Investment climate - FiFo Ost

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

Turkmenistan Investment Profile 

Contents 

page 

Foreword 1 

Introduction 2 

Map of Turkmenistan 3 

Economic summary 4 

Selected economic indicators 5 

Investment climate 6 

Foreign direct investment 6 

Investment policy and incentives 6 

Privatisation and restructuring 8 

Markets and trade 9 

Taxation and social expenditure 9 

Major sectors of the economy 10 

Oil and gas 10 

Case study: Dragon Oil 11 

Agriculture and agribusiness 13 

Energy 14 

Telecommunications 14 

Transport 14 

Financial sector 17 

Banking sector 17 

Non-bank financial institutions 18 

EBRD activities in Turkmenistan 19 

This document was drafted by the EBRD Country Promotion Programme 

team assisted by Bank staff and the Turkmen authorities. It was 

prepared with information available up to March 2001, derived principally 

from the EBRD, the IMF, the World Bank, Reuters, BISNIS, and Turkmen 

government agencies. Every effort has been made to ensure accuracy. 

However, no responsibility is accepted for the contents of this document. 

ISSN 1470-3963

Foreword 

Thank you for your interest in this publication, prepared in 

cooperation with the EBRD. It aims to provide information for 

potential investors who are interested in supporting enterprises 

in the non-state sector of the economy and private business 

about opportunities for long-term investments in certain sectors 

of Turkmenistan's economy. 

The future of the Turkmen economy is linked with the 

continuation of market reforms in the country, its greater 

openness and active entry into the international community. 

Under the leadership of the President of Turkmenistan a 

national programme has been prepared, the Strategy for Social- 

Economic Reforms for the period up to 2010. This is a global 

plan for the transformation of Turkmenistan into a developed 

state, for which all the essential conditions exist. It involves a 

qualitative reform of all aspects of life: a thorough renewal of 

technological provisions and of economic relations, changes 

in the composition and nature of labour and of material and 

spiritual living conditions. 

The main element of the national economic model consists 

in creating a developed, socially oriented market economy - 

with strong state macroeconomic regulation. The ultimate 

aim is to attain the level of developed countries with a rich 

resource provision. 

The economic reform currently being conducted in Turkmenistan 

is aimed at strengthening economic independence, and at 

achieving stable development in all sectors of the economy 

and especially the non-state sector of the economy. 

Turkmenistan is actively implementing the processes of 

privatisation and demonopolisation of enterprises. At the 

beginning of 2001, about 2,000 state-owned objects were 

transferred to the non-state sector, and many enterprises were 

transformed into joint stock companies. Turkmenistan is on the 

way towards major economic reforms, and there is still much to 

be done to bring them into being. The effectiveness of economic 

reforms directly depends on the volume of investments made 

by international financial institutions, notably the EBRD. Credits 

extended by the EBRD and the TACIS programme are being fully 

and actively used towards the development of small and 

medium-sized businesses in Turkmenistan. 

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

In addition, we wish to note that this profile on the investment 

climate of Turkmenistan does not mention all the successes 

that have been achieved, especially in the agricultural, textile 

and chemical sectors. We would wish the world community to 

have a clear impression of our country's economy. 

Finally we would like to note that this profile will give potential 

investors the chance to take a new look at Turkmenistan's 

economic potential and to evaluate the opportunities it offers 

in terms of investment. 

Seyitbay Kandymov 

Chairman of the Central Bank of Turkmenistan 

EBRD Governor for Turkmenistan 

Turkmenistan Investment Profile 1

Turkmenistan has taken an individual path towards transition, and favours a gradual and cautious approach. It places 

emphasis on social stability as a necessary condition for economic growth, and therefore prefers not to apply dramatic reform 

measures. The government’s 10-year development plan issued in 2000 emphasises state-led investment to build Turkmenistan 

into a modern economy, fuelled by energy production and cotton processing. Renewed gas exports have supported a vigorous 

output recovery since 1999 but doubts over the sustainability of Turkmenistan’s economic course remain. 

Turkmenistan achieved record double digit growth rates in 1999 

and 2000, on the back of resumed gas exports to Russia and 

Ukraine, as well as a series of good cotton and wheat harvests. 

The country reacted to the Russian crisis by reintroducing 

exchange controls, which remain in place and are a cause of 

significant economic distortions and imbalances. 

Transition years 

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

The years following independence in 1991 were characterised 

by a sharp fall in GDP. Between 1992 and 1996 real GDP fell 

by a cumulative 50 per cent. Turkmenistan was unable to 

benefit from rising energy prices due to the inability of several 

CIS countries to pay for their gas imports and, as a result, 

payment arrears mounted and gas output declined. The 

suspension of gas exports to Ukraine in 1997 due to 

payment problems contributed to a further 11 per cent 

decline in GDP that year. 

However, since 1997, there has been a steady economic 

improvement. For the first time since independence, real GDP 

has increased for three consecutive years. These increases 

were due mainly to improved cotton and wheat harvests and 

to rising gas and oil production. Continuing growth in 2000 

resulted in part from increased gas exports to Russia. In late 

1999, Turkmenistan signed a deal with Russia for the sale of 

20 billion cubic metres (bcm) of gas to Moscow, which was 

later increased to 30 bcm. Turkmenistan also has an 

agreement to supply 30 bcm of gas to Ukraine this year, 

although the challenge to diversify gas transit and access 

more creditworthy customers remains. 

After the break-up of the Soviet Union, prices rose sharply in 

Turkmenistan. Since 1995, Turkmenistan has progressively 

reduced inflation rates to an official 8 per cent in 2000. 

This is partly the result of using foreign exchange intervention 

to sterilise the expansionary impact of state directed credits. 

However, prices controls remain on a number of key 

commodities, which combined with other administrative 

restrictions help to keep official inflation in check, despite 

much larger unofficial estimates. 

2 Turkmenistan Investment Profile 

Introduction 

Gradual pace of reform 

Compared to most of the CIS countries, economic reforms 

have been implemented very slowly in Turkmenistan. The state 

remains the dominant player in the economy. In addition to 

the fact that some price controls are still in place, foreign 

exchange is rationed and the parallel exchange rate is three 

times the official rate. 

Privatisation of small enterprises has been implemented 

but there is still scope for selling off medium and large 

scale companies. In the short term, the foreign exchange 

restrictions are the main weakness in Turkmenistan’s 

investment climate. Increased gas export revenues should 

provide the room for unification. 

Given its resource base, Turkmenistan has good long-term 

potential for development. Realisation of this potential would 

be boosted by further foreign investments. 

Political regime and international relations 

The President is the main decision-maker for the country’s 

economic, social and political choices. Political life is 

dominated by a single party, the Democratic Party of 

Turkmenistan. In the international arena, Turkmenistan pursues 

an active policy of neutrality, which means no alignment with 

any political or military alliances or blocs and a commitment 

to remain neutral in any conflict between states. The policy 

of neutrality has been the backbone of Turkmen foreign policy 

and was devised by President Niyazov. 

Together with Iran, Turkmenistan is the only other country that 

first advocated a joint use of the Caspian Sea resources and 

opposed the delimitation of the sea along sectoral lines, 

which would give each littoral country its own sea sector 

together with the right to explore the seabed resources and 

minerals. However, Turkmenistan’s position is shifting. 

Turkmenistan has particular differences with Azerbaijan 

over the division of the Caspian Sea, claiming that a part 

of the sea, known in Turkmenistan as Serdar, belongs to 

Turkmenistan and that Azerbaijan is conducting exploration

C A S P I A N S E A 

Karabogazkol 

Gulf 

Turkmenbashi 

Etrek 

Balkanabat 

to Tehran 

Kazakhstan 

Bereket 

Serdar 

This map has been prepared exclusively for the convenience of 

readers. The denominations used and the boundaries shown on this 

map do not imply any judgement on the legal status of any territory 

or any endorsement of such boundaries. 

4844 IP01 Turkmenistan map 

LAKE 

SARYKAMYSH 

Islamic Republic of Iran 

Kunja- 

Urgench 

KARAKUM DESERT 

✈ ASHGABAT 

works there illegally. However, Russia’s changing attitude 

towards the division of the Caspian Sea resources to accept 

delimitation rather than the principle of common use is likely 

to affect an overall outcome. A recent initiative by President 

Niyazov to convene a presidential summit of the five littoral 

states was endorsed by Azerbaijan and Russia. The summit 

will take place in spring 2001. 

