikhmuradov (a former deputy prime minister and former foreign minister), Khudaiberdy Orazov (a former deputy prime minister and former head of the central bank) and Nurmukhammed Khanamov (former Turkmen ambassador to Turkey), all of whom are leaders of Turkmen opposition abroad, of having plotted the terrorist attack. Former agriculture minister Saparmurad Yklymov, who left Turkmenistan back in the early 1990s, was also put on the ‘blacklist’… The head of the presidential staff’s international information department…[on 26 November said] There is no doubt that this criminal act was commissioned and arranged from abroad. I cannot say that this was done from Russia, but I can state officially that there are political figures in Russia who have patronized those who organized the assassination attempt’… Opposition leaders deny they planned the attack… The opposition says Niyazov staged the attack to justify a crackdown on opponents. (CDSP, 2002, vol. 54, no. 48, pp. 4–5) The president said four former government officials…had plotted to kill him. All live in exile and said they knew nothing of the plot. ‘But Niyazov deserves as many deadly gunshots as lives and destinies he has ruined,’ said Mr Shikhmuradov… Plenty of people might have a grudge: life in Turkmenistan gets steadily grimmer. The president has closed the academy of sciences and the country’s main opera and ballet theatre. Education is limited to nine years. Most people live in dire poverty, although the country, with extensive gas reserves, ought to be rich. This year Mr Niyazov has sacked dozens of senior officials for abuse of office. (The Economist, 30 November 2002, p. 60) 26 November 2002: President Niyazov: ‘This [attack] was ordered from abroad. I cannot say that this was done from Russia, but I can say absolutely officially that there are political activists in Russia who protect the organizers and motivators’ (Independent, 27 November 2002, p. 13). Hundreds of people have been arrested after an alleged assassination attempt against President Saparmurad Niyazov… Diplomats in Ashkhabad and human

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rights groups say up to 300 have been arrested… The mass round-up as well as discrepancies in the government’s description of the 25 November incident lead many to question whether an assassination attempt actually took place… Observers say that what is clear is that Turkmen officials have used the incident as an opportunity to crack down on the miniscule opposition. In that way Mr Niyazov…seems to be following a strategy employed by several autocratic rulers in the region…[for example Islam Karimov, Nursultan Nazarbayev and Gaidar Aliev]. (FT, 17 December 2002, p. 8) 16 December 2002: Fifteen officers from the Turkmen ministry of national security burst into the grounds of the Uzbek ambassador’s residence and conducted a search for ‘Turkmen citizens in hiding’ there… The security officers made no secret of the fact that they were looking for Boris Shikhmuradov. (CDSP, 2002, vol. 54, no. 50, p. 4) 18 December 2002: The Turkmen prosecutor-general…accused Uzbek diplomats of having planned a coup d’état in Turkmenistan…[He claimed that] Boris Shikhmuradov arrived in Uzbekistan shortly before the terrorist attack and, with the help of his Uzbek accomplices, illegally crossed the southern sector of the Uzbek-Turkmen border on the night of 23 November and made his way to Ashkhabad. (CDSP, 2002, vol. 54, no. 51, p. 15) 21 December 2002: Turkmenistan expelled the ambassador of neighbouring Uzbekistan… accusing him of assisting a recent alleged assassination attempt on Saparmurad Niyazov… Uzbekistan’s ambassador…was accused by Turkmen officials last week of aiding Boris Shikhmuradov…[who] is accused of mastering the attack…in the assassination attempt…[The ambassador] was said to have harboured Mr Shikhmuradov in his residence and then helped him escape the country… Turkmen officials claim outside forces conspired to topple the country’s government… Russia, Azerbaijan and Turkey are also said to have assisted the coup plotters. (FT, 23 December 2002, p. 8) 25 December 2002: A ceremony marking the opening of the embassy of Azerbaijan…was held in Turkmenistan yesterday [25 December]… Relations between the two countries have always been rather tense, mainly on account of their disputes over oil and

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natural gas fields in the Caspian. In the wake of the attempt to assassinate the Turkmenbashi in late November 2002 relations…were strained even more. The Turkmen security services accused Azerbaijani authorities of having aided the terrorists: Turkmenistan’s investigation showed that some of the plotters had obtained visas to enter Turkmenistan with Baku’s help… The Turkmen leadership apparently decided that it would be best to remain on good terms with Azerbaijan, since Turkmenistan has to transport energy resources through that country to the West. (CDSP, 2002, vol. 54, no. 52, pp. 16–17) 26 December 2002: President Saparmurad Niyazov…yesterday [26 December] announced the arrest of Boris Shikhmuradov… At the same time the Turkmen opposition’s website posted a statement [written on 24 December] by Mr Shikhmuradov in which he declared that he had voluntarily surrendered to the authorities in order to ‘stop the persecution of totally innocent people’ … In it [the statement] he reports that the opposition planned to hold mass demonstrations in late November with the aim of toppling the ‘dictatorial Niyazov regime and holding democratic elections’ and that he arrived in Ashkhabad in September to co-ordinate these actions. Mr Shikhmuradov describes the attempted assassination of Niyazov as a ‘staged incident arranged by the authorities to pre-empt these events and settle scores with the opposition’. He goes on to say that the incident was followed by mass arrests. (CDSP, 2002, vol. 54, no. 52, pp. 6–7) 29 December 2002: Shikhmuradov confessed on national television, saying literally the following: ‘A criminal group was created, consisting of Khanamov, Orazov, myself and others. Living in Russia we used narcotics and, while high on drugs, we trained people and recruited mercenaries for the terrorist attack …to destabilize the situation in Turkmenistan, undermine the constitutional system and assassinate the president… After we committed the criminal act we received assistance from the Uzbek ambassador…[The president] is a gift bestowed on the people of Turkmenistan from above’… Shikhmuradov’s associates said that ‘he could only have said such nonsense on pain of death or under the influence of drugs’… The opposition calls the confession a ‘political show’ reminiscent of Stalin’s 1937 trials [and] charges that many arrestees have been brutally tortured. (CDSP, 2002, vol. 54, no. 52, pp. 6–7) Despite this week’s ‘confession’ by Turkmenistan’s former foreign minister that he plotted to kill the republic’s president, an important question remains: did such a conspiracy really exist?… There may in fact have been a conspiracy, but

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of a different sort. Last February [2002] the United States obtained details of a developing plot to force Niyazov to resign, not through assassination but through a coup… And former foreign minister Boris Shikhmuradov admitted before his 25 December arrest that he had been living secretly in the country since September, organizing mass demonstrations to force Niyazov to hold new elections. But the alleged plotters say there was no assassination attempt. One of them [is] former deputy agriculture minister Saparmurad Yklymov. (FEER, 9 January 2003, p. 9) 30 December 2002: ‘Boris Shikhmuradov…has been sentenced to life in prison by the country’s supreme representative body, the Khalk Maslakhaty (People’s Council)… Until now the maximum penalty under the constitution was twenty-five years’ incarceration’ (CDSP, 2002, vol. 54, no. 52, p. 11). 2–3 January 2003: Russian Federation security council secretary Vladimir Rushailo visited Turkmenistan… He acknowledged that Russia regards the attempt to assassinate Saparmurad Niyazov as an ‘act of international terrorism and is prepared to offer co-operation’… A document on co-operative measures was signed…[providing] assistance to each other in searching for and extraditing [criminals]. (CDSP, 2003, vol. 55, nos 1–2, pp. 16–17) 13 January 2003: ‘President Saparmurad Niyazov yesterday [13 January] announced a suspension of his country’s [1994] dual citizenship agreement with Russia…because [he said] most of the people charged with plotting the attempt to assassinate him hold Turkmen-Russian citizenship’ (CDSP, 2003, vol. 55, nos 1–2, p. 16). 20 January 2003: ‘Turkmenistan has named the year after the deceased mother of Saparmurad Niyazov… The decree…declared that the year would be named Gurbansoltan “to immortalize her sacred image and blessed memory”’ (Telegraph, 21 January 2003, p. 16). ‘His mother died in an earthquake [in 1946]…[She] is said to have died saving him… The word for bread was replaced with her name… Turkmenistan’s only two internet cafés have been closed down’ (The Times, 28 February 2003, p. 24). 3 March 2003: Human rights abuses are widespread…according to OSCE…[the] authorities responded to the attack on their president last November [2002] by detaining and torturing relatives of suspects, televising forced confessions and staging show trials… This is the highest-level condemnation of abuses yet. (FT, 4 March 2003, p. 12) OSCE has the distinction of being the only European organization of which Turkmenistan is a member…[Turkmenistan has] refused to allow a mission of OSCE experts to visit the country in order to conduct an on-site investigation of numerous statements alleging wholesale violations of human rights in

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Turkmenistan. (CDSP, 2003, vol. 55, no 9, pp. 14–15) [OSCE] noted that Turkmenistan had refused to co-operate with OSCE during the preparation of the report, declined to exercise its right to select an expert acceptable to it as a co-author of the report and, moreover, refused to allow a mission of experts to visit Turkmenistan in order to study on-site circumstances surrounding the investigation of the alleged ‘assassination attempt’. (CDSP, 2003, vol. 55, no. 10, p. 17) 10 April 2003: A visit by President Saparmurad Niyazov to Moscow was marked by two events: (1) The signing of a long-term agreement, extending all the way to 2028, on co-operation in the natural gas sector… Russia is prepared to purchase up to 70 million or 80 million cubic metres of natural gas from Turkmenistan annually… Half the cost will be paid in goods and technologies; (2) A decision to abolish dual citizenship. (CDSP, 2003, vol. 55, no. 14, p. 17)

THE ECONOMY Economic background Although its gas reserves are the fourth largest in the world…its hands are tied when it comes to using this potential. Access to the only pipeline linking Turkmenistan with the outside world is restricted by Russia, and customers in the CIS partner countries are strapped for cash…60 per cent of gross domestic product comes from gas. (Deutsche Bank, Focus: Eastern Europe, 1996, no. 162, p. 3)

The economy is dominated by the gas industry, which in 1996 accounted for close to half of GDP and three-quarters of industrial production and export revenues. In 1997 gas supplies to CIS customers were disrupted following disputes about rapidly accumulating payments arrears. Their resumption has been stalled by disagreements with Russia’s Gazprom over transit fees through Russia. This led to a 49 per cent decline in gas production, dragging down industrial production by 30 per cent (EBRD 1998b 194). In November 1993 Russia cut Turkmenistan’s access to the European natural gas market (FT, 3 January 1995, p. 4). In August 1994 Turkmenistan, Iran and Turkey agreed to build a gas pipeline from Turkmenistan through the other two countries to connect with the European network (The Economist, 29 October 1994, p. 98). Later developments were as follows:

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27 July 1997: the USA says that it has no objection to a gas pipeline being built from Turkmenistan to Turkey via Iran (FEER, 18 September 1997, p. 60). The USA will not object to the construction of a pipeline connecting with the Iranian system even though it breaches the 1996 US Sanctions Act, which bans US investments exceeding $40 million in the development of the Iranian energy sector. A US company operates the Turkmen gas network (Newsbrief, 1997, vol. 17, no. 9, p. 70). 27 October 1997: a consortium of oil and gas companies led by Unocal has agreed to build a natural gas pipeline from Turkmenistan to Pakistan via Afghanistan. Ten per cent is reserved for Russia’s Gazprom, which may join the consortium later. All Turkmenistan’s gas exports must currently travel through Russian pipelines and for the past few years Gazprom has prevented Turkmenistan from exporting more than a nominal amount of gas to Western Europe, sending it instead primarily to Ukraine, which pays only sporadically in cash (FT, 28 October 1997, p. 5). 29 December 1997: the new president of Iran, Mohammed Khatami (a moderate cleric elected in May 1997), attends the opening of the first pipeline to pump natural gas from Turkmenistan to Iran (IHT, 29 December 1997, p. 9). (Although the scale of the pipeline development, financed by the government of Iran, is relatively small by world standards, the pipeline is important for Turkmenistan. Export revenues plummeted after March 1997 when Turkmenistan cut off gas exports to Russia, Ukraine and other former Soviet republics in a dispute about gas prices: FT, 30 December 1997, p. 1. Turkmenistan has the fourth largest natural gas reserves in the world and the pipeline will lessen dependence on Russian pipelines. Iran financed the pipeline and gas deliveries will be used to pay off Turkmenistan’s debt: IHT, 31 December 1997, p. 2.) 25 November 1998: President Niyazov says that a $2.5 billion gas pipeline stretching from Turkmenistan to Turkey will be built by 2001 with the help of the World Bank. The 2,000-kilometre pipeline will carry gas from Turkmenistan across the Caspian Sea through Azerbaijan and Georgia to Turkey (IHT, 26 November 1998, p. 21). 18 November 1999: an agreement is signed on a gas pipeline from Turkmenistan via the Caspian Sea to Turkey. 17 December 1999: an agreement is signed whereby Turkmenistan will resume gas supplies to Russia suspended in March 1997 (CDSP, 1999, vol. 51, no. 51, p. 10). 6–7 June 2000: at a CIS meeting in Moscow it was decided to terminate the 1992 Bishkek agreement on visa-free travel. Henceforth terms governing travel throughout the former USSR would be established by bilateral and multilateral agreements among CIS countries. Turkmenistan withdrew from the visa-free travel agreement in 1999. Turkmenistan is the only CIS country with which Russia requires visas (CDSP, 2000, vol. 52, no. 23, pp. 16–17). July 2001: This week the EBRD sent an open letter…objecting to the lack of democratic as well as economic change… The bank observes [that] political opponents and religious minorities are persecuted and Turkmenistan’s citizens lack freedom. They cannot, for instance, leave the country without an exit visa. On the economic front the bank’s lending to small businesses has been thwarted by restrictions on access to foreign currency. The EBRD also worries about what

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Mr Niyazov is doing with Turkmenistan’s $1.7 billion ‘foreign exchange fund’, a pot of money worth about 60 per cent of the country’s GDP, which comes directly under his control and does not form part of the state budget… Part of the revenues [of] production-sharing agreements…goes straight into his foreign exchange fund… Mr Niyazov’s …latest…decree [says] that foreigners must pay $50,000 to marry into the Turkmen race. (The Economist, 28 July 2001, p. 74) Economic reform The Economist (22 January 1994, p. 59) saw not much reform having taken place. A report dated 11 January 1996 commented on a recently introduced presidential programme for intensifying market reforms. The proposed measures included making the national currency convertible and regulating monetary and fiscal policy. The provisions limiting the permissible size of wages and salaries relative to production costs and the maximum profitability levels set for enterprises were to be abolished in January 1996. But the government would continue to regulate prices for the most important types of goods and services, e.g. flour and petroleum products, public transport fares, rates for municipal services and telephone charges. The general public would continue to be supplied with gas, electricity and water free of charge. The government would make up the difference between world prices and domestic wholesale prices for meat, powdered milk, baby food, sugar and tea that are imported on the basis of state orders. There would be state control of wholesale and retail prices for bread, meat, rice and cottonseed oil that comes out of state reserves, as well as of prices and rates for electricity, gas, cement, mineral fertilizers and petroleum products, shipping rates and fares for passenger transportation. Farmers had been promised that, as needed, purchase prices for agricultural prices would be revised in accordance with the dynamics of the world market (CDSP, 1996, vol. XLVIII, no. 2, p. 27). ‘Turkmenistan still has a centrally planned economy, with minimal private ownership. During 2000 it approved an ambitious ten-year plan for national development, based on lavish Soviet-style state investment’ (Business Central Europe 2000:47). ‘The recent creation of a state fund for the textiles industry confirms Turkmenistan’s dirigiste approach to economic development’ (EBRD 2001a:92). ‘Only Turkmenistan, already lagging in reform, registered a further decline this year [2001]’ (EBRD 2001b:17). ‘Only in Turkmenistan, where the political commitment to reform has been weak, was there a backtracking in reform’ (p. 30). Access to foreign exchange and provision of large subsidies to domestic consumers for water, gas, electricity, fuel and other public services remain under government control… The prevalence of output targets is another manifestation of the prevailing central planning mode in the country. (EBRD 2002b:206)

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Financial policy Turkmenistan’s own currency, the manat, was introduced on 1 November 1993. The manat was made the sole legal tender on 20 December 1994. In mid-February 1995 banks were required to surrender 75 per cent of their 1994 profits to the state and to cut lending rates to 15 per cent per annum (EBRD 1995:65). Interest rates have subsequently been sharply raised. The flow of ‘quasi-fiscal directed credits…appears to have dried up since the announcement on 27 December 1995 by the president of a move towards more reform-oriented policies’. There is a tax on excess wage increases (EBRD 1996b: 179). An ambitious stabilization programme was adopted in January 1996, including further price liberalization, tight monetary and fiscal policies and consolidation in the commercial banking sector. The central bank is now only allowed to provide financing equivalent to 1 per cent of GDP to cover the budget deficit (Deutsche Bank, Focus: Eastern Europe, 1996, no. 162, pp. 3–4). Free utilities have been withdrawn. The price of bread, long subsidized, has risen several-fold. Wages are paid late and not indexed against inflation which runs at about 20 per cent a month… Concrete policies consist of emergency stop-gap measures like bread price hikes and freezes in public-sector pay. Inflation is running riot at some 100 per cent in 1997. (Business Central Europe 1997:52) ‘Turkmenistan is the only former Soviet country never to have had a reform programme with the IMF’ (The Economist, Survey, 7 February 1998, p. 13). A bankruptcy law was passed in June 1992, but few enterprises have been forced into bankruptcy (EBRD 1997b:206). The decreed doubling of public sector wages in April 1998 implied severe fiscal imbalances. Inter-enterprise arrears increased from around 20 per cent of GDP at the end of 1996 to over 40 per cent by January 1998. Tax arrears also shot up in the wake of the gas export crisis to reach 6 per cent of GDP by January 1998. No state enterprises have been bankrupted so far, although workers have been placed on forced temporary leave (EBRD 1998a:42). By March 1998 overdue payments to suppliers had increased to 42 per cent of GDP. A netting out operation among enterprises reduced arrears to 23 per cent of GDP by August 1998. ‘However, arrears are likely to remain a substantial problem as they partially reflect continued weak financial discipline. Market discipline is also weakened by the failure to apply effectively the 1992 bankruptcy law’ (EBRD 1998b:195). The macroeconomic environment has deteriorated in recent months, with rising inflation, a substantial current account deficit and a large depreciation in the exchange rate, especially on the parallel market… There was some progress [in banking] in the period before December 1998, with the official abolition of directed credits and an end to interest rate controls. There was also increased lending by banks to small and medium-sized enterprises following exchange

