Investment climate - FiFo Ost
Investment climate - FiFo Ost
Investment climate - FiFo Ost
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Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
Turkmenistan <strong>Investment</strong> Profile<br />
Contents<br />
page<br />
Foreword 1<br />
Introduction 2<br />
Map of Turkmenistan 3<br />
Economic summary 4<br />
Selected economic indicators 5<br />
<strong>Investment</strong> <strong>climate</strong> 6<br />
Foreign direct investment 6<br />
<strong>Investment</strong> policy and incentives 6<br />
Privatisation and restructuring 8<br />
Markets and trade 9<br />
Taxation and social expenditure 9<br />
Major sectors of the economy 10<br />
Oil and gas 10<br />
Case study: Dragon Oil 11<br />
Agriculture and agribusiness 13<br />
Energy 14<br />
Telecommunications 14<br />
Transport 14<br />
Financial sector 17<br />
Banking sector 17<br />
Non-bank financial institutions 18<br />
EBRD activities in Turkmenistan 19<br />
This document was drafted by the EBRD Country Promotion Programme<br />
team assisted by Bank staff and the Turkmen authorities. It was<br />
prepared with information available up to March 2001, derived principally<br />
from the EBRD, the IMF, the World Bank, Reuters, BISNIS, and Turkmen<br />
government agencies. Every effort has been made to ensure accuracy.<br />
However, no responsibility is accepted for the contents of this document.<br />
ISSN 1470-3963
Foreword<br />
Thank you for your interest in this publication, prepared in<br />
cooperation with the EBRD. It aims to provide information for<br />
potential investors who are interested in supporting enterprises<br />
in the non-state sector of the economy and private business<br />
about opportunities for long-term investments in certain sectors<br />
of Turkmenistan's economy.<br />
The future of the Turkmen economy is linked with the<br />
continuation of market reforms in the country, its greater<br />
openness and active entry into the international community.<br />
Under the leadership of the President of Turkmenistan a<br />
national programme has been prepared, the Strategy for Social-<br />
Economic Reforms for the period up to 2010. This is a global<br />
plan for the transformation of Turkmenistan into a developed<br />
state, for which all the essential conditions exist. It involves a<br />
qualitative reform of all aspects of life: a thorough renewal of<br />
technological provisions and of economic relations, changes<br />
in the composition and nature of labour and of material and<br />
spiritual living conditions.<br />
The main element of the national economic model consists<br />
in creating a developed, socially oriented market economy -<br />
with strong state macroeconomic regulation. The ultimate<br />
aim is to attain the level of developed countries with a rich<br />
resource provision.<br />
The economic reform currently being conducted in Turkmenistan<br />
is aimed at strengthening economic independence, and at<br />
achieving stable development in all sectors of the economy<br />
and especially the non-state sector of the economy.<br />
Turkmenistan is actively implementing the processes of<br />
privatisation and demonopolisation of enterprises. At the<br />
beginning of 2001, about 2,000 state-owned objects were<br />
transferred to the non-state sector, and many enterprises were<br />
transformed into joint stock companies. Turkmenistan is on the<br />
way towards major economic reforms, and there is still much to<br />
be done to bring them into being. The effectiveness of economic<br />
reforms directly depends on the volume of investments made<br />
by international financial institutions, notably the EBRD. Credits<br />
extended by the EBRD and the TACIS programme are being fully<br />
and actively used towards the development of small and<br />
medium-sized businesses in Turkmenistan.<br />
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
In addition, we wish to note that this profile on the investment<br />
<strong>climate</strong> of Turkmenistan does not mention all the successes<br />
that have been achieved, especially in the agricultural, textile<br />
and chemical sectors. We would wish the world community to<br />
have a clear impression of our country's economy.<br />
Finally we would like to note that this profile will give potential<br />
investors the chance to take a new look at Turkmenistan's<br />
economic potential and to evaluate the opportunities it offers<br />
in terms of investment.<br />
Seyitbay Kandymov<br />
Chairman of the Central Bank of Turkmenistan<br />
EBRD Governor for Turkmenistan<br />
Turkmenistan <strong>Investment</strong> Profile 1
Turkmenistan has taken an individual path towards transition, and favours a gradual and cautious approach. It places<br />
emphasis on social stability as a necessary condition for economic growth, and therefore prefers not to apply dramatic reform<br />
measures. The government’s 10-year development plan issued in 2000 emphasises state-led investment to build Turkmenistan<br />
into a modern economy, fuelled by energy production and cotton processing. Renewed gas exports have supported a vigorous<br />
output recovery since 1999 but doubts over the sustainability of Turkmenistan’s economic course remain.<br />
Turkmenistan achieved record double digit growth rates in 1999<br />
and 2000, on the back of resumed gas exports to Russia and<br />
Ukraine, as well as a series of good cotton and wheat harvests.<br />
The country reacted to the Russian crisis by reintroducing<br />
exchange controls, which remain in place and are a cause of<br />
significant economic distortions and imbalances.<br />
Transition years<br />
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
The years following independence in 1991 were characterised<br />
by a sharp fall in GDP. Between 1992 and 1996 real GDP fell<br />
by a cumulative 50 per cent. Turkmenistan was unable to<br />
benefit from rising energy prices due to the inability of several<br />
CIS countries to pay for their gas imports and, as a result,<br />
payment arrears mounted and gas output declined. The<br />
suspension of gas exports to Ukraine in 1997 due to<br />
payment problems contributed to a further 11 per cent<br />
decline in GDP that year.<br />
However, since 1997, there has been a steady economic<br />
improvement. For the first time since independence, real GDP<br />
has increased for three consecutive years. These increases<br />
were due mainly to improved cotton and wheat harvests and<br />
to rising gas and oil production. Continuing growth in 2000<br />
resulted in part from increased gas exports to Russia. In late<br />
1999, Turkmenistan signed a deal with Russia for the sale of<br />
20 billion cubic metres (bcm) of gas to Moscow, which was<br />
later increased to 30 bcm. Turkmenistan also has an<br />
agreement to supply 30 bcm of gas to Ukraine this year,<br />
although the challenge to diversify gas transit and access<br />
more creditworthy customers remains.<br />
After the break-up of the Soviet Union, prices rose sharply in<br />
Turkmenistan. Since 1995, Turkmenistan has progressively<br />
reduced inflation rates to an official 8 per cent in 2000.<br />
This is partly the result of using foreign exchange intervention<br />
to sterilise the expansionary impact of state directed credits.<br />
However, prices controls remain on a number of key<br />
commodities, which combined with other administrative<br />
restrictions help to keep official inflation in check, despite<br />
much larger unofficial estimates.<br />
2 Turkmenistan <strong>Investment</strong> Profile<br />
Introduction<br />
Gradual pace of reform<br />
Compared to most of the CIS countries, economic reforms<br />
have been implemented very slowly in Turkmenistan. The state<br />
remains the dominant player in the economy. In addition to<br />
the fact that some price controls are still in place, foreign<br />
exchange is rationed and the parallel exchange rate is three<br />
times the official rate.<br />
Privatisation of small enterprises has been implemented<br />
but there is still scope for selling off medium and large<br />
scale companies. In the short term, the foreign exchange<br />
restrictions are the main weakness in Turkmenistan’s<br />
investment <strong>climate</strong>. Increased gas export revenues should<br />
provide the room for unification.<br />
Given its resource base, Turkmenistan has good long-term<br />
potential for development. Realisation of this potential would<br />
be boosted by further foreign investments.<br />
Political regime and international relations<br />
The President is the main decision-maker for the country’s<br />
economic, social and political choices. Political life is<br />
dominated by a single party, the Democratic Party of<br />
Turkmenistan. In the international arena, Turkmenistan pursues<br />
an active policy of neutrality, which means no alignment with<br />
any political or military alliances or blocs and a commitment<br />
to remain neutral in any conflict between states. The policy<br />
of neutrality has been the backbone of Turkmen foreign policy<br />
and was devised by President Niyazov.<br />
Together with Iran, Turkmenistan is the only other country that<br />
first advocated a joint use of the Caspian Sea resources and<br />
opposed the delimitation of the sea along sectoral lines,<br />
which would give each littoral country its own sea sector<br />
together with the right to explore the seabed resources and<br />
minerals. However, Turkmenistan’s position is shifting.<br />
Turkmenistan has particular differences with Azerbaijan<br />
over the division of the Caspian Sea, claiming that a part<br />
of the sea, known in Turkmenistan as Serdar, belongs to<br />
Turkmenistan and that Azerbaijan is conducting exploration
C A S P I A N S E A<br />