In February 2001, Turkmenistan agreed to export 10 bcm of 

gas to Russia this year, at a price of US$ 40 per 1,000 cubic 

metres, in addition to 30 bcm of gas sales to Ukraine agreed 

in October 2000. To reduce the vulnerability of its economy to 

non-payment or transit disruptions, Turkmenistan is exploring 

options for alternative gas pipelines. One option would be to 

Dashoguz 

Darvaza 

Seytli 

Tedzhen 

MARY 

Serakhs 

Serkhetabat 

R . A m u D a r y a 

TURKMENABAT 

R . M u r g a b 

Uzbekistan 

Bukhara 

Beshkyzyl 

Atamurat 

Yelkui 

LAKE KARAKUM 

to Samarkand 

Afghanistan 

Introduction 

Scale 

km 

0 40 80 120 160 200 

Qarshi 

build a trans-Caspian pipeline under the Caspian Sea to Turkey, 

although disagreements over the terms have put this plan on 

hold. Another option consists of an already existing small 

pipeline to Iran, whose capacity could be increased once a 

pipeline between Iran and Turkey is completed so that Turkmen 

gas could be exported to the lucrative Turkish market. However, 

a recent gas find in Azerbaijan’s Shah Deniz exploration area in 

the Caspian Sea creates competition for Turkmen gas exports 

as Azerbaijan is also keen to export gas to Turkey. There are 

further options for exporting Turkmen gas through Afghanistan 

to Pakistan or through Central Asia to China although the 

political situation surrounding these plans is even more 

complicated. Turkmenistan will need a carefully crafted foreign 

economic policy to secure its future economic prospects. 


20 

15 

10 

5 

0 

-5 

-10 

-15 

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

-20 

’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

est proj. 

90 

80 

70 

60 

50 

40 

30 

20 

10 

800 

600 

400 

200 

GDP 

% change 

0 

’97 ’98 ’99 ’00 ’01 

est. proj. 

0 

-200 

-400 

-600 

-800 

Consumer prices 

Annual average, % change 

-1000 

’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

est. proj. 

250 

200 

150 

100 

50 

Current account 

US$ millions 

Total FDI 

US$ millions, cash receipts, net 

0 

’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

est. proj. 

Source: EBRD, February 2001 


Economic summary 

Turkmenistan recorded a GDP growth rate of 17.6 per cent in 2000, surpassing the high rate 

achieved in 1999. Strong gains in economic growth were a result of resumed gas exports 

after a few years of interruption of gas supplies to Ukraine and Russia. It is predicted that 

growth could be further accelerated if the country would give momentum to its economic 

reforms including the development of the private sector and the unification of the dual 

exchange rate. In the absence of alternative pipeline routes, the country remains highly 

dependent on the conclusion of gas export agreements with Russia and Ukraine. 

GDP growth 

According to EBRD, estimated GDP growth in 2000 was 17.6 per cent, following a rate of 16 per 

cent in 1999. An increase in industrial output and gas exports helped GDP to maintain this pace of 

growth. According to some independent projections, the growth rate for 2001 may fall to 7 per cent 

due to limited prospects for further rapid increases in gas production, as well as to Turkmenistan’s 

gradual approach to economic reform and commitment to social security and stability, which does 

not allow for higher growth rates. However, according to government sources, thanks to existing 

contracts to supply 50 billion cubic metres of gas to Russia, Ukraine and Iran, and to ongoing 

negotiations to increase the supply this year, a higher rate of growth is expected in 2001. 

Inflation 

The year-end annual increase in consumer prices in 2000 reached 8 per cent according to official 

data, down from 21.2 per cent in 1999. The doubling of wages in December 1999 and bonus 

payments made during April 2000 have negatively affected inflation. The moderate nature of the 

country’s monetary policy and the dual exchange rate system are likely to add to a significant 

increase in the end-year annual inflation rate in 2001. However, as the money supply doubled and 

the parallel market exchange rate fell by 40 per cent during the year, the inflation rate is believed 

to be higher. 

Current account 

According to EBRD estimates, the current account deficit declined to US$ 60 million in 2000, 

compared to US$ 527 million in 1999, and reserves increased to an estimated US$ 1.7 billion 

due to additional foreign loan disbursals under existing agreements. External balances improved 

substantially in 2000 because of a good cotton harvest in 1999 and increased gas exports. The 

current account deficit is projected to rise to about US$ 150 million again in 2001,as imports 

and foreign interest payments increase. According to government statistics, after four years 

in deficit the current account recorded a surplus of US$ 385.32 million in 2000, and is 

projected to record a surplus in 2001 as well. 

Foreign Direct Investment and privatisation 

According to EBRD preliminary estimates, net FDI was around US$ 100 million, compared to US$ 89 

million in 1999. The oil and gas sector received the biggest portion of FDI in 2000. Total net FDI is 

expected to increase to US$ 150 million in 2001, with further investments in oil and gas. 

Privatisation has been slow, with only around half of all eligible small scale firms privatised. In 

addition, the government considers a number of enterprises in the utilities and oil and gas sectors 

to be of strategic importance, which further limits the potential for a privatisation programme and

for inflows of foreign investment. Pending reorganisation of the privatisation unit in the 

Ministry of Finance, privatisation ground to a virtual halt in 2000, with only 11 units sold. 

Government balance 

EBRD figures estimate that the government balance was even in 2000 at 0 per cent of GDP, down 

from a surplus of 0.9 per cent of GDP in 1999. Government spending accounted for 26 per cent of 

GDP, up from 19.6 per cent in 1999. The balance is expected to deteriorate in 2001 to a projected 

-3 per cent of GDP. 

Exchange rate 

Turkmenistan’s currency, the manat (TMM), is not freely convertible. The official exchange rate is 

overvalued and the manat trades at a 400 per cent premium on the parallel market. The black 

market exchange rate fell in 2000 by 46 per cent of the end-1999 level. The annual average 

exchange rate in 2000, which refers to a weighted average between the official exchange rate 

(60 per cent weight) and the commercial rate (40 per cent weight), given as the buying rate offered 

at commercial banks, was TMM 10,333 to the US dollar, although the official rate was almost half 

this amount. With the exception of a brief period in 1998, when the official and parallel market 

rates were unified, Turkmenistan has operated with dual exchange rates since the introduction 

of the manat in 1993. 

Relations with the IMF 

The IMF has regularly advised the Turkmen government on macroeconomic policies. However, there 

is currently no financial arrangement in place between Turkmenistan and the IMF, and the Fund 

has scaled down its presence in Turkmenistan because of differences over economic policy 

management. The basic IMF recommendations have focused on currency convertibility, speedy 

privatisation, and establishing the necessary legal framework to support these policies. 

Selected economic indicators 

1 

0 

-1 

-2 

-3 

-4 

14000 

12000 

10000 

Economic summary 

General government 

balance 

% of GDP 

-5 

’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

est. proj. 

8000 

6000 

4000 

2000 

Exchange rate 

Annual average, manats per US$ 

0 

’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

est. proj. 


1993 1994 1995 1996 1997 1998 1999 2000 2001 

est. proj. 

GDP (% change in real terms) 

Consumer prices 

-10.0 -17.3 -7.2 -6.7 -11.3 5.0 16.0 17.0 3.0 

(annual average % change) 3,102 1,748 1,005 992 83.7 16.8 24.2 9.1 36.4 

Current account (in US$ millions) 776 84 24 2 -580 -935 -527 -60 -150 

General government balance (% of GDP) -4.1 -2.3 -2.6 0.3 0.0 -2.7 0.9 0.0 -3.0 

Trade balance (in US$ millions) 

Total FDI 

1,100 485 441 304 -231 -523 -166 550 500 

(in US$ millions, cash receipts, net) 79 103 233 108 108 62 89 100 150 

External debt stock (US$ millions) 

Exchange rate (annual average, 

na 418 550 668 1,356 1,750 2,050 2,400 2,400 

manats per US$)* na 42 240 3,546 4,627 5,500 9,159 10,333 13,782 

Gross reserves, excluding gold 

(end-year, US$ millions) 818 927 1,165 1,172 1,285 1,379 1,514 1,704 1,454 

* Turkmenistan has had dual exchange rates for most months after the introduction of the manat in November 1993. 

The series refers to a weighted average between the official exchange rate (60% weight) and the commercial rate (40% weight), 

given as the buying rate offered at commercial banks. 



Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

Turkmenistan’s investment climate has not had the benefit of extensive market-oriented reforms. Additionally, price and 

currency controls remain in place, and privatisation has made little progress. The country has entrepreneurial potential, 

but the necessary framework to support it has not yet emerged properly. 

Foreign direct investment 

Total FDI 

US$ millions, cash receipts, net 

Estimated total net FDI in 

250 

2000 amounted to US$ 100 

million, up from US$ 89 

200 

million in 1999. The biggest 150 

single sector that attracted 

most investment is oil and 

100 

gas. Foreign investment in oil 

50 

and gas exploration and 

0 

’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

production has picked up over 

the past decade, reaching a 


est. proj. 

cumulative total of US$ 500 million by 2000. As new PSA 

contracts are concluded this amount could increase in the 

future. After a failed tender process in 1998, Turkmenistan is 

now conducting direct negotiations for a total of 16 offshore 

blocks in its sector of the Caspian Sea. Among other sectors 

that have attracted foreign investment and could offer 

potential, given a more favourable business climate, are cotton 

and textiles. In 2000, privatisation progressed slowly. However, 

the country’s most attractive assets, such as energy utilities 

and the telecoms company, which could have the potential to 

bring in FDI, are not on offer. 

In the past year Turkmenistan focused on upgrading of the 

Turkmenbashi refinery and large construction projects requiring 

huge capital investment. Although most of these projects are 

related to public buildings, one example in infrastructure is the 

repair of the Karakum canal, which is used to irrigate a large 

area of agricultural land. Another project to construct a water 

reservoir in the Karakum desert was initiated in 2000. The 

project is planned to be finished by 2010 and will cost around 

US$ 5-6 billion. Given that most public utilities are essentially 

free of charge, large infrastructure investments will be mostly 

financed from foreign sovereign borrowing and energy-related 

budget surpluses. 

