Chechnya's economic recovery tested by slowdown

The women in colourful headscarves laugh and chat as they harvest the cucumbers and pack them into boxes, stacked up in the giant greenhouse that stretches as far as the eye can see.

Ten hectares in size, squeaky clean and operated by automatic temperature control and drip irrigation technology, the greenhouse could be in Spain or anywhere else in Europe. In fact it is on the outskirts of Grozny, capital of the Chechen Republic.

For the city that the Russian military bombed into ruins only a decade ago in its desperate attempt to squash the North Caucasus insurgency, the Rodina farm, Russia's most modern greenhouse facility, is a sign of hope.

Grozny has been rebuilt with massive cash injections from Russia's federal government since the worst of the fighting ended in Russia's prolonged war in Chechnya.

Under a deal with Ramzan Kadyrov, a former warlord whose father switched sides to Moscow during the conflict, Russia's president Vladimir Putin granted Mr Kadyrov free rein in the republic and federal money in exchange for loyalty and stability.

"What has been achieved is, of course, most astonishing. Nobody would have believed any of this was possible," says Musa Basnukaev, an economist at Chechen State University, pointing out of the window at Grozny-City Towers, a skyscraper complex that includes a luxury hotel.

But Moscow's complete reliance on a band of former fighters in administering the region has come at a price.

Unemployment is high: almost one-fifth of Chechnya's 1.3m population are without a job, according to official statistics, and the region is struggling to change that. The economy is also heavily reliant on the state, which is itself controlled by many of those same fighters and their associates.

"The real [private] sector is almost nonexistent in our economy," says Mr Basnukaev. "What you call a market economy does not exist either - we have more of a command economy."

Over the past decade, that worked reasonably well. Under a federal programme started in 2002, the bulk of Chechnya's regional budget came via federal transfers. Almost all of it went into the reconstruction of homes, schools, hospitals, roads and other infrastructure and support for the unemployed.

But the end of the programme in 2012 led to a sudden drop in fixed asset investment in Chechnya. Although massive federal budget transfers have continued, Moscow has signalled to Mr Kadyrov that he will be expected to deliver economic development with less cash from the centre.

This is all the more true now as Russia's recession means federal money is needed elsewhere.

Muslim Khuchiev, Chechnya's economy minister, insists Grozny is doing well. "The macroeconomic indicators show that [unlike] Russia as a whole, our economy is growing," he says.

He believes Chechnya is creating a positive climate for business, and says private investment accounted for 79 per cent of all fixed asset investment in the republic in 2014.

However, independent observers are sceptical. "I am not convinced this is so," says Mr Basnukaev with a polite smile.

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Abubakar Arsamakov, the Chechen tycoon, started investing there in 2009, transforming what was scarred land peppered with unexploded landmines into apple orchards and strawberry fields, as well as constructing the giant greenhouse. "We have invested Rbs2bn ($39m) so far, and we will eventually employ about 200 people here," says Apti Akhmetov, Rodina's financial director.

But elsewhere in the republic, jobs are hard to come by.

One Grozny resident who asked not to be named for fear of retribution, said the authorities began denying unemployment benefits late last year. "Instead, I was told to register a private business," he says.

The young man and his sister now sell bread and cakes in Grozny's Berkat market, but the venture is lossmaking. Although he received a one-off payment of Rbs58,000, he had to put almost half into a pension fund. "How is that enough to start a business?" he asks.

Most investment in the city has been pumped into property and retail developments such as Grozny-City Towers. Some of it came from a United Arab Emirates investor actively courted by the Chechen leader, while other investment came from two funds established in the name of Mr Kadyrov and his father.

According to dozens of people interviewed in Grozny, the funds receive money in the form of deductions from the salaries of civil servants through quotas assigned to government departments. Social security payments such as maternity bonuses are said to be taxed in the same way. There is "an entire parallel tax system", according to Varvava Pakhomenko, an analyst at the International Crisis Group.

With Mr Kadyrov now on western sanctions lists due to his close ties with Moscow, attracting western investment will be difficult. He declined to be interviewed for this article. Sanctions are also hitting the Chechen tycoons in their pockets. Officials in Grozny say Mr Arsamakov is unlikely to invest any more money besides his Rodina project for now.

Ruslan Baisarov, another Chechen tycoon, has pledged to build a ski resort complex in the mountains south of Grozny, but local observers say work on the road leading to the capital has stopped. "Baisarov needs loans from VTB," says Mr Basnukaev, referring to the state-run bank. "But VTB is under sanctions, so the prospects are limited."

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