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rate unification and the accompanying reduction in foreign exchange arbitrage opportunities. These advances were reversed, however, in December 1998 when a proposal by President Niyazov to merge two private banks received parliamentary approval, thus confirming the state’s ability to interfere at will in the banking system. (EBRD 1999a:45) ‘The government effectively nationalized a private bank by forcing it to merge with another, state-controlled institution’ (p. 23). The central budget deficit on a commitment basis was around 4 per cent of GDP in 1998. This figure excludes deficits of the state funds (agriculture, cotton, oil and gas). The quasi-fiscal deficit—central budget deficit plus deficits of the state funds—was around 15 per cent in 1998, financed mainly through foreign borrowing. The government has also extended substantial subsidized directed credits to agricultural sector. The latter are rarely paid back, effectively resulting in money creation by the central bank. (EBRD 1999b:274) Prices The prices of nineteen consumer goods remain controlled and subsidized by the state, including bread, butter and vodka. Certain other items, including electricity and gas, are free (EBRD 1994:39). There are price controls for the following: (1) ‘necessities’ (twenty-four products, mainly foodstuffs, whose prices are set by presidential decree); (2) ‘goods under presidential review’ (forty goods such as petroleum products for households and urban transport), whose prices can be altered only after the relevant ministry seeks presidential approval; (3) ‘other consumer goods’ (473 items, including cotton fabrics and knitwear), whose prices, usually based on cost plus mark-up, can be altered only with permission from the ministry of economy and finance (EBRD 1995b:60). During the course of 1995 and the first half of 1996 price controls were significantly loosened. In January 1995 there was a reduction in the number of goods and services subject to price controls and rationing from more than 400 to about fifty. Remaining controls include state-defined prices for bread, meat, baby food, sugar, milk, heating and housing. Rations of gas, electricity and water continue to be distributed to the population free of charge (EBRD 1996b:179). Price controls still apply to twenty-six goods and services (down from 400 at the start of 1995), including basic foodstuffs, energy, public services (rents, heating and water), telecommunications, transport and selected construction materials. In the second half of 1996 the prices for butter, milk, meat and fodder were liberalized and state orders abolished, reducing the number of food items under price controls to six (flour, bread, cotton, oil, rice and sugar). Procurement prices of cotton and wheat were adjusted again at the beginning of 1997 but remain considerably below the world market price. Most of the population still has access to free water, gas and electricity (EBRD 1997b:206). After further price liberalization in 1997 (affecting products such as butter, meat, oil, sugar and tea) price controls now apply only

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to flour and bread, utilities, communal services, rents, petrol, transportation and building materials. Some utility prices have recently been raised, but most prices remain far below cost-recovery levels. Electricity, gas and water, as well as rents, remain free of charge for households. State procurement prices for cotton and wheat have been kept at their January 1997 levels, a decline of about 30 per cent in real terms (EBRD 1998b:194). Turkmenistan is one of the few transition economies where price controls remain in effect outside of public utilities and rents. The domestic prices of flour, bread, petrol and building materials are subject to control and are substantially below world market levels… Households have free access to water [there are frequent shortages due to under-investment] and pay nominal sums for electricity and gas… Enterprises pay slightly more [for electricity], but still well below cost-recovery levels. (EBRD 1999b:274–5) ‘Public utilities remain a major source of subsidies to domestic enterprises, as power, gas and water are supplied virtually free of charge’ (EBRD 2000a:82). ‘Both gas and oil are sold domestically at prices below short-run operational costs… From May 2001 individuals who want to claim government coupons for subsidized flour and bread have to apply to a committee’ (EBRD 2001b:202). Before November 1993 only the prices of imports and products using a high proportion of imported feedstuffs were liberalized (Deutsche Bank, Focus: Eastern Europe, 1994, no. 100, p. 45). Price liberalization was continued at the beginning of 1996. Market prices now apply to all goods except meat and flour. Some concessions to citizens have been retained. They continue to have free use of local services such as gas and water supplies. Wages were increased, especially those of public sector workers (Deutsche Bank, Focus: Eastern Europe, 3 September 1996, no. 162, p. 3). A fresh round of reforms was announced on 1 November 1993, including the freeing of prices on all but forty staple products and a tightening of monetary and fiscal policy (IHT, 2 November 1993, p. 11). According to the FT (2 November 1993, p. 4), the prices of the largely state-controlled staples were to be raised and a privatization programme (excluding the oil and gas sectors) was also due to be launched. But both attempts at price liberalization (most recently in November 1993) were scrapped after only a few days, according to Business Central Europe (March 1994, p. 74). The government provides free gas, electricity and water to its citizens and basic foodstuffs are available at very low prices for ration coupons (Baltic Observer, 19–25 January 1995, p. 12). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 10 per cent; 1993, 10 per cent; 1994, 15 per cent; 1995, 15 per cent; 1996, 20 per cent; 1997, 25 per cent; 1998, 25 per

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cent; 1999, 25 per cent; 2000, 25 per cent; 2001, 25 per cent (EBRD 1999b:24, 276; and 2002b:20, 208). The 19 February 1992 privatization law set out the following principles (Kaser and Mehrotra 1992:47–8): land, water and energy deposits would remain state property; staff can determine by majority vote the form of divestment of the enterprise in which they work; employee buy-outs are facilitated by the distribution of part of the profits and of the depreciation fund; foreigners could buy shares in privatized enterprises within a quota but priority would be given to Turkmen citizens; a voucher scheme for citizens would be formulated by presidential decree. Privatization has been slow (Deutsche Bank, Focus: Eastern Europe, 28 February 1993, no. 70, p. 5). An 11 March 1993 source (CDSP, 1993, vol. XLV, no. 10, pp. 25–6) said that President Niyazov had signed a resolution on state support for ‘entrepreneurial activity’, including the establishment of a joint stock bank and the creation of seven economic zones for free enterprise. But the president said that ‘We will not take the path of largescale, uncontrolled privatization or of handing enterprises over to their collectives.’ Deutsche Bank (Focus; Eastern Europe, 22 March 1994, no. 100, p. 45) says that the emphasis is now on rapid and comprehensive privatization (although the state will maintain control in the oil and gas sectors, for the time being, through a majority stake in the major companies). Large privatization remains largely at the planning stage. Little has been achieved to date in small privatization, but there has been substantial growth in the number of small private enterprises. There is no programme of property restitution (EBRD 1994:38). By late 1994 about 850 small entities in the service sector had been sold. A presidential decree of 13 May 1994 (formalized further in October 1994) foresaw a voucher-type privatization process with preference granted to members of workers’ collectives. But preparations for implementation are at an early stage (EBRD 1995a:65). About 850 small entities in the service sector, mostly shops, had been privatized by late 1994 (EBRD 1995b:60). The government aims to privatize 600 medium-sized or large enterprises by the end of 1996 but neither the enterprises nor the methods have been revealed. ‘Reportedly, four enterprises, with between 100 and 500 employees each, have been privatized.’ Ownership has changed in 1,800 small units (mainly catering shops, tailors, hairdressers, laundries and repair shops). Of these 600 have been auctioned off to private individuals and the remainder purchased by co-operatives. The 1,800 ‘privatized’ units represent 40 per cent of all small (fewer than twenty employees) state units. Shops for food, including small outlets for fruit and vegetables, remain fully government-owned. Little effort has been made to initiate orderly restructuring of enterprises (EBRD 1996b:178–9). The government continues to specify profit margins even in privatized enterprises. Large privatization has seen little progress (EBRD 1997a: 33). In mid-1997 the private sector accounted for roughly 25 per cent of GDP (EBRD 1997b:14). Privatization has been slow, involving mainly small service units. A significant acceleration of the process was pledged in a series of presidential decrees in April and August 1997. Only enterprises such as public utilities were to be exempt. By the end of 1996 not a single large enterprise had been transferred to majority private ownership. In the first half of 1997 a handful of medium-sized enterprises were privatized by public

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tender (EBRD 1997b:205–6). The April 1997 privatization programme continues to suffer from slow implementation (EBRD 1998a:42). Both small and large privatization continue to lag. Line ministries continue to exert effective control over the corporate sector. In April 1997 a presidential decree earmarked 345 medium-sized and large enterprises for privatization by 2000 and established equal rights for participating foreigners. The August 1997 decree highlighted a subset of eighty-three enterprises for corporatization and privatization through auctions by the end of the year. But only four medium-sized and large enterprises were sold during 1997. Small privatization has also slowed down, primarily because of overly optimistic price expectations in the cash auctions which became the primary privatization method in December 1996. In January 1998 a new privatization centre was created with the immediate aim of privatizating eighteen large enterprises through international investment tenders. A modest acceleration of privatization occurred in the first half of 1998 when thirty medium-sized companies were sold (EBRD 1998b:194). Large-scale privatization is moving ahead at a modest pace. Of the eighteen firms selected by the government for initial privatization only one has been sold so far. This sale was to a domestic investor. Of the other seventeen, four have been corporatized, and the intention is to find domestic or foreign strategic investors to purchase majority shares. After the eighteen firms have been sold a further 280 await privatization. Problems remain with the framework for privatization. In particular the practice of setting a reservation price equal to book value makes sale of firms difficult because the true value of firms tends to be less than their book value. Social obligations on the privatized firms’ owners further reduce the value of enterprises on offer. (EBRD 1999a:45) ‘Social obligations (such as a prohibition on laying off employees) are imposed on privatized firms, thus reducing their value to potential investors’ (p. 20). Twenty-three medium-sized enterprises were privatized in the first half of 1999, ten of them in textiles, seven in food and one in electric appliances. The private sector outside of agriculture accounts for less than 10 per cent of GDP. All the large enterprises—including cotton ginneries, building material plants and food processing—remain in the state sector. ‘There is frequent interference in the running of private companies. For example, the chairman of a private pharmaceutical company was recently removed from office by order of the state.’ Banks continue to extend credit predominantly to state companies (EBRD 1999b: 274–5). ‘Small-scale privatization continues at a slow pace… Recently completed sales of six pilot privatizations for larger enterprises suggest a preference for tight state control… The government has also announced plans to privatize housing’ (EBRD 2000a:82). Since 1997, when the first wave of small-scale privatization came to an end, Turkmenistan has managed to sell only some 200 companies from over 2,000 of the original list of 4,300 privatization objects still remaining in state hands. It is thus one of the few countries in the region in which small-scale privatization has

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not been completed… The government has made several attempts in recent years to accelerate the process of medium-scale privatization. From the total list of 280 companies, a pilot list of eighteen was drawn up in 1999. By mid-2000, however, privatization was completed in only six of these companies. In most cases shares were distributed among the work force, the management and key suppliers to the plant (particularly in food processing). The government’s concern seems to have been to minimize potential disruptions that might result from reorientation of production post-privatization by building vertically integrated ownership structures along traditional ministerial lines… In January 2000 President Niyazov set up a new bank…to provide cheap loans primarily to small and medium-sized enterprises. By mid-year, however, only one loan had been approved…In June 2000 the president outlawed domestic citizens from holding foreign bank accounts… Over 95 per cent of credit still goes to the state sector. (EBRD 2000b:218) ‘Little progress in privatization…has been made since 1997’ (EBRD 2001b: 202). Privatization has stalled and is no longer on the policy agenda. No enterprise sales have taken place since the responsibility for privatization moved back to the ministry of economy and finance in 2001. All strategic assets remain stateowned and the government tends to hold at least a 50 per cent stake in all new commercial investments… Outside agriculture the private sector role in the economy is very limited. (EBRD 2002b:206) A new stage of privatization was to begin in 1996. Whereas in the previous two years denationalization had encompassed about 1,800 consumer service facilities, public eating establishments and small retail trade outlets, the 1996 plan called for the privatization of roughly 1,600 small enterprises in many different branches of the economy (CDSP, 1996, vol. XLVIII, no. 2, p. 27). In December 1996 it was reported that foreign and domestic investors would be offered an equal opportunity to buy one hundred state enterprises specializing in sales before the end of the year. More than 2,000 enterprises involved in public catering and the retail trade were to be privatized over the next two years (Transition, 1996, vol. 7, nos 11–12, p. 28). Foreign trade Centralized state trading remains a prevalent influence on both foreign trade and production. Outside this system licences can be obtained for most imports and exports, but duties and tariffs can be very high (EBRD 1994:39). On 1 May 1996 barter for cotton, wool, oil and oil products was banned. Exports of these goods must now be sold for cash at the commodity exchange established on 1 August 1994. The establishment of the exchange led to a further centralization of foreign trading operations, since all domestic or

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foreign trade transactions exceeding a modest amount had to be carried out (or be registered and endorsed) at the exchange. There are formally few quota restrictions on imports but most foreign trade is subject to licensing (EBRD 1996:179). Centralized state trading remains a prevalent influence on both foreign trade and production (EBRD 1997b:206). At the beginning of November 1993 full currency convertibility and a unified exchange rate for the purpose of trade transactions were introduced in principle (EBRD 1994:39). There are various restrictions on current account convertibility and there are capital controls. There is a 50 per cent surrender requirement at the official rate and there are multiple exchange rates for different transactions (p. 111). The authorities moved to unify the exchange rate on 2 January 1996 at a rate close to the market rate. Prior to this an ‘official rate’ applied to all government transactions and a ‘commercial rate’ applied to all other transactions. After keeping the two exchange rates largely unified during January 1996, the authorities allowed a substantial wedge to emerge between the rates during the first half of February. On 22 February 1996 the manat was revalued. But on 30 March 1996 the official rate was again sharply devalued, leading to a reunification of the official and commercial exchange rates. In principle the exchange rate is to be determined in regular inter-bank auctions but by late May 1996 only one auction had taken place. Since 27 December 1995 currency receipts earned by state entities have, as a general rule, been subject to a 50 per cent surrender requirement (70 per cent in the case of oil and gas). There is no foreign currency surrender requirement for private sector export earnings (EBRD 1996b:179). The government continued to hold foreign exchange and credit auctions throughout 1996. But access to foreign exchange auctions remains restricted mainly to state agencies and the exchange rate retains a premium of around 25 per cent over the official rate (EBRD 1997a: 34). Since 27 December 1995 currency receipts earned by state entities have, as a general rule, been subject to a 50 per cent surrender requirement, except in the case of oil and gas, to which a 70 per cent surrender requirement applied until April 1997. Since then all surrendered foreign exchange has gone to the central bank at a unified rate of 50 per cent. There is no foreign exchange surrender requirement for private sector export earnings (EBRD 1997b:206–7). The commercial and official exchange rates were unified in April 1998, implying a depreciation of the official rate by 25 per cent. But the government continues to screen access to the central bank’s non-cash foreign exchange auctions, thereby implicitly regulating imports by enterprises. Moreover, surrender requirements on hard currency export earnings remain in place (EBRD 1998b:194). While Turkmenistan has few tariff and non-tariff barriers, foreign trade remains tightly constrained by restrictions on access to foreign exchange. Enterprises may apply for (but not necessarily receive) foreign exchange through the banking system to purchase capital equipment or to repay foreign currency loans. Consequently, there is a large parallel foreign exchange market (EBRD 1999b:274). ‘The agreement in December 1999 to renew gas exports to Russia…[was] followed by an agreement in principle to increase such exports… In July 2000 Turkmenistan announced a new agreement over gas exports to Ukraine’ (EBRD 2000b:219). The manat was launched at a rate of two to the US dollar, but galloping inflation has undermined the currency. The commercial exchange rate has been brought more closely

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into line with black market rates. The manat has been pegged at 230 to the US dollar, down from the old official rate of ten and commercial rate of seventy-five. At the same time the commercial rate offered by state banks and the largely disused official rate have been unified. Individuals are allowed to buy up to $500 at the new rate (Baltic Observer, 19–25 January 1995, p. 12). The official and commercial exchange rates for the manat against the US dollar, which existed in parallel until the beginning of April 1996, were unified in one single rate. It is fixed on the basis of market rates. Until April 1996 exporters had to convert their receipts at the official rate, which was far below the market rate (Deutsche Bank, Focus: Eastern Europe, 1996, no. 162, p. 3). At the end of April 1996 commercial banks were readmitted to the foreign exchange auctions (Deutsche Morgan Grenfell, Focus: Eastern Europe, 3 March 1997, p. 79). ‘In early July [2000] the government said it would monitor all visiting foreigners and close down foreign bank accounts held by Turkmens to prevent capital flight’ (FEER, Asia 2001 Yearbook, December 2000, p. 103). Foreign direct investment The volume of foreign direct investment has been very modest considering the country’s natural resources. (See Table 7.1.) ‘The introduction of international accounting standards and recent adoption of production sharing agreement legislation provide a good legal basis for foreign investment in the oil and gas sector. However, implementation risks continue to limit foreign interest’ (EBRD 2000a:82). Most foreign investment proposals require government approval. Foreigners may lease but not own land (EBRD 1996b:179–80). By early 1997 the stock of foreign investment had reached $410 million (Deutsche Morgan Grenfell, Focus: Eastern Europe, 3 March 1997, p. 79). Turkmenistan has made little progress in attracting new foreign investment. ExxonMobil has closed its Ashkhabad office, while Bidas, an Argentinian company, has been forced out of the country and its assets have been confiscated despite two international court rulings in its favour. (EBRD 2002:86)

Table 7.1 Turkmenistan: selected economic indicators 1995–2002

Economic indicator

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

Rate of growth of GDP (%)

–7.2

–6.7

–11.3

7.0

16.5

17.6

11.8

5.1

Rate of growth of industrial output (%)

21.4

30.7

–33.0

25.8

13.0

29.0

13.6

5.4

4.5

–45.2

123.7

8.7

35.0

17.0

8.0

–6.6

Rate of growth of

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agricultural output (%) Inflation rate (consumer, %)

1,005

992.4

83.7

16.8

24.2

8.3

11.6

10.6

0.4

0.3

–0.2

–2.6

0.0

0.3

1.0

–2.7

Balance of payments (current account, $ billion)

0.024

0.002

0.680

0.952

0.583

0.386

0.074

0.167

Foreign direct investment (net, $ billion)

0.233

0.108

0.108

0.062

0.125

0.126

0.170

0.100

Budget surplus or deficit (% GDP)1 Unemployment rate (end of year, %)2

Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, United Nations Economic Commission for Europe, Economic Survey of Europe. Note: 1 General government balance: includes the state, municipalities and some extra-budgetary funds (EBRD). Significant off-budget expenditures occur through extra-budgetary funds and directed lending. The overall balance moved from a deficit of –8 per cent to –10 per cent of GDP in 1998– 9 to a surplus of 5 per cent to 7 per cent of GDP in 2000–1. The overall public sector borrowing requirement has been estimated as 8 per cent of GDP in 2001. 2 Official unemployment does not exist. In 1995 household survey estimates produced a figure of 5 per cent, but this did not take account of substantial public sector overemployment (EBRD 2000a:83). Every Turkmen citizen is guaranteed employment. Thus official unemployment does not exist. According to a household survey, unemployment was 19 per cent in 1998 (EBRD 2002b:207).