Investment policy and incentives 

The government recognises that foreign investment is crucial 

for the economy and is taking action to prepare the necessary 

legislative framework to attract it. Existing foreign investment 


Investment climate 

legislation includes provisions for the government’s role 

in attracting and coordinating foreign investment activity. 

The Law on Foreign Investment, amended in 1993, provides 

the legal framework for foreign investment, including protection. 

An investor must own an average of at least 20 per cent of the 

capital in a company throughout the calendar year to be 

protected by the Law on Foreign Investment. 

The Law guarantees that foreign investments are not subject 

to nationalisation or requisition, and that foreign properties 

may only be subject to confiscation through referral to a court 

in cases where the foreign investor has acted illegally. 

The Law on Ownership adopted in 1993 states that the right to 

ownership of all forms of property is recognised and protected 

by the state. The law defines three categories of private 

ownership: physical persons, legal persons and mixed private 

ownership based on incorporation of properties belonging to 

physical and legal persons. Foreign citizens have the right to 

own any property except for land. They may be allotted a plot 

of land for use but without the right of ownership. A Law on 

Distribution of Land for Private Ownership, passed at the end 

of 1996, allows foreign citizens to lease but not to own land. 

Turkmen citizens are eligible to own up to 50 hectares of land 

but they cannot sell, exchange or transfer it. 

In 1993, Turkmenistan also introduced a Law on Foreign 

Concessions. Under this law, foreign concessions are granted 

for onshore and offshore areas containing natural resources, 

and for investment in industrial enterprises that explore, 

develop, extract and use natural resources. Concessions 

lasting from five to 40 years are granted on a competitive 

basis. Since the passage of a new Law on Hydrocarbon 

Resources in March 1997, the government has granted 

concessions to several multinational energy companies to 

participate in the development of Turkmenistan’s oil and gas 

reserves through production sharing and joint venture 

agreements. The government has a preference for PSAs, 

although the new law also allows for joint ventures. 

For example, Dragon Oil, which inherited a joint venture, the 

Larmag-Cheleken JV, had to renegotiate its status into a PSA. 

The law also recognises international law as a means of 

dispute settlement.

Turkmenistan’s economy depends to a significant extent 

on the oil and gas sector. The authorities recognise the 

need to make contingency plans in case gas exports remain 

constrained by limited export outlets and pipelines. One pillar 

of this approach has been to attract foreign direct investment 

to the oil and gas sector. PSA legislation has been passed 

and the energy sector has been restructured following the 

formation of Turkmenneft and Turkmengas, respectively the 

state oil and gas companies. (See Major Sectors of the 

economy: Oil and gas below.) The new PSA legislation creates 

the basis for an internationally accepted and transparent legal 

structure, which improves prospects for foreign investment. 

It introduces international accounting standards into the 

energy sector. PSAs are also drawn up individually. 

The government has also identified some “priority areas” 

to attract foreign investment. Apart from oil and gas, 

telecommunications, transportation, industry, irrigation, 

agricultural investments and textiles are other priority areas. 

The government grants investors in these sectors extra 

advantages such as credits guaranteed by Vnesheconombank, 

the state bank for foreign economic relations. 

The government has also simplified tax legislation to alleviate 

the burden on small enterprises for all kind of investments. 

Investors who hold more than 30 per cent of hard currency 

shares in an enterprise’s capital fund are exempt from 

dividend tax. Enterprises are not required to pay the profit tax 

until the investors have received a full return on their original 

investment. Those who reinvest their profits are exempted 

from tax payments on the reinvestment capital. Customs 

duties are not charged on foreign investors’ imported property 

if it is designed for production purposes or considered to be 

part of an enterprise’s capital fund. 

The Law on Foreign Investment guarantees the protection of 

intellectual property. Turkmenistan has also signed the World 

Intellectual Property Organisation’s (WIPO) Paris Convention, 

and is a member of Eurasian Patent Organisation that was 

created as part of the WIPO for the CIS countries. The 1993 

Patent Law regulates trademarks in the industrial sector. The 

Patent Agency provides state policy for protection of industrial 

property rights. Furthermore, a company holding a patent in 

Turkmenistan is given favourable tax status provided that the 

innovation, once licensed, is used in the company’s own 

production. Effective March 1999, a new Copyright Law was 

enacted as part of Turkmenistan’s Civil Code. 

Challenges for the investment climate 


Attracting foreign investors to non-oil and gas sectors will 

depend on improvements in the investment climate, which 

requires adjustments to macroeconomic policy. The fact 

that the economy is tightly controlled and that most foreign 

investors have to rely on good relations with top officials to 

ensure that their projects receive appropriate government 

attention impedes possible investments. 

Other deterrents cited by foreign investors are: 

• the need for approval of foreign investments by the State 

Agency for Foreign Investment (SAFI); 

• a lack of technical and financial experience in managing 

international tenders; 

• limited action to privatise medium and large enterprises; 

• no foundations for a competitive environment; 

• tight restrictions on access to and detention of hard 

currencies; 

• restrictions on foreign ownership of Turkmen joint stock 

companies; and 

• excessive involvement of administrative bodies in 

commercial transactions. 

New laws and amendments to existing ones are required, as the 

current legal regime governing foreign investment is inconsistent, 

ambiguous and inadequate. The definition of foreign investment 

does not include other key foreign investors in the Turkmen 

economy such as lenders, lessors, suppliers, and joint ventures 

with less than 20 per cent foreign participation. Therefore, 

guarantees and benefits extended under existing foreign 

investment legislation cover only a limited set of foreign 

investors. The implementation and judicial reliability of certain 

laws concerning foreign investment remain to be tested. The 

legislation provides no direction to the proper enforcement 

authority. Decisions made by international arbitration panels 

are not generally binding or enforceable in Turkmenistan. 


Introduction 


Free Economic Zones 

There are 10 free economic zones. However, only one of them, 

located at Ashgabat International airport, is operational and actively 

conducting business. This modern airport provides the opportunity 

to develop growing transit business and services. 

The other free economic zones are located at Mary-Bayramali, 

Okarem-Cheleken, Turkmenabat-Seidi, Bakharden-Serdar, Dashoguz 

Airport, Ashgabat-Anau, Ashgabat-Bezmein, Serakhs, and Guneshli 

Turkmenistan near Anau. 

In theory, the Law on Economic Zones for Free Entrepreneurship 

determines the legal regime for conducting business in these 

zones. It guarantees the rights of both foreign and domestic 

investors, forbids nationalisation of enterprises and 

discrimination against foreign investors, and provides 

guarantees to foreign investors for repatriating after-tax profits 

and exporting production. Enterprises are permitted to set prices 

freely for all goods and services within the free economic zones. 

All enterprises are exempt from profit taxes for the first three years 

of profitable operation. Enterprises with foreign investment greater 

than 30 per cent of initial capital will be charged a 50 per cent 

profit tax rate during the next 10 years. Profits reinvested in 

export-oriented and technically advanced enterprises are 

exempt from taxation. 

The law also ensures a favourable customs regime within the free 

economic zones. Goods and properties imported into or exported 

from the zones are exempted from customs duties except for goods 

of foreign origin exported from these zones. Although customs 

duties have not been introduced for legal entities, excise taxes 

for certain goods are charged. 

Most of the free economic zones are not fully operational. The 

lack of government financial support, inadequate infrastructure 

services and the obstacles hindering the development of a private 

sector are the main reasons for the weak performance of the free 

economic zones. 

State Agency for Foreign Investment (SAFI) 

SAFI is the main government agency responsible for foreign 

investment procedures. Among its tasks are to: 

• scrutinise all foreign investment proposals; 

• assess the feasibility of the project and its likely economic 

impact before a company can register and begin operations; 

• approve the project; 


• remove the companies that are not in compliance with the 

Turkmen laws from the Single State Register of Enterprise and 

Organisation (SSREO); 

• coordinate the government’s foreign borrowing programme; 

• assess foreign currency credits which the relevant government 

ministries and agencies may have available; and 

• approve the allocation of credits before making any commitments 

in order to make sure it goes to so-called “priority projects.” 

State Agency for Foreign Investment (SAFI) 

53 Azadli Street, 744000 Ashgabat 

Tel: (+993-12) 35 02 31 or 35 03 18 

Fax: (+993-12) 35 04 13 

Privatisation and restructuring 

Since 1997, when the first wave of small-scale privatisation came to 

an end, Turkmenistan has managed to sell only some 200 companies 

from over 2,000 of the original list of 4,300 privatisable objects still 

remaining in state hands. It is one of the few countries in the region 

where small-scale privatisation has not yet been completed. However, 

the country prefers to take a gradual approach. Privatisation of 

medium-sized and large enterprises is now under way and despite 

slow progress in 2000, the government expects it to pick up pace in 

2001 and the years to come. 

