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Turkmenistan
Country Overview |
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Capital: Ashgabat
Area: 488,100 square kilometers
Population: 5 million
Currency: Manat
Exchange Rates: $1 = 5,200 (official, 12/30/98); $1 = 5,350
(commercial, 12/30/98); $1 = 17,500 (parallel, 4/1/99)
GNP: $2.9 billion (1997)
GDP Growth: -7.74% (1996); -25.9% (1997); -1.0% (est. 1998)
GNP per capita: $630 (1997)
Inflation: 25% (1998)
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EXECUTIVE
SUMMARY
The Republic of Turkmenistan lies
in the southernmost part of the former Soviet Union, situated on the eastern edge of the
Caspian. Desert covers 90% of its land area. Turkmenistan became independent in 1991 and
has since pursued a policy of neutrality in foreign affairs. It is a single-party state
led since independence by President Niyazov and his closest advisors.
The cornerstone of the Turkmeni economy is energy. With 2.9 trillion
cubic meters (tcm) in proven and probable natural gas reserves, and additional indicative
reserves estimated at 14 tcm, Turkmenistan is the fourth largest gas producer in the
world. The country also has an estimated 1.1 billion tons of oil reserves. The nation’s
principal exports in 1997 were natural gas (36% of total exports), crude and refined oil
(28%), and cotton fiber (12%). The principal export destinations were Russia (44% of
total), Iran (16%), Ukraine (15%), and Turkey (13%).
Future
Opportunities |
- Agriculture
- Heavy Industries
- Ports
- Roads
- Steel Pipes
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Recent economic
performance in Turkmenistan has been poor, reflecting both external shocks and poor
economic management. Declines in exports of natural gas (by 73%) and cotton fiber (by 52%)
in 1997 caused an explosion of the trade deficit, which is estimated to have risen to 15%
of GDP. The underlying fiscal position has weakened over the years, and inflation,
although brought down to 20% by 1997, is estimated to have increased to an average of 25%
in 1998. The official and black market exchange rates continued to diverge.
Nonetheless, with improved macroeconomic policy and acceleration of
systemic economic reform, given its abundant natural resources, Turkmenistan’s prospects
are strong. Good opportunities present themselves currently relating to: the development
of pipeline routes to transport Turkmen gas to western markets; upgrading the existing
refining and power generation facilities; and exploitation of the nation’s natural
advantages in industrial and chemical production.
ECONOMIC OUTLOOK
Turkmenistan was initially less
negatively affected by the breakup of the former Soviet Union than other republics because
of its reliance on oil and gas exports. But the inability of several former Soviet
republics to pay for their gas imports eventually led to serious external arrears and
declining gas output. In 1994, export volumes declined sharply due to interruptions in
deliveries of gas to Ukraine and Georgia, and with a worsening of the payments situation,
gas exports were suspended completely in March of 1997. Although agreement was reached
with Ukraine to export 20 bcm of gas in 1999, 60% of the payment will be made in equipment
and other goods. Difficulties with this arrangement have already begun to appear.
Turkmenistan authorities are giving high priority to relieving their
dependence on other former Soviet republics as export destinations for their natural gas.
A new spur pipeline to Iran was opened in December of 1997 with annual capacity to
transport 8 – 10 billion cubic meters (bcm) of gas annually. Turkmenistan hopes to
export 4 bcm of gas to Iran through this pipeline in 1999. In addition, in February of
1999 President Niyazov announced an ambitious project to build a Trans-Caspian Pipeline
(TCP) during the next three years that will have the capacity to export from 16 bcm to 30
bcm of gas annually to Turkey, and ultimately, to Europe.
Recent economic developments have highlighted the economy’s
vulnerability to external shocks. Merchandise exports fell from $1.7 billion in 1996, to
$523 million in 1998, because of the dual effect of deep declines in exports of natural
gas and cotton fiber. Turkmenistan’s export destinations swung markedly away from Russia
and Ukraine in 1998 because of the payment difficulties those countries were experiencing.