Karabogazkol<br />
Gulf<br />
Turkmenbashi<br />
Etrek<br />
Balkanabat<br />
to Tehran<br />
Kazakhstan<br />
Bereket<br />
Serdar<br />
This map has been prepared exclusively for the convenience of<br />
readers. The denominations used and the boundaries shown on this<br />
map do not imply any judgement on the legal status of any territory<br />
or any endorsement of such boundaries.<br />
4844 IP01 Turkmenistan map<br />
LAKE<br />
SARYKAMYSH<br />
Islamic Republic of Iran<br />
Kunja-<br />
Urgench<br />
KARAKUM DESERT<br />
✈ ASHGABAT<br />
works there illegally. However, Russia’s changing attitude<br />
towards the division of the Caspian Sea resources to accept<br />
delimitation rather than the principle of common use is likely<br />
to affect an overall outcome. A recent initiative by President<br />
Niyazov to convene a presidential summit of the five littoral<br />
states was endorsed by Azerbaijan and Russia. The summit<br />
will take place in spring 2001.<br />
In February 2001, Turkmenistan agreed to export 10 bcm of<br />
gas to Russia this year, at a price of US$ 40 per 1,000 cubic<br />
metres, in addition to 30 bcm of gas sales to Ukraine agreed<br />
in October 2000. To reduce the vulnerability of its economy to<br />
non-payment or transit disruptions, Turkmenistan is exploring<br />
options for alternative gas pipelines. One option would be to<br />
Dashoguz<br />
Darvaza<br />
Seytli<br />
Tedzhen<br />
MARY<br />
Serakhs<br />
Serkhetabat<br />
R . A m u D a r y a<br />
TURKMENABAT<br />
R . M u r g a b<br />
Uzbekistan<br />
Bukhara<br />
Beshkyzyl<br />
Atamurat<br />
Yelkui<br />
LAKE KARAKUM<br />
to Samarkand<br />
Afghanistan<br />
Introduction<br />
Scale<br />
km<br />
0 40 80 120 160 200<br />
Qarshi<br />
build a trans-Caspian pipeline under the Caspian Sea to Turkey,<br />
although disagreements over the terms have put this plan on<br />
hold. Another option consists of an already existing small<br />
pipeline to Iran, whose capacity could be increased once a<br />
pipeline between Iran and Turkey is completed so that Turkmen<br />
gas could be exported to the lucrative Turkish market. However,<br />
a recent gas find in Azerbaijan’s Shah Deniz exploration area in<br />
the Caspian Sea creates competition for Turkmen gas exports<br />
as Azerbaijan is also keen to export gas to Turkey. There are<br />
further options for exporting Turkmen gas through Afghanistan<br />
to Pakistan or through Central Asia to China although the<br />
political situation surrounding these plans is even more<br />
complicated. Turkmenistan will need a carefully crafted foreign<br />
economic policy to secure its future economic prospects.<br />
Turkmenistan <strong>Investment</strong> Profile 3
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
-20<br />
’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01<br />
est proj.<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
800<br />
600<br />
400<br />
200<br />
GDP<br />
% change<br />
0<br />
’97 ’98 ’99 ’00 ’01<br />
est. proj.<br />
0<br />
-200<br />
-400<br />
-600<br />
-800<br />
Consumer prices<br />
Annual average, % change<br />
-1000<br />
’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01<br />
est. proj.<br />
250<br />
200<br />
150<br />
100<br />
50<br />
Current account<br />
US$ millions<br />
Total FDI<br />
US$ millions, cash receipts, net<br />
0<br />
’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01<br />
est. proj.<br />
Source: EBRD, February 2001<br />
4 Turkmenistan <strong>Investment</strong> Profile<br />
Economic summary<br />
Turkmenistan recorded a GDP growth rate of 17.6 per cent in 2000, surpassing the high rate<br />
achieved in 1999. Strong gains in economic growth were a result of resumed gas exports<br />
after a few years of interruption of gas supplies to Ukraine and Russia. It is predicted that<br />
growth could be further accelerated if the country would give momentum to its economic<br />
reforms including the development of the private sector and the unification of the dual<br />
exchange rate. In the absence of alternative pipeline routes, the country remains highly<br />
dependent on the conclusion of gas export agreements with Russia and Ukraine.<br />
GDP growth<br />
According to EBRD, estimated GDP growth in 2000 was 17.6 per cent, following a rate of 16 per<br />
cent in 1999. An increase in industrial output and gas exports helped GDP to maintain this pace of<br />
growth. According to some independent projections, the growth rate for 2001 may fall to 7 per cent<br />
due to limited prospects for further rapid increases in gas production, as well as to Turkmenistan’s<br />
gradual approach to economic reform and commitment to social security and stability, which does<br />
not allow for higher growth rates. However, according to government sources, thanks to existing<br />
contracts to supply 50 billion cubic metres of gas to Russia, Ukraine and Iran, and to ongoing<br />
negotiations to increase the supply this year, a higher rate of growth is expected in 2001.<br />
Inflation<br />
The year-end annual increase in consumer prices in 2000 reached 8 per cent according to official<br />
data, down from 21.2 per cent in 1999. The doubling of wages in December 1999 and bonus<br />
payments made during April 2000 have negatively affected inflation. The moderate nature of the<br />
country’s monetary policy and the dual exchange rate system are likely to add to a significant<br />
increase in the end-year annual inflation rate in 2001. However, as the money supply doubled and<br />
the parallel market exchange rate fell by 40 per cent during the year, the inflation rate is believed<br />
to be higher.<br />
Current account<br />
According to EBRD estimates, the current account deficit declined to US$ 60 million in 2000,<br />
compared to US$ 527 million in 1999, and reserves increased to an estimated US$ 1.7 billion<br />
due to additional foreign loan disbursals under existing agreements. External balances improved<br />
substantially in 2000 because of a good cotton harvest in 1999 and increased gas exports. The<br />
current account deficit is projected to rise to about US$ 150 million again in 2001,as imports<br />
and foreign interest payments increase. According to government statistics, after four years<br />
in deficit the current account recorded a surplus of US$ 385.32 million in 2000, and is<br />
projected to record a surplus in 2001 as well.<br />
Foreign Direct <strong>Investment</strong> and privatisation<br />
According to EBRD preliminary estimates, net FDI was around US$ 100 million, compared to US$ 89<br />
million in 1999. The oil and gas sector received the biggest portion of FDI in 2000. Total net FDI is<br />
expected to increase to US$ 150 million in 2001, with further investments in oil and gas.<br />
Privatisation has been slow, with only around half of all eligible small scale firms privatised. In<br />
addition, the government considers a number of enterprises in the utilities and oil and gas sectors<br />
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<br />
Ministry of Finance, privatisation ground to a virtual halt in 2000, with only 11 units sold.<br />
Government balance<br />
EBRD figures estimate that the government balance was even in 2000 at 0 per cent of GDP, down<br />
from a surplus of 0.9 per cent of GDP in 1999. Government spending accounted for 26 per cent of<br />
GDP, up from 19.6 per cent in 1999. The balance is expected to deteriorate in 2001 to a projected<br />
-3 per cent of GDP.<br />
Exchange rate<br />
Turkmenistan’s currency, the manat (TMM), is not freely convertible. The official exchange rate is<br />
overvalued and the manat trades at a 400 per cent premium on the parallel market. The black<br />
market exchange rate fell in 2000 by 46 per cent of the end-1999 level. The annual average<br />
exchange rate in 2000, which refers to a weighted average between the official exchange rate<br />
(60 per cent weight) and the commercial rate (40 per cent weight), given as the buying rate offered<br />
at commercial banks, was TMM 10,333 to the US dollar, although the official rate was almost half<br />
this amount. With the exception of a brief period in 1998, when the official and parallel market<br />
rates were unified, Turkmenistan has operated with dual exchange rates since the introduction<br />
of the manat in 1993.<br />
Relations with the IMF<br />
The IMF has regularly advised the Turkmen government on macroeconomic policies. However, there<br />
is currently no financial arrangement in place between Turkmenistan and the IMF, and the Fund<br />
has scaled down its presence in Turkmenistan because of differences over economic policy<br />
management. The basic IMF recommendations have focused on currency convertibility, speedy<br />
privatisation, and establishing the necessary legal framework to support these policies.<br />
Selected economic indicators<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
14000<br />
12000<br />
10000<br />
Economic summary<br />
General government<br />
balance<br />
% of GDP<br />
-5<br />
’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01<br />
est. proj.<br />
8000<br />
6000<br />
4000<br />
2000<br />
Exchange rate<br />
Annual average, manats per US$<br />
0<br />
’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01<br />
est. proj.<br />
Source: EBRD, February 2001<br />
1993 1994 1995 1996 1997 1998 1999 2000 2001<br />
est. proj.<br />
GDP (% change in real terms)<br />
Consumer prices<br />
-10.0 -17.3 -7.2 -6.7 -11.3 5.0 16.0 17.0 3.0<br />
(annual average % change) 3,102 1,748 1,005 992 83.7 16.8 24.2 9.1 36.4<br />
Current account (in US$ millions) 776 84 24 2 -580 -935 -527 -60 -150<br />
General government balance (% of GDP) -4.1 -2.3 -2.6 0.3 0.0 -2.7 0.9 0.0 -3.0<br />
Trade balance (in US$ millions)<br />
Total FDI<br />