The government has made several attempts in recent years to 

accelerate the process of medium-scale privatisation. From the total 

list of 280 companies, a pilot list of 18 enterprises was drawn up in 

1999. By mid-2000, however, privatisation was completed for only six 

of these companies. In most cases, shares were distributed among 

the workforce, the management and key suppliers to the plant 

(particularly in food processing). In June 2000, the government 

announced an upcoming tender for 32 medium-sized companies, 

but in the end only 11 units were sold during the whole year. 

According to official figures, the private sector accounts for about 

25 per cent of industrial output. All large enterprises are under state 

control. The pilot programme to privatise 18 large companies 

brought few tangible results as corporatisation plans have often 

faced resistance from stakeholders in the ministries and from 

enterprise directors. 

As most valuable assets in the energy and textiles sectors remain 

under state control and are not offered for sale yet, no substantial 

income from privatisation should be expected. However, a model for 

the reorganisation of the oil and gas sector has been prepared and 

partly implemented. Restructuring involved spinning off non-core 

activities and setting up separate oil and gas companies. 

(See Major Sectors of the Economy: Oil and gas below.)

Markets and trade 

Turkmenistan maintains a significant number of non-tariff barriers 

to trade. Among them is the trade contract and investment project 

registration requirement. A presidential decree issued in 1999 

introduced a 5 per cent customs duty for goods imported to 

Turkmenistan by individuals. Duties are not charged on goods that 

have been exported previously from Turkmenistan, declared at a 

customs point and re-imported into the country. There are excise 

duties on a limited number of exported goods such as wool, leather, 

and some chemicals. A large number of items imported to 

Turkmenistan are subject to 10 to 100 per cent excise duties. 

The Foreign Exchange Regulation Law determines the general 

principles of foreign exchange operations, the authority of state 

bodies in foreign exchange regulation, and the rights of residents 

and non-residents regarding foreign exchange ownership and usage. 

According to this law, non-residents may freely convert the national 

currency, the manat, to hard currency without limitations or 

unreasonable delays, provided the amount converted is to pay for 

transactions made with Turkmen residents. The law also permits 

non-residents to repatriate capital goods previously imported into 

Turkmenistan, provided such goods were declared to customs upon 

entry. In practice, however, due to the shortage of hard currency, 

the Central Bank provides commercial banks with limited amounts 

of foreign exchange to convert cash and non-cash manat sums. 

Not all requests for manat convertibility are serviced in a timely 

manner and in full, which results in delays in receiving hard 

currency incomes and impedes doing business. 

There are strict rules about currency exchange operations. 

The Central Bank allows commercial banks to sell non-cash foreign 

exchange at the official exchange rate to legal entities that are 

resident in Turkmenistan only for certain purposes. One such 

purpose is to repatriate foreign investments and profits, providing 

an investment project is registered with the SAFI and the Chief 

State Tax Inspectorate (CSTI). 

Turkmenistan is not a member of any free trade arrangements 

or of the CIS Customs Union. 

Taxation and social expenditure 


According to the Profit Tax Law, foreign investors with a permanent 

establishment in Turkmenistan must pay a 25 per cent profit tax, 

a 15 per cent tax on income from dividends, interest, copyrights, 

licences, leases, royalties, and other income earned in any sector 

of the economy, and a 6 per cent tax on income from international 

cargo transport. Foreign entities that do not have permanent 

establishments in Turkmenistan are subject to withholding tax at 

a rate of 15 per cent on most types of income including dividends, 

interest, royalties, rents and services provided to Turkmen 

companies. Investors in the oil and gas sector must pay a 25 per 

cent profit tax plus a negotiable royalty sum. 

The Value Added Tax (VAT) Law requires foreign and domestic 

enterprises to pay a 20 per cent tax on the volume of goods and 

services produced and/or sold in Turkmenistan. For imported 

goods and services, the VAT is charged on the basis of the 

difference between a trade contract price and the value. 

Foreign entities must pay a property tax of 1 per cent of the 

average value of assets. From 1 October 2000, social insurance 

fund contributions are charged at a rate of 20 per cent of the 

local payroll and should be remitted to the Tax Inspectorate on 

the day salaries are paid to local employees. Salaries paid to 

expatriate employees are exempt if the source of their payment 

is outside the country. 


The Turkmen economy relies largely on oil and gas, and agriculture, particularly cotton production. With new agreements and 

sales of gas in 2000, export revenues and the general state of the economy have improved, contributing to a higher rate of 

GDP growth (17 per cent). Cotton-related industries such as textiles offer good investment opportunities. An increased number 

of gas sale agreements is likely to motivate further investments in the oil and gas sector and related industries. Infrastructure 

investments, particularly in transportation, are under way and will have a regional impact, with improved road and rail links 

between Ashgabat, other regions and neighbouring countries. 

Oil and gas 

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

Turkmenistan has proven natural gas reserves of three trillion 

cubic metres, making it the fourth largest producer in the 

world. It also borders the Caspian Sea, which contains 

substantial oil and gas reserves, but needs pipeline routes 

to export its oil and gas. 

In 2000, Turkmenistan produced 7.1 million tonnes of oil and 

about 38 billion cubic metres (bcm) of gas. The country aims 

to produce 10 million tonnes of oil and 75 bcm of gas per 

year. The gas production target is based on the calculation of 

30 bcm of gas exports to Russia, 30 bcm to Ukraine, 5 bcm to 

Iran and 10 bcm for domestic needs. The oil and gas sector 

makes up one-fifth of GDP, and its share may rise in the future 

with possible increased findings and sales. The recent gas 

deal with Russia is a case in point. In late 1999 Ashgabat 

signed an agreement with Moscow for the sale of 20 bcm of 

natural gas, which will increase to 50 bcm by 2004. However, 

the deal for the continuation of gas delivery to Russia in 2001 

was put on hold due to disagreements over the price. Finally, 

in February 2001 the two sides reached an agreement for 

10 bcm of Turkmen gas to be sold to Russia in 2001 at a 

price of US$ 40 per 1,000 cubic metres. Turkmenistan is also 

conducting gas sale negotiations with Ukraine, and in October 

2000 signed an agreement for the sale of 35 million cubic 

metres of Turkmen gas in 2000-01. Under this deal, 5 million 

cubic metres of gas was supplied by the end of 2000 at a 

price of US$ 38 per 1,000 cubic metres, to be paid for 40 per 

cent in currency and 60 per cent in goods and investment 

projects. The price will go up to US$ 40 in 2001 and will be 

paid on a 50-50 basis in goods and investment projects. 

Renewed gas exports will ease foreign exchange shortages. 

Foreign investment in oil exploration and production had 

reached a cumulative total of US$ 500 million by 2000. 

The introduction of production sharing agreement (PSA) 

legislation and international accounting standards are 

encouraging signs for foreign investment. Direct negotiations over 

a total of 16 offshore blocks in the country’s Caspian sector are 

under way. The Turkmen government prefers to hold direct talks 


Major sectors of the economy 

with interested companies. Monument Oil (UK), recently acquired 

by Lasmo Oil, made a deal in 1998 to explore the offshore Burun 

field in western Turkmenistan and to swap oil with Iran. The 

Burun field currently has a capacity of 10,000 barrels per day 

(bpd) and is situated in the Nebit Dag (Balkanabat) concession, 

which is estimated to have a much greater capacity. UAE-based 

Dragon Oil operates in the offshore Block 2 area and produces 

about 7,500 bpd. In July 1998, Monument signed two PSAs with 

Mobil (US) and state oil company Turkmenneft for an onshore 

concession in Garashsyzlyk. Turkmenneft will be responsible for 

production in and development of existing mature fields covered 

by the agreement area. The second PSA covers reserves under 

the Kotor Tepe and Barsa Gelmes fields. Mobil is the operator, 

holding a 52.4 per cent interest. Mobil and Monument together 

plan to invest US$ 100 million to conduct seismic surveys and 

drill wells. If a suitable export route becomes available, all these 

fields could yield substantial increases in oil and gas production 

by 2006-07. 

Turkmenistan is continuing to harmonise its regulatory framework 

to make it easier for foreign companies to operate within a legally 

consistent environment. Activities handled by the Ministry of Oil 

and Gas were unbundled into five state-owned companies. 

Turkmenneft carries out oil production. Turkmengeologia 

is responsible for exploration, while oil and gas construction is 

the responsibility of Turkmenneftgazstroi. Turkmenneftegas is in 

charge of gas exports. Turkmengas deals with gas production. 

Uncertainty about the future of the Trans-Caspian pipeline 

project centres mainly on disagreement over the terms, including 

gas sale prices. The project proposes to build a pipeline to 

carry Turkmen gas to Turkey via Azerbaijan, running under the 

Caspian Sea and across Georgia (see pipeline map, page 12). 

It involves a consortium led by PSG International, a global 

pipeline development company jointly owned by GE Capital 

Structured Finance Group (US) and Bechtel Enterprises (US). 

Royal Dutch/Shell (UK-Netherlands) is also a member of 

the consortium. PSG International signed a US$ 2.5 billion 

agreement with Turkmenistan to lead the development of the 

Continued on page 13

Dragon Oil 

The Dragon Oil project in the Caspian 

Sea is an excellent example of an 

international co-operative venture in oil 

exploitation, which in effect provides 

something for everyone. This is the first 

international offshore project that the 

EBRD has been involved with in 

Turkmenistan and has been a difficult 

project to structure. Together with 

investors from Ireland and the Middle 

East, the EBRD has provided project 

financing totalling US$ 75 million, part 

of which will be syndicated to other 

commercial banks. The total project 

cost is estimated at US$ 520 million. 