Agriculture The Land Code of 12 October 1990 termed land ‘the property of the whole people’. Each citizen has the right to the use of a plot of land and leases (including to foreigners) can be granted for up to twenty-five years. The 23 April 1992 law allows collective and state farms to be divided up into leaseholds for the lifetime of a citizen, with the right of inheritance, to be used not only for farming but also for handicrafts and buildings (Kaser and Mehrotra 1992:47). About 90 per cent of Turkmenistan is desert and only 2 per cent is arable land (98 per cent of which is irrigated). (Ahmed Rashid puts the desert area at two-thirds and the arable area at 2.5 per cent: FEER, 17 February 1994, p. 30.) The acquisition of agricultural land is allowed only in the form of a long-term lease (see the comments by Nikonov under ‘Agriculture’ in the section on Kazakhstan). In 1991 agriculture accounted for 46 per cent of national income (Deutsche Bank, Focus: Eastern Europe, 28 February 1993, no. 70, pp. 1–9). Another (11 March 1993) source, however, reports that a law on the introduction of private land ownership has been adopted. Every citizen has

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the right to own up to 50 ha of land or to lease up to 500 ha on a long-term lease (CDSP, 1993, vol. XLV, no. 10, p. 26). A small share of land has been leased to private individuals. Land ownership has been legalized (EBRD 1994:38). The maximum plot size that can be owned privately is 50 ha (EBRD 1995b:60). In December 1996 a land reform initiative was announced, allowing for the private ownership of land. Private land rights extend to collective farmers only, although other citizens may obtain long-term leases or be granted ownership rights at the government’s discretion. Land rights do not extend to the sale of land. In January 1997 land rights were issued to the first eighty private farmers. In January 1997 monthly subsidized rations for flour were announced at a nominal price in response to sharp increases in bread prices following a disastrous grain harvest (EBRD 1997a:33–4). During the first half of 1997 almost all land was allocated to individual farmers and the transfer of land titles to private ownership was envisaged after a two-year lease (EBRD 1997b:206). State procurement for cotton and wheat remains in place and prices have been held constant at their January 1997 levels, a significant fall in real terms. This undermines production incentives for farmers who during 1997 received private ownership titles in the context of the land reform programme (EBRD 1998a:42). Following a decree on land reform in December 1996 most land has been allocated to individual farmers on a two-year lease and for eventual private ownership. But the registration of land titles has been slow owing to a lack of administrative capacity. Ownership rights remain contingent upon fulfilment of government-determined output targets for cotton and wheat. State control is also exercised through the allocation of collectively owned assets, input supplies and subsidized rural credit. Most individual plots are small and ownership rights do not extend to the sale of land (EBRD 1998b:19). State procurement remains in place for raw cotton and wheat, at prices representing less than half of their value on world markets. The government has extended substantial subsidized directed credits to agriculture. ‘The latter are rarely paid back, effectively resulting in money creation by the central bank’ (EBRD 1999b: 274). ‘Land reform is progressing with the allocation of individual land leases to almost all farmers’ (EBRD 2000a:82). As a result of below world market procurement prices for wheat and cotton and the distortions in the foreign exchange market, the agricultural sector in Turkmenistan is very heavily taxed… Net transfers out of agriculture reach 15 per cent of GDP… Given large effective taxation, the government’s push for further production increases in wheat and cotton has been based on very limited freedom for farmers to choose what to produce. (EBRD 2000b:218) ‘Little progress in…land reform has been made since 1997… The land reform process has stalled as few private land titles have been issued to existing leasehold farmers’ (EBRD 2001b:202). According to official figures, private sector employment reached 63 per cent of the total in 2001. However, this figure includes estimates for people employed

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in their own household and rural Dayhan farms (25 per cent of total employment), where commercial autonomy is limited. Their land rights are not tradable and they are typically reliant on the state for all inputs and are subject to strict output quotas. (EBRD 2002b:206) By the end of 1992 there were 100,000 private farms, with an average size of 10 ha; they accounted for 2.8 per cent of total agricultural land (United Nations Economic Commission for Europe 1993:206). Some 60 per cent of food is still imported (Ahmed Rashid, FEER, 17 February 1994, p. 30). The share of peasant farms in agricultural land increased from 0.0 per cent in 1994, to 0.02 per cent in 1995 and to 0.04 per cent in 1998 (Spoor and Visser 2001:888). The share of private farms and household plots in agricultural production increased from 17 per cent in 1991, to 22 per cent in 1992 and to 42 per cent in 1996. ‘In the Central Asian states “peasant co-operatives” are most likely included, over-representing “private production”’ (p. 890). Economic performance GDP growth did not turn positive until 1998 but in and after 1999 it was very high. (See Table 7.1.) The GDP growth rate was –5.3 per cent in 1992, –10 per cent in 1993 and – 17.3 per cent in 1994 (EBRD 2000a:83). ‘Within the CIS developments in 1999 were dominated first by the Russian crisis, then by the unexpected strength of recovery in Russia and the rise of many commodity prices… The best placed have been countries with large natural resource sectors’ (pp. 5, 7). GDP in 2001 was an estimated 96 per cent of the 1989 level (EBRD 2002b:58). A further substantial fall in GDP in 1997 was mainly caused by the suspension of gas exports to major CIS customers owing to increasing arrears in payments (EBRD 1998a:7; Statistical Review, Economics of Transition, vol. 6, no. 1, p. 242). There was hyperinflation or near so in the period 1992 to 1996, with consumer prices rising by 493 per cent in 1992, 3,102 per cent in 1993, 1,748 per cent in 1994, 1,005 per cent in 1995 and 992 per cent in 1996. There was a significant improvement from 1997 onwards. ‘The macroeconomic environment has deteriorated in recent months, with rising inflation, a substantial current account deficit and a large depreciation in the exchange rate, especially on the parallel market’ (EBRD 1999a:45). ‘While there is no officially recorded unemployment and no unemployment benefit, the actual level of unemployment is likely to be about 20 per cent’ (EBRD 1999b:275).

8 Uzbekistan POLITICS The political and demographic background ‘Mr [Islam] Karimov has kept a tight grip at home, particularly over the media and the Islamic movement… Mr Karimov is suspicious of the free market’ (Business Central Europe 1997:53). The opposition parties in Uzbekistan have been clamped down on and the US state department has revealed significant abuses of human rights. President Islam Karimov argues that restrictions on opposition parties are necessary to prevent the spread of Islamic fundamentalism. On 21 January 1993 the supreme court suspended the activities of Birlik (the main Uzbek nationalist opposition party) for three months (FEER, Asia 1994 Yearbook, 1994, p. 112). The Birlik (Unity) Popular Movement (formerly the Democratic Party of Uzbekistan) has still not been allowed to register as a political party (The Economist, 15 May 1993, p. 88). The Erq (Will) opposition party is legal, but has been harassed (The Times, 26 May 1993, p. 12). ‘[Some] 7,000 political prisoners remain in jail’ (FEER, 9 May 2002, p. 15). The population was 24 million at the end of 1998. In 1989 the ethnic composition of the population was as follows: Uzbeks, 68.7 per cent; Russians, 10.8 per cent; Tatars, 4.2 per cent; Kazakhs, 4.0 per cent; Tajiks, 3.9 per cent; other, 8.4 per cent (Economic Bulletin for Asia and the Pacific, 1991, vol. XLII, nos 1 and 2, p. 2). In 1992 Uzbeks accounted for 71 per cent of the population, Russians 10.8 per cent, Tajiks 4 per cent and Tatars 4.2 per cent (FEER, Asia 1994 Yearbook, 1994, p. 112). A later figure for Russians was 8 per cent (Anthony Hyman, The World Today, November 1993, p. 206). The population is divided into the following ethnic groups: Uzbek, 74.7 per cent; Russian, 6.5 per cent; Tajik, 4.8 per cent; Kazakh, 4.1 per cent; others, 9.9 per cent (UZET, Quarterly Issue, January–March 1998, p. 1). The respective figures have changed to 77 per cent, 6 per cent, 5 per cent, 4 per cent and 8 per cent (UZET, Quarterly Issue, October–December 1999, p. 1). Between 1989 and 1998 the proportion of ethnic Russians in the population fell from 8.3 per cent to 6.5 per cent (The Economist, 3 April 1999, p. 70). According to official statistics, 98,000 emigrated in 1991 (partially offset by 58,000 immigrants). Although the numbers emigrating fell in 1992, around 100,000 left the country in 1993 through Russian embassy channels alone (CDSP, 1994, vol. XLVI, no. 24, p. 12).

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Political developments 25 December 1994: the general election takes place. There are 250 members of the new parliament (the former Supreme Soviet had 500 deputies). Thirty-nine seats need further rounds of voting, but the People’s Democratic Party (successor to the Communist Party) and its supporters win handsomely: People’s Democratic Party, fifty-four seats; Party of National Progress, six seats; local government candidates, 145 (most, perhaps 93 per cent, belong to the PDP). The Party of National Progress was created by the government as a party of business. The Birlik and Erq parties did not take part in the election. Ahmed Rashid (FEER, 16 March 1995, p. 24) assessed the results thus: His [Karimov’s] People’s Democratic Party won 231 seats, with the remainder going to close allies in the Party of National Progress, which Karimov set up two years ago. Opposition parties, most of whose members have been jailed or forced into exile, have been barred since 1992 and were barred from standing in the elections… The turnout was high. Some 93 per cent of Uzbekistan’s people voted, many because government officials forced them to. 26 March 1995: there is a referendum on the question of postponing the presidential election scheduled for December 1996 until December 2000. There was a turnout of 99.3 per cent and 99.6 per cent of voters said ‘yes’, according to official figures. Only those voting against had to enter cubicles to make their mark, while those voting ‘yes’ simply placed the voting paper unmarked in the ballot box (The Economist, 8 April 1995, p. 81). 7 September 1996: secular and religious opposition leaders meet in their first sanctioned public meeting in three years. Abdumannob Polatov is re-elected chairman of the Human Rights Society of Uzbekistan. He has been invited to address a human rights conference in Tashkent organized by OSCE (FT, 9 September 1996, p. 4). Prominent dissidents are being allowed to return to Uzbekistan and a conference on human rights was held in Tashkent last week… Most people reckon things began to change with the preparations for Mr Karimov’s visit to the United States in June. A few days before meeting Bill Clinton, Mr Karimov decreed an amnesty, which included a few political prisoners (though it is thought that twenty-seven still remain in Uzbekistan’s jails). Then at a press conference in America, Mr Karimov met Abdumannob Polatov, Uzbekistan’s most prominent dissident and chairman of the country’s Human Rights Society, and invited him to come home. In 1992 Uzbek officials had kidnapped Mr Polatov at a conference in Kyrgyzstan and thrown him in jail. He was found guilty of insulting the president. But within two months, after protests abroad, he was released and left for America. In spite of this experience, Mr Polatov accepted Mr Karimov’s invitation. He returned to Tashkent a month ago… In an unprecedented speech to parliament on independence day, 29 August, he [Karimov] said that his government would

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315

protect human rights and allow opposition. (The Economist, 21 September 1996, p. 89) 3 February 1999: Uzbekistan announces that it is to opt out of the CIS Collective Security Treaty, which was signed in May 1992 by Armenia, Azerbaijan, Georgia, Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan (CDSP, 1999, vol. 51, no. 5, p. 11). (By the time of the CIS meeting held on 2 April 1999 Uzbekistan, Azerbaijan and Georgia had withdrawn from the security treaty: CDSP, 1999, vol. 51, no. 14, p. 20.) 16 February 1999: there are a number of bomb blasts in Tashkent. President Karimov: ‘This action was planned in advance and the blasts went off in four or five places. The aim was to destroy the president and, if necessary, sow fear and panic among the civilian population’ (FT, 17 February 1999, p. 5). The official death toll has reached fifteen (IHT, 18 February 1999, p. 7). Fifteen people were killed and over a hundred injured as a result of six explosions (CDSP, 1999, vol. 51, no. 8, p. 15). At a recent press conference Uzbek president Islam Karimov said the authorities were giving serious consideration to just one theory: that the acts of terrorism were perpetuated by religious fanatics… Islam Karimov emphasized, however, that Islamic fundamentalists do not yield any meaningful influence in Uzbekistan itself. For that reason Tashkent is convinced that the terrorist acts were planned and prepared outside the country. Karimov also cited several specific regions that ‘export’ extremism to Uzbekistan—namely, Tajikistan, Afghanistan and Chechnya. (p. 16) ‘Uzbekistan has joined GUAM, the alliance comprising Georgia, Ukraine, Azerbaijan and Moldova. The alliance was renamed GUUAM’ (UZET, Quarterly Issue, January–March 2000, p. 19). 28 June 1999: The supreme court of Uzbekistan sentenced six people to death yesterday [28 June] after convicting them of involvement in the bombing of government buildings that killed sixteen people. Eight of the twenty-two people convicted… were sentenced to twenty years in prison, while the remaining eight were sentenced to ten to eighteen years. The defendants were found guilty of charges including terrorism, attempting to kill the president, murder, drug-trafficking, illegal weapons possession and robbery… [President] Islam Karimov…said Islamic fundamentalists had staged the attack in an attempt to kill him… Two main suspects…remained at large yesterday. (FT, 29 June 1999, p. 7) All the defendants—twenty-two people, mainly Uzbeks aged twenty to thirty— pleaded guilty. Six of the defendants…were sentenced to be shot, while the rest

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are to be incarcerated for periods of ten to twenty years in a strictregime facility. The harshness of the verdict can be explained by the seriousness of the accusations—the defendants were charged with attempting to kill President Islam Karimov and to overthrow the constitutional regime in order to create an Islamic state. (CDSP, 1999, vol. 51, no. 26, p. 17) 22 August 1999: see the entry for this date in the chapter on Kyrgyzstan, on Islamic insurgents. 5 December 1999: a parliamentary election is held. ‘Western groups refused to send observers, saying the poll had failed to satisfy democratic norms’ (IHT, 6 December 1999, p. 6). Mr Karimov’s isolation and paranoia have reached new heights. The main symptom of this has been his relentless campaign against the country’s mainly harmless Islamic community, culminating in mid-year [1999] when several Islamists were sentenced to death for alleged involvement in a fishy assassination attempt on the president. Mr Karimov thinks little of stirring up regional tension. He has continued to interfere in neighbouring conflicts in Tajikistan and Afghanistan, even sending his air force on clumsy bombing raids over other countries to stamp out perceived insurgents. (Business Central Europe 1999:48) 9 January 2000: a presidential election is held. Islam Karimov is re-elected with 91.9 per cent of the vote. His opponent, Abdulkhafiz Dzhalalov (first secretary of the national council of the People’s Democratic Party) won 4.17 per cent of the vote. President Islam Karimov of Uzbekistan was assured of victory in the presidential election Sunday [9 January] during which his only rival revealed that he had cast his vote for the head of state… OSCE refused to send observers to the vote. It said that authorities had done little to offer voters ‘genuine choice’. The only other candidate, Abdulkhafiz Dzhalalov, showed television cameras that he had voted for Mr Karimov. (IHT, 10 January 2000, p. 6) Proxy voting [e.g. a man voting for members of his family] is illegal in Uzbekistan, but the ban is not generally enforced… Islam Karimov… retained the presidency with 92 per cent of the vote. This was Uzbekistan’s first presidential election for eight years. One due in 1996 was cancelled… [His opponent] Abdulkhafiz Jalalov [Dzhalalov], a philosopher…voted for Mr Karimov… On the day before the election 2,000 Moslems gathered in Tashkent to celebrate the end of Ramadan. Among them was Sheikh Mohammed Sadeq, Uzbekistan’s former Islamic leader…forced into exile seven years ago. Mr Karimov then invited him back, hoping that he would counter the growing influence of politicized Islamic groups whose call for the overthrow of the

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regime has attracted thousands of young Uzbeks denied free religious or political expression… In 1998 in Tajikistan… Uzbekistan was accused of supporting a failed coup against the Russian-backed government. (The Economist, 15 January 2000, p. 72) ‘A month later pro-government parties won all the seats in parliamentary elections, with no opposition candidates standing’ (Business Central Europe 2000:49). 8 August 2000: For further clashes with Islamic militants, see the entry for 8 August 2000 and following entries in the chapter on Kyrgyzstan. The Uzbek government maintains that…an Islamic insurgency [is] bent on toppling President Islam Karimov’s secular post-Soviet regime and establishing a Moslem caliphate… Uzbek authorities say the harsh measures are justified because they are fighting an insurgency that threatens the entire Central Asian region and earns money from the drugs trade… What is actually happening… however, human rights groups say, is a mass round up of political opponents and members of independent mosques. (FT, 5 January 2001, p. 9) 11 September 2001: there are terrorist attacks on the USA. (For details, see the entry for 11 September in the chapter on Tajikistan.) In Uzbekistan, and to a much lesser extent in Kyrgyzstan, there have been mass arrests of members of a Moslem group called Hizb-ut-Tahrir (Freedom Party), which wants to install a caliphate across the whole of Central Asia. Unlike the IMU [Islamic Movement of Uzbekistan], it insists its methods are peaceful. (The Economist, 29 September 2001, p. 21) US co-operation with Uzbekistan is not new and has included joint military exercises. According to some officials, the country has also been used to base intelligence and other assets for US covert efforts over the last three years to track down Osama bin Laden. In his 20 September speech to Congress President George W.Bush named just two international groups linked to al-Qaeda: the Egyptian Islamic Jihad and the Islamic Movement of Uzbekistan (IMU), which wants to overthrow the autocratic government of President Islam Karimov and set up Islamist states elsewhere in the region. (FT, 1 October 2001, p. 28) According to US and Uzbek officials, the IMU may have up to 5,000 followers. They also say the group receives support from the Taleban and Osama bin Laden and that it maintains training bases in Afghanistan… Support for the insurgents among the predominantly Sunni Moslem and apolitical population seems to be limited… Human Rights Watch, the respected US-based rights group, says that up to 7,000 people have been incarcerated and often tortured, many of whom were arrested simply for expressing an independent religious or

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political opinion… External debt… is already around 50 per cent of GDP. (FT, 2 October 2001, p. 2) In Uzbekistan there are more than 7,000 political prisoners… The United States has already muted its criticism in recent years. Despite campaigning by human rights groups, Uzbekistan was not on the State Department’s 2000 watch list of countries where religious freedom was not respected. A government commission recently produced its list for 2001 and Uzbekistan was not on it. (IHT, 2 October 2001, p. 2) The Islamist Movement of Uzbekistan, identified by President George W. Bush as working closely with Osama bin Laden, became radicalized after being driven out of legitimate civic life. It is a reasonable assumption that if Uzbekistan had been more tolerant of legitimate religious practices and legitimate political opposition the IMU would not exist today in its present form. (Gareth Evans, president of the Brussels-based Crisis Group, IHT, 3 October 2001, p. 6) After the Soviet Union broke up in 1991 there was an explosive religious revival. Militant Islamic groups following the strict teachings of the Wahhabi, a Saudi Arabian group, set up their own security force, demanding the imposition of sharia law and a share of power in the [Ferghana] Valley. They gained a huge following at the expense of moderate Moslem groups… Islam Karimov…set about crushing the militants…[Some] went into exile, among them Takhir Yuldash, who had been Mr Karimov’s fiercest opponent, and Jumabai Khojiev, who in 1998 formed the Islamic Movement of Uzbekistan, a guerrilla group now said to be fighting alongside the Taleban in Afghanistan. Mr Yuldash has become the IMU’s political leader, and Mr Khojiev is believed to be a deputy of Osama bin Laden. Mr Khojiev (who also calls himself Juma Namangani, after his home town [of Namangan] has said his aim is to spread a Taleban-style Islamic revolution throughout Central Asia… Moderate religious leaders may not favour the extremists, but they resent the closure of …[many] mosques, together with the banning of religious instruction at home and the appointment of government supporters to manage mosques and religious schools. (The Economist, 10 November 2001, p. 80) 22 October 2001: The United States has signed an agreement with Uzbekistan to remove deadly anthrax from a remote island [vozrozhdeniye] in the Aral Sea where the Soviet Union dumped tonnes of lethal spores…[which were] secretly buried…in 1988… Until the Russian military abandoned the island in 1992 it was the Soviet Union’s major open-air biological testing site… Shared byvUzbekistan and Kazakhstan the island is now the largest anthrax burial ground in the world. At the invitation of Uzbekistan and Kazakhstan US military scientists and