1,100 485 441 304 -231 -523 -166 550 500<br />
(in US$ millions, cash receipts, net) 79 103 233 108 108 62 89 100 150<br />
External debt stock (US$ millions)<br />
Exchange rate (annual average,<br />
na 418 550 668 1,356 1,750 2,050 2,400 2,400<br />
manats per US$)* na 42 240 3,546 4,627 5,500 9,159 10,333 13,782<br />
Gross reserves, excluding gold<br />
(end-year, US$ millions) 818 927 1,165 1,172 1,285 1,379 1,514 1,704 1,454<br />
* Turkmenistan has had dual exchange rates for most months after the introduction of the manat in November 1993.<br />
The series refers to a weighted average between the official exchange rate (60% weight) and the commercial rate (40% weight),<br />
given as the buying rate offered at commercial banks.<br />
Source: EBRD, February 2001<br />
Turkmenistan <strong>Investment</strong> Profile 5
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
Turkmenistan’s investment <strong>climate</strong> has not had the benefit of extensive market-oriented reforms. Additionally, price and<br />
currency controls remain in place, and privatisation has made little progress. The country has entrepreneurial potential,<br />
but the necessary framework to support it has not yet emerged properly.<br />
Foreign direct investment<br />
Total FDI<br />
US$ millions, cash receipts, net<br />
Estimated total net FDI in<br />
250<br />
2000 amounted to US$ 100<br />
million, up from US$ 89<br />
200<br />
million in 1999. The biggest 150<br />
single sector that attracted<br />
most investment is oil and<br />
100<br />
gas. Foreign investment in oil<br />
50<br />
and gas exploration and<br />
0<br />
’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01<br />
production has picked up over<br />
the past decade, reaching a<br />
Source: EBRD, February 2001<br />
est. proj.<br />
cumulative total of US$ 500 million by 2000. As new PSA<br />
contracts are concluded this amount could increase in the<br />
future. After a failed tender process in 1998, Turkmenistan is<br />
now conducting direct negotiations for a total of 16 offshore<br />
blocks in its sector of the Caspian Sea. Among other sectors<br />
that have attracted foreign investment and could offer<br />
potential, given a more favourable business <strong>climate</strong>, are cotton<br />
and textiles. In 2000, privatisation progressed slowly. However,<br />
the country’s most attractive assets, such as energy utilities<br />
and the telecoms company, which could have the potential to<br />
bring in FDI, are not on offer.<br />
In the past year Turkmenistan focused on upgrading of the<br />
Turkmenbashi refinery and large construction projects requiring<br />
huge capital investment. Although most of these projects are<br />
related to public buildings, one example in infrastructure is the<br />
repair of the Karakum canal, which is used to irrigate a large<br />
area of agricultural land. Another project to construct a water<br />
reservoir in the Karakum desert was initiated in 2000. The<br />
project is planned to be finished by 2010 and will cost around<br />
US$ 5-6 billion. Given that most public utilities are essentially<br />
free of charge, large infrastructure investments will be mostly<br />
financed from foreign sovereign borrowing and energy-related<br />
budget surpluses.<br />
<strong>Investment</strong> policy and incentives<br />
The government recognises that foreign investment is crucial<br />
for the economy and is taking action to prepare the necessary<br />
legislative framework to attract it. Existing foreign investment<br />
6 Turkmenistan <strong>Investment</strong> Profile<br />
<strong>Investment</strong> <strong>climate</strong><br />
legislation includes provisions for the government’s role<br />
in attracting and coordinating foreign investment activity.<br />
The Law on Foreign <strong>Investment</strong>, amended in 1993, provides<br />
the legal framework for foreign investment, including protection.<br />
An investor must own an average of at least 20 per cent of the<br />
capital in a company throughout the calendar year to be<br />
protected by the Law on Foreign <strong>Investment</strong>.<br />
The Law guarantees that foreign investments are not subject<br />
to nationalisation or requisition, and that foreign properties<br />
may only be subject to confiscation through referral to a court<br />
in cases where the foreign investor has acted illegally.<br />
The Law on Ownership adopted in 1993 states that the right to<br />
ownership of all forms of property is recognised and protected<br />
by the state. The law defines three categories of private<br />
ownership: physical persons, legal persons and mixed private<br />
ownership based on incorporation of properties belonging to<br />
physical and legal persons. Foreign citizens have the right to<br />
own any property except for land. They may be allotted a plot<br />
of land for use but without the right of ownership. A Law on<br />
Distribution of Land for Private Ownership, passed at the end<br />
of 1996, allows foreign citizens to lease but not to own land.<br />
Turkmen citizens are eligible to own up to 50 hectares of land<br />
but they cannot sell, exchange or transfer it.<br />
In 1993, Turkmenistan also introduced a Law on Foreign<br />
Concessions. Under this law, foreign concessions are granted<br />
for onshore and offshore areas containing natural resources,<br />
and for investment in industrial enterprises that explore,<br />
develop, extract and use natural resources. Concessions<br />
lasting from five to 40 years are granted on a competitive<br />
basis. Since the passage of a new Law on Hydrocarbon<br />
Resources in March 1997, the government has granted<br />
concessions to several multinational energy companies to<br />
participate in the development of Turkmenistan’s oil and gas<br />
reserves through production sharing and joint venture<br />
agreements. The government has a preference for PSAs,<br />
although the new law also allows for joint ventures.<br />
For example, Dragon Oil, which inherited a joint venture, the<br />
Larmag-Cheleken JV, had to renegotiate its status into a PSA.<br />
The law also recognises international law as a means of<br />
dispute settlement.
Turkmenistan’s economy depends to a significant extent<br />
on the oil and gas sector. The authorities recognise the<br />
need to make contingency plans in case gas exports remain<br />
constrained by limited export outlets and pipelines. One pillar<br />
of this approach has been to attract foreign direct investment<br />
to the oil and gas sector. PSA legislation has been passed<br />
and the energy sector has been restructured following the<br />
formation of Turkmenneft and Turkmengas, respectively the<br />
state oil and gas companies. (See Major Sectors of the<br />
economy: Oil and gas below.) The new PSA legislation creates<br />
the basis for an internationally accepted and transparent legal<br />
structure, which improves prospects for foreign investment.<br />
It introduces international accounting standards into the<br />
energy sector. PSAs are also drawn up individually.<br />
The government has also identified some “priority areas”<br />
to attract foreign investment. Apart from oil and gas,<br />
telecommunications, transportation, industry, irrigation,<br />
agricultural investments and textiles are other priority areas.<br />
The government grants investors in these sectors extra<br />
advantages such as credits guaranteed by Vnesheconombank,<br />
the state bank for foreign economic relations.<br />
The government has also simplified tax legislation to alleviate<br />
the burden on small enterprises for all kind of investments.<br />
Investors who hold more than 30 per cent of hard currency<br />
shares in an enterprise’s capital fund are exempt from<br />
dividend tax. Enterprises are not required to pay the profit tax<br />
until the investors have received a full return on their original<br />
investment. Those who reinvest their profits are exempted<br />
from tax payments on the reinvestment capital. Customs<br />
duties are not charged on foreign investors’ imported property<br />
if it is designed for production purposes or considered to be<br />
part of an enterprise’s capital fund.<br />
The Law on Foreign <strong>Investment</strong> guarantees the protection of<br />
intellectual property. Turkmenistan has also signed the World<br />
Intellectual Property Organisation’s (WIPO) Paris Convention,<br />
and is a member of Eurasian Patent Organisation that was<br />
created as part of the WIPO for the CIS countries. The 1993<br />
Patent Law regulates trademarks in the industrial sector. The<br />
Patent Agency provides state policy for protection of industrial<br />
property rights. Furthermore, a company holding a patent in<br />
Turkmenistan is given favourable tax status provided that the<br />
innovation, once licensed, is used in the company’s own<br />
production. Effective March 1999, a new Copyright Law was<br />
enacted as part of Turkmenistan’s Civil Code.<br />
Challenges for the investment <strong>climate</strong><br />
<strong>Investment</strong> <strong>climate</strong><br />
Attracting foreign investors to non-oil and gas sectors will<br />
depend on improvements in the investment <strong>climate</strong>, which<br />
requires adjustments to macroeconomic policy. The fact<br />
that the economy is tightly controlled and that most foreign<br />
investors have to rely on good relations with top officials to<br />
ensure that their projects receive appropriate government<br />
attention impedes possible investments.<br />
Other deterrents cited by foreign investors are:<br />
• the need for approval of foreign investments by the State<br />
Agency for Foreign <strong>Investment</strong> (SAFI);<br />
• a lack of technical and financial experience in managing<br />
international tenders;<br />