Dragon Oil’s main asset is its share 

in the Cheleken Production Sharing 

Agreement (PSA) for Block II located in 

the Turkmen zone of the Caspian Sea. 

Dragon Oil plc, an Irish registered oil 

and gas producer, is 70 per cent owned 

by Emirates National Oil Company 

(ENOC) of Dubai, United Arab Emirates 

(UAE). ENOC operates one of the most 

modern refineries in the Arabian Gulf, 

owns a network of retail petrol stations 

throughout the UAE and is the main 

supplier of jet fuel at Dubai airport. 

Dragon Oil itself is providing technical 

and management expertise, while 

ENOC will be able to offset its crude 

oil purchase with its own production. 

Through Turkmenneft, the national oil 

company, the Turkmenistan government 

will benefit from royalties and a share 

of production. The production can either 

be refined locally or exported to 

international markets. 

Although PSAs are common enough in 

the oil industry across the world, the 

application of the appropriate legislation 

is untested and remains a major transitional 

challenge for the contractors and 

the authorities. The borrower, Dragon 

Oil (Turkmenistan), a counterpart to the 

PSA, is 100 per cent owned by Dragon 

Oil plc. The EBRD has also signed a 

direct agreement with the Competent 

Body for the Development of 

Hydrocarbon Reserves, stipulating the 

role of the bank in this project. 

In 1999 the EBRD agreed to go ahead 

with a financing package of US$ 75 

million for the commercial development 

of the Cheleken PSA concession. The 

loan came into effect in 2000 and the 

first disbursement was made at yearend. 

The investment is consistent with 

the Bank’s Natural Resources Policy to 

“support independent oil companies 

that provide an important contribution 

to production volumes in the present 

development phase.” 

The EBRD’s loan is in two tranches. 

The first US$ 60 million is being made 

to Dragon Oil (Turkmenistan) Ltd., and 

the second tranche of the facility, up to 

US$ 15 million, will be in the form of a 

syndicated loan through a consortium of 

international banks. This will be the first 

time that the EBRD has attempted to 

mobilise a new source of commercial 

credit for a Central Asian country. 

Cheleken PSA’s main reserves lie in two 

fields – Lam and Zhdanov. The concession 

area covers 950 square kilometres 

with total remaining proven reserves in 

the two fields estimated at around 122 

million barrels, and total proven plus 

probable reserves estimated at around 

600 million barrels. The production from 

Case study 

proved and probable reserves is 

expected to peak at around 80,000 

barrels per day. 

The two fields are located in shallow 

water, in depths of between 20-30 

metres and are drilled to between 

1,400 and 4,000 metres. Much of 

the oil extraction infrastructure for 

the fields was completed during 

Soviet times, but only 12 out of the 

61 platforms are currently producing. 

The EBRD funding is being used to 

finance the rehabilitation of the field 

including new drilling, upgrading of 

onshore and offshore facilities, 

and development of crude oil 

transportation infrastructure. The 

Soviet-built platforms and flow lines 

need substantial refurbishment to 

prevent environmental and safety 

problems. The latter consideration 

is a significant factor, as the EBRD’s 

presence will ensure that a 

satisfactory environmental action plan 

is implemented with the introduction 

of advanced technology and standards. 

An environmental action plan has been 

developed in partnership with the 

government and in consultation with 

the public to minimise damage from 

any oil spill that may occur. 

This is the EBRD’s first investment 

in the Turkmen oil industry with the 

aim not only of boosting oil production 

and exports but also of bringing in new 

business practices, technologies, and 

environmental standards so as to 

enhance the overall oil and gas 

industry in the country. 


Map of existing and proposed oil and gas pipelines 

UKRAINE 

Black Sea 

Ankara 

TURKEY 

Novorossiysk 

Samsun 

Çeyhan 

12 

Tikhoretsk 


Dzhubga 

SYRIA 

Existing pipeline 

Proposed pipeline 

Active (2000) gasline proposal 

Pipeline under construction 

CPC Caspian Pipeline Consortium 

Supsa 

3 

11 

RUSSIAN 

FEDERATION 

CPC 

Izobilnoye 

2 

Erzerum 

5 

1 

Midyat 

CHECHNYA 

GEORGIA 

1. Baku-Novorossiysk existing pipeline primarily used by SOCAR. 

2. Baku-Supsa “Early Oil” existing pipeline used by the Azerbaijan 

International Operating Company (AIOC). 

3. Baku-Tbilisi-Ceyhan (BTC) route agreed by the governments 

of Azerbaijan, Georgia and Turkey and endorsed by the government 

of the USA; financing yet to be agreed. 

4. Baku-Iran route, possible Azerbaijan option studied by TotalFinaElf. 

5. Atyrau-Novorossiysk route now under construction. 

6. Atyrau-Samara-Druzhba existing line; Kazakhstan would like 

capacity increased. 

7. Kazakhstan-China route, under study by China National 

Petroleum Corporation. 

10 

ARMENIA 

IRAQ 

14 

Tabriz 

Caspian 

AZERBAIJAN 

4 

IRAN 

Sea 

This map has been prepared exclusively for the 

convenience of readers. The denomination used 

and the boundaries shown on this map do not 

imply any judgment on the legal status of any 

territory or any endorsement of such boundaries. 

4924 IP01 Pipelines map 

Aktau 

Baku 

Tehran 

Qom 

Isfahan 

To Samara and the Druzhba system 

6 

Tengiz 

9 

Atyrau 

8,9 

Uzen 

Korpedzhe 

KAZAKHSTAN 

13 

Kurt-Kui 

8 

7 

To China 

UZBEKISTAN 

10 

Aral 

Sea 

Bovrideshik 

Khivinskaya 

TURKMENISTAN 

0 Miles 250 

0 Km 400 

8. Tengiz/Uzen-Kharg route, proposed by TotalFinaElf. 

9. Trans-Caspian Oil proposed route (extension to BTC). 

10. Azerbaijan-Turkey gas pipeline under consideration by 

the Shah Deniz consortium. 

11. Trans-Caspian Gas Pipeline (extension to Azerbaijan – 

Turkey gas pipeline). 

12. Blue Stream Russia-Turkey gas line; under construction. 

13. KKK gas line, Turkmenistan’s only route to by-pass Russia. 

14. Tabriz-Erzurum gas line; Iranian section complete, Turkish 

section under construction. 

Source: EBRD, East European Energy

pipeline project and conclude agreements with other prospective 

consortium members. Bechtel was to provide engineering, 

procurement, and construction services, and GE Capital Finance 

Group was to arrange the financing. However, PSG has since 

reduced its presence in Turkmenistan, citing delayed procedures 

and uncertainties over the gas sale deal, and Royal Dutch/Shell 

(UK-Netherlands) has taken over the role of consortium leader. 

There are various other pipeline proposals to export Turkmen 

gas via Iran and Turkey to Europe. Talks are also under way on 

the sale of liquefied natural gas (LNG) to Pakistan. President 

Niyazov has invited Pakistani companies to participate in the 

construction of a liquefied natural gas plant and in a project 

to modernise the Seidi oil refinery in eastern Turkmenistan. 

Downstream activities 

Most oil for domestic consumption is processed at the 

Turkmenbashi refinery on the Caspian Sea, which is being 

upgraded at a cost of about US$ 1 billion including a US$ 400 

million polypropylene plant, one of the largest single investments 

in the country. The first stage of the project foresees increasing 

production to 6 million tonnes a year. It is also hoped to produce 

200,000 tonnes of polymers a year. 

Turkmenistan has another refinery at Seidi, Turkmenabat, which 

is also being upgraded as it has been operating under capacity. 

Current production from the two refineries is about 240,000 

barrels a day. The country plans to increase refining capacity 

at Seidi refinery to 3-3.5 million tonnes per year by 2003. 

According to the National Institute of State Statistics and 

Information, oil refining production grew by 8 per cent in the 

first nine months of 2000, compared to the same period in 

1999. There was also a 19 per cent increase in production 

in the chemical and petrochemical industries. 

Agriculture and agribusiness 

Turkmenistan is a wheat and major cotton producer. According 

to official statistics, the grain harvest in 2000 amounted 

to 1.7 million tonnes, above the target grain harvest of 1.6 

million tonnes, but due to a severe drought in Central Asia 

in 2000 the actual figure is believed to be below that target. 

The government is aiming in the long term at self-sufficiency in 

grain, which is about 1.5 million tonnes per year, although the 

targeted production level for 2001 has been set at 2 million 

tonnes. A Programme for the Development of the Agro- 

Industrial complex is a key element in the Strategy for Socioeconomic 

Transformation for 2010. The government is also 

planning to build more mills and import agricultural equipment. 


There is substantial purchase of agricultural equipment such 

as tractors particularly from Belarus to increase production 

and quality, and farmers are being encouraged to switch to 

mechanised methods. 