Imports also contracted markedly, although not enough to prevent a burgeoning trade
deficit. This, combined with a deterioration in the services account associated with
payments to foreign companies for construction services, caused an implosion of the
current account in the balance-of-payments, from a small surplus in 1996 to a $600 million
deficit in 1997. The financial crisis in Russia in 1998 contributed to further
deterioration in the current account deficit, to an estimated $650 million.
Foreign debt rose from zero in 1992 to the equivalent of 74% of GDP in
1997. By 1998 a severe liquidity crisis had emerged. The reaction of Government
authorities has been to restrict currency convertibility and try to maintain an
artificially strong official foreign exchange rate. The black market rate in the first
quarter of 1999 was three times the official rate.
Although no figures have yet been published on budget performance in
1998, it is likely that the weakness in the economy has increased tax arrears.
State-sector wages were doubled in 1998, while pensions were increased by between 50% and
100%. The cumulative effect has been that inflation, although reduced to 20% by 1997, is
likely to have
increased to an average of 25% in 1998, and may be accelerating. The monthly inflation
rate was 4.5% in October of 1998 (implying an annualized rate of 172%).
Given its strong natural resource base, Turkmenistan has excellent
long-term development potential. However, economic reform has lagged, and recent
developments have highlighted the nation’s vulnerability to external shocks. Although
authorities are attempting to diversify the export base by finding new markets for natural
gas, the nation’s economic vulnerability should also be reduced by accelerating the pace
of economic reform. The immediate challenges are to adopt an effective macroeconomic
stabilization program, consolidate the budget and give the central bank the independence
it needs to conduct a restrained monetary policy. Over the medium term, Turkmenistan will
also need to initiate comprehensive structural reform, fully liberalize prices, privatize
non-strategic medium- and large-scale enterprises, and encourage economic competition.
BUSINESS AND
INVESTMENT CLIMATE
Turkmenistan officially welcomes
foreign investment in all areas. Since the March 1997 passage of a new law on hydrocarbon
resources, the government has been actively courting large energy multinationals to
participate in the development of Turkmenistan's oil and gas reserves through production
sharing agreements and as minority joint venture partners. Yet it is still the case that,
because the economy is still largely state-owned and controlled, most economic decisions
continue to be made at the highest levels of government. The regulatory and legal
foundations of a market economy are rudimentary, and discretionary official authority
tends to prevail over the rule-of-law. These issues are gradually being resolved as the
Government and the population become more familiar with the international norms of the
world marketplace.
Turkmenistan is now announcing international tenders for competitive
bids on government projects. Previously, trade contracts were granted for purely political
reasons, with little regard for feasibility, economic viability, or the ability of the
winning company to do the job. Despite the new policy, competition remains an alien
concept to many government officials. Large-scale contracts are still signed at the
presidential level and usually require a company's CEO to travel to Ashgabat to close the
deal. Almost all companies investing in Turkmenistan form a joint venture with a local
company. Practically all joint ventures include a government partner. Arbitrary
re-negotiation of signed contracts remains a problem.
A new law concerning hydrocarbon resources, adopted in March of 1997,
is intended to create better transparency in the regulation of foreign investors in the
oil and gas sector. This law provides a detailed legal framework for conducting oil and
gas business in Turkmenistan. Three types of licenses can be issued on the basis of tender
results or direct negotiations: the exploration license, the extraction license and the
single exploration and extraction license. Two types of agreements can be signed for oil
production: the production sharing agreement and the joint venture agreement. A few
foreign companies have already begun operations by signing production sharing agreements
in the oil and gas sector before the new hydrocarbon resources law was adopted, and the government expects
more foreign oil and gas companies to be attracted by this improved regulatory framework
in the near future.
The State Agency for Foreign Investment monitors all foreign
investment. It reviews and clears all investment proposals and foreign currency credits
proposed by Government ministries. The Investment Agency tends to give preference to the
Government’s "priority" projects. The Investment Agency operates in
cooperation with the Turkmen State Bank for Foreign Economic Affairs, the key institution
for foreign businessmen and investors.