• limited action to privatise medium and large enterprises;<br />
• no foundations for a competitive environment;<br />
• tight restrictions on access to and detention of hard<br />
currencies;<br />
• restrictions on foreign ownership of Turkmen joint stock<br />
companies; and<br />
• excessive involvement of administrative bodies in<br />
commercial transactions.<br />
New laws and amendments to existing ones are required, as the<br />
current legal regime governing foreign investment is inconsistent,<br />
ambiguous and inadequate. The definition of foreign investment<br />
does not include other key foreign investors in the Turkmen<br />
economy such as lenders, lessors, suppliers, and joint ventures<br />
with less than 20 per cent foreign participation. Therefore,<br />
guarantees and benefits extended under existing foreign<br />
investment legislation cover only a limited set of foreign<br />
investors. The implementation and judicial reliability of certain<br />
laws concerning foreign investment remain to be tested. The<br />
legislation provides no direction to the proper enforcement<br />
authority. Decisions made by international arbitration panels<br />
are not generally binding or enforceable in Turkmenistan.<br />
Turkmenistan <strong>Investment</strong> Profile 7
Introduction<br />
<strong>Investment</strong> <strong>climate</strong><br />
Free Economic Zones<br />
There are 10 free economic zones. However, only one of them,<br />
located at Ashgabat International airport, is operational and actively<br />
conducting business. This modern airport provides the opportunity<br />
to develop growing transit business and services.<br />
The other free economic zones are located at Mary-Bayramali,<br />
Okarem-Cheleken, Turkmenabat-Seidi, Bakharden-Serdar, Dashoguz<br />
Airport, Ashgabat-Anau, Ashgabat-Bezmein, Serakhs, and Guneshli<br />
Turkmenistan near Anau.<br />
In theory, the Law on Economic Zones for Free Entrepreneurship<br />
determines the legal regime for conducting business in these<br />
zones. It guarantees the rights of both foreign and domestic<br />
investors, forbids nationalisation of enterprises and<br />
discrimination against foreign investors, and provides<br />
guarantees to foreign investors for repatriating after-tax profits<br />
and exporting production. Enterprises are permitted to set prices<br />
freely for all goods and services within the free economic zones.<br />
All enterprises are exempt from profit taxes for the first three years<br />
of profitable operation. Enterprises with foreign investment greater<br />
than 30 per cent of initial capital will be charged a 50 per cent<br />
profit tax rate during the next 10 years. Profits reinvested in<br />
export-oriented and technically advanced enterprises are<br />
exempt from taxation.<br />
The law also ensures a favourable customs regime within the free<br />
economic zones. Goods and properties imported into or exported<br />
from the zones are exempted from customs duties except for goods<br />
of foreign origin exported from these zones. Although customs<br />
duties have not been introduced for legal entities, excise taxes<br />
for certain goods are charged.<br />
Most of the free economic zones are not fully operational. The<br />
lack of government financial support, inadequate infrastructure<br />
services and the obstacles hindering the development of a private<br />
sector are the main reasons for the weak performance of the free<br />
economic zones.<br />
State Agency for Foreign <strong>Investment</strong> (SAFI)<br />
SAFI is the main government agency responsible for foreign<br />
investment procedures. Among its tasks are to:<br />
• scrutinise all foreign investment proposals;<br />
• assess the feasibility of the project and its likely economic<br />
impact before a company can register and begin operations;<br />
• approve the project;<br />
8 Turkmenistan <strong>Investment</strong> Profile<br />
• remove the companies that are not in compliance with the<br />
Turkmen laws from the Single State Register of Enterprise and<br />
Organisation (SSREO);<br />
• coordinate the government’s foreign borrowing programme;<br />
• assess foreign currency credits which the relevant government<br />
ministries and agencies may have available; and<br />
• approve the allocation of credits before making any commitments<br />
in order to make sure it goes to so-called “priority projects.”<br />
State Agency for Foreign <strong>Investment</strong> (SAFI)<br />
53 Azadli Street, 744000 Ashgabat<br />
Tel: (+993-12) 35 02 31 or 35 03 18<br />
Fax: (+993-12) 35 04 13<br />
Privatisation and restructuring<br />
Since 1997, when the first wave of small-scale privatisation came to<br />
an end, Turkmenistan has managed to sell only some 200 companies<br />
from over 2,000 of the original list of 4,300 privatisable objects still<br />
remaining in state hands. It is one of the few countries in the region<br />
where small-scale privatisation has not yet been completed. However,<br />
the country prefers to take a gradual approach. Privatisation of<br />
medium-sized and large enterprises is now under way and despite<br />
slow progress in 2000, the government expects it to pick up pace in<br />
2001 and the years to come.<br />
The government has made several attempts in recent years to<br />
accelerate the process of medium-scale privatisation. From the total<br />
list of 280 companies, a pilot list of 18 enterprises was drawn up in<br />
1999. By mid-2000, however, privatisation was completed for only six<br />
of these companies. In most cases, shares were distributed among<br />
the workforce, the management and key suppliers to the plant<br />
(particularly in food processing). In June 2000, the government<br />
announced an upcoming tender for 32 medium-sized companies,<br />
but in the end only 11 units were sold during the whole year.<br />
According to official figures, the private sector accounts for about<br />
25 per cent of industrial output. All large enterprises are under state<br />
control. The pilot programme to privatise 18 large companies<br />
brought few tangible results as corporatisation plans have often<br />
faced resistance from stakeholders in the ministries and from<br />
enterprise directors.<br />
As most valuable assets in the energy and textiles sectors remain<br />
under state control and are not offered for sale yet, no substantial<br />
income from privatisation should be expected. However, a model for<br />
the reorganisation of the oil and gas sector has been prepared and<br />
partly implemented. Restructuring involved spinning off non-core<br />
activities and setting up separate oil and gas companies.<br />
(See Major Sectors of the Economy: Oil and gas below.)
Markets and trade<br />
Turkmenistan maintains a significant number of non-tariff barriers<br />
to trade. Among them is the trade contract and investment project<br />
registration requirement. A presidential decree issued in 1999<br />
introduced a 5 per cent customs duty for goods imported to<br />
Turkmenistan by individuals. Duties are not charged on goods that<br />
have been exported previously from Turkmenistan, declared at a<br />
customs point and re-imported into the country. There are excise<br />
duties on a limited number of exported goods such as wool, leather,<br />
and some chemicals. A large number of items imported to<br />
Turkmenistan are subject to 10 to 100 per cent excise duties.<br />
The Foreign Exchange Regulation Law determines the general<br />
principles of foreign exchange operations, the authority of state<br />
bodies in foreign exchange regulation, and the rights of residents<br />
and non-residents regarding foreign exchange ownership and usage.<br />
According to this law, non-residents may freely convert the national<br />
currency, the manat, to hard currency without limitations or<br />
unreasonable delays, provided the amount converted is to pay for<br />
transactions made with Turkmen residents. The law also permits<br />
non-residents to repatriate capital goods previously imported into<br />
Turkmenistan, provided such goods were declared to customs upon<br />
entry. In practice, however, due to the shortage of hard currency,<br />
the Central Bank provides commercial banks with limited amounts<br />
of foreign exchange to convert cash and non-cash manat sums.<br />
Not all requests for manat convertibility are serviced in a timely<br />
manner and in full, which results in delays in receiving hard<br />
currency incomes and impedes doing business.<br />
There are strict rules about currency exchange operations.<br />
The Central Bank allows commercial banks to sell non-cash foreign<br />
exchange at the official exchange rate to legal entities that are<br />
resident in Turkmenistan only for certain purposes. One such<br />
purpose is to repatriate foreign investments and profits, providing<br />
an investment project is registered with the SAFI and the Chief<br />
State Tax Inspectorate (CSTI).<br />
Turkmenistan is not a member of any free trade arrangements<br />
or of the CIS Customs Union.<br />
Taxation and social expenditure<br />
<strong>Investment</strong> <strong>climate</strong><br />
According to the Profit Tax Law, foreign investors with a permanent<br />
establishment in Turkmenistan must pay a 25 per cent profit tax,<br />
a 15 per cent tax on income from dividends, interest, copyrights,<br />
licences, leases, royalties, and other income earned in any sector<br />
of the economy, and a 6 per cent tax on income from international<br />
cargo transport. Foreign entities that do not have permanent<br />
establishments in Turkmenistan are subject to withholding tax at<br />
a rate of 15 per cent on most types of income including dividends,<br />
interest, royalties, rents and services provided to Turkmen<br />
companies. Investors in the oil and gas sector must pay a 25 per<br />