Production of cotton, regarded as “white gold,” is an essential 

agricultural activity. Of a government target of 1.3 million 

tonnes of raw cotton, 1.03 million tonnes was harvested in 

2000, according to official statistics. Unofficially, the harvest 

is estimated at less than 1 million tonnes due to drought. The 

government aims to increase annual cotton output to 3 million 

tonnes a year by 2010. The targeted production level for 2001 

is 1.8-2 million tonnes. 

Given quality cotton supplies, the government has been 

developing a domestic textiles industry that offers potential for 

foreign investment. One of the main foreign companies involved 

is Chalik Holding (Turkey), which is a partner in the EBRD’s Gap 

Turkmen Jeans Project as well as in a number of other projects 

with the Ministry of Textiles including the US$ 168 million 

Ashgabattekstil plant. In the last nine years Turkish companies 

have invested more than US$ 500 million in various cotton 

processing plants and textile mills in Turkmenistan. 

Turkmenistan produces quality cotton fibre and clothing 

products in textile complexes equipped with modern machinery. 

The country aims to increase the number of modern production 

facilities to 20 in the coming years, which would bring raw 

cotton processing capacity to 3.2 million tonnes a year. 

Land reform and ownership 

Agricultural reforms in Turkmenistan have progressed very 

unevenly. Nevertheless, Turkmenistan has taken a lead in the 

region in reforming land tenure systems with the 1997 decree 

on land privatisation. Former collective farm land has been 

parcelled into individual plots, the majority of which are leased 

out to individual households or small groups. According to a 

World Bank survey, only 16 per cent of land in Turkmenistan 

remains in joint use. 

Turkmenistan has launched a gigantic project to build a huge 

artificial lake of up to 4,000 square kilometres in size in the 

Karakum desert. The aim is to help develop 10,000 hectares of 

land in the desert and meet water needs for 50 years. However, 

some environmentalists have commented that in the long term 

the lake could have negative environmental implications. 


Introduction 


Energy 

There are substantial investment plans in this sector totalling 

US$ 2.2 million, about US$ 2 million of which is expected to 

come from foreign sources. Energy production will be increased 

and the surplus will be exported. In October 2000, 

Turkmenistan agreed to sell 300 million kWh of electricity 

to Turkey in 2001. Turkmenistan aims to generate 4,193 

megawatts (MW) per year by 2010, up from the present level 

of 2,652 MW. As part of the plan to increase foreign revenues, 

new export transmission networks to Pakistan, Iran, Turkey and 

other Central Asian countries will be built. The extension of a 

new export transmission line from Belek, running through Kum- 

Dag, Madau and Erek to the Iranian border was completed in 

1999 to export electricity to Turkey. 

There are also plans to build four new thermal power stations 

at Etrek, Dashoguz, Mary and Lebap. However, lack of reforms 

in the energy sector hinders the involvement of IFIs, preventing 

further investments and therefore development. Power, like gas 

and water, remains free of charge for most households and is 

hugely subsidised for industrial customers. The most valuable 

assets in the energy sector are excluded from privatisation. 

Telecommunications 

This sector offers a wide range of opportunities for investors and 

is one of the least developed in the region. There are plans to 

increase the number of telephone subscribers and also upgrade 

all communication systems, for which the country has adopted 

a strategy for the first 10 years of the millennium. Telephone 

exchange systems in particular need to be upgraded. Some 

foreign companies such as Siemens (Germany), Alcatel (France), 

and Barash (US) have in the past been offered contracts to 

modernise old analogue equipment and to introduce cellular and 

paging systems. German companies have installed more than 20 

digital exchanges in recent years, increasing fixed line phones by 

110,000. The country is also connected to some CIS countries 

via satellite channels. Siemens and Alcatel are installing a mobile 

telephone network with 7,000 lines and are upgrading part of the 

fixed telephone network in Ashgabat at a cost of US$ 1 million. 

State-owned monopoly Turkmentelecom provides local public 

telephone services and also Internet access. MCI (US) won 

a contract in 1997 to provide Internet access, which became 

available in 1998. It provided 15 digital channels for e-mail and 

Internet services and also installed a direct link with the US. 

However, in late 2000 the government annulled the licences 

of existing private Internet providers. 


Transport 

Turkmenistan is not as geographically isolated as some other 

Central Asian countries because of its access to the Caspian 

Sea and the Volga-Don canal. In 1996, the most recent year for 

which data are available, Turkmenistan had 24,000 kilometres 

of road and 2,187 kilometres of railway track. The transport 

sector is in dire need of investment. However, various road, rail 

and air projects are being carried out. A US$ 34 million World 

Bank project to upgrade the public transport systems in 

Ashgabat, Dashoguz and Mary is under way. In 1999 President 

Niyazov launched a 1,000-day programme to build new roads 

and railways and upgrade existing ones to increase freight and 

haulage capacity by 50 per cent. 

However, a more rigorous economic evaluation of some of the 

proposed projects is needed if Turkmenistan is to avoid costly 

investments that divert scarce resources away from less 

ambitious projects with higher rates of return. 

Road 

The government is conducting a number of major road renewal 

projects at state expense, except for a stretch of the Ashgabat- 

Mary road which is being financed by the Islamic Development 

Bank (IDB). In view of the poor condition of existing roads, all 

the rehabilitation projects involve building new roads from 

scratch. 

Construction of a 600-kilometre road between Ashgabat and 

Dashoguz started in spring 2000. This major project will 

improve the existing road between the capital and the north of 

the country, which needs extensive upgrading. Another project, 

under the umbrella of the EU’s TRACECA programme (see 

opposite page), involves upgrading of the 350-kilometre road 

between Ashgabat and Mary, the country’s second most 

developed region. Construction firm Mensel (Turkey) is to 

carry out the work once the financing is guaranteed. The 

IDB is financing one stretch of this road. 

Rehabilitation of the road running 600 kilometres from 

Ashgabat to Turkmenbashi port will improve the existing link 

between the capital city and the oil-producing western region. 

The project has been under way since mid-1999. 

Rail 

A new 203-kilometre railway line (Turkmenabat-Atamurat) 

along the Amu Darya River opened in 1999, with a capacity 

of 4 million tonnes of freight and 650,000 passengers a year. 

A railway link with Iran was opened in 1996. Modernisation 

Continued on page 16

TRACECA stands for the Transport 

Corridor Europe Caucasus Asia, the 

EU-sponsored umbrella programme to 

coordinate the development of east-west 

transit routes. The transport corridor 

runs from Europe across the Black Sea, 

through the Caucasus and the Caspian 

Sea to Central Asia, and links up with 

the EU’s Trans European Networks 

(TENs), which cover the transport system 

for EU countries, and its Pan-European 

Transport Corridors, which cover the 

rest of Europe. 

Under the TRACECA programme, 

in 1998 the relevant countries signed 

a multilateral agreement on transport 

(“MLA”), which aims to help develop 

economic relations, trade and transport 

communications in the region, ensure 

access to world markets by road, rail 

and sea, ensure safety and 

environmental protection, harmonise 

transport policy and legal structures, 

and create equal conditions for 

competition in transport operations. 

Signatory states are: Caucasus and 

Central Asian countries, Moldova, 

Ukraine, Turkey, Romania and Bulgaria. 

TRACECA’s work includes: financing 

technical assistance for transport 

infrastructure, legal and regulatory 

issues and management training; 

cooperation with IFIs on major 

infrastructure projects; and fostering 

and coordinating regional cooperation 

in transport. 

There are two supporting structures, 

the Intergovernmental Commission at 

the ministerial level, and the Permanent 

Secretariat, based in Baku. The 

Intergovernmental Commission, including 

heads of government and transport 

ministers identified priorities such as 

harmonising tariff liberalisation and 

simplifying customs and border 

procedures. All the participants 

recognise the importance to regional 


TRACECA: The Great Silk Road Revival 

Sofia 

Israel 

Bulgaria 

Turkey 

Jordan 

Romania 

Turkey 

Ukraine 

Moldova 

Kiev 

VarnaSupsa 

Poti 

Ankara 

Bucharest 

Burgas 

Istanbul 

Chisinau 

Odessa 

B lac k Se a 

LebanonBaghdad 

Damascus 

Saudi Arabia 

Constantza 

Syria 

Iraq 

Batumi 

D n i e p e r 

Novorossiysk 

Yerevan 

Georgia Tbilisi 

Armenia Azerbaijan Baku 

Teheran 

Moscow 

V o lga - D o n C a n a l 

Caspian 

S e a 

V o l g a 

Turkmenbashi 

I s l a m i c R e p u bli c o f I r a n 

Aktau 

R u s s i a n F e d e r a t i o n 

Aktobe 

Turkmenistan 

Uzbekistan 

Ashgabat 

A ral 

S e a 

A m u D a r y a 

S 

y r 

D a r y a 

Samarkand 

development of reviving the ancient 

“Silk Road” through mutual cooperation. 

Three priority programmes established 

for 2001 are harmonisation of frontier 

procedures, establishment of a common 

legal basis for transit haulage, and 

elaboration of a common policy for 

transit duties. These are to be financed 

through EU technical assistance funding. 