On October 25, 1993 a bilateral trade agreement, which provides
reciprocal most favored nation (MFN) status, went into effect between Turkmenistan and the
United States. Discussions concerning a U.S.-Turkmenistan bilateral investment treaty are
ongoing. The United States Government has also proposed a bilateral tax treaty, which
would provide U.S. businesses relief from double taxation of income. In September 1993,
President Niyazov signed a law on the protection of intellectual property rights, and in
December 1998 the Mejlis (Parliament) adopted a new Civil Code that addressed copyright
regulations, although enforcement of these decrees remains untested. The U.S.-Turkmenistan
trade agreement also contains commitments on protection of intellectual property.
Foreign companies can benefit from a number of exemptions and tax
holidays established for specific circumstances. Foreign companies, their branches or
representative offices, and foreign individuals registered and engaged in production
and/or commercial activity in Turkmenistan, are subject to a value added tax (20 percent),
a profit tax (25 percent), a property tax (1 percent) as well as excise taxes for certain
imported goods and products. A VAT is levied on turnover including export operations,
sales of all kinds of goods and services produced by the enterprise and/or acquired
elsewhere, internal sale within the enterprise, barter, and free-of-charge transfer of
goods and/or sales of collateral to other legal entities. There are a number of activities
defined by the Law on the VAT under which VAT is not charged. The Law on Profit Tax offers
some tax relief to foreign companies provided that at least 30 percent of the authorized
capital of an enterprise is in hard currency. This enterprise can then enjoy a profit tax
exemption for the period of repayment of initial capital investments. Also, foreign
companies functioning in free economic zones are exempt from profit tax for three years,
and agriculture investment projects are also provided a profit tax holiday. Investors in
the oil and gas sector must pay a 25 percent profit tax plus a negotiable royalty sum.
POLITICAL CLIMATE
Turkmenistan is a single party
state led by an authoritarian President and his closest advisors. There is no Vice
President or Prime Minister. According to the Constitution, the Chairman of the Mejlis
assumes the presidency upon the death or permanent incapacitation of the President and
then calls elections. The Mejlis is the supreme legislative body and is elected for a five
year term. Its decisions generally reflect the views of the President.
The National Democratic Party, the successor to the Communist Party, is
the country's only legal political party. Mr. Saparmurad Niyazov, appointed Communist
Party chief in 1985,
was appointed President of the Turkmen Republic within the old Soviet Union in October
1990 when the post was created during Gorbachev’s perestroika. Mr. Niyazov was elected President of the new Republic of
Turkmenistan in a direct election on June 21, 1992 in which, unchallenged, he won 99.5
percent of the vote. In a January 1994 referendum, 99.9 percent of the electorate voted to
extend Mr. Niyazov's term in office to the year 2002. The Government also conducted
single- candidate elections for the 50-member, one-house Mejlis in December of 1994. The
next parliamentary election is scheduled for 1999.
Turkmenistan is politically stable and has had no incidents of
politically-motivated damage to projects or installations; there is no organized
opposition. There are no nascent insurrections and Turkmenistan maintains friendly
relations with all of its neighbors (including Iran and all parties in Afghanistan).
SOURCES OF
FINANCING
The banking system in
Turkmenistan consists of the State Central Bank of Turkmenistan, three state banks and 17
commercial banks. Most of the commercial banks are small- and medium-sized. There are four
banks with foreign capital including the Turkish-Turkmen bank "T.C. Ziraat
Bankasi," the Russian-Turkmen bank "Rossiyskiy Credit," the
Pakistani-Turkmen bank and an Iranian commercial bank "Saderat." All banks,
including foreign banks, must be issued a license by the Central Bank of Turkmenistan, in
order to operate. Five Turkmen commercial banks, a Turkish-Turkmen joint commercial bank,
and Sberbank have licenses from the Central Bank enabling them to carry out foreign
exchange operations. The State Bank for Foreign Economic Affairs (Vnesheconombank) is the
key institution for foreign businessmen and investors, as well as local exporters. It
dominates import/export operations and is a member of the International Payment Cards
Association. The Vnesheconombank has been authorized to sign an agreement with
"Standard and Poors" agency concerning awarding Turkmenistan with the
international sovereign credit rate.