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intelligence experts began travelling to the island in 1997 to survey it and take samples of bacteria. The Soviets buried the anthrax on the island after a deadly accident at one of their germ plants… Even after the 1972 treaty…banning biological weapons…took effect tens of thousands of Soviet scientists and technicians in secret laboratories…worked at turning germs into weapons… A spate of letters containing anthrax spores…have killed one person in Florida and two others in Washington… In addition Washington has pledged to help Tashkent upgrade security at its research institutes and other sites where deadly germs and toxins are stored. (IHT, 24 October 2001, p. 4) 25 November 2001: ‘Juma Namangani…the head of the Islamic Movement of Uzbekistan…[was] reported yesterday [25 November] to have been killed [while fighting] in Afghanistan’ (FT, 26 November 2001, p. 8). 27 January 2002: ‘Islam Karimov…voting in a referendum on extending the presidential term of office, criticized the West for demanding too much democracy too quickly’ (FT, 28 January 2002, p. 8). The main purpose [of the referendum question]… ‘Do you agree that the presidential term of office should be lengthened from five to seven years?’ …is to make it possible for President Islam Karimov to remain in office for another five years…until 2007… The idea…of a second, upper house [of parliament] is for this body to share the burden of power with President Islam Karimov. (Kommersant, 7 December 2001, p.3: CDSP, 2001, vol. 53, no. 49. p. 19) ‘The president has decided to take timely steps to ensure that his second—and, under the constitution, final—official term ends somewhat later than originally intended’ (Vremya Novostei, 7 December 2001, p. 1: CDSP, 2001, vol. 53, no. 49, p. 19). Uzbekistan’s central electoral commission announced yesterday [28 January] that 91 per cent of the country’s 13 million registered voters said ‘yes’ to extending the presidential term… Confusion reigned, however, over which fiveyear period Sunday’s referendum referred to: the present one that Mr Karimov is serving or the next one, starting in 2005. Government officials also hinted that Mr Karimov might stand again for yet another term, although at the moment that would contradict the constitution. A second referendum question whether to increase the country’s parliament from a one-chamber legislature to two, also easily met with approval. (FT, 29 January 2001, p. 7) [The] referendum [was] derided in the West as a ploy [by Karimov] to hang on to office…[The] head of Uzbekistan’s central election commission said …that between 91 per cent and 92 per cent had voted ‘yes’…[and that] between 93 per cent and 94 per cent…had backed a second proposal to replace…[the] onechamber parliament with a bicameral legislature.

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(IHT, 29 January 2002, p. 5) A scarcely credible 91 per cent of Uzbek voters supported an extension of the presidential term from five to seven years. The voters also made the parliament bicameral. Whether the extension of presidential duty will apply to Mr Karimov’s current term, due to end in 2005, has been left unclear… Mr Karimov’s ultimate aim, some believe, may be to follow the example of the leader of neighbouring Turkmenistan, and be made president for life. (The Economist, 2 February 2002, p. 61) According to preliminary figures, more than 91 per cent of eligible voters took part…[The final figures were 93.65 per cent in favour of a bicameral parliament and 91.78 per cent in favour of extending the president’s term to seven years] The president is worried about the historical traditions of regionalism and geographic parochialism. All twelve regions of Uzbekistan will be represented in the upper house of parliament. Each region will have equal representation. By contrast, in the existing unicameral parliament the number of deputies is pegged to the number of voters in each province… A final reason for holding this referendum was that the terms of both the president and the parliament will expire almost simultaneously in 2005. Now the president’s mandate has been extended there won’t be a power vacuum. (Izvestia, 29 January 2002, p. 7: CDSP, 2002, vol. 54, no. 5, p. 19) (‘Parliament voted Friday [5 April] to hold the next presidential elections in December 2007, adding two years to the term of President Islam Karimov… The vote ensured that a referendum extending the presidential term from five to seven years would affect Karimov’s current term’: IHT, 6 April 2002, p. 3. ‘The president did not say whether he would run again. Karimov is now in his second term, the last he is allowed by the constitution. But observers do not rule out the possibility that everything could change and that the present head of state could stay for another term… Parliament is also going to be elected in a new way from now on…[with] two houses… The Legislative Chamber will consist of 120 deputies chosen in direct elections. But [in] the upper house, the Senate…sixteen senators will be appointed by the president personally, and six representatives will be sent to the Senate by each of the twelve provinces, the autonomous republic of Karakalpakia and Tashkent’: CDSP, 2002, vol. 54, no. 14, p. 17.) March 2002: Karimov’s deputy foreign minister and special envoy, Sodyq Safaev said in Washington last week that his government had just given legal recognition to Uzbekistan’s first human rights organization. This is part of a modernization drive that will include the currency becoming convertible this July. (Jim Hoagland, IHT, 11 March 2002, p. 6) The ‘declaration of strategic partnership’ that [US] secretary of state Colin Powell and Uzbek foreign minister Adulaziz Kamilov signed…gives Karimov…

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a vague US pledge to support Uzbekistan against any external threat, along with promises of military training and hardware. In exchange the Uzbek ruler committed himself, in writing, to a long list of political and economic reforms. These include ‘establishing a multi-party system’, ‘ensuring free and fair elections’ and ‘ensuring independence of the media’. There are also promises to reform the judiciary and carry out the free market economic programme that the World Bank and IMF have been unsuccessfully pressing on Uzbekistan for years. (IHT, 20 March 2002, p. 9) 14 June 2002: Uzbekistan announced yesterday [14 June] that it was withdrawing from the alliance of five post-Soviet states known as GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova)… The GUUAM organization was created in 1997 as a strategic alliance of four states (Uzbekistan joining it two years later). Its official purpose was to broaden political and economic co-operation among the member states. In reality, however, the GUUAM countries joined forces in order to work together to break free of Russian influence… President Islam Karimov…[visited] the United States in March… Almost as soon as he returned to Tashkent…he said that the United States had done for Uzbekistan what its CIS partners had been unable to do. For the past five years Uzbekistan and its people had lived under the threat of an armed invasion by the Taleban and the ‘decisive role in easing the tensions on Uzbekistan’s southern borders was played solely by the United States and its resolve and well-trained military forces, not by the parties to the CIS Collective Security Treaty’. (Kommersant, 15 June 2002, pp. 1, 4: CDSP, 2002, vol. 54, no. 24, pp. 14–15) 20 July 2002: The presidents of Azerbaijan, Georgia, Moldova and Ukraine signed an agreement [in Yalta in Ukraine]…to create a free-trade zone… The accord… will now be considered by the respective parliaments. The four nations are part of GUUAM… A fifth member, Uzbekistan, plans to leave the group. (IHT, 22 July 2002, p. 10) The four countries of the GUUAM association (Georgia, Ukraine, Azerbaijan and Moldova) have created a free-trade zone… However, each of the GUUAM countries’ trade with its partners in the organization accounts for only about 2 per cent of its total foreign trade, whereas Russia is the GUUAM countries’ principal trading partner… Uzbekistan… announced that it was suspending its membership in GUUAM. Moreover, last year [2001] the organization’s excessive politicization and economic ineffectiveness nearly prompted Moldova to withdraw from it. Just days before the summit [Moldovan President] Vladimir Voronin reiterated his position, saying that the ‘organization’s prospects are

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indistinct’… Tashkent [Uzbekistan] confined itself to having its ambassador to Ukraine…attend the summit as an observer. (Nezavisimaya Gazeta, 22 July 2002, p. 6: CDSP, 2002, vol. 54, no. 29, pp. 14– 15) Uzbekistan announced a month ago that it was suspending its membership in the organization… Still, not everything is clear as yet with regard to Uzbekistan’s withdrawal…[The Uzbek ambassador to Ukraine, who represented Tashkent at the meeting] made a point of saying that Uzbekistan had not terminated its membership… Moldova expressed doubts as to whether the organization should continue to exist. (Kommersant, 22 July 2002, p. 5: CDSP, 2002, vol. 54, no. 29, p. 15) Smaller alliances began to form after it became clear that the unwieldy structure of the CIS was ineffective… The groupings are always against someone else… GUUAM was founded precisely against… Russia. As soon as Uzbekistan, an active participant in the America ‘anti-terrorist operation’, realized that from the standpoint of safeguarding its security and eventually obtaining potential investment, it had a far more powerful patron in the United States, GUUAM instantly lost a letter… On the other hand…it would be much more advantageous for Moldova to pursue closer ties with Russia than to oppose it, if only for the sake of solving the Dniestre region problem… Moreover, Moldova has had problems with GUUAM where electricity and oil are concerned. (Boris Volkonsky, Kommersant, 22 July 2002, p. 5: CDSP, 2002, vol. 54, no. 29, p. 15) 6 December 2002: ‘A United Nations envoy said Friday [6 December] after an inspection of Uzbekistan’s prisons that he had found signs of systemic torture and had been denied full access to two of the most notorious jails’ (IHT, 7 December 2002, p. 2). Late December 2002: Central Asia’s dominant military power is worried about a new Russian military build-up in Kyrgyzstan, where the United States enjoys the use of an air base for flights into Afghanistan. ‘If they are doing this in a competition, I think this competition is absolutely unproductive,’ President Islam Karimov told reporters in early December. He was reacting to President Vladimir Putin’s announcement days earlier that Russia will base warplanes …at Kant airport near the Kyrgyz capital of Bishkek. (FEER, 26 December 2002, p. 8) The rationale for Washington’s marriage of convenience to Tashkent is clear and understandable. But inertia and the logic of events may tempt the Bush administration to let a temporary expedient grow into an enduring policy shift. This would be a mistake. Propping up Uzbekistan as a regional hegemon not only would fail to address but would actually exacerbate a key source of Central

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Asian instability: the domestic political repression that fosters the radicalization of Islamist movements and galvanizes popular support behind them… The Islamic Movement of Uzbekistan (IMU) [is] an organization that advocates the use of violence to install an Islamic state … The IMU began as a small group of local imams, known as Adolat (Justice), who in 1991 attempted to impose Islamic law to counter widespread corruption in Namangan, a city in the Ferghana Valley, Uzbekistan’s most fertile, densely populated and conservative area. But Adolat turned toward extremism and began seeking the overthrow of the government the following year, when an official crackdown forced its members to flee to Tajikistan and Afghanistan. There they trained with Afghan mujahadin and built strong ties to both the Northern Alliance and the Taleban. The movement gained popular support when the state expanded its crackdown to include any practising Moslems and their extended families. (Jones-Luong and Weinthal 2002:62–4) 28 January 2003: ‘Uzbekistan has decided to gain transportation independence from Turkmenistan as quickly as possible… The government has adopted a resolution entitled “On accelerating the construction of the new Tashguzar-Baisun-Kumkurgan railroad line”’ (CDSP, 2003, vol. 55, no. 4, p. 14). 4 May 2003: [After much controversy] the opening [is to take place on 4 May] of the biggest international event in the former Soviet republic’s short history—the annual meeting of the EBRD… Last week…parliament—dominated by Mr Karimov’s supporters—approved a law that granted the head of state immunity after his term expires, or if he should be forced to retire early ‘for health reasons’… Human Rights Watch estimates that 7,000 or more people have been jailed for their religious or political beliefs. (FT, 2 May 2003, p. 11) 5 May 2003: Speaking at the end of the EBRD’s controversial annual meeting in Tashkent… Jean Lemierre, president of the EBRD, yesterday [5 May] warned that Tashkent could face cuts in the bank’s financial support next year [2004] unless it implemented wide-ranging reforms…radical economic and political changes, including eliminating torture in his prisons … Mr Lemierre was responding to Mr Karimov’s failure during the conference to pledge publicly to root out torture, despite intense pressure from the EBRD before the meeting. The bank… has already severely limited its support in two countries for political reasons— Belarus and Turkmenistan… The bank is particularly anxious that Uzbek activists who participated in the annual meeting should not be harassed by the authorities… Human Rights Watch…estimates that there are about 6,500 political prisoners, including many devout Moslems arrested for religious observances.

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(FT, 6 May 2003, p. 10)

THE ECONOMY The economic background Nearly 80 per cent of Uzbekistan is desert and only 9 per cent is arable land (it is a net importer of food). It has major gas deposits and some oil (Deutsche Bank, Focus: Eastern Europe, 1993, no. 70, pp. 1–9). ‘Mr Karimov seems more comfortable using the same repressive measures to control the economy that he uses to control political opposition: show-trials of speculators and money-changers are commonplace’ (Business Central Europe 1999:48). Financial policy The government has pursued a cautious policy on reform and restructuring, arguing against shock therapy (Kaser and Mehrotra 1992:43). The coupon system differs from that introduced during 1991 in a number of other Soviet republics. Coupons did not replace Soviet roubles, but accompanied 70 per cent of all wages and collective farm dividends and were necessary to purchase most goods and services in state shops. In late July 1992 it was announced that coupons were to replace the rouble and that coupons, in turn, were to be replaced by a new currency (p. 46). Uzbekistan had debated whether to introduce its own currency, but after the Russian currency reform of late July 1993 agreement was reached with Russia (on 7 August 1993) that the country would remain in the rouble zone. (Russia imposed tougher conditions in late September.) But the sum (som) was introduced on 15 November 1993 in the form of coupons (one coupon=one rouble). These were to circulate together with new rouble notes and lower-denomination old rouble notes. At the beginning of 1994 the coupon became the sole legal tender. The sum itself was introduced on 1 July 1994: coupons were to be deposited in state banks and exchanged after a month in order to restrict the initial circulation to current salaries; the coupon remained legal tender during the first month. Originally the sum coupon was pegged at par with the rouble, but since midApril 1994 the exchange rate has been determined via a managed floating system. Nevertheless, there is still a wedge between the official rate and the street rate. This reflects less than full convertibility, including for current account transactions. A fully fledged national currency was introduced in July 1994 (EBRD 1994:41). There is a 30 per cent surrender requirement at a rate set by the central bank (p. 111). The government is committed to making the sum convertible for current account purposes by the end of 1995 (EBRD 1995b:64). A surrender requirement of 30 per cent (15 per cent for CIS currencies) applies to export proceeds, with an obligation to sell this amount on the currency market at the prevailing market exchange rate. Between mid-April 1994 and April 1995 the ‘official exchange rate’ was set by the central bank on the basis of closed auctions attended by only a few state banks. Foreign currency auctions are now accessible to all banks and have been held twice a week since April 1995. In mid-1995 the restrictions on

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the purchase by individuals of foreign exchange were eliminated. But the availability of foreign exchange in the auction declined sharply in 1996. A very large wedge has developed between the official exchange rate and the rate quoted by the banks and there is a further wedge between the rate quoted by the banks and that quoted in the black market. This points to ‘increasingly severe administrative limitations on currency convertibility’ (EBRD 1996b:183–4). In the wake of intensifying balance of payments pressures the authorities have increasingly resorted to various restrictions on access to foreign currency, effectively reintroducing a currency rationing and licensing system with little transparency. At the beginning of 1997 an explicit multiple exchange rate regime was institutionalized (EBRD 1997:212). The government planned to ban the use of foreign currencies in commercial transactions as of 15 October 1994. All payments and settlements between individuals and legal entities were to be conducted only in the sum (IHT, 11 October 1994, p. 11). All restrictions on the purchase of foreign currency from commercial banks were lifted on 1 July 1995 (Transition, 1995, vol. 6, nos 7–8, p. 20). A law on bankruptcy was adopted in May 1994, but no bankruptcy proceedings have yet been initiated (EBRD 1994:40). The effectiveness of the law remains uncertain. In 1995 about twenty medium-sized or large enterprises were declared bankrupt (EBRD 1996b:183). Wages in budgetary organizations are adjusted in line with the minimum wage. Outside the budgetary sector both private and state enterprises have, since June 1994, been subject to a strict incomes policy. Increases in the wage bill cannot exceed 70 per cent of the increase in output value. In 1995, as a supplement to this system, a taxbased incomes policy was adopted for state enterprises (subsequently extended to cover the first half of 1996) (p. 184). By the end of 1996 only about 130 enterprises, mostly small ones, had been declared bankrupt (EBRD 1997b:211). All domestic enterprises are restricted to having only one bank account. State banks continue to act as controlling agencies for the government (EBRD 1998a: 27). All companies not part of a foreign joint venture are required to keep one single bank account for tax tracking purposes… The persistence of the Soviet-era distinction between cash and non-cash money reduces confidence in the banking system and incurs resource misallocation costs. Most business transactions must be performed by bank transfer. Cash transactions—with the exception of salary payments and some business travel expenses—are illegal. (EBRD 1998b:198) On 1 March 1995 the IMF approved a loan under the systemic transformation facility. The first instalment of $74 million was to be used to support the government’s programme of macroeconomic stabilization and systemic reform. The chief objective of the government was to reduce the monthly rate of inflation to 2 per cent by the end of 1995. The second tranche of the loan was to depend on implementation of the stabilization programme. Negotiations were also taking place with the World Bank for a loan of $160 million (CDSP, 1995, vol. XLVII, no. 5, pp. 23–4). On 19 December 1996 the IMF announced that it had suspended disbursements of a $185 million stand-by loan because of foreign exchange controls and a failure to meet

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inflation targets (FT, 20 December 1996, p. 6). The financial disarray reminds many of the fruits of the previous year’s [cotton] harvest, when the central bank nearly doubled the money supply in a month to pay off the bad debts of cotton farmers… The Uzbek regime under President Islam Karimov is configured around expropriating as much as 80–90 per cent of the revenues from the country’s annual cotton crop as the main source of budget revenue. But in doing so it has kept the farmers insolvent and perpetually dependent on infusions of inflationary central bank credit to clear payments arrears, and hence the main source of Uzbekistan’s instability… The Uzbek government has pursued a fairly obvious policy of simply printing money to pay the farmers at each harvest. (FT, 6 November 1997, p. 6) The state owns all seventy-seven cotton gins (which turn raw cotton into exportable fibre) and is thus the sole purchaser of raw cotton in the country (FT, 6 November 1997, p. 6). An IMF mission ended in early March 1998. The government failed to reestablish an agreement owing to its adherence to exchange rate and trade restrictions (EBRD 1998a: 43). Very high inflation rates began in 1993 and continued up to the middle of 1995. The central bank then introduced a tight monetary policy (UZET, Quarterly Issue, January– March 1998, p. 53). The first large sales of securities took place in April 1996 when Treasury bills (GKOs) were introduced (p. 67). A regulation scheme for wage payments was introduced in Uzbekistan on 1 August 1994… Cash means for wage payments directed by commercial banks to enterprises and organizations could be raised by 0.7 per cent for each per cent of increase in real output. (UZET, Six-monthly Issue, July–December 1999, p. 39) ‘The Karimov government seeks Western aid but does virtually nothing to reform the moribund economy, prompting the IMF to announce that it was closing its Tashkent office on 14 April [2001]’ (Ahmed Rashid, FEER, 19 April 2001, p. 30). Prices Uzbekistan has pursued a path of gradual price liberalization (UZET, Quarterly Issue, January–March 1998, p. 52). By 1998 almost all prices had been liberalized, the exceptions including flour, energy, housing services and some transportation tariffs (mainly for passengers) (p. 52). The price of housing (rent, water and energy) has increased fourteen-fold in the last three years (p. 53). The price of transport and communications has increased more than seven-fold (p. 54). There are still monopolies (energy supply, transportation services, household services) or oligopolies (in industrial goods production) and their prices are controlled by government bodies (p. 54). The bulk of consumer prices were liberalized in January 1992. After a partial reversal