cent profit tax plus a negotiable royalty sum.<br />
The Value Added Tax (VAT) Law requires foreign and domestic<br />
enterprises to pay a 20 per cent tax on the volume of goods and<br />
services produced and/or sold in Turkmenistan. For imported<br />
goods and services, the VAT is charged on the basis of the<br />
difference between a trade contract price and the value.<br />
Foreign entities must pay a property tax of 1 per cent of the<br />
average value of assets. From 1 October 2000, social insurance<br />
fund contributions are charged at a rate of 20 per cent of the<br />
local payroll and should be remitted to the Tax Inspectorate on<br />
the day salaries are paid to local employees. Salaries paid to<br />
expatriate employees are exempt if the source of their payment<br />
is outside the country.<br />
Turkmenistan <strong>Investment</strong> Profile 9
The Turkmen economy relies largely on oil and gas, and agriculture, particularly cotton production. With new agreements and<br />
sales of gas in 2000, export revenues and the general state of the economy have improved, contributing to a higher rate of<br />
GDP growth (17 per cent). Cotton-related industries such as textiles offer good investment opportunities. An increased number<br />
of gas sale agreements is likely to motivate further investments in the oil and gas sector and related industries. Infrastructure<br />
investments, particularly in transportation, are under way and will have a regional impact, with improved road and rail links<br />
between Ashgabat, other regions and neighbouring countries.<br />
Oil and gas<br />
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
Turkmenistan has proven natural gas reserves of three trillion<br />
cubic metres, making it the fourth largest producer in the<br />
world. It also borders the Caspian Sea, which contains<br />
substantial oil and gas reserves, but needs pipeline routes<br />
to export its oil and gas.<br />
In 2000, Turkmenistan produced 7.1 million tonnes of oil and<br />
about 38 billion cubic metres (bcm) of gas. The country aims<br />
to produce 10 million tonnes of oil and 75 bcm of gas per<br />
year. The gas production target is based on the calculation of<br />
30 bcm of gas exports to Russia, 30 bcm to Ukraine, 5 bcm to<br />
Iran and 10 bcm for domestic needs. The oil and gas sector<br />
makes up one-fifth of GDP, and its share may rise in the future<br />
with possible increased findings and sales. The recent gas<br />
deal with Russia is a case in point. In late 1999 Ashgabat<br />
signed an agreement with Moscow for the sale of 20 bcm of<br />
natural gas, which will increase to 50 bcm by 2004. However,<br />
the deal for the continuation of gas delivery to Russia in 2001<br />
was put on hold due to disagreements over the price. Finally,<br />
in February 2001 the two sides reached an agreement for<br />
10 bcm of Turkmen gas to be sold to Russia in 2001 at a<br />
price of US$ 40 per 1,000 cubic metres. Turkmenistan is also<br />
conducting gas sale negotiations with Ukraine, and in October<br />
2000 signed an agreement for the sale of 35 million cubic<br />
metres of Turkmen gas in 2000-01. Under this deal, 5 million<br />
cubic metres of gas was supplied by the end of 2000 at a<br />
price of US$ 38 per 1,000 cubic metres, to be paid for 40 per<br />
cent in currency and 60 per cent in goods and investment<br />
projects. The price will go up to US$ 40 in 2001 and will be<br />
paid on a 50-50 basis in goods and investment projects.<br />
Renewed gas exports will ease foreign exchange shortages.<br />
Foreign investment in oil exploration and production had<br />
reached a cumulative total of US$ 500 million by 2000.<br />
The introduction of production sharing agreement (PSA)<br />
legislation and international accounting standards are<br />
encouraging signs for foreign investment. Direct negotiations over<br />
a total of 16 offshore blocks in the country’s Caspian sector are<br />
under way. The Turkmen government prefers to hold direct talks<br />
10 Turkmenistan <strong>Investment</strong> Profile<br />
Major sectors of the economy<br />
with interested companies. Monument Oil (UK), recently acquired<br />
by Lasmo Oil, made a deal in 1998 to explore the offshore Burun<br />
field in western Turkmenistan and to swap oil with Iran. The<br />
Burun field currently has a capacity of 10,000 barrels per day<br />
(bpd) and is situated in the Nebit Dag (Balkanabat) concession,<br />
which is estimated to have a much greater capacity. UAE-based<br />
Dragon Oil operates in the offshore Block 2 area and produces<br />
about 7,500 bpd. In July 1998, Monument signed two PSAs with<br />
Mobil (US) and state oil company Turkmenneft for an onshore<br />
concession in Garashsyzlyk. Turkmenneft will be responsible for<br />
production in and development of existing mature fields covered<br />
by the agreement area. The second PSA covers reserves under<br />
the Kotor Tepe and Barsa Gelmes fields. Mobil is the operator,<br />
holding a 52.4 per cent interest. Mobil and Monument together<br />
plan to invest US$ 100 million to conduct seismic surveys and<br />
drill wells. If a suitable export route becomes available, all these<br />
fields could yield substantial increases in oil and gas production<br />
by 2006-07.<br />
Turkmenistan is continuing to harmonise its regulatory framework<br />
to make it easier for foreign companies to operate within a legally<br />
consistent environment. Activities handled by the Ministry of Oil<br />
and Gas were unbundled into five state-owned companies.<br />
Turkmenneft carries out oil production. Turkmengeologia<br />
is responsible for exploration, while oil and gas construction is<br />
the responsibility of Turkmenneftgazstroi. Turkmenneftegas is in<br />
charge of gas exports. Turkmengas deals with gas production.<br />
Uncertainty about the future of the Trans-Caspian pipeline<br />
project centres mainly on disagreement over the terms, including<br />
gas sale prices. The project proposes to build a pipeline to<br />
carry Turkmen gas to Turkey via Azerbaijan, running under the<br />
Caspian Sea and across Georgia (see pipeline map, page 12).<br />
It involves a consortium led by PSG International, a global<br />
pipeline development company jointly owned by GE Capital<br />
Structured Finance Group (US) and Bechtel Enterprises (US).<br />
Royal Dutch/Shell (UK-Netherlands) is also a member of<br />
the consortium. PSG International signed a US$ 2.5 billion<br />
agreement with Turkmenistan to lead the development of the<br />
Continued on page 13
Dragon Oil<br />
The Dragon Oil project in the Caspian<br />
Sea is an excellent example of an<br />
international co-operative venture in oil<br />
exploitation, which in effect provides<br />
something for everyone. This is the first<br />
international offshore project that the<br />
EBRD has been involved with in<br />
Turkmenistan and has been a difficult<br />
project to structure. Together with<br />
investors from Ireland and the Middle<br />
East, the EBRD has provided project<br />
financing totalling US$ 75 million, part<br />
of which will be syndicated to other<br />
commercial banks. The total project<br />
cost is estimated at US$ 520 million.<br />
Dragon Oil’s main asset is its share<br />
in the Cheleken Production Sharing<br />
Agreement (PSA) for Block II located in<br />
the Turkmen zone of the Caspian Sea.<br />
Dragon Oil plc, an Irish registered oil<br />
and gas producer, is 70 per cent owned<br />
by Emirates National Oil Company<br />
(ENOC) of Dubai, United Arab Emirates<br />
(UAE). ENOC operates one of the most<br />
modern refineries in the Arabian Gulf,<br />
owns a network of retail petrol stations<br />
throughout the UAE and is the main<br />
supplier of jet fuel at Dubai airport.<br />
Dragon Oil itself is providing technical<br />
and management expertise, while<br />
ENOC will be able to offset its crude<br />
oil purchase with its own production.<br />
Through Turkmenneft, the national oil<br />
company, the Turkmenistan government<br />
will benefit from royalties and a share<br />
of production. The production can either<br />
be refined locally or exported to<br />
international markets.<br />
Although PSAs are common enough in<br />
the oil industry across the world, the<br />
application of the appropriate legislation<br />
is untested and remains a major transitional<br />
challenge for the contractors and<br />
the authorities. The borrower, Dragon<br />
Oil (Turkmenistan), a counterpart to the<br />
PSA, is 100 per cent owned by Dragon<br />
Oil plc. The EBRD has also signed a<br />
direct agreement with the Competent<br />
Body for the Development of<br />
Hydrocarbon Reserves, stipulating the<br />
role of the bank in this project.<br />
In 1999 the EBRD agreed to go ahead<br />
with a financing package of US$ 75<br />
million for the commercial development<br />
of the Cheleken PSA concession. The<br />
loan came into effect in 2000 and the<br />
first disbursement was made at yearend.<br />
The investment is consistent with<br />
the Bank’s Natural Resources Policy to<br />
“support independent oil companies<br />
that provide an important contribution<br />
to production volumes in the present<br />
development phase.”<br />
The EBRD’s loan is in two tranches.<br />
The first US$ 60 million is being made<br />
to Dragon Oil (Turkmenistan) Ltd., and<br />
the second tranche of the facility, up to<br />
US$ 15 million, will be in the form of a<br />
syndicated loan through a consortium of<br />
international banks. This will be the first<br />
time that the EBRD has attempted to<br />
mobilise a new source of commercial<br />
credit for a Central Asian country.<br />
Cheleken PSA’s main reserves lie in two<br />
fields – Lam and Zhdanov. The concession<br />
area covers 950 square kilometres<br />