Turkmenistan signed an OPIC agreement in 1993 that provides for loan
guarantees, direct loans and investment insurance to U.S. companies. To date, there has
been little U.S. investment utilizing these facilities in Turkmenistan. The U.S.
Export-Import Bank provides short- and medium-term coverage for sovereign risk
transactions. Ex-Im Bank requires an irrevocable letter of credit (ILC) or guarantee from
the State Bank for Foreign Economic Affairs, Vnesheconombank, for short-term transactions.
Many American companies in Turkmenistan have used Ex-Im Bank funds or guarantees to
finance their projects.
Domestic enterprises are supposed to have access to credits from local
commercial banks, but to date these banks have made few loans. The Central Asian-American
Enterprise Fund and the European Bank for Reconstruction and Development have both opened
credit lines for Turkmen private enterprises.
Turkmenistan is a member of the IMF and the fund has a permanent
advisor stationed in Ashgabat. Turkmenistan is also a member of the World Bank and the
EBRD, both of which have development projects in the country.
SECTORAL OVERVIEW
OIL & GAS
Turkmenistan has the world's
fourth largest known natural gas reserves, after Russia, the U.S. and Iran, with estimated
reserves totaling 13-21 trillion cubic meters of gas. In 1992, Turkmenistan produced 84
billion cubic meters of gas, more than twice as much as was produced in 1996. Faced with
limited export pipeline options and non-paying customers, gas production had fallen to 35
billion cubic meters by 1996. The nation is actively engaged in the development of
alternative pipeline options for the export of its natural gas.
Turkmenistan also has significant oil resources that amount to 6 to 8
billion tons. There are two oil refineries in the country: the Turkmenbashi Refinery and
the Seidi Refinery. The Turkmenbashi Refinery, where most Turkmen oil is being refined to
meet domestic needs in petroleum products, is currently being reconstructed. The Seidi
Refinery, which has its only oil supply pipeline coming from Siberia, is currently running
at less than 50 percent of its projected capacity using local crude oil shipped by rail.
· Trans-Caspian Pipeline (TCP). The $3.4 billion Trans-Caspian Pipeline (TCP) will
transport natural gas 1,800 kms from the field fence in Mary, eastern Turkmenistan to
Erzurum , Turkey, via Azerbaijan and Georgia. Depending on negotiation of transit rights
and financing, construction could start as early as 2001 and be completed in 2004 or 2005.
The exact configuration of the design is still to be determined. Most likely it will
evolve in three stages, beginning with Stage I, development of the capacity to export up
to16 bcm to Turkey. Subsequent stages could augment the capacity to 30 bcm, with the
residual to go to European markets.
· Turkmenbashi Steel pipe Production. The GOT proposes to enter into a Build-Operate- Transfer
(BOT) arrangement with a foreign sponsor to plan, construct, supply and assemble
equipment, initiate operations, and collect repayment of its investment from the receipts
of managing and operating a steel pipe production facility in Turkmenbashi, Turkmenistan.
The estimated total cost of the investment is $30 million.
· Seidi Oil Refinery Rehabilitation. Under a 1997 Presidential decree, the GOT would like to
attract foreign sponsors to rehabilitate the Seidi oil refinery at an estimated cost of
$104 million, while keeping interruptions to current production to a minimum.