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liberalization was resumed in mid-1993. By early 1994 only the prices of basic necessities remained fixed. On other goods, however, there are indirect price controls through ceilings on mark-ups for trade organizations and profitability ceilings for a range of producers in monopolistic positions (EBRD 1994:41). In the second half of 1994 the scope of the state order system was greatly reduced (see the section on agriculture, below) and there were also fewer administered prices. In early 1995 the remaining rationing of staple food was abolished and limits on profit margins were removed for all goods except natural monopolies and certain medicines. Domestic prices were to continue to be adjusted to cover fully the cost of supply. Producer prices for oil were supposed to be raised to world market levels by the fourth quarter of 1995 (EBRD 1995a:68). Prices that remain administered are being adjusted to cost-recovery or world market levels. Oil and oil producer prices were to reach world market levels by late 1995 (EBRD 1995b:63). Domestic prices for oil products reached world market levels by the end of 1995 (they were only 25 per cent of the world market level at the beginning of 1995). During the second half of 1995 state subsidies to the electricity and gas companies were phased out and cross-subsidization in the pricing of these products between industry and household was substantially reduced (EBRD 1996a:11). Formal price controls had been abolished by 1996 for most foodstuffs, consumer goods and services. Since then administrative price controls have applied to energy, rents, communal services, public transport and telecommunications. The government also determines the prices of a large number of monopoly products and monopoly enterprises. Procurement prices for cotton and wheat, for which the state order system is still in place (covering 40 per cent of cotton production and 25 per cent of wheat production) are also administratively set. In late 1996 and early 1997 there were sharp rises in energy prices and communal service charges for households (EBRD 1997b:211). The social safety net consists partly of family allowances, but also relies heavily on indirect benefits such as subsidized central heating, urban transport and housing (EBRD 1998b:199). Full price liberalization was once again postponed in January 1994 (Business Central Europe, May 1994, p. 74). Bread and flour prices have tripled, with virtually all adults receiving income compensation (FT, 6 September 1994, p. 5). Subsidies on basic foodstuffs and public transport were axed in 1994, while those on utilities are being reduced (The Economist, 7 January 1995, p. 56). Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 10 per cent; 1993, 15 per cent; 1994, 20 per cent; 1995, 30 per cent; 1996, 40 per cent; 1997, 45 per cent; 1998, 45 per cent; 1999, 45 per cent; 2000, 45 per cent; 2001, 45 per cent (EBRD 1999b:24, 284, and 2002b:20, 216). The law of 19 November 1991 foresaw leasing, transformation into co-operatives, sale by auction, sale by tender and, for some housing, gratis hand-over to tenants. There is no offer of vouchers, but the possibility is envisaged of a buy-out by staff, who can be given a share of the enterprise’s profit and depreciation fund to assist purchase. State cotton

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plantations, energy, metallurgy, mining, railway and air transport, pharmaceuticals and high-technology industries are not to be privatized (Kaser and Mehrotra 1992:45). To date privatization has been minimal; in February 1994 the first auction of state property (such as hotels and shops) was held (Ahmed Rashid, FEER, 31 March 1994, p. 61). An ultra-cautious approach is taken towards privatization (Business Central Europe, November 1993, p. 60). Around 53,000 state enterprises were partially or fully privatized in 1993, but most of them were very small. The government is now starting to sell off larger enterprises, using management or employee buy-outs and auctions. In March 1994 locals (and to a limited extent foreigners) were allowed to bid for fifteen state enterprises. Industries such as mining, cotton and energy will remain under majority state ownership for some time to come (Business Central Europe, May 1994, p. 74) (metallurgy and transport too: Havrylyshyn et al., 1994:392). Officially, small privatization is well advanced. In practice many privatized enterprises go on much as before. Large privatization is not progressing (Business Central Europe, April 1996, p. 78). ‘Privatization is at best half-hearted despite continual promises of strategic sales’ (Business Central Europe 1997:53). The FT (8 February 1994, p. 4) reports the announcement of a reform programme by presidential decree on 23 January 1994. There were promises for the first time to auction off state enterprises publicly, foreigners being allowed to bid. The decree enacted a fiveyear tax holiday for manufacturers established under more than 50 per cent foreign ownership (those with a lower percentage are exempt from tax on their first two years’ profits: Ahmed Rashid, FEER, 31 March 1994, p. 60) and also promised a phasing out of import duties in July 1995. Since becoming independent Uzbekistan has taken the route of ‘collectivization’, i.e. the transfer of enterprises to their employees in fixed-price shares. The programme includes a speeding-up of privatization, encouragement of the private sector and the cancellation of many import duties until July 1995 (The Economist, 19 March 1994, p. 80). Uzbekistan has drafted an ambitious privatization programme. The plan calls for selling off leading enterprises in the mining, fuel and cotton industries (IHT, 18 February 1995, p. 11). The private sector contributes around 10 per cent of GDP (Deutsche Bank, Focus: Eastern Europe, 22 March 1994, p. 42). A presidential decree was issued in March 1994. About 4,000 medium-sized or large enterprises were marked for privatization in 1994 and the first auctions took place in March. By mid-1994 more than 50,000 small enterprises had been privatized or leased. There has been no property restitution (EBRD 1994:40). Privatization moved forward after March 1994 with the extension to mediumsized and large enterprises. By the end of 1994, according to official figures, 67 per cent of the number of enterprises (50 per cent of GDP) had been privatized or corporatized. Housing privatization was almost complete, and small privatization and the sale of many consumer services were also advanced (EBRD 1995a: 16). The official estimate of the size of the non-state sector had risen to 50 per cent of GDP by the end of 1994, including joint stock companies irrespective of the size of the state’s stake. This share was planned to increase to 60 per cent by the end of 1995. With encouragement from the IMF and the World Bank the government committed

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itself to pushing ahead with the privatization of medium-sized to large enterprises and with agricultural reforms. A new cashbased comprehensive privatization scheme was to be adopted by the end of March 1995. The methods of privatization were to be diversified and a total of 1,796 enterprises were earmarked for privatization during 1995 (p. 68). The genuine private sector (which excludes enterprises in which the state retains majority ownership) is likely to account for 25 per cent to 30 per cent of GDP. In 1994 a total of 9,774 enterprises were privatized, including 2,884 large and medium-sized ones. While the allocation of shares to employees is proceeding fast, the involvement of outside investors has been much slower than planned. Presidential decrees providing for an acceleration of privatization and the creation of a network of private investment funds were issued in mid-1995. The state is to retain, for the time being, a majority interest in strategic sectors, such as energy, fuel and gold mining. The 1995 privatization target was to sell 2,046 enterprises (EBRD 1995b:63). By the end of 1995 about 2,300 mediumsized or large enterprises (out of about 11,800) had been privatized. The government planned to privatize over 400 during 1996. Privatization methods have been diverse and include auctions, direct sales, joint ventures and floatation on the stock exchange. ‘Application of vouchers has been excluded from the very beginning… Since January 1994 cash auction has become the basic method of small-scale privatization.’ The first auctions took place in March 1994. A mass privatization scheme using investment funds was adopted in 1995, but implementation has been ‘significantly delayed’. (The ‘Privatization Investment Funds’ are expected to be formed by private entrepreneurs. Each citizen will be allowed to purchase from each fund up to one hundred ‘public privatization shares’, each costing the equivalent of 25 per cent of the minimum monthly wage. The funds will buy shares from the government. Initially the government is to offer at least 30 per cent of the shares in 300 enterprises during the second half of 1996, with another fifth of the shares being sold directly on the stock exchange and more than a fifth being allocated to the employees of participating enterprises: p. 23.) The state would temporarily retain a majority interest in strategic sectors such as energy, fuel and gold mining. Economic restructuring has been hindered by the slow pace of privatization, the predominantly insider nature of the privatization process so far, strong bureaucratic obstacles and shortage of skilled managers, as well as the low degree of competition throughout the economy (EBRD 1996b:183) The implementation of a mass privatization programme has been delayed since the World Bank suspended its assistance. The suspension was related to that of the IMF programme in December 1996 (EBRD 1997a:34). By the end of 1996 about 94 per cent of small state enterprises had been transferred to private hands, typically to employee collectives. But less than 20 per cent of the 11,800 medium-sized and large enterprises had been privatized, in most cases only partially. The long-delayed mass privatization programme, based on investment funds, finally began to be implemented in late 1996. The first auction took place in December 1997. The typical ownership structure of a privatized enterprise is as follows: 25 per cent of shares retained by the state property committee; 26

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per cent sold to employee collectives; 49 per cent available to the general public, including foreign investors. In many cases, however, a large part of this 49 per cent shareholding has either been transferred or sold to other state structures or remains with the state property committee. Shareholdings by individual investment funds are subject to a limit of 10 per cent (EBRD 1997b:211). During 1997, 830 medium-sized and large enterprises were privatized (out of an estimated 11,800) after a period in which privatization had been confined almost exclusively to small enterprises. About fifty Privatization Investment Funds have bought into a hundred privatizations to date. The Uzbek public purchase shares in these funds (EBRD 1998a:43). The mass privatization programme started in 1996 and minority stakes in about 150 enterprises were sold to Privatization Investment Funds in sixteen auctions. Individuals can participate in the process by purchasing stakes in the funds. The second phase of the programme has been delayed. The secondary market for shares has almost completely dried up since the government prohibited managers from buying shares in their own enterprises in early 1998. In many case a large part of the 49 per cent shareholding available for privatization has been transferred to other state entities. A large proportion of the shares on both the stock market and the over-the-counter market has been bought by state-owned or statecontrolled entities. The government is planning to privatize six large enterprises through international tenders (EBRD 1998b: 198–9). ‘In Uzbekistan the state remains unwilling to relinquish control of newly privatized entities’ (EBRD 1999a:20). Despite plans to speed up privatization ‘the privatization process has been slowed down by the state’s reluctance to give up controlling stakes in the newly privatized industries’ (p. 46). Privatization has so far been limited mainly to small enterprises, most of which had been transferred to employee collectives by the end of 1996. The mass privatization programme launched in 1996 has not given controlling stakes in industrial enterprises to private owners. Individuals invested vouchers in Privatization Investment Funds, which were then used to bid for minority stakes (most not exceeding 30 per cent) in around 150 mostly medium-sized enterprises. In 1998 the government shifted to trade sales for medium-sized enterprises. In 1998 international investment tenders were announced for some of its largest industrial assets. However, only one large chemical plant had been sold by September 1999. The main problem remains the government’s reluctance to offer majority stakes to strategic investors, although unrealistic price expectations, a difficult investment environment and the slump in commodity prices have also played a role… An example of the state’s interventionist approach to industrial restructuring is a legal provision granting the state veto rights over major restructuring decisions even in companies where it holds small minority stakes. (EBRD 1999b:282–3) Advances in the planned strategic sales of large industrial enterprises will depend on offering controlling stakes as well as lowering unrealistic price expectations… Recent attempts to sell state property via international tenders largely failed due to low demand in the face of the multiple exchange rate regime… The government is prepared to consider the sale of majority stakes.

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The state remains a majority shareholder in most large enterprises. Given the reluctance of the government to give up control to foreign investors, the World Bank-supported case-by-case privatization programme has not been successful. It was revitalized late in 1999 when a new list of twenty-seven companies to be privatized was drawn up… The state continues to hold majority stakes in most banks in the country and interferes in the credit allocation under the national investment plan. About two-thirds of all outstanding loans were extended under state direction. (EBRD 2000b:226–7) Progress in large-scale privatization remains slow, mainly as a result of exchange rate distortions and fears of government interference. Under the privatization programme, Uzbektelekom, ElectroChimProm (the energy monopoly), the National Bank for Foreign Economic activity (the country’s largest bank) and the Asaka Bank are to be sold. The government has extended the deadline to 2005 and has reduced the number of companies to be privatized from 258 to 162… A 50 per cent stake of Uzbektelekom is to be sold to a strategic investor. (EBRD 2001a:96) Large-scale privatization is still lagging…and the government continues to be reluctant to sell majority stakes. The current large-scale privatization programme includes thirty-eight major enterprises that are to be sold to foreign investors. However, a majority stake (51 per cent) is on offer in only one company, the national telecommunications company, Uzbektelekom… The banking sector continues to be dominated by the state banks, the largest of which is the National Bank of Uzbekistan. Much of the government’s national investment plan is operated through the banking system, which channels credits to state enterprises under government guarantees, often at preferential rates. (EBRD 2001b:210–11) A new privatization plan for the sale of thirty-eight large enterprises was adopted in March 2001. So far majority stakes in two of the listed companies… have been sold to Russian investors… Measures [taken] have resulted in a large increase in the number of registered small and mediumsized enterprises. (EBRD 2002b:215) The price of a public participation share is around 10 per cent of the minimum wage and each citizen can buy a maximum of one hundred shares in each investment fund. Investment funds pay only one-sixth the purchase price of enterprise shares. The balance is a deferred payment, repayable after a four-year grace period, at seven years’ maturity, at low interest. About 300 enterprises in some of the more attractive sectors (such as food, edible oils, and grain and cotton processing) were preselected and approved in September

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1996. ‘The World Bank’s enterprise reform loan, negotiated in September 1996, provided the crucial impetus for ensuring that good enterprises were included on the list of selected enterprises.’ More than fifty investment private investment funds have been licensed, ‘indicating that a large number of local private businesspersons were ready to invest their money in fund management’. Shares in seventy-five enterprises have been sold in eight auctions since the first pilot auction was held on 6 December 1996 (Transition, June 1997, vol. 8, no. 3, p. 21). A total of 1,915 enterprises were sold for cash in 1996 (Deutsche Morgan Grenfell, Focus: Eastern Europe, 3 March 1997, p. 80). There have been two phases of privatization. The first, small privatization, took place in 1993–4. It consisted of the privatization of small and medium-sized enterprises of other than the services and trade sectors or the textile, footwear, food, etc. industries. It was organized mainly so that only employees and the administration of a particular enterprise were allowed to purchase equity. (UZET, Quarterly Issue, January–March 1998, p. 70) The second phase, mass privatization, started in 1995. This resulted in the ownership change of other enterprises, namely giant enterprises producing raw materials, machinery and equipment. Other enterprises had to change their ownership structure mostly from closed to open joint stock companies. Legislation regulated the shares each investor could acquire. There are many privileges for investment funds (UZET, Quarterly Issue, January–March 1998, p. 70). Formal privatization has reached an advanced stage in Uzbekistan but real restructuring and shift of company governance to correspond to efficient market behaviour has lagged behind. Insider control of privatized enterprises is still common. Many managers of large companies have been reluctant to sell shares to outside investors, preferring state and collective control. At present the law limits state ownership to 25 per cent and collective ownership to 26 per cent of the shares of privatized companies but this rule is not always observed. (UZET, Quarterly Issue, April–June 1998, p. 15) In 1998 the non-state sector accounted for 64 per cent of industrial output and 95 per cent of retail trade (UZET, Quarterly Issue, October–December 1998, p. 42). The privatization programme in Uzbekistan has been implemented in three stages. The first stage, largely completed in 1995, involved the privatization of housing units and small enterprises, essentially through the transfer of ownership to workers and managers. The second phase, which started in late 1996 and is still in progress, involves the privatization of medium-sized enterprises through a specific scheme: the Privatization Investment Funds programme… Basically, PIFs are to be offered (through auctions) shares of 600 pre-selected medium-sized and large enterprises, with, in turn, the possibility to

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sell public participation shares to the public. The third phase, which began in mid-1998, involves the privatization of large enterprises. It is based on a caseby-case approach and designed so as to involve substantial participation of foreign investors. (UZET, Quarterly Issue, October–December 1998, p. 60) Although the current law restricts state ownership to 25 per cent, a resolution of the cabinet of ministers (August 1998) granted state representatives the right to postpone strategic decisions in shareholder meetings if the latter do not meet the interests of the state. (p. 62) In 1998 the non-state sector accounted for 73.2 per cent of employment, 99 per cent of agricultural output and 64 per cent of industrial output (UZET, Quarterly Issue, April– June 1999, p. 11). ‘The acceleration of the privatization process (especially the privatization of large-sized enterprises) is hampered by the lack of foreign investors’ interest… About 20 per cent of Uzbekistan’s medium-and large-sized enterprises have been privatized’ (p. 47). ‘Restructuring of privatized enterprises…remains so far limited. In particular the influence of the state on corporate governance remains strong’ (p. 11). Real restructuring of and improvement of corporate governance of both small and medium-sized enterprises is still limited by a number of factors… The limited development of core outside ownership as well as by persisting state influence on corporate governance… PIFs outside ownership still amounts to 30 per cent or less in more than 80 per cent of privatized companies. (p. 48) The main designs of the privatization process for medium-sized/large state enterprises were originally contained in…[a cabinet resolution] dated 18 November 1998… The resolution provided for a list of 258 enterprises to be sold by tender to foreign investors. However, the lack of buyers’ interest, especially due to the high prices of enterprises and the requirement that companies do not change their specialization, has led to the government adopting a new resolution in December 1999. The number of enterprises listed for privatization in 2000–2001 has been reduced to 162… Generally the state is to keep a controlling interest in major enterprises, including the Almalyk mining and metallurgical plant, the Tashkent Chkalov Aviation Production Association, the National Bank for Economic Activity and the Uzbek Oil and Gas Holding Company. (UZET, Six-monthly Issue, July–December 1999, p. 55) ‘According to official statistics, the non-state sector accounted for 65.6 per cent of GDP in 1999, 73 per cent of employment, 99 per cent of agricultural output and 61.4 per cent of industrial output’ (UZET, Quarterly Issue, April–June 2000, p. 13).