with total remaining proven reserves in<br />
the two fields estimated at around 122<br />
million barrels, and total proven plus<br />
probable reserves estimated at around<br />
600 million barrels. The production from<br />
Case study<br />
proved and probable reserves is<br />
expected to peak at around 80,000<br />
barrels per day.<br />
The two fields are located in shallow<br />
water, in depths of between 20-30<br />
metres and are drilled to between<br />
1,400 and 4,000 metres. Much of<br />
the oil extraction infrastructure for<br />
the fields was completed during<br />
Soviet times, but only 12 out of the<br />
61 platforms are currently producing.<br />
The EBRD funding is being used to<br />
finance the rehabilitation of the field<br />
including new drilling, upgrading of<br />
onshore and offshore facilities,<br />
and development of crude oil<br />
transportation infrastructure. The<br />
Soviet-built platforms and flow lines<br />
need substantial refurbishment to<br />
prevent environmental and safety<br />
problems. The latter consideration<br />
is a significant factor, as the EBRD’s<br />
presence will ensure that a<br />
satisfactory environmental action plan<br />
is implemented with the introduction<br />
of advanced technology and standards.<br />
An environmental action plan has been<br />
developed in partnership with the<br />
government and in consultation with<br />
the public to minimise damage from<br />
any oil spill that may occur.<br />
This is the EBRD’s first investment<br />
in the Turkmen oil industry with the<br />
aim not only of boosting oil production<br />
and exports but also of bringing in new<br />
business practices, technologies, and<br />
environmental standards so as to<br />
enhance the overall oil and gas<br />
industry in the country.<br />
Turkmenistan <strong>Investment</strong> Profile 11
Map of existing and proposed oil and gas pipelines<br />
UKRAINE<br />
Black Sea<br />
Ankara<br />
TURKEY<br />
Novorossiysk<br />
Samsun<br />
Çeyhan<br />
12<br />
Tikhoretsk<br />
12 Turkmenistan <strong>Investment</strong> Profile<br />
Dzhubga<br />
SYRIA<br />
Existing pipeline<br />
Proposed pipeline<br />
Active (2000) gasline proposal<br />
Pipeline under construction<br />
CPC Caspian Pipeline Consortium<br />
Supsa<br />
3<br />
11<br />
RUSSIAN<br />
FEDERATION<br />
CPC<br />
Izobilnoye<br />
2<br />
Erzerum<br />
5<br />
1<br />
Midyat<br />
CHECHNYA<br />
GEORGIA<br />
1. Baku-Novorossiysk existing pipeline primarily used by SOCAR.<br />
2. Baku-Supsa “Early Oil” existing pipeline used by the Azerbaijan<br />
International Operating Company (AIOC).<br />
3. Baku-Tbilisi-Ceyhan (BTC) route agreed by the governments<br />
of Azerbaijan, Georgia and Turkey and endorsed by the government<br />
of the USA; financing yet to be agreed.<br />
4. Baku-Iran route, possible Azerbaijan option studied by TotalFinaElf.<br />
5. Atyrau-Novorossiysk route now under construction.<br />
6. Atyrau-Samara-Druzhba existing line; Kazakhstan would like<br />
capacity increased.<br />
7. Kazakhstan-China route, under study by China National<br />
Petroleum Corporation.<br />
10<br />
ARMENIA<br />
IRAQ<br />
14<br />
Tabriz<br />
Caspian<br />
AZERBAIJAN<br />
4<br />
IRAN<br />
Sea<br />
This map has been prepared exclusively for the<br />
convenience of readers. The denomination used<br />
and the boundaries shown on this map do not<br />
imply any judgment on the legal status of any<br />
territory or any endorsement of such boundaries.<br />
4924 IP01 Pipelines map<br />
Aktau<br />
Baku<br />
Tehran<br />
Qom<br />
Isfahan<br />
To Samara and the Druzhba system<br />
6<br />
Tengiz<br />
9<br />
Atyrau<br />
8,9<br />
Uzen<br />
Korpedzhe<br />
KAZAKHSTAN<br />
13<br />
Kurt-Kui<br />
8<br />
7<br />
To China<br />
UZBEKISTAN<br />
10<br />
Aral<br />
Sea<br />
Bovrideshik<br />
Khivinskaya<br />
TURKMENISTAN<br />
0 Miles 250<br />
0 Km 400<br />
8. Tengiz/Uzen-Kharg route, proposed by TotalFinaElf.<br />
9. Trans-Caspian Oil proposed route (extension to BTC).<br />
10. Azerbaijan-Turkey gas pipeline under consideration by<br />
the Shah Deniz consortium.<br />
11. Trans-Caspian Gas Pipeline (extension to Azerbaijan –<br />
Turkey gas pipeline).<br />
12. Blue Stream Russia-Turkey gas line; under construction.<br />
13. KKK gas line, Turkmenistan’s only route to by-pass Russia.<br />
14. Tabriz-Erzurum gas line; Iranian section complete, Turkish<br />
section under construction.<br />
Source: EBRD, East European Energy
pipeline project and conclude agreements with other prospective<br />
consortium members. Bechtel was to provide engineering,<br />
procurement, and construction services, and GE Capital Finance<br />
Group was to arrange the financing. However, PSG has since<br />
reduced its presence in Turkmenistan, citing delayed procedures<br />
and uncertainties over the gas sale deal, and Royal Dutch/Shell<br />
(UK-Netherlands) has taken over the role of consortium leader.<br />
There are various other pipeline proposals to export Turkmen<br />
gas via Iran and Turkey to Europe. Talks are also under way on<br />
the sale of liquefied natural gas (LNG) to Pakistan. President<br />
Niyazov has invited Pakistani companies to participate in the<br />
construction of a liquefied natural gas plant and in a project<br />
to modernise the Seidi oil refinery in eastern Turkmenistan.<br />
Downstream activities<br />
Most oil for domestic consumption is processed at the<br />
Turkmenbashi refinery on the Caspian Sea, which is being<br />
upgraded at a cost of about US$ 1 billion including a US$ 400<br />
million polypropylene plant, one of the largest single investments<br />
in the country. The first stage of the project foresees increasing<br />
production to 6 million tonnes a year. It is also hoped to produce<br />
200,000 tonnes of polymers a year.<br />
Turkmenistan has another refinery at Seidi, Turkmenabat, which<br />
is also being upgraded as it has been operating under capacity.<br />
Current production from the two refineries is about 240,000<br />
barrels a day. The country plans to increase refining capacity<br />
at Seidi refinery to 3-3.5 million tonnes per year by 2003.<br />
According to the National Institute of State Statistics and<br />
Information, oil refining production grew by 8 per cent in the<br />
first nine months of 2000, compared to the same period in<br />
1999. There was also a 19 per cent increase in production<br />
in the chemical and petrochemical industries.<br />
Agriculture and agribusiness<br />
Turkmenistan is a wheat and major cotton producer. According<br />
to official statistics, the grain harvest in 2000 amounted<br />
to 1.7 million tonnes, above the target grain harvest of 1.6<br />
million tonnes, but due to a severe drought in Central Asia<br />
in 2000 the actual figure is believed to be below that target.<br />
The government is aiming in the long term at self-sufficiency in<br />
grain, which is about 1.5 million tonnes per year, although the<br />
targeted production level for 2001 has been set at 2 million<br />
tonnes. A Programme for the Development of the Agro-<br />
Industrial complex is a key element in the Strategy for Socioeconomic<br />
Transformation for 2010. The government is also<br />
planning to build more mills and import agricultural equipment.<br />
Major sectors of the economy<br />
There is substantial purchase of agricultural equipment such<br />
as tractors particularly from Belarus to increase production<br />
and quality, and farmers are being encouraged to switch to<br />
mechanised methods.<br />
Production of cotton, regarded as “white gold,” is an essential<br />
agricultural activity. Of a government target of 1.3 million<br />
tonnes of raw cotton, 1.03 million tonnes was harvested in<br />
2000, according to official statistics. Unofficially, the harvest<br />
is estimated at less than 1 million tonnes due to drought. The<br />
government aims to increase annual cotton output to 3 million<br />
tonnes a year by 2010. The targeted production level for 2001<br />
is 1.8-2 million tonnes.<br />
Given quality cotton supplies, the government has been<br />
developing a domestic textiles industry that offers potential for<br />
foreign investment. One of the main foreign companies involved<br />
is Chalik Holding (Turkey), which is a partner in the EBRD’s Gap<br />
Turkmen Jeans Project as well as in a number of other projects<br />
with the Ministry of Textiles including the US$ 168 million<br />
Ashgabattekstil plant. In the last nine years Turkish companies<br />
have invested more than US$ 500 million in various cotton<br />
processing plants and textile mills in Turkmenistan.<br />
Turkmenistan produces quality cotton fibre and clothing<br />
products in textile complexes equipped with modern machinery.<br />
The country aims to increase the number of modern production<br />
facilities to 20 in the coming years, which would bring raw<br />
cotton processing capacity to 3.2 million tonnes a year.<br />
Land reform and ownership<br />
Agricultural reforms in Turkmenistan have progressed very<br />
unevenly. Nevertheless, Turkmenistan has taken a lead in the<br />
region in reforming land tenure systems with the 1997 decree<br />
on land privatisation. Former collective farm land has been<br />
parcelled into individual plots, the majority of which are leased<br />
out to individual households or small groups. According to a<br />
World Bank survey, only 16 per cent of land in Turkmenistan<br />
remains in joint use.<br />
Turkmenistan has launched a gigantic project to build a huge<br />
artificial lake of up to 4,000 square kilometres in size in the<br />
Karakum desert. The aim is to help develop 10,000 hectares of<br />
land in the desert and meet water needs for 50 years. However,<br />
some environmentalists have commented that in the long term<br />