A major TRACECA project is the 

upgrading of the container services 

between Turkmenbashi port and Baku 

port in Azerbaijan. The two ports occupy 

key strategic positions on the transport 

route across the Caspian Sea and are 

regarded as potential bottlenecks in 

the flow of container traffic along the 

TRACECA corridor. The project aims to 

improve container handling facilities at 

the two ports, maintain and improve 

vessels linking them and assist in 

restructuring the management of the 

ports and shipping lines. 

Astana 

K a z a k h s t a n 

Tashkent 

Tajikistan 

Sea 

Road 

Rail 

This map has been prepared exclusively for the 

convenience of readers. The denominations used 

and the boundaries shown on this map do not 

imply any judgement on the legal status of any 

territory or any endorsement of such boundaries. 

Bishkek 

Kyrgyzstan 

4849 IP01 Traceca map 

Almaty 

Kabul 

A f g h a n i s t a n 


Introduction 


work is under way at Ashgabat locomotive depot. Financing 

is being provided by the Japanese Overseas Economic 

Cooperation Fund. Dai Nippon and Itochu, both Japanese, won 

a tender worth US$ 37.5 million to modernise rail links. Among 

a series of infrastructure projects begun in early 2000 is the 

construction of a railway line between Ashgabat in the south 

and Dashoguz in the north, to be completed by 2006. 

Air 

An additional runway was opened at Ashgabat airport in 2000. 

Access to passenger terminals has been made easier. 

Balkanabat Airport is to have a new runway. Thomson (France), 

which equipped Ashgabat airport, is also installing air traffic 

control systems at Turkmenbashi and Turkmenabat airports. 

There are also several projects to upgrade facilities at other 

regional airports to improve domestic air services. The national 

airline, Turkmen Hava Yollari, has announced plans to replace its 

entire fleet with Boeing aircraft. The airline will also receive three 

Boeing 717s in 2001 as part of a deal signed in July 2000. 

Sea ports 

Modernisation of Turkmenbashi port is to be accelerated. The 

port is an important gateway for the entire Central Asian region. 

The EBRD has provided a loan of € 32.23 million towards a 

total project cost of € 48.95 million (under the TRACECA 

umbrella – see above) and is helping restructure management 

systems. Turkey’s STFA has won a US$ 40 million tender to 

upgrade the passenger ferry and dry bulk cargo terminals. 

Development of a regional transportation system 

Turkmenistan is affected by the interdependent structure of Central 

Asia’s transport networks. Any disruption to cross-border transport 

services can have a damaging effect on trade and travel. Therefore, 

development of a regional transportation system is of priority among 

the Central Asian states, who need to focus on upgrading their 

transport networks to increase trade with each other and with other 

neighbours such as China, Iran, Turkey and Pakistan. Economic links 

between the Central Asian countries are hampered by the awkward 

legacy of the Soviet-era transport system. Kazakhstan, Kyrgyzstan, 

Tajikistan, Turkmenistan and Uzbekistan need to adapt a transport 

network that was in place when the five former Soviet republics were 

oriented exclusively toward Russia. 

There were no rail or pipeline connections to the south as all 

transport links led north to Russia or through the Caucasus. 


The fact that transport networks in Iran, Pakistan and Turkey have 

also long been oriented to the south towards ports on the Indian 

Ocean and the Mediterranean Sea, rather than towards Central Asia, 

has further complicated the situation. Such physical difficulties 

stand in the way of a rapid expansion of intra-regional trade and 

the development of new outlets for Central Asian trade on world 

markets. This physical structure and the northern orientation of the 

transport infrastructure is influencing post-independence trade flows. 

Oil and gas exports from Kazakhstan and Turkmenistan, for 

example, continue to flow to the CIS, despite some disadvantages. 

The most urgent area for reorientation is the rail network, which was 

the most important part of the old Soviet transport system. The 

Central Asian republics are linked to one another and to the rest 

of the FSU by a few key routes, which do not always take republic 

borders into account. The railway from Osh, the second largest city 

in Kyrgyzstan, to Bishkek passes through Tajikistan, Uzbekistan and 

Kazakhstan before re-entering Kyrgyzstan just before Bishkek. 

However, railroads, like pipelines, are expensive to build, and 

networks are only being modified slowly. To give another example, 

Turkmenistan is limited by a pipeline network that runs through 

Russia, leaving it dependent on former Soviet customers who have 

often failed to pay their bills for gas. Kazakhstan and Kyrgyzstan 

have also had disputes over unpaid rail transit bills, leading to 

closure of common borders. For lack of alternative routes, Kazakh 

oil is transported through a Russian pipeline company. A large 

proportion of oil from the Tengiz field is shipped by train to the Baltic 

ports or across the Caspian Sea by barge and then by train to Black 

Sea ports as the only, expensive alternative. 

The poor condition of roads is another problem for increasing trade 

volumes. The least limited mode of transport and least bound by 

history is air, but it is expensive. Although the aviation networks 

are still dominated by intra-CIS flights, the national airlines have 

established some international routes and are making steady 

progress in this respect. 

In order to tackle these problems, more investment and cooperation 

are needed in the maintenance and upgrading of roads, railroads, 

and pipelines before the existing system comes close to collapse. 

Improving the roads will yield the most immediate benefits. The 

Lugovoye (Kazakhstan) via Bishkek (Kyrgyzstan) to Balykchy 

(Kyrgyzstan) railway route and the Andijan (Uzbekistan) via Osh 

(Kyrgyzstan) to Irkeshtam (Kyrgyzstan) road route have been singled 

out as priority projects by the relevant governments. They have 

agreed to set up working groups to coordinate the implementation 

of each project and help resolve any issues involved.

Financial sector 

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

The financial sector is largely controlled by the government. Financial intermediation to the private sector is limited, with most 

bank lending to the state sector under government direction. Some progress in developing banks for SME lending has been 

made with the support of the EBRD. Capital markets have yet to be established. 

Banking sector 

The banking sector remains small and access to finance is 

limited. The sector still bears the characteristics of the old 

Soviet system, and continues to be controlled from above. 

More than 95 per cent of credit still goes to the state sector, 

while the availability of financial intermediation to the private 

sector is minimal. Most lending is provided by state-owned 

banks under the direction of the government and goes 

to favoured sectors such as oil and gas and agriculture. 

Development of commercial banking, including small private 

banks, has been constrained by the country’s macroeconomic 

environment, lack of private sector development and, most 

importantly, excessive government involvement in the economy. 

There are 12 commercial banks. Five are state-owned, 

including Turkmen Vnesheconombank (which deals with foreign 

trade and is the channel through which the state borrows 

abroad), Sberbank (the Savings Bank and recipient of most 

household desposits), Turkmenistan Bank, Investbank and 

Daykhanbank (which finances the agricultural sector). Three 

of the 12 are joint-stock commercial banks – Senagat Bank, 

Garashsyzlyk Bank (a merger of Gaz Bank and Ashgabat Bank), 

and the International Bank for Reconstruction, Development 

and Promotion of Entrepreneurship of Turkmenistan. A fourth 

joint-stock commercial bank, Obabank, was liquidated in 

September 2000. Two others are joint banks with foreign 

participation and the remaining two are branches of foreign 

banks operating in Turkmenistan. Most banks engage in 

financing a specific economic sector or selected public 

enterprises. Daykhanbank has retained its agricultural focus 

since absorbing the Co-op Bank. 

According to the Central Bank of Turkmenistan, personal bank 

deposits in local and foreign currencies increased by 53.5 per 

cent in the first half of 2000. However, total bank deposits are 

no more than 6 per cent of GDP and the majority are held by 

enterprises. The five state commercial banks account for 

around 80 per cent of total assets and deposits in the banking 

system. Most loans are to state enterprises. The term structure 

is heavily weighted towards short-term instruments. Any existing 

long-term loans are state directed credits, mostly at preferential 

interest rates. Average interest rates are 3.2-20 per cent on 

local currency deposits and 5.2-35 per cent on local currency 

loans, depending on maturity, type of borrower and type of 

lending institution. The equivalent figures for foreign exchange 

transactions are 5-21 and 5-13 per cent. Total reported net 

domestic bank assets do not exceed 20 per cent of GDP. 

Four of the largest banks now prepare their accounts according 

to International Accounting Standards (IAS) and are providing 

SME credits under an EBRD credit line with around US$ 5 

million disbursed. Under the agreement with the EBRD, the 

banks will need to meet traditional financial criteria such as 

capital adequacy, liquidity and maximum exposure, based on 

IAS audit figures. 

The Central Bank has issued new minimum capital 

requirements of US$ 5 million at the official exchange rate for 

all private banks, and US$ 10 million for the three largest state 

banks. It has also drawn up a timetable for each individual 

bank to meet the requirements. The Central Bank plans to 

introduce IAS accounting for all banks in 2001. Although 

banking supervision is weak, the Central Bank is making an 

effort to improve monitoring procedures and the enforcement 

of capital requirements. The Central Bank gained relative 

autonomy in 1997 as part of an attempt at stabilisation. 

However, political appointments have prevented it from fully 

exercising this autonomy. 