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Since last summer [2002] ‘shuttle traders’, who import cheap consumer goods from neighbouring countries, have had to stomach sharply increased import duties; the closure of the Hippodrome, Tashkent’s main market, for three months; a panoply of new regulations on licensing, certification and inspection; and, starting this month [April], a requirement for Uzbek-language labels on all imported goods… The result has been to strangle small-scale trade, which… constitutes the backbone of the distribution system… Wholesale trade is now restricted to firms with a minimum capital of $25,000 (a fortune by Uzbek standards). (The Economist, 12 April 2003, p. 59) Foreign trade Trade with CIS countries is largely determined by bilateral intergovernmental agreements. In early 1994 it was made legal for individuals to engage in foreign trade. At the same time the customs duties on all imports were suspended until mid-1995 and the number of product categories subject to export quotas and export licensing systems was reduced from seventy to twenty-six (EBRD 1994:41). There are few quantitative restrictions on imports. The state foreign trade monopoly was lifted in March 1994 (p. 111). As of December 1994 the number of products subject to export licences was reduced from twenty-six to eleven. Customs duties on all imports were to be suspended until mid-1995, when the government was to consider putting in place a homogeneous and low import tariff structure. The exchange rate was unified in October 1994. The gap between the official market rate and the black market rate narrowed and the exchange rate stabilized at twenty-five sum to the US dollar after mid-November 1994 (EBRD 1995a:68). By early 1995 the number of product categories subject to export quotas and export licensing systems had been reduced from seventy to eleven. But the list includes cotton and gas, accounting for over half non-gold exports. The bulk of foreign trade is still channelled through state-owned foreign trade companies and there are limits on enterprise access to hard currency for the purchase of imports (EBRD 1995b:63). The system of export tariffs, applying in 1995 to 102 product groups, was simplified and liberalized in two steps in April and July 1996. Export tariffs are now imposed on seventy-two product groups (EBRD 1996b:183). Since the second half of 1996 there have been significant setbacks in trade liberalization. Ex ante licence requirements and administrative controls on imports have been introduced, especially with regard to consumer goods. Currency convertibility has been severely restricted since mid-1996. Measures have included instructions for banks not to sell foreign exchange to importers of a wide range of consumer goods, rationing of foreign exchange for other imports, and restrictions on commercial banks’ access to official foreign exchange auctions. This has led to a growing fragmentation of foreign exchange markets and a large increase in the wedge between the official rate and the black market rate. As of 1 January 1997 the central bank eased restrictions on currency convertibility for investors but maintained restrictions for trade transactions (EBRD 1997a:34). The previous progress in trade liberalization has been reversed through a range of trade restrictions imposed during the second half of 1996 (EBRD 1997b:211). The multiple exchange rate regime was

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institutionalized at the beginning of 1997 and supports activities in the government’s priority sectors. The highly over-valued ‘auction rate’ and ‘commercial bank rate’ are used for converting export revenues under the obligatory surrender requirement. The rates also apply to selected importers, giving them privileged access to foreign exchange. The widely used (though illegal) black market exchange rates were almost twice as high as the formal rates in mid-1998. There has been a lack of progress on foreign exchange and trade liberalization. The state has a trading monopoly in the export of cotton and gold, which generate most of the foreign exchange earnings. Since late 1996 import contracts have to be registered, giving authorities effective control over imports. Since February 1998 imports have had to be prepaid in hard currency and these payments can only be processed by authorized banks (EBRD 1998b:198). Restrictive trade practices introduced in 1997 remain in place, including registration and prepayment requirements for imports and high average import tariffs. The state trading monopoly for the export of cotton and gold, which generated over 40 per cent of foreign exchange earnings in 1998, also remains in place. Following the Russian crisis high import duties were imposed on selected items from Kyrgyzstan and Kazakhstan (the latter partly in retaliation against the measures taken by Kazakhstan) and introduced barriers to shuttle trade. Foreign exchange surrender requirements on exports were increased from 30 per cent to 50 per cent in January 1999. Surrendered foreign exchange is converted at the over-valued official exchange rate (EBRD 1999b:282). Restrictive trade practices introduced in 1997 remain largely in place, including registration and prepayment requirements for imports and high average import tariffs. However, in recent months two encouraging steps were taken. The official exchange rate, at which mainly budgetary operations were calculated, and the inter-bank rate, at which companies with import permissions could obtain foreign currency, were reunified at the end of April 2000 at the higher commercial exchange rate, thus bringing the average administrative rate closer to the underlying market rate. Furthermore, at the end of June the government allowed banks to buy hard currency from the public at a rate close to the black market rate and excluded the import of consumer goods from the list of goods imported at the lower inter-bank rate. Yet full convertibility seems to have been postponed another six months to the middle of 2001… Limiting access to the official exchange rate market to capital goods was a welcome step. (EBRD 2000b:226) While a multiple exchange rate regime is still maintained the decree on access to foreign currency issued in June and July 2001 has reduced distortions in the economy significantly. Almost all imports are now conducted at the over-thecounter (OTC) rate, which is close to the current underlying market rate… Export surrender requirements are also at this rate rather than the over-valued official exchange rate. All debt service and repatriation of profits will also be conducted at the OTC rate… It remains unclear if rationing will continue or if the OTC rate will be fully market-determined… As part of the recent decrees liberalizing the forex market certain ‘liquid’ goods, including cotton, can now

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be sold in free auctions to foreign and domestic buyers…Proceeds from the auctions must still be fully surrendered to the central bank but are now exchanged at the OTD rate rather than at the less favourable official rate. However, as with the changes to the foreign exchange regime, implementation of the open auctions will be key. In the auctions so far the volumes sold have been too small to have a significant effect. (EBRD 2001b:210) ‘The staff monitoring programme agreed with the IMF foresees full current account convertibility by mid-2002. This is to be achieved by gradually removing restrictions on access to hard currency for importers’ (EBRD 2002a:90). The recent reduction in the wedge between the official and black market exchange rates has been achieved, to a large extent, through lower cash emissions and tighter monetary policy rather than liberalizing the foreign exchange market. Uzbekistan maintains tight controls on cash withdrawals from banks by companies. This has allowed the authorities to liberalize the cash market while keeping a separate exchange rate for non-cash transactions… The list of consumer goods for which no foreign currency is available was abolished in June 2002 and the number of goods that cannot be exported was reduced. (EBRD 2002b:214) ‘Uzbekistan’s economic outlook depends critically on whether the authorities follow through with their commitment to fully liberalize the exchange rate in 2003’ (EBRD 2003a:92). Restrictions have been placed on the conversion of sums into hard currency (Deutsche Morgan Grenfell, Focus: Eastern Europe, 3 March 1997, p. 80). The 1996 cotton and wheat crops were poor. More than 1,000 foreigners were barred from converting banked local earnings into dollars, which the government itself felt it needed. That left them holding tens of millions of dollars of local money whose value had dropped by about half. There was a sudden shortage of dollars as the government bought them up on the black market. (IHT, 6 March 1997, pp. 11, 15) ‘As of the fall of 1997 Uzbekistan’s trade regime remains excessively controlled.’ The primary means of regulating imports is through the rationing of foreign exchange at the official (over-valued) exchange rate. Exporters have to surrender 30 per cent of their foreign exchange earnings to the state. Export taxes range from 20 per cent to 40 per cent and many items cannot be sold abroad. There are licences and export quotas for the most important export products, such as cotton, fuel, ferrous and nonferrous metals, and ores, which together account for about 80 per cent of total exports. Cotton is the major export item. Under a state order system the state buys cotton at a low price, strictly limits its exports, and restricts the quantity that can be sold freely on the domestic market (David

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Tarr, Transition, 1997, vol. 8, no. 6, p. 9). A presidential decree of 1 November 1997 abolished customs duties and export licensing for manufactured goods. The corporation tax on enterprises exporting more than 30 per cent of their output was halved. Enterprises selling their own products to enterprises within the CIS were exempted from excise duty and value-added tax as of 1 January 1998. But restrictions were not lifted on primary products that constitute the bulk of export earnings—cotton, gold, other precious and nonferrous metals, rolled steel, and oil and gas (Transition, 1997, vol. 8, no. 6, p. 11). In 1997 the CIS accounted for 34.4 per cent of exports and 28 per cent of imports (UZET, Quarterly Issue, January–March 1998, p. 1). The 1994 figure for exports was 62.1 per cent and the 1996 figure was 21.1 per cent (p. 15). Russia accounted for 29 per cent of exports in 1994 and 18.8 per cent in 1995 (p. 17). In 1997 cotton fibre accounted for 36 per cent of exports and energy products for 12 per cent (p. 17). In 1994 the CIS accounted for 53.8 per cent of imports (p. 38). The figure for Russia alone was 29.8 per cent in 1994 and 24.9 per cent in 1995 (p. 39). While a third of imports from the CIS consisted of energy products in 1993 the figure fell to under 2 per cent in 1996. Consequently, Uzbekistan has become more or less self-sufficient in energy (p. 38). Multiple foreign exchange practices still exist, of them two prevail: official and parallel exchange markets. The first one is regulated by the central bank while the second—unofficial—reflects demand and supply. Instead of exchange interventions for supporting own currency the central bank practises the rationing of participants in foreign exchange sales. There are many barriers to participation in the currency sales held in republican foreign exchange. Some of them require almost zero enterprise debt and arrears. Consequently, arrears entail liquidity shortage and difficulties in acquiring appropriate raw materials. Thus legal limitations prevent business from direct access to foreign exchange. As a result an unofficial exchange market without administrative interference has emerged. (pp. 72–3) There are two main types of foreign exchange markets… The first is…the Republican Currency Stock Exchange, where the ratio fixed between two currencies is considered as the official exchange rate. The second type includes all the rest (non-RCSE) currency markets, where the list of participants is not so strictly predefined by central bank legal regulation. (UZET, Quarterly Issue, April–June 1998, p. 71) A presidential decree was adopted on 1 July 1998. Authorized banks fix bid and buy exchange rates, but the central bank determines the upper and lower limits. Uzbek enterprises are bound to sell a part (or the total) of export revenue to banks. The new decree regulates several changes of this procedure: revenue from centralized cotton fibre exports must be fully (100 per cent) sold to the central bank at the official exchange rate;

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revenue from other centralized exports must be fully (100 per cent) sold to the central bank at the buy-price in the non-RCSE market; 30 per cent of the revenue from decentralized exports must be sold in currency markets outside the RCSE (in fact to commercial banks licensed to deal in foreign exchange). All free foreign exchange (that is left) enterprises sell at the buy-price in the nonRCSE market. (UZET, Quarterly Issue, April–June 1998, p. 71) The current structure of the foreign exchange market emerged in late 1996… The official market was split into two segments: the URCE market and the commercial bank and exchange bureau for individuals market. Foreign exchange restrictions in these segments, however, resulted in…the developments of two other unofficial (illegal) segments (for cash and non-cash sum)… Supply in the URCE mainly flows from the mandatory surrender of foreign exchange proceeds from centralized exports (gold and cotton fibre)… In the second official segment commercial banks are allowed to trade at a depreciated rate with other commercial banks, enterprises as well as individuals. Demand is also regulated through restrictive licensing while supply is enforced through mandatory sales of proceeds from decentralized exports. This surrender requirement was raised from 30 per cent to 50 per cent of proceeds in January 1999. (p. 150) ‘Progress on the implementation of reforms decelerated significantly from late 1996 onwards. Especially, the collapse of world prices for cotton fibre and gold led the government to tighten trade and foreign exchange restrictions’ (UZET, Six-monthly Issue, July–December 1999, p. 54). The Uzbek currency was set at 231 sums per US dollar…effective as of 1 May 2000. Exchange rates are to be announced on a weekly basis and adjusted in line with the outcomes of foreign currency transactions in the domestic currency market and off-exchange, as well as the dynamics of money supply and inflation. (UZET, Quarterly Issue, April–June 2000, p. 31) The resolution on improving and developing the country’s off-exchange currency market (29 June)…aimed at putting an end to the foreign currency black market. Under the resolution authorized banks are entitled from 1 July 2000 to freely purchase and sell cash foreign currency in a bid through their specialized currency exchange offices… These banks have a limit on selling foreign currency (500 US dollars per person conditional upon the presentation of a visa or proof of travel). (p. 33) In January 1997 Uzbekistan (re)introduced a system of multiple exchange rates

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and restrictions on current account transactions with the aim of promoting import substituting industries, protecting foreign exchange reserves and subsidizing basic food imports… Its consequences for economic efficiency and welfare…have so far received little attention. This paper…tries to address this question… After a period of foreign exchange and trade liberalization in 1995– 6, this system was first created as an emergency measure in response to growing balance of payments pressures… Since then the authorities have justified the continued—and intensified—use of current account restrictions with a need to direct resources from traditional exports (such as cotton, gold, minerals) to the development of a capital-intensive, import-substituting industrial base (for example, automobiles, energy, chemistry) and to subsidize socially important consumer good imports… In practice Uzbekistan’s foreign exchange market is split into three segments: two official and one unofficial. In 1997 the largest segment was the so-called auction market at the Uzbek Republican Currency Exchange. In this market the government determines administratively an appreciated exchange rate, well below the market clearing level. Since at this rate demand for foreign exchange exceeds supply, the government has to restrict access and enforce supply [the latter through mandatory surrender of foreign exchange earnings]. (Rosenberg and De Zeeuw 2001:160–1) Until now…[Uzbekistan] has clung to a…system of multiple, state-controlled rates for hard currency exchanges. At the same time local businesses have been limited by quotas on the amount of sum…that they can turn into dollars. On 30 June [2002] all this is supposed to end. A staff monitored programme (SMP) agreed in January [2002] between the IMF and…[the] government promises to remove all restrictions on foreign currency exchanges. It should also reduce the difference between the official rate and the black market rate to 20 per cent. The restrictions were imposed in 1996 to shield the country from the shocks of transition to a free-market economy… The SMP also calls for other…changes this year [2002], such as an overhaul in procurement practices in the cotton industry… Two official exchange rates remain: a commercial rate for business transactions and an over-the-counter rate for individuals. Uzbek officials freed up the overthe-counter rate last month [May] and are now believed to be buying up sum in order to drive down the black market rate. At the moment the commercial rate stands at 740 sum to the dollar, with the black market and overthe-counter rates just above 900. (FT, 19 June 2002, p. 10) [The government has refused] to remove restrictions on the trade of hard currency, implemented in 1996. The government fixes the rate of exchange for the…sum. Companies are also severely limited in the amount of sum that they can trade for dollars… Those with access to hard currency at the official rate… can make handsome profits. Such politically well-connected and influential lobbies present a formidable obstacle to reform.

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(FT, Survey, 29 April 2003, p. vi) The proportion of exports accounted for by CIS countries was as follows (Russia alone in brackets): 1996, 22.9 per cent (11.6 percentage points): 1997, 34.4 per cent (19.1 percentage points); 1998, 26.0 per cent (14.9 percentage points); 1999, 30.4 per cent (13.4 percentage points). The respective figures for the EU were 20.3 per cent, 18.8 per cent, 23.3 per cent and 20.7 per cent. The proportion of imports accounted for by CIS countries was as follows (Russia alone in brackets): 1996, 32.1 per cent (21.0 percentage points): 1997, 28.0 per cent (17.0 percentage points); 1998, 27.8 per cent (16.0 percentage points); 1999, 26.0 per cent (13.9 percentage points). The respective figures for the EU were 30.1 per cent, 21.1 per cent, 23.5 per cent and 26.0 per cent (UZET, Six-monthly Issue, July– December 1999, pp. 68, 108). Uzbekistan and the Asian/Russian financial crisis ‘Compared with the situation in other emerging markets the effects of the Russian crisis have been relatively mild’ (UZET, Quarterly Issue, April–June 1999, p. 44). In the third quarter of 1998 the Uzbek economy faced the consequences of the crisis of emerging markets—especially Russia: overall decrease of external demand (and especially in Russia and South Korea, accounting for about 25 per cent of Uzbek exports); a deterioration of the Uzbek price competitiveness of exports (due to the depreciation of currencies in many countries in transition); decrease of the world market price, in dollar terms, of the export commodities the Uzbek economy relies on (cotton, metal, energy). However, Russian banks are not very active in Uzbekistan and Russia accounts for only 15 to 20 per cent of Uzbekistan’s exports of goods. Besides, the generally low harvest of cotton (in Uzbekistan, China) helped sustain export prices (cotton fibre being 40 per cent of Uzbek exports). (UZET, Quarterly Issue, July–September 1998, p. 6) The central bank continued its strict foreign exchange control over supply and demand. As a result the gap between the official and unofficial exchange rate widened rapidly in the last quarter… In the last quarter of 1998 tough restrictions were imposed by the monetary authorities based on the drop in cotton output and the financial collapse in Russia. To support macroeconomic stability currency quotas on consumer product imports were diminished and new regulations on currency exchange were introduced for financial institutions. For example, conditions for receiving access to the currency exchange were rescheduled. (UZET, Quarterly Issue, October–December 1998, p. 108) In January 1999 the cabinet of ministers passed a resolution on additional measures to strengthen the non-RCSE (Republican Currency Stock Exchange) currency markets. From 1 January 1999 until the end of the year the sale rate of

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enterprise revenue gained from decentralized exports (except cotton) to authorized banks is to increase from 30 per cent to 50 per cent. Uzbek enterprises are to sell half of export revenue at the bidprice set in the non-RCSE market. Resources obtained from these measures will be directed to convert sum for enterprises with a central bank licence and to purchase consumer products for state needs on the basis of tenders in 1999. (p. 30) The proportion of exports going to Russia was 15 per cent in 1998, while Russia accounted for 16 per cent of Uzbekistan’s imports (p. 5). ‘All import duties for major foodstuffs and some pharmaceutical products have been lifted from 1 January 1999’ (EBRD 1999a:46). Foreign direct investment Uzbekistan has attracted more than $2 billion in commitments (Business Central Europe, April 1994, p. 82). ‘The burden of red tape is such that foreign investment is negligible for a country of Uzbekistan’s size’ (Business Central Europe: The Annual 1997–98, p. 53). (See Table 8.1.)