AGRICULTURE
Agriculture, especially cotton
production, is the country's second largest source of foreign exchange earnings after the
oil and gas sector. Turkmenistan used to produce as much as 1.2 million tons of cotton per
year, although due to unfavorable weather conditions, outdated equipment, lack of manpower, and key
inputs, the 1996 cotton harvest dropped to 436 thousand tons. In 1998, Turkmenistan
produced 707 tons of raw cotton. As a priority area of development in agriculture, the
government intends to become self-sufficient in wheat production. Although Turkmenistan
produces seasonal fruits, vegetables, rice, wheat and maize, it imports most of its
foodstuffs. In a998, farmers met the state order for wheat production of 1.2 million tons
for the first time. The food processing industry is extremely underdeveloped. A shortage
of modern storage facilities aggravates existing procurement system problems in
agriculture.
· Crop Protection and Veterinary Services. This is the first World Bank agricultural project in
Turkmenistan. The $30 million total cost is to be supported by a $15 million World Bank
loan. The project aims to support agricultural reforms by maintaining key public services,
reducing losses due to pests and diseases, and supporting agricultural development.
POWER
Turkmenistan is self-sufficient
in electricity. Approximately 15-17 percent of electrical power produced in Turkmenistan
is exported to its neighbors, often in barter arrangements. Turkmenistan has to import its
electrical power equipment. The Ministry of Energy and Industry is interested in
increasing the capacity and improving the efficiency of electricity production. There are
significant opportunities to upgrade Turkmenistan’s electrical generation plant through
investment in new gas steam turbines, which would greatly improve efficiency. GE Power
Group completed the first $42 million stage of the upgrade to the Bezmein power station in
November of 1998. Over the medium term Turkmenistan could increase its export earnings
from electricity as its neighbors in the region become increasingly capable of paying for
it in hard currency rather than barter.
· Thermal Power Plants. This $700 million project deals with rehabilitation and
construction of three major power plants in Turkmenistan. Project 1 calls for the construction of a combined cycle gas-fired plant in Tashauz. Project 2 deals with the reconstruction of the Mary Power Generation Plant. Project 3 is the construction of a new electrical power generation plant in Nebitdag.
TRANSPORTATION
During the next few years there
will be a significant need to improve the public infrastructure and transportation systems
in Turkmenistan. Development of the Trans-Caspian Pipeline, in particular, will require
improved port facilities and surface transport infrastructure across the country to the
gas field near Mary.
· Turkmenbashi Port. EBRD is providing a loan of $30 million toward a total
project cost of $42 million for the reconstruction, rehabilitation and supply of equipment
to Turkmenbashi Port. The balance of the cost will be borne by the Turkmen Sea Administration (with a sovereign loan
guarantee).
· Ashgabat-Mary Road Rehabilitation. The GOT has obtained a $50 million loan from the EBRD to
support the rehabilitation of sections 1 and 2 and $25 million from the Kuwait Fund for
Arabic Development (KFAD) and the Islamic Development Bank (IsDB) to support the
rehabilitation of section 3 of the main road between Ashkabat and Mary, Turkmenistan.
INDUSTRIAL
PRODUCTION
Turkmenistan’s natural gas
resources give it a competitive advantage in production of energy-intensive products such
as aluminum. Turkmenistan also possesses significant mineral resources, most of which have
not been widely developed. There are 10 chemical enterprises involved in the production of
mineral fertilizers, iodine and bromine, carbon, sulfites, gypsum, and other minerals.
Most of the facilities are in need of rehabilitation. The government considers as priority
projects the upgrade and increase of iodine production, the expansion of carbomide and
defoliant production, the construction of a gas chemical complex to produce polyethylene,
and some other projects.
· Mary Aluminum Plant. This $300-700 million project is for construction of an
aluminum plant in Mary, Turkmenistan, to produce 150,000 tons of aluminum per year. TDA is
financing a feasibility study being conducted by Bechtel.
· Charjou Carbomide Production Plant. The Ministry is looking for an investor interested in
constructing a $300 million plant to produce ammonia and carbomide in Charjou,
Turkmenistan. The Ministry plans to conduct tendering for a Build-Operate-Transfer
contract to plan, construct, and start-up the plant and then operate it under management
contract. This project is considered to be of high priority by the GOT |
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