the lake could have negative environmental implications.<br />
Turkmenistan <strong>Investment</strong> Profile 13
Introduction<br />
Major sectors of the economy<br />
Energy<br />
There are substantial investment plans in this sector totalling<br />
US$ 2.2 million, about US$ 2 million of which is expected to<br />
come from foreign sources. Energy production will be increased<br />
and the surplus will be exported. In October 2000,<br />
Turkmenistan agreed to sell 300 million kWh of electricity<br />
to Turkey in 2001. Turkmenistan aims to generate 4,193<br />
megawatts (MW) per year by 2010, up from the present level<br />
of 2,652 MW. As part of the plan to increase foreign revenues,<br />
new export transmission networks to Pakistan, Iran, Turkey and<br />
other Central Asian countries will be built. The extension of a<br />
new export transmission line from Belek, running through Kum-<br />
Dag, Madau and Erek to the Iranian border was completed in<br />
1999 to export electricity to Turkey.<br />
There are also plans to build four new thermal power stations<br />
at Etrek, Dashoguz, Mary and Lebap. However, lack of reforms<br />
in the energy sector hinders the involvement of IFIs, preventing<br />
further investments and therefore development. Power, like gas<br />
and water, remains free of charge for most households and is<br />
hugely subsidised for industrial customers. The most valuable<br />
assets in the energy sector are excluded from privatisation.<br />
Telecommunications<br />
This sector offers a wide range of opportunities for investors and<br />
is one of the least developed in the region. There are plans to<br />
increase the number of telephone subscribers and also upgrade<br />
all communication systems, for which the country has adopted<br />
a strategy for the first 10 years of the millennium. Telephone<br />
exchange systems in particular need to be upgraded. Some<br />
foreign companies such as Siemens (Germany), Alcatel (France),<br />
and Barash (US) have in the past been offered contracts to<br />
modernise old analogue equipment and to introduce cellular and<br />
paging systems. German companies have installed more than 20<br />
digital exchanges in recent years, increasing fixed line phones by<br />
110,000. The country is also connected to some CIS countries<br />
via satellite channels. Siemens and Alcatel are installing a mobile<br />
telephone network with 7,000 lines and are upgrading part of the<br />
fixed telephone network in Ashgabat at a cost of US$ 1 million.<br />
State-owned monopoly Turkmentelecom provides local public<br />
telephone services and also Internet access. MCI (US) won<br />
a contract in 1997 to provide Internet access, which became<br />
available in 1998. It provided 15 digital channels for e-mail and<br />
Internet services and also installed a direct link with the US.<br />
However, in late 2000 the government annulled the licences<br />
of existing private Internet providers.<br />
14 Turkmenistan <strong>Investment</strong> Profile<br />
Transport<br />
Turkmenistan is not as geographically isolated as some other<br />
Central Asian countries because of its access to the Caspian<br />
Sea and the Volga-Don canal. In 1996, the most recent year for<br />
which data are available, Turkmenistan had 24,000 kilometres<br />
of road and 2,187 kilometres of railway track. The transport<br />
sector is in dire need of investment. However, various road, rail<br />
and air projects are being carried out. A US$ 34 million World<br />
Bank project to upgrade the public transport systems in<br />
Ashgabat, Dashoguz and Mary is under way. In 1999 President<br />
Niyazov launched a 1,000-day programme to build new roads<br />
and railways and upgrade existing ones to increase freight and<br />
haulage capacity by 50 per cent.<br />
However, a more rigorous economic evaluation of some of the<br />
proposed projects is needed if Turkmenistan is to avoid costly<br />
investments that divert scarce resources away from less<br />
ambitious projects with higher rates of return.<br />
Road<br />
The government is conducting a number of major road renewal<br />
projects at state expense, except for a stretch of the Ashgabat-<br />
Mary road which is being financed by the Islamic Development<br />
Bank (IDB). In view of the poor condition of existing roads, all<br />
the rehabilitation projects involve building new roads from<br />
scratch.<br />
Construction of a 600-kilometre road between Ashgabat and<br />
Dashoguz started in spring 2000. This major project will<br />
improve the existing road between the capital and the north of<br />
the country, which needs extensive upgrading. Another project,<br />
under the umbrella of the EU’s TRACECA programme (see<br />
opposite page), involves upgrading of the 350-kilometre road<br />
between Ashgabat and Mary, the country’s second most<br />
developed region. Construction firm Mensel (Turkey) is to<br />
carry out the work once the financing is guaranteed. The<br />
IDB is financing one stretch of this road.<br />
Rehabilitation of the road running 600 kilometres from<br />
Ashgabat to Turkmenbashi port will improve the existing link<br />
between the capital city and the oil-producing western region.<br />
The project has been under way since mid-1999.<br />
Rail<br />
A new 203-kilometre railway line (Turkmenabat-Atamurat)<br />
along the Amu Darya River opened in 1999, with a capacity<br />
of 4 million tonnes of freight and 650,000 passengers a year.<br />
A railway link with Iran was opened in 1996. Modernisation<br />
Continued on page 16
TRACECA stands for the Transport<br />
Corridor Europe Caucasus Asia, the<br />
EU-sponsored umbrella programme to<br />
coordinate the development of east-west<br />
transit routes. The transport corridor<br />
runs from Europe across the Black Sea,<br />
through the Caucasus and the Caspian<br />
Sea to Central Asia, and links up with<br />
the EU’s Trans European Networks<br />
(TENs), which cover the transport system<br />
for EU countries, and its Pan-European<br />
Transport Corridors, which cover the<br />
rest of Europe.<br />
Under the TRACECA programme,<br />
in 1998 the relevant countries signed<br />
a multilateral agreement on transport<br />
(“MLA”), which aims to help develop<br />
economic relations, trade and transport<br />
communications in the region, ensure<br />
access to world markets by road, rail<br />
and sea, ensure safety and<br />
environmental protection, harmonise<br />
transport policy and legal structures,<br />
and create equal conditions for<br />
competition in transport operations.<br />
Signatory states are: Caucasus and<br />
Central Asian countries, Moldova,<br />
Ukraine, Turkey, Romania and Bulgaria.<br />
TRACECA’s work includes: financing<br />
technical assistance for transport<br />
infrastructure, legal and regulatory<br />
issues and management training;<br />
cooperation with IFIs on major<br />
infrastructure projects; and fostering<br />
and coordinating regional cooperation<br />
in transport.<br />
There are two supporting structures,<br />
the Intergovernmental Commission at<br />
the ministerial level, and the Permanent<br />
Secretariat, based in Baku. The<br />
Intergovernmental Commission, including<br />
heads of government and transport<br />
ministers identified priorities such as<br />
harmonising tariff liberalisation and<br />
simplifying customs and border<br />
procedures. All the participants<br />
recognise the importance to regional<br />
Major sectors of the economy<br />
TRACECA: The Great Silk Road Revival<br />
Sofia<br />
Israel<br />
Bulgaria<br />
Turkey<br />
Jordan<br />
Romania<br />
Turkey<br />
Ukraine<br />
Moldova<br />
Kiev<br />
VarnaSupsa<br />
Poti<br />
Ankara<br />
Bucharest<br />
Burgas<br />
Istanbul<br />
Chisinau<br />
Odessa<br />
B lac k Se a<br />
LebanonBaghdad<br />
Damascus<br />
Saudi Arabia<br />
Constantza<br />
Syria<br />
Iraq<br />
Batumi<br />
D n i e p e r<br />
Novorossiysk<br />
Yerevan<br />
Georgia Tbilisi<br />
Armenia Azerbaijan Baku<br />
Teheran<br />
Moscow<br />
V o lga - D o n C a n a l<br />
Caspian<br />
S e a<br />
V o l g a<br />
Turkmenbashi<br />
I s l a m i c R e p u bli c o f I r a n<br />
Aktau<br />
R u s s i a n F e d e r a t i o n<br />
Aktobe<br />
Turkmenistan<br />
Uzbekistan<br />
Ashgabat<br />
A ral<br />
S e a<br />
A m u D a r y a<br />
S<br />
y r<br />
D a r y a<br />
Samarkand<br />
development of reviving the ancient<br />
“Silk Road” through mutual cooperation.<br />
Three priority programmes established<br />
for 2001 are harmonisation of frontier<br />
procedures, establishment of a common<br />
legal basis for transit haulage, and<br />
elaboration of a common policy for<br />
transit duties. These are to be financed<br />
through EU technical assistance funding.<br />
A major TRACECA project is the<br />
upgrading of the container services<br />
between Turkmenbashi port and Baku<br />
port in Azerbaijan. The two ports occupy<br />
key strategic positions on the transport<br />
route across the Caspian Sea and are<br />
regarded as potential bottlenecks in<br />
the flow of container traffic along the<br />
TRACECA corridor. The project aims to<br />
improve container handling facilities at<br />
the two ports, maintain and improve<br />
vessels linking them and assist in<br />
restructuring the management of the<br />
ports and shipping lines.<br />
Astana<br />
K a z a k h s t a n<br />
Tashkent<br />
Tajikistan<br />
Sea<br />
Road<br />
Rail<br />
This map has been prepared exclusively for the<br />
convenience of readers. The denominations used<br />
and the boundaries shown on this map do not<br />
imply any judgement on the legal status of any<br />
territory or any endorsement of such boundaries.<br />
Bishkek<br />
Kyrgyzstan<br />
4849 IP01 Traceca map<br />
Almaty<br />
Kabul<br />
A f g h a n i s t a n<br />