Table 8.1 Uzbekistan: selected economic indicators 1995–2002

Economic indicator Rate of growth of GDP (%)

1995

1996

1997

1998

1999

2000

2001

2002 (estimate)

–0.9

1.6

2.5

4.3

4.3

3.8

4.2

4.2

Rate of growth of industrial output (%)

0.2

6.3

6.5

5.8

6.1

3.5

8.1

8.5

Rate of growth of agricultural output (%)

2.3

–6.5

5.8

4.0

5.9

3.2

4.5

6.1

Inflation rate (consumer, %)

304.6

54.0

70.9

29.0

29.1

25.0

27.2

27.6

Budget surplus or deficit (% GDP)1

–4.1

–7.3

–2.2

–3.3

–2.6

–2.2

–2.3

–0.8

Unemployment rate (end of year, %)2

0.3

0.3

0.3

0.4

0.4

0.4

0.6

–

Balance of payments (current account, $ billion)

–0.021 –0.979 –0.584 –0.101 –0.163

0.182 –0.110

0.222

Foreign direct investment (net, $ billion)

–0.024

0.075

0.065

0.090

0.167

0.140

0.121

0.083

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Sources: Various issues of European Bank for Reconstruction and Development, Transition Report, Uzbekistan Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe. Note: 1 General government balance: includes extra-budgetary funds but excludes local government (EBRD) 2 Officially registered unemployment

Foreign direct investment amounted to $145 million in the period 1990–3 (EBRD 1994:123). Foreigners may not own land, but may acquire rights to the use of land (EBRD 1996b:184). Joint ventures with more than 30 per cent foreign participation are tax exempt for two years after registration. Joint ventures investing in the public investment programme are given a five-year tax holiday (EBRD 1997b:213). Since 1 January 1997 ‘manufacturing enterprises with foreign investment’ meeting certain conditions (e.g. a minimum of 30 per cent of charter capital) have been granted a seven-year tax holiday. Joint ventures with more than 50 per cent foreign ownership are required to pay only a 20 per cent tax on profits for a two-year period and are exempted from taxation on reinvested profits. But there are obstacles to foreign investment, e.g. delays in customs clearance and ‘the acquisition of [currency] conversion licences is cumbersome’. ‘In addition, exporting companies are required each quarter to convert 50 per cent of projected (by the government) foreign exchange proceeds at the official rate’ (UZET, Quarterly Issue, April–June 1999, p. 122). Although foreign ownership is not officially restricted, foreign direct investment consists mainly of joint ventures… The share of joint ventures operating in the industrial sector has noticeably increased from 27.2 per cent in 1996 to about 40 per cent in 1999. Overall output of joint ventures accounted for about 13 per cent of GDP in 1998–9. (UZET, Six-monthly Issue, July–December 1999, p. 135) A foreign exchange system that hinders the repatriation of profits continues to be a major impediment to foreign direct investment. In the oil and gas sector the country is increasingly looking to Russian energy companies as a source of investment but it is also implementing production sharing agreements for the first time with Western/Uzbek joint ventures. (EBRD 2001b:210) ‘Faced with difficulties in repatriating profits, long delays in obtaining vital inputs and a generally difficult investment climate, many foreign investors have left Uzbekistan over the last few years’ (EBRD 2002b:214).

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Agriculture Agriculture accounts for about one-third of GDP… Nowadays the main objectives in agriculture are to shift from cotton monoculture to food grains (grain, fruits and vegetables) in order to achieve selfsufficiency and settle the ecological problems caused by wasteful usage of water for cotton irrigation. (UZET, Quarterly Issue, January–March 1999, p. 87)

‘Agricultural policy aims at achieving food self-sufficiency through shifting from cotton monoculture to food crops, expanding the supply of agricultural products to export markets and enhancing farms' independence’ (UZET, Quarterly Issue, April–June 1999, p. 13). See the comments by Nikonov under 'Agriculture' in the chapter on Kazakhstan. Nikonov (1992:1161) says that Uzbekistan has chosen its own way. Efforts are directed towards expanding individual peasants’ private plots. Irrigated lands are added to previously allotted individual subsidiary plots. In 1991 individual subsidiary farming accounted for 60.6 per cent of total agricultural output. In addition 8,000 farmer holdings have been established. Unprofitable state farms have been transformed into co-operative and leased enterprises. Another source informs us that by the end of 1992 nearly 6,000 private farms had been established, with an average size of 8 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for only 0.18 per cent of total agricultural land (United Nations Economic Commission for Europe 1993:206). As of 1 April 1993 there were 5,800 private farms, with an average size of 9 ha (CDSP, 1993 vol. XLV, no. 21, p. 20). The private sector is well advanced. In the autumn of 1991 loss-making state farms were sold off to staff or transformed into co-operatives; together with other collective farms the latter were to be distributed among members by the end of 1993 (Kaser and Mehrotra 1992:45). Van Atta (1993:598–604) takes a detailed look at the agrarian scene in Uzbekistan: 1 He argues that only very limited agrarian reform has been undertaken to date. The regime clearly intends to maintain the old Soviet-style system of state orders and subsidies. President Karimov’s strategy has been to stabilize agricultural production before attempting any reform. The supply of inputs and the processing and sale of agricultural products remain in the hands of the state. The government provides the all-important water free. 2 State orders for cotton are being reduced (in 1994, 70 per cent of the crop will have to be delivered and then orders are supposed to decline by 5 per cent a year for several more years), but the state still controls all the cotton gins and the distribution network. At present only 10 per cent of cotton production is processed as finished goods within Uzbekistan and the aim is to increase the proportion. 3 The way the government intends to increase incentives for individual farm workers is

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to lease land and assets to individuals and families within the framework of the existing collective and state farms. 4 Because the collective and state farms concentrated so intensively on cotton, much food comes from the private plots. In 1991 the president claimed that private plots produced 40 per cent of foodstuffs on 4.5 per cent of the land. By mid-1993, as a result of extra land being made available, the plots accounted for between 11 per cent and 12.5 per cent of agricultural land. The plots now account for 70 per cent of milk, 50 per cent of meat and 50 per cent of potatoes, vegetables and fruit. 5 The July 1990 law allowed individuals to lease but not to buy land. Even after January 1992 Uzbekistan retained retail price controls on basic foodstuffs and the system of state orders for agricultural production. The law on peasant farms was adopted on 3 July 1992. Individual peasant families were allowed to obtain a share of land and assets from the farm in order to establish their own private farms. But the right to leave with a land share was absent. So peasant farms can be established only as sharecropping operations within the large farms, when an entire state or collective farm is reorganized into peasant farms by its membership or on (the very little) unused yet suitable land. Peasant farmers were to be given a state order for 50 per cent of their crops and freed from all taxes for two years. 6 A decree issued on 10 January 1993 concerned the denationalization of around 700 state farms. The farms were to be reorganized into collective farms or ‘associations of peasant farms’. It is not exactly clear what these terms mean. Perhaps the new collective farms may grant peasant farmers the nominal right to leave the farm with a share of land and capital assets, while the associations theoretically make the peasant households legally independent proprietors. ‘In general, however, the peasant farms created when entire farms are reorganized are not legally independent, and the change more resembles “internal khozraschyot” than it does the creation of truly independent farms’ (p. 603). 7 The government reported that by mid-1992, 4,378 peasant farms existed, compared with 1,358 at the start of 1991 and 1,868 at the start of 1992 (over this period of time the average size increased from 6.7 ha to 7.3 ha and then to 8.1 ha). The statistics are supposed to reflect the number of farmers who have received title to their land. But Van Atta was told unofficially that ‘there are only about 250 genuinely private, or peasant, farms in Uzbekistan. These peasant farms are not “family” farms in the Western sense. Instead…they are “clan” or group farms, with the oldest competent male officially regarded as the “farmer”’ (pp. 603–4). In 1997 the non-state sector accounted for 98 per cent of agricultural output. In Soviet times the kolkhozes were formally co-operatives, not state-owned. Lately these and the state farms (former sovkhozes) have been transformed into co-operatives, joint stock companies, split up into family (dehkan) farms, etc. The creation of such private farms (average size 15 ha) has been encouraged… Land remains state property. (UZET, Quarterly Issue January–March 1998, p. 11)

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The number of private farms increased from 1,900 in 1992 to 21,400 in 1998 (p. 11). In 1997 agriculture accounted for 27 per cent of output and 40 per cent of the labour force. ‘At present different organizational forms are functioning: collective farms (shirkats), peasant (dehkan) farms, farm enterprises, tenant-operated farms, etc. Large collective farms are mostly specialized in cotton and grain’ (p. 30). In 1997 agriculture employed 40 per cent of the labour force, of which the contributions in percentage points were as follows: collective farms, 18.4; peasant (dehkan) farms, 1.6; private plots, 16.2; farm enterprises, 2.2. Some 87 per cent of arable land is irrigated. The aim is self-sufficiency in grain. Agricultural products are sold by farms at free-market prices, except cotton and grain for which state orders still partly apply. In 1998 it was stipulated that state purchases for cotton fibre should amount to 30 per cent of output at a price of 85 per cent of the world market price. The remainder of output could be sold at market prices. State grain purchases were set at 25 per cent of output (p. 30). The aim is the development of agriculture, especially private plots. These account for 69 per cent of potatoes, 55 per cent of fruits and berries, 69 per cent of vegetables, 81 per cent of meat, 88.6 per cent of milk and 69 per cent of eggs. In conditions…where agriculture is mainly specialized in cotton on irrigated lands, and where agricultural production is inseparably connected with interfarm irrigation systems, the opinion prevails that land cannot be an object of purchase and sale. Otherwise it may lead to serious social and economic problems, sharp polarization of society, emergence of conflicts caused by land and water use, degradation of irrigation systems, etc. For the solution of the issue of land property sharing relations will be developed in the countryside. In this system land is distributed between members of farms, but it will not be an object that can be bought or sold. Each member of the farm shall be given a certificate, which secures him his share of the property and the profit obtained by the farm. (p. 31) In order to diversify the government has encouraged the cultivation of crops other than cotton (p. 2). On 1 January 1998 the former system of main food groups distribution was abolished in accordance with the presidential decree on retail and wholesale trade, which opened up the possibility of making direct agreements between local producers and wholesale distributors (p. 75). In 1998 the non-state sector accounted for 99 per cent of agricultural output. In 1998 private farms accounted for 11.3 per cent of cultivated land, compared with 0.3 per cent in 1992 (UZET, Quarterly Issue, July–September 1998, p. 29). Large collective or co-operative farms still dominate cotton and grain production. The share of private farmers is still relatively small, while private plots make up the largest share in such products as potatoes, vegetables and fruit (p. 52). In 1998 dehkan farms accounted for 60.3 per cent of agricultural production (compared with 56.6 per cent in 1997). Co-operatives accounted for 35.8 per cent (compared with 40.2 per cent in 1997). The share of the household plot is substantial in livestock production and it has also significantly increased with respect to the production of cereals, vegetables and fruit.

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However, state involvement in the agricultural sector remains substantial. First…land largely remains state property. Second, public authorities still control agricultural enterprises through state orders for cotton and wheat. In addition, the state remains very active in the distribution of essential agricultural inputs…as well as in the financing of the irrigation system. Significant state support for the sector also takes place through preferential credits, rescheduling of debts and arrears, as well as preferential tax treatment. (UZET, Quarterly Issue, July–September 1998, p. 49) Since 1991 state farms (former sovkhozes) have been transformed into various forms of non-state collective enterprises. These include the creation of joint stock companies and producer co-operatives (shirkats). Private farming (dehkan farms and the private plots of rural households, farming enterprises) have also been especially encouraged. The process of ownership transformation in agriculture noticeably accelerated in 1999. In 1999 989 agricultural enterprises (former kolkhozes) were converted into shirkats, which raised their total number to 963. The latter made up 33.7 per cent of overall production in 1999 against 60.7 per cent for dehkans. (UZET, Six-monthly Issue, July–December 1999, p. 57) In 1998 and 1999 the respective percentage contributions to agricultural output were as follows: dehkans, 62.8 per cent and 60.7 per cent; shirkats and other agricultural enterprises, 33.7 per cent and 34.7 per cent; farming enterprises, 3.5 per cent and 4.4 per cent (UZET, Quarterly Issue, January–March 2000, p. 62). The shirkat is a co-operative with permanent collective possession of land. As regards capital (land, equipment), shirkat members have their own shares. ‘Activity in shirkats is carried out by work teams (divided into work groups) and family contracts… Part of family production is owned by the family contractor (after provision of the production agreed upon in the contract).’ The dehkan involves the dehkan farm itself (with lifetime possession of land and family workers with only occasional hired labour) and household plots (with life-time inheritable possession). Farming enterprises involve land leases of between ten and fifty years and family workers plus hired labour (pp. 63–4). About a quarter of state farms were to be privatized before the end of 1994. Over 10 per cent of the cultivated land has been leased to private farmers (EBRD 1994:40). Uzbekistan still prohibits private ownership of land by its nationals and legal entities, although leasing is permitted (p. 74). Some 25 per cent of all irrigated land was planned to be leased to private farmers by mid-1995, rising to about 40 per cent by the end of the year. The scope of the state order system was greatly reduced in the second half of 1994. State orders (involving obligatory production targets and administrative price setting) are now in place only for cotton and grain, and their coverage has been reduced to 60 per cent and 50 per cent of production (from 67 per cent) respectively. These state orders were scheduled to be eliminated within three years (EBRD 1995a: 17, 68). State farms have been transformed into co-operatives without any major impact on enterprise behaviour. The state order system has been phased out except for cotton and grain (EBRD 1995b:63). The state owns almost all land but long-term leases for land exist. Most of the

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agricultural land has been leased to state farms and collectives. Land for individual use (commercial and residential) and attached to a building can be owned by private individuals. But the land must be used for its original purpose and cannot be traded freely. One-fifth of agricultural land is occupied by private farms or household plots. In January 1996 a regulation was issued which permitted the auctioning of land with the right of lifetime ownership and heritage (EBRD 1996b:183). Procurement prices for cotton and wheat, for which the state order system is still in place (covering 40 per cent of cotton production and 25 per cent of wheat production) are also administratively set (EBRD 1997b:211). The agricultural sector is largely unreformed. The state has almost full control over the vital cotton industry. The state sets production targets, supplies all inputs and procures the bulk of the crop. Individual farms have to fulfil a state order quota before being allowed to market the remaining cotton. All exports have been effectively centralized in four state foreign trade agencies. Land continues to be owned mostly by the state. A land code came into force in July 1998, which declared land state property that cannot be traded or mortgaged except in cases where there are specific provisions in other pieces of (as yet unspecified) legislation (EBRD 1998b:198–9). The government extracts large transfers from the agricultural sector to support its import substitution programme in industry. The cotton sector…is implicitly taxed at a rate of around 75 per cent’ (EBRD 2000a:86). Through a system of implicit and explicit taxation, every year the authorities transfer about 15 per cent of GDP out of agriculture into import substituting industries. As a result wages for farmers are a quarter of those in industry and there is under-investment in the sector’s infrastructure… Wages in the agricultural sector are rapidly falling behind the national average, largely as a result of the government’s taxation policies. These policies have contributed to increased civil unrest…[The authorities insist] on the replacement of cotton and fodder with wheat. (EBRD 2000b:227) Reform of the agricultural sector is proceeding slowly. Government interference in the sector is still pervasive… State procurement of cotton, which is at a fraction of world market prices, continues to cover around 70 per cent of the total harvest… The government has allowed a private company to procure and gin cotton. (EBRD 2001b:211) In an important pilot scheme introduced in January 2002 the government has agreed to transform all co-operative farms in three districts into private farms. Furthermore, the government has agreed under the [IMF] staff monitoring programme that the rules for state procurement of cotton and grain will be changed during 2002. Farms will now have to sell half of the actual harvest at fixed prices to the state rather than half of an unrealistically high target (as in the previous system). (EBRD 2002a:90)

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The prices [of cotton and grain] paid by the state are now linked to world market prices. However, the extent to which these [procurement and price] changes have been implemented for the 2002 harvest remains unclear… The government has reorganized the former sovkhozes and kolkhozes into new forms of collective farms (shirkats), whose subdivisions are farmed by extended families. The former household plots of farm labourers have been turned into peasant farms (dehkan), which have become the main source of dynamism in the agricultural sector. (EBRD 2002b:215) According to Business Central Europe (March 1995, p. 11), the first private land auction has been held. In Uzbekistan, where a large part of the state and collective farm economy is linked to the cotton complex, land reform has been limited. Some land distribution took place in 1992 and 1993, involving around 12 per cent of cultivated land. Most was allotted as very tiny plots to households on state and collective farms. During 1993 nearly all state farms were transformed into joint stock companies and some were split into a number of collectives. In some cases land issues have led to overt ethnic tension, especially in the Ferghana Valley that borders on Kyrgyzstan. After February 1994 land was to be distributed (actually leased for long periods of time) to peasant farmers, based on a minimum area per head of cattle owned, in order to promote the emergence of viable private farms (Spoor 1995:51). In November 1994 a field visit to an area north of Tashkent confirmed that the various presidential decrees were being put into effect. ‘However, with the system of allotting land through the powerful… mayors, vested private interests in the public sector promote privatization of land to the benefit of the rural nomenklatura’ Land ownership is still a monopoly of the state. Peasant farmers can obtain leasing (or usufruct) rights. Peasant farmers are partly exempted from taxes but are obliged to sell a substantial part of their output (cotton, grain, meat and milk) to the state at ‘negotiated’ (below market) prices (p. 52). The state order system is still largely in force (p. 56). There has been some diversification away from cotton and towards food crops (p. 52). ‘Where peasant farmers started to produce, problems arose…because existing services are still geared exclusively to state and collective farms’ (p. 53). In the presidential decrees of February 1994 the central authorities launched an attack on the powerful local mayors or regional governors. They were prohibited from interfering in the ‘economic and financial activity of collective and peasant farms’ (quotation cited by Spoor on p. 59). Spoor argues that ‘rural life is still dominated by the nomenklatura, often intimately related to the vested interests in the cotton complex’. But the government ‘seems to be dedicated to market reforms and with the new push towards a coherent reform programme has also started to limit the influence of powerful party structures at the regional and district levels’ (p. 59). In 1995 a policy of self-sufficiency in grain production was adopted. After the harvest bona fide grain requisitioning was organized. Contrary to earlier promises the state took nearly all the grain produced by collective farm

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workers and even private farmers, without leaving even minimal reserves. (CDSP, 1995, vol. XLVII, no. 52, pp. 21–2) Cotton accounts for 60 per cent of export revenues. The government has taken a cautious first step towards ending its monopoly on cotton exports. The government has tried to encourage production by paying higher prices and ensuring that state orders make up only 40 per cent of cotton production, leaving farmers free to sell 60 per cent for export or domestic sales. ‘It has pledged to phase out state orders altogether by 1998. But only the ministry of trade has been able to license exporters, keeping a tight rein and offering minimal prices.’ In late September 1996 a decree was issued allowing the sale of cotton fibre at a commodity exchange in Tashkent, with a price in dollars, freedom to export and exemption from export tariffs, but ‘Western traders are pessimistic about the effects of the new cotton exchange’ (FT, 22 October 1996, p. 29). While land is still exclusively leasehold, Uzbekistan has broken up two-thirds of its collective farms into peasant smallholdings. The remaining farm land is run as cooperatives (United Nations Economic Commission for Europe 1997:199). Uzbekistan initiated its agrarian reform in 1992. Land remained state property but land use was devolved, as state farms were replaced by collective farms and private use rights were established on the collectives (Pomfret 2000a:269–70). ‘In Uzbekistan the reform came from above and, although new household farms were created, they did not displace the old farms that remained as parallel institutions.’ The July 1992 law on peasant farms established 9,254 peasant (dehkan) farms and by the end of 1995 their number had increased to 21,514. Of these 9,346 were independent peasant farms with lifetime inheritable possession of use right and 12,168 were leasehold peasant farms formed on land from collectives. A January 1993 decree laid out a programme for restructuring the 1,062 state farms and by the end of 1995 only sixteen of these remained. Most of the state farms were turned into collective farms (p. 271). Twenty-six state farms, all producing only cotton and grain, were converted into joint stock companies, ‘apparently with little change in their behaviour’ (p. 280). ‘The collectives subsequently adopted something akin to the Chinese household responsibility system, creating new leasehold peasant farms on which families were granted use rights to parcels of land subject to providing their share of the output quota.’ Further decrees in 1994 authorized the creation of private livestock farms and private vineyards and orchards. At the end of 1995 the distribution of land area by farm type was as follows: state farms, 3.7 per cent; collective farms, 46.6 per cent; leasehold dehkan farms, 6.7 per cent; independent dehkan farms, 5.5 per cent; smallholdings, 9 per cent. The remainder of the land included the private livestock farms and other minor farm types. Smallholdings, which increased from 2.3 million in 1990 to 2.9 million in 1995, supply over two-thirds of animal products by value as well as a large share of potatoes, vegetables and melons, but they are minor producers of cotton or grain (p. 271). The kolkhoz [collective farm] dominates Uzbekistan’s agriculture, and not just by their size. They have retained responsibility for the distribution of water… The collectives often control other inputs, such as fertilizer, and sometimes the marketing of outputs… State control is reinforced by dependence on a major