Introduction 

Financial sector 

Foreign involvement in the banking sector 

A number of foreign banks are cooperating with the Central Bank 

and others on training and financing activities. The Central Bank 

sends Turkmen bankers to Pakistan for international banking 

courses organised by the National Bank of Pakistan (NBP) in 

Karachi. The NBP has a branch in Turkmenistan providing various 

banking services including checking accounts, foreign currency 

conversion, letters of credit and interest-bearing foreign exchange 

accounts. The course aims to teach Turkmen bankers modern 

banking techniques and equip them with skills to mobilise financial 

resources derived from oil and natural gas towards developing the 

country’s agricultural base. 

The Turkmen-Turkish Joint Stock Commercial Bank, founded in 1993 

by Turkey’s state-owned Ziraat Bank and the Turkmen state-owned 

Daykhanbank, deals with foreign exchange auctions through 

Daykhanbank. The bank has correspondent relations with such large 

American banks as Chase Manhattan, Citibank and Bank of America 

through Ziraat Bank’s branches in Turkey. 

In October 2000 Deutsche Bank (Germany) extended a cooperation 

agreement, initially signed in 1996, with Turkmenistan. Under the 

agreement signed by the German bank, which has a branch in 

Ashgabat, and the Turkmen President, a preliminary credit 

agreement will be signed to finance a number of investment projects 

in the oil and gas sector, including financing of imported equipment 

and services. The agreement envisages allocating credits to 

Turkmen Vnesheconombank to finance medium-term commercial 

deals, as well as training Turkmen bankers in project financing and 

bank auditing. Deutsche Bank will also open a credit line to 

Turkmenistan for short and long-term commercial transactions 

and provide consultancy on certain projects. 

Russia’s joint stock Rossiysky Kredit Bank has a branch in 

Turkmenistan, which opened in 1995. The bank provides consulting 

services on foreign exchange operations, the stock market, 

legislation, and taxation and customs regulations, and represents 

Turkmen clients’ interests in Russia and the region. It also provides 

worldwide money transfers. 


In January 2000, President Niyazov set up a new bank, the 

President Bank, with US$ 10 million in starting capital to 

provide low-interest loans primarily to SMEs. However, only one 

loan had been approved by mid-2000, and funding and staffing 

of the bank remained unclear. In June 2000, the President 

banned citizens living in Turkmenistan from holding foreign bank 

accounts and obliged them to transfer money held in foreign 

accounts to Turkmen banks within three months. 

As the existing trade and foreign exchange controls distort all 

economic and banking sector activities, developing an efficient 

banking system in Turkmenistan requires major changes, 

including liberalisation of the exchange system, introduction 

of an independent Central Bank with a focus on effective 

supervision, and also further private sector development. 

Non-bank financial institutions 

There are no non-bank financial institutions in Turkmenistan 

apart from the State Insurance Company, which exercises an 

absolute monopoly over the limited insurance sector. A number 

of banks have started developing leasing activities although 

they commit, for the time being, no more than a tiny share of 

bank assets. The Central Asian American Enterprise Fund is 

the only private venture capital fund active in the country. 

There is no stock exchange or capital market in operation, 

despite long-standing plans to establish both. A state securities 

market established in 1994 has handled small issues of nontradable 

treasury bills which provide domestic financing for the 

budget, but have no effect on monetary policy.

EBRD activities 

in Turkmenistan 

Aral Sea 

Turkmenistan 

Kazakhstan 

Uzbekistan 

As at 31 December 2000, the European Bank for Reconstruction and Development (EBRD) had signed five projects in 

Turkmenistan, totalling € 165.1 million: a credit line for small and medium-sized enterprises (SMEs); a loan and equity 

investment to expand the textile plant created by the Gap Turkmen joint venture; a loan for the development of offshore 

hydrocarbon fields; financing for the reconstruction of Turkmenbashi Port; and a further equity investment in Gap Turkmen. 

In addition, 29 technical cooperation projects in Turkmenistan 

have been completed or approved. The majority of these have 

involved studies for infrastructure projects. The EBRD is also 

focusing on private investment financing, especially in cases 

where it would contribute to key areas of reform, such as the 

modernisation of agriculture and oil and gas production. 

Overview of EBRD activities and key objectives 

Turkmenistan is rich in energy resources and has considerable 

export potential in this sector. However, placing all expectations 

on energy carries considerable risk. The EBRD’s overriding 

medium-term objective, therefore, is to realise Turkmenistan’s 

energy export potential to the fullest extent, while diversifying 

its economy and promoting non-energy exports with a view to 

achieving sustained economic growth and higher living 

standards. 

At the same time, the EBRD aims to assist in bringing about 

policy change and institution-building in Turkmenistan in 

conjunction with projects that address critical infrastructure 

bottlenecks. The Bank is also maintaining a dialogue with 

the country to encourage transition towards economic and 

democratic reform, working closely with other international 

organisations. 

With this in mind, the EBRD intends to concentrate its activities 

for the immediate term on the development of the local private 

sector and the attraction of foreign private investment. 

Development of SMEs 

The EBRD is giving priority to the intensive implementation 

of a € 34.25 million export-oriented credit line which came into 

effect in April 1996 and is intended to encourage small and 

medium-sized business development. Modelled on other credit 

lines pioneered by the Bank in recent years, it provides hardcurrency 

term financing through four selected participating 

banks, which on-lend to enterprises in the private sector. 

This was not only the first substantial EBRD project in 

Turkmenistan, but also the first investment project in the 

country by an international financial institution. The Bank 

expects to accelerate disbursement of the credit line now that 

the private sector is developing. 

Private sector development 

Special emphasis is now being placed on making further 

progress with joint-venture projects, in particular for the textile, 

agribusiness, transport, and oil and gas industries. A textiles 

project was developed by the EBRD in 1996 with a Turkish 

sponsor. This involved the expansion of a recently built denim 

weaving plant into a vertically integrated textile company. 

The EBRD’s total investment in the project amounts to 

€ 34.15 million in debt and equity out of a total project 

cost of € 111.57 million. 

This is the first private foreign investment joint venture in 

Turkmenistan, and the government has used it as a 

demonstration project for introducing a wide variety of new 

procedures. The EBRD is keen to continue assisting potential 

foreign investors to develop project proposals. 

Critical infrastructure 

Turkmenbashi port 

With grant funds from the US government, a phased development 

plan for the upgrading of the dry cargo terminal at Turkmenbashi 

port was prepared. This study became the basis for EBRD 

financing of the reconstruction of the passenger ferry and dry 

bulk and general cargo terminals. The project also aims to 

improve the legal and operational environment in which the port 

operates and to help the Turkmen Sea Administration enhance its 

organisational structure and become a commercially oriented 

entity. The Bank has provided a loan of € 32.23 million towards 

a total project cost of € 48.95 million. This project will have great 

significance for a much wider area than Turkmenistan alone. 

Oil and gas 

The EBRD is encouraging foreign oil companies interested in 

establishing a long-term presence in Turkmenistan. This will 

result in the introduction of modern technologies and Western 

management practices, and make it possible to test alternative 

routes for exporting oil by sea, rail and road. 


Introduction 

EBRD activities in Turkmenistan 

A loan facility of € 64.4 million to Dragon Oil in the Cheleken 

PSA concession has been signed to support the commercial 

development of hydrocarbon reserves in the Turkmen sector of 

the Caspian Sea. An associated technical cooperation project 

will assist Turkmenistan in preparing a National Oil Spill 

Contingency Plan (NOSP). 

In the gas industry, the EBRD has carried out a technical 

cooperation study for the preparation of a Gas Resource 

Development Strategy for Turkmenistan. 

Agriculture 

In line with government priorities to increase agricultural 

diversification, while maintaining a strong cotton sector, the 

EBRD is contributing to the attraction of private investments 

in processing locally available raw materials. Other areas of 

interest are wholesale, packaging, input production, machinery 

services and equipment. 


Contact names 

David Hexter 

Business Group Director for Russia and Central Asia 

Tel: +44 20 7338 6197 

Fax: +44 20 7338 7590 

Kazuhiko Koguchi 

Country Director for Uzbekistan, Turkmenistan and Tajikistan 

EBRD Resident Office 

International Financial Centre, 4th Floor 

1 Turab Tula Street 

700003 Tashkent 

Uzbekistan 

Tel: +998 71 120 62 79 

Fax: +998 71 144 21 65 

Jaap Sprey 

Head of Resident Office 

95 Azadi Street 

744000 Ashghabat 

Turkmenistan 

Tel: +993 12 51 22 63 

Fax: +993 12 51 03 18 

Signed projects as at 31 December 2000 (in € million, exchange rate as at 31 December 2000) 

Name Brief description Total project cost EBRD finance Type of financing 

Private 

Export-oriented credit line Credit line for SMEs 34.25 34.25 Loan 

GAP Turkmen Expansion of existing textile company 18.81 Loan 

95.46 11.94 Equity 

GAP Turkmen 2 Further equity investment 16.12 3.4 Equity 

Dragon Oil Commercial development of 

State 

off-shore hydrocarbon fields 558.78 64.47 Loan 

Turkmenbashi Port Development Upgrading of port 48.95 32.23 Loan 

Total signed 753.56 165.1 

of which private 81% 

of which public 19%

Investment climate - FiFo Ost

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