Turkmenistan <strong>Investment</strong> Profile 15
Introduction<br />
Major sectors of the economy<br />
work is under way at Ashgabat locomotive depot. Financing<br />
is being provided by the Japanese Overseas Economic<br />
Cooperation Fund. Dai Nippon and Itochu, both Japanese, won<br />
a tender worth US$ 37.5 million to modernise rail links. Among<br />
a series of infrastructure projects begun in early 2000 is the<br />
construction of a railway line between Ashgabat in the south<br />
and Dashoguz in the north, to be completed by 2006.<br />
Air<br />
An additional runway was opened at Ashgabat airport in 2000.<br />
Access to passenger terminals has been made easier.<br />
Balkanabat Airport is to have a new runway. Thomson (France),<br />
which equipped Ashgabat airport, is also installing air traffic<br />
control systems at Turkmenbashi and Turkmenabat airports.<br />
There are also several projects to upgrade facilities at other<br />
regional airports to improve domestic air services. The national<br />
airline, Turkmen Hava Yollari, has announced plans to replace its<br />
entire fleet with Boeing aircraft. The airline will also receive three<br />
Boeing 717s in 2001 as part of a deal signed in July 2000.<br />
Sea ports<br />
Modernisation of Turkmenbashi port is to be accelerated. The<br />
port is an important gateway for the entire Central Asian region.<br />
The EBRD has provided a loan of € 32.23 million towards a<br />
total project cost of € 48.95 million (under the TRACECA<br />
umbrella – see above) and is helping restructure management<br />
systems. Turkey’s STFA has won a US$ 40 million tender to<br />
upgrade the passenger ferry and dry bulk cargo terminals.<br />
Development of a regional transportation system<br />
Turkmenistan is affected by the interdependent structure of Central<br />
Asia’s transport networks. Any disruption to cross-border transport<br />
services can have a damaging effect on trade and travel. Therefore,<br />
development of a regional transportation system is of priority among<br />
the Central Asian states, who need to focus on upgrading their<br />
transport networks to increase trade with each other and with other<br />
neighbours such as China, Iran, Turkey and Pakistan. Economic links<br />
between the Central Asian countries are hampered by the awkward<br />
legacy of the Soviet-era transport system. Kazakhstan, Kyrgyzstan,<br />
Tajikistan, Turkmenistan and Uzbekistan need to adapt a transport<br />
network that was in place when the five former Soviet republics were<br />
oriented exclusively toward Russia.<br />
There were no rail or pipeline connections to the south as all<br />
transport links led north to Russia or through the Caucasus.<br />
16 Turkmenistan <strong>Investment</strong> Profile<br />
The fact that transport networks in Iran, Pakistan and Turkey have<br />
also long been oriented to the south towards ports on the Indian<br />
Ocean and the Mediterranean Sea, rather than towards Central Asia,<br />
has further complicated the situation. Such physical difficulties<br />
stand in the way of a rapid expansion of intra-regional trade and<br />
the development of new outlets for Central Asian trade on world<br />
markets. This physical structure and the northern orientation of the<br />
transport infrastructure is influencing post-independence trade flows.<br />
Oil and gas exports from Kazakhstan and Turkmenistan, for<br />
example, continue to flow to the CIS, despite some disadvantages.<br />
The most urgent area for reorientation is the rail network, which was<br />
the most important part of the old Soviet transport system. The<br />
Central Asian republics are linked to one another and to the rest<br />
of the FSU by a few key routes, which do not always take republic<br />
borders into account. The railway from Osh, the second largest city<br />
in Kyrgyzstan, to Bishkek passes through Tajikistan, Uzbekistan and<br />
Kazakhstan before re-entering Kyrgyzstan just before Bishkek.<br />
However, railroads, like pipelines, are expensive to build, and<br />
networks are only being modified slowly. To give another example,<br />
Turkmenistan is limited by a pipeline network that runs through<br />
Russia, leaving it dependent on former Soviet customers who have<br />
often failed to pay their bills for gas. Kazakhstan and Kyrgyzstan<br />
have also had disputes over unpaid rail transit bills, leading to<br />
closure of common borders. For lack of alternative routes, Kazakh<br />
oil is transported through a Russian pipeline company. A large<br />
proportion of oil from the Tengiz field is shipped by train to the Baltic<br />
ports or across the Caspian Sea by barge and then by train to Black<br />
Sea ports as the only, expensive alternative.<br />
The poor condition of roads is another problem for increasing trade<br />
volumes. The least limited mode of transport and least bound by<br />
history is air, but it is expensive. Although the aviation networks<br />
are still dominated by intra-CIS flights, the national airlines have<br />
established some international routes and are making steady<br />
progress in this respect.<br />
In order to tackle these problems, more investment and cooperation<br />
are needed in the maintenance and upgrading of roads, railroads,<br />
and pipelines before the existing system comes close to collapse.<br />
Improving the roads will yield the most immediate benefits. The<br />
Lugovoye (Kazakhstan) via Bishkek (Kyrgyzstan) to Balykchy<br />
(Kyrgyzstan) railway route and the Andijan (Uzbekistan) via Osh<br />
(Kyrgyzstan) to Irkeshtam (Kyrgyzstan) road route have been singled<br />
out as priority projects by the relevant governments. They have<br />
agreed to set up working groups to coordinate the implementation<br />
of each project and help resolve any issues involved.
Financial sector<br />
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
The financial sector is largely controlled by the government. Financial intermediation to the private sector is limited, with most<br />
bank lending to the state sector under government direction. Some progress in developing banks for SME lending has been<br />
made with the support of the EBRD. Capital markets have yet to be established.<br />
Banking sector<br />
The banking sector remains small and access to finance is<br />
limited. The sector still bears the characteristics of the old<br />
Soviet system, and continues to be controlled from above.<br />
More than 95 per cent of credit still goes to the state sector,<br />
while the availability of financial intermediation to the private<br />
sector is minimal. Most lending is provided by state-owned<br />
banks under the direction of the government and goes<br />
to favoured sectors such as oil and gas and agriculture.<br />
Development of commercial banking, including small private<br />
banks, has been constrained by the country’s macroeconomic<br />
environment, lack of private sector development and, most<br />
importantly, excessive government involvement in the economy.<br />
There are 12 commercial banks. Five are state-owned,<br />
including Turkmen Vnesheconombank (which deals with foreign<br />
trade and is the channel through which the state borrows<br />
abroad), Sberbank (the Savings Bank and recipient of most<br />
household desposits), Turkmenistan Bank, Investbank and<br />
Daykhanbank (which finances the agricultural sector). Three<br />
of the 12 are joint-stock commercial banks – Senagat Bank,<br />
Garashsyzlyk Bank (a merger of Gaz Bank and Ashgabat Bank),<br />
and the International Bank for Reconstruction, Development<br />
and Promotion of Entrepreneurship of Turkmenistan. A fourth<br />
joint-stock commercial bank, Obabank, was liquidated in<br />
September 2000. Two others are joint banks with foreign<br />
participation and the remaining two are branches of foreign<br />
banks operating in Turkmenistan. Most banks engage in<br />
financing a specific economic sector or selected public<br />
enterprises. Daykhanbank has retained its agricultural focus<br />
since absorbing the Co-op Bank.<br />
According to the Central Bank of Turkmenistan, personal bank<br />
deposits in local and foreign currencies increased by 53.5 per<br />
cent in the first half of 2000. However, total bank deposits are<br />
no more than 6 per cent of GDP and the majority are held by<br />
enterprises. The five state commercial banks account for<br />
around 80 per cent of total assets and deposits in the banking<br />
system. Most loans are to state enterprises. The term structure<br />
is heavily weighted towards short-term instruments. Any existing<br />
long-term loans are state directed credits, mostly at preferential<br />
interest rates. Average interest rates are 3.2-20 per cent on<br />
local currency deposits and 5.2-35 per cent on local currency<br />
loans, depending on maturity, type of borrower and type of<br />
lending institution. The equivalent figures for foreign exchange<br />
transactions are 5-21 and 5-13 per cent. Total reported net<br />
domestic bank assets do not exceed 20 per cent of GDP.<br />
Four of the largest banks now prepare their accounts according<br />
to International Accounting Standards (IAS) and are providing<br />
SME credits under an EBRD credit line with around US$ 5<br />
million disbursed. Under the agreement with the EBRD, the<br />
banks will need to meet traditional financial criteria such as<br />
capital adequacy, liquidity and maximum exposure, based on<br />
IAS audit figures.<br />
The Central Bank has issued new minimum capital<br />
requirements of US$ 5 million at the official exchange rate for<br />
all private banks, and US$ 10 million for the three largest state<br />
banks. It has also drawn up a timetable for each individual<br />
bank to meet the requirements. The Central Bank plans to<br />
introduce IAS accounting for all