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crop that requires state-provided inputs (especially irrigation) and is produced for export rather than local markets… The former state farm managers have retained their authority and their links with other key players in Uzbekistan’s political system… The statecontrolled banking system often acts as a monitor. By law purchases of seeds, fertilizer, machinery, fuel and other inputs must be through bank transfer, and revenue from agricultural sales must be deposited in a bank and can only be used for approved purposes. Depositors’ right of withdrawal in cash is circumscribed by centrally determined limits and local practice. The banks…serve the state in checking that funds are appropriately used… The pricing system gives little incentive for increasing output. The state order system is being liberalized as the percentage of the crop that must be sold to the state has been reduced—down to 30 per cent for cotton and 25 per cent for grain by 1998—but these numbers are misleading. If a farm produces less than its target output of cotton then the entire crop must be sold through the state order system… Although over four-fifths of live-stock are now on some sort of private farms, rather than collectives, the livestock sector remains heavily influenced by kolkhoz policies. (pp. 272–3) The share of peasant farms in agricultural land increased from 0.1 per cent in 1992 to 1.7 per cent in 1999 (Spoor and Visser 2001:888). ‘In countries like Uzbekistan (and Kazakhstan) the comparison should be with arable land, as large tracts of agricultural land are desert (or steppe). In the Uzbek case this changes the percentage to 7.3 per cent’ (p. 889). The share of private farms and household plots in agricultural production increased from 33 per cent in 1991 to 53 per cent in 1997. ‘In the Central Asian states “peasant cooperatives” are most likely included, over-representing “private production”’ (p. 890). The Ferghana Valley is…home to a third of Uzbekistan’s population of 24 million… In return for their produce farmers are paid by the state up to one year late and then often in grain and cooking oil only. The state decides what crops they grow, and the harvest is turned over to officials, a much-resented practice retained since Soviet times. (The Economist, 10 November 2001, p. 80) Economic performance Although the GDP growth rate turned positive only in 1996, Uzbekistan’s earlier growth record was relatively good by CIS standards: –11.1 per cent in 1992, –2.3 per cent in 1993, –4.2 per cent in 1994 and –0.9 per cent in 1995 (EBRD 2000a:87). In 2000 GDP was an estimated 98 per cent of the 1989 level (EBRD 2001b:59). In 2001 GDP was 5 per cent in excess of the 1989 level (EBRD 2002b:58). ‘The economic downturn typical of all transition countries has been relatively mild in Uzbekistan… The production structure of Uzbekistan has been rather favourable… Availability of easily marketable products like cotton, gold and gas has alleviated the situation’ (UZET, Quarterly Issue, January–March 1998, p. 11). ‘Compared with the

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situation in other emerging markets the effects of the Russian crisis have been relatively mild’ (UZET, Quarterly Issue, April–June 1999, p. 44). The proportion of exports going to Russia was 15 per cent in 1998, while Russia accounted for 16 per cent of Uzbekistan’s imports (UZET, Quarterly Issue, October–December 1998, p. 5). (See Table 8.1.) There was hyperinflation in 1994 (1,568 per cent), with consumer prices rising by 645 per cent in 1992 and 534 per cent in 1993. Inflation fell sharply in 1995, but the lowest inflation rate to date was achieved in 1998 (EBRD 2002b: 217). Open unemployment is low but hidden unemployment is considerable (UZET, Quarterly Issue, January–March 1998, p. 27). Open unemployment was 0.3 per cent in 1997. Superfluous workers in agriculture amount to more than 20 per cent of employment in that sector (p. 49). After the breakup of the Soviet Union, Uzbekistan’s output fell less than in any other former Soviet republic, and growth turned positive in 1996–7. Given the country’s hesitant and idiosyncratic approach to reforms, this record has surprised many observers… The main result [of this paper] is that Uzbekistan’s performance can be accounted for by a combination of low initial industrialization, its cotton production, and its self-sufficiency in energy. (Zettelmeyer 1999:274) This paper has two main findings. The first is that the exceptional mildness of Uzbekistan’s transitional recession can be largely accounted for by a combination of its low degree of initial industrialization, its cotton production, and its near self-sufficiency in energy The relative importance of these factors, in particular the latter two, remains uncertain. Second, it is unlikely that the government’s public investment programme and import substitution strategy (except where it is related to the energy sector) has played an important role in achieving Uzbekistan’s favourable output performance. (pp. 287–8) ‘Uzbekistan’s…role in the Soviet division of labour was as a producer of primary products, especially cotton…and minerals such as gold and uranium’ (Pomfret 2000b: 735). ‘Its economic performance, measured by change in real GDP between 1989 and 1999, was one of the least bad among transition economies and the best of all former Soviet republics’ (p. 734). During the middle 1990s Uzbekistan emerged as a paradox among CIS countries. Although cumulative reform was still far behind the Baltics, Russia or even the neighbouring Kyrgyz Republic and Kazakhstan, Uzbekistan did not experience the deep decline in GDP suffered by all other CIS countries. The cumulative decline in GDP between 1989 and 1999 was the lowest among all former Soviet republics. Moreover, Uzbekistan appeared to do relatively well by other measures such as providing a social safety net, alleviating poverty and limiting spending cuts in education and health care… Resource endowment

The Caucasus and central asian republics

352

was…fundamental to the balance of payments, the public sector budget and investment. Buoyant export earnings from cotton and gold contribute directly to GDP and were a major source of government revenue. The government kept tight control over both activities and, by a state order system which gave farmers a small fraction of the world price, siphoned resources from agriculture… An important difference from Russia or Kazakhstan was that the resource rents were not privatized and the government used the revenue to maintain public spending on education and health care better than in other CIS countries. (pp. 739–40) ‘The relatively successful economic performance was helped by some favourable initial conditions, but…some credit must be given to Uzbekistan’s policy-makers’ (pp. 743–4). Through a system of implicit and explicit taxation, every year the authorities transfer about 15 per cent of GDP out of agriculture into import substituting industries. As a result wages for farmers are a quarter of those in industry and there is under-investment in the sector’s infrastructure… Compared with other transition countries, Uzbekistan maintains relatively high levels of social assistance… Expenditures [are tilted] towards the better-earning large cities. Wages in the agricultural sector are rapidly falling behind the national average, largely as a result of the government’s taxation policies. These policies have contributed to increased civil unrest. (EBRD 2000b:227) ‘Uzbekistan has been struggling this year [2000] with…a severe drought, the worst in the past hundred years’ (CDSP, 2000, vol. 52, no. 42, p. 16). ‘Around 31 per cent of the population are estimated to live in poverty’ (EBRD 2002b:215).

Bibliography Periodicals and reports CDSP

Current Digest of the Soviet Press (since 5 February 1992 Post-Soviet)

EEN

Eastern Europe (formerly Eastern Europe Newsletter)

EBRD

European Bank for Reconstruction and Development

FEER

Far Eastern Economic Review

FT

Financial Times

IHT

International Herald Tribune

ARET

Armenia Economic Trends

AZET

Azerbaijan Economic Trends

BET

Belarus Economic Trends

GET

Georgia Economic Trends

KET

Kazakhstan Economic Trends

MET

Moldovan Economic Tends

RET

Russian Economic Trends

UET

Ukrainian Economic Trends

UZET

Uzbekistan Economic Trends

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Index

Abashidze, A. 121, 124–5 Abdildin, S. 185, 186 Abilov, B. 198 Abkhazia 10, 13, 117–47, 154,169 Ablyazov, M. 195–8 Abulajanov, A. 27, 268 Adzharia 126 Aitmatov, C. 239 Akayev, A. 22–3. 25, 184, 228–54,260, 264 Akilov, A. 278 Akunov, T. 249 Aliev, G. 7, 88–104, 110, 113, 133, 315 Aliyev, R. 191–5 al-Qaeda 131, 142–3,149–54,244, 275–6,281 Ardzinba, V. 118, 121–3,125, 136, 155 Amanbayev, J. 231 Article 5 (Nato) 281 Article 8 (IMF) 7, 10, 20, 81,111–2,255 Arutyunyan, K. 59 Ash, T. 13, 171 Ashirkulov, M. 253 Asia Pacific Economic\forum (APEC) 284 Asian financial crisis 81, 213, 362 Atovulloyev, D. 274 Azimov, Y. 269 Babayan, S. 94 Badalian, S. 60,63 Bagratian, G. 59, 61 Baimenov, A. 198 Baku Declaration 95 Balcerowicz, L. 157 Balgimbayev 19, 183–4,186, 210, 216 Basayev, S. 131 Beknazarov, A. 246–52 black economy 76, 86, 190, 356–7 blue chip privatization programme (Kazakhstan) 18–9, 203–7 Bush, G.W. 132, 152, 276, 281, 284,287, 338 Bushkov, V. and Mikulsky, D. 301

Index

365

Caryl, C. 176 Caspian Sea 7, 16, 33, 35, 94–9, 101–3,113, 133, 176–7,183, 198, 220, 223, 305, 309–10,315, 319 Cavanaugh, C. 238 Cemovich, R. 14, 171 Central Asian Co-operation (CAC) 194 Central Asian Economic Community (CAEC) 194 CFE Treaty 125 Chanturia, G. 121 Chechnya 120, 127, 131–54 Chernobyl 69, 109 Chibirov, L. 121, 141 Chyngyshev, T. 229 CIS (Commonwealth of Independent States) 8–10, 23, 34, 36, 41–2,66, 70, 81–2,86, 90–2,103, 113, 115, 129, 138, 153–4,194, 201, 213, 227, 268,271, 274, 306, 308, 318–9,331, 334, 342, 350– 2,356, 359, 362 Clinton, B. 32, 58, 245, 306, 334 Collective Security Treaty (of the CIS) 41–2,243–4,253, 288, 305, 334, 342 convertibility (current account) 10, 15, 20, 26, 31, 37, 42–3,81, 111, 211–2,255,260–97,327, 356– 7,360, 371 Council of Europe 70, 91, 95, 102, 13, 126 Daniyelyan, A. 94 Darbinyan, A. 64 Dashnak (Armenian Revolutionary Federation) 58, 62, 64 dayhan farm (Turkmenistan) 39, 331 dehkan (peasant farm, Uzbekistan) 49–50,366–71 dekhan (peasant farm, Tajikistan) 300 Demirchyan, K. 63–4,69 Demirchyan, S. 69–70 Dillon, M. 287 Dobbs, M. 58 Dyryldarev, R. 218 Dzhalalov, A. 40, 336–7 Dzhandosov, U. 191 Elchibey, A. 90, 93 Esenov, M. 308 Evans, G. 338 Ferghana Valley 53, 232, 240–3,273, 338, 344, 371, 373 Forest Brothers 123 Freeland, C. 71 Gabala radar station 7, 99, 103 Gambar, I. 94, 100 Gamsakhurdia, Z. 10, 118–23,131 Gandymov, S. 310 Gaziyev, R. 92

Index

366

Gelayev, R. 133, 139, 143,146, 149, 155 Georgadze, I. 120–2 Grey Wolves 91 GUAM 41, 92, 335 Gukasyan, A. 92, 101 Guladze, V. 93 Guliyev, F. 92 GUUAM 41–2,194, 335, 342–3 Harutyunyan, V. 5, 66 Havrylyshyn, O., Miller, M. and Perraudin, W. 80, 349 Herzig, E. 60 hidden economy (see black economy) Hizb-ut-Tahrir al-Islami (Party of Islamic Liberation) 40, 245, 253, 337 Hoagland, J. 341 Hoffman, D. 61 Huseinov, S. 90,93 Huskey, E. 230 Hyman, A. 266, 303 hyperinflation 6, 8, 11, 36, 42, 87, 116, 157, 172, 227, 301, 332, 373 IMF 42–3,72,96, 111, 157–,184, 200, 213, 261, 291–2,300, 321, 337–9,341, 346–7,358, 361, 370 IMU (Islamic Movement of Uzbekistan) 22, 40, 232–45,273, 281, 285, 337–9,343 informal economy (see black economy) insiders 6,9, 74–6,106 Ioseliani, D. 120 Islamic Movement of Uzbekistan (see IMU) Ivanov, I. 142–3,152, 277–8 Ivanov, S. 67, 135, 148, 277, 282, 285 Jack, A. 33, 304 Jandosov, U. 199 Javadov, M. 91 Javadov, R. 91 Jiang Zemin 249, 275 Jones-Luong, P. and Weintahl, E. 344 Kaiser, R. 33, 199, 305 Kakayev, K. 311 Kamilov, A. 341 Karekin I (Patriarch) 64 Karekin II 67 Karimov, I. 23, 39–42,234, 241, 245, 254, 273, 281, 283, 315, 333–44,366 Karimov, J. 269 Karzai, H. 287 Kaser, M. 171 Kaser, M. and Mehrotra, S. 24, 256, 262, 290, 293, 299, 324, 330, 345, 349, 366 Kashagan oil field 177, 218–21

Index

367

Kasyanov, M. 68, 131 Kasymov, G. 185 Kazhegeldin, A. 182–9,194, 210–1 Khanamov, N. 308, 313, 316 Khattab 131, 143–4 Khojiev, J. 339 Kinzer, S. 233 Kitovani, T. 117 Kocharyan, R. 5, 61–70, 92 Kodori Gorge 10, 132–46 Kokoyev, E. 145 Kulov, F. 22, 235–48 Kvashnin, A. 277 Lemierre, J. 344 LeVine, S. 62, 291 Lippmann, T. 33, 306 Mamedov, E. 92 management contracts (Kazakstan) 17, 204–10 Mancours, K. and Swinnen, J. 21, 226 Manoucharian, A. 60 Manukian, V. 60,63 Marchenko, G. 184 Margaryan, A. 66 Markaryan, G. 63 Masaliyev, A. 231 Masaliyev, I. 238 Medzamor (nuclear power plant) 68, 86 Meier, A. 267 Mingrelia 118 Minsk group 62 Mkhedrioni (Horsemen) 120 Mutalibov, A. 91 Mulladzhanov, N. 252 Musabekov, R. 103 Nagorno-Karabakh 5–8, 57–66, 86, 88–93 Namangani, J. 232,240–4,285, 339 Nasmyth, P. 156 Nato (and Georgia) 127 Nato-Russian Permanent Joint Council 276 Nazarbayev, N. 15, 21, 176–99,218, 225, 232, 279–80,310, 315 Nazarkulov, S. 246 Nazarov, M. 304, 309–11 Nazriev, M. 268 Nikonov, A. 48, 171, 263, 299, 330, 365 Niyazov, S. 32–4,37, 97, 278, 281, 303–26

Index

368

Nourzhanov, K. and Saikal, A. 181, 200 Nuclear Non-proliferation Treaty 181 Nuri, S.A. 26, 28, 269, 270–1 Oganesian, V. 63 Orazov, K. 308, 313, 316 Osama bin-Laden 132, 143, 233, 245, 276, 277, 281, 283, 338–9 OSCE 5,8, 16, 22, 27, 34, 40, 59–63, 70, 91, 93–4,117, 125, 148,185, 187, 230, 235, 237, 242– ,266, 306, 317, 336 Ottoman Empire 67 Pankisi Gorge 10, 134–54 Patiashvili, D. 121, 126 Patsatsia, O. 118 Polatov, A. 334 Pomfret, R. 52–3,372 Pope John Paul II 67, 191 Powell, C. 286, 341 Primakov, Y. 122 privatization (see contents page) privatization cheque (Tajikistan) 29 privatization options (Azerbaijan) 108 production-sharing agreement 222 Pryde, I. 25, 228,262 Putin,V. 7, 11, 67, 95, 97, 103, 133, 138, 141, 145,149–53,177–8,254, 273, 276, 278–85,310–,343 Rabbani, B. 285–6 Raduyev, S. 131 Rakhmonov, I. 26–8,268–89 Rashid, A. 27, 40–1,182, 230, 233, 245, 261, 267,305, 308, 330–2,334, 347, 349 Robertson, G. 281 Rosenberg, C. and DeZeeuw, M. 45, 361 Rugman, J. 290 Ruhnama 33, 303 Rumsfeld, D. 68, 99, 142, 282, 285, 287 Rushailo, V. 317 Russian financial crisis 6, 11, 16, 28, 81–2,85, 172, 213–6,291, 332, 357, 362, Saakashvili, M. 133, 140 Sadeq, M. 337 Safaev, S. 341 Sanaya, G. 131, 140 Sarishvili-Chanturia, I. 121 Sarkisyan, A. 5, 65 Sarkisyan, V. 64 Shadman-Valavi, M. 157 shadow economy (see black economy) Shamshiyev, B. 239

Index

369

Shanghai Co-operation Organization(Forum) 23, 275 Shanghai Five 274–5 Shaw, P. 149, 154 Sherimkulov, M. 231, 239 Shevardnadze, E. 10, 14, 117–55,171 Shikhmuradov, B. 34, 307–9,313–6 shirkat (collective farm/producer co-operative, Uzbekistan) 49–52,366–71 Sigua, T. 118 South Ossetia 10, 13, 121,127, 141, 145–7,152, 169 Spoor, M. 49, 264, 300, 371 Spoor, M. and Visser, O. 10, 15, 21, 25, 32, 39, 53, 86, 116, 172, 226, 264, 332, 373 Stalin, J. 98, 316 strategic enterprises 11–2, 18, 159–60,162 Surikov, A. 274 Talbott, S. 5, 65 Taleban 42,274–85,338, 342–4 Tanayev, N. 250–1 Tarr, D. 358 Tekebayev, O. 241 Tengiz oil field 177, 197, 218, 221–2 Tereshchenko, S. 186 Ter-Petrossian, L. 4, 58–62 terrorism (international: see contents pages) Tokayev, K. 176, 192, 194, 220 Turgunaliyev, T. 244 Turkmenbashi 33, 303, 309–13 Uighurs 252 Unanyan, N. 65 Usenov, D. 235, 237 Usmon, D. 271 Van Atta, D. 49, 365–6 Volkonsky, B. 343 Voronin, V. 342 Wahhabi 338 White Legion 123 Williams, D. 63 Wolfowitz, P. 287 WTO (World Trade Organization) 6, 15, 24, 81, 255 Yeltsin, B. 61, 92, 118, 119, 181–2,268 Yertlesova, Z. 192 Yklymov, S. 313, 317 Yuldash, T. 339

Index Zakayev, A. 144 Zemlyanov, V. 198 Zhakianov, G. 192, 195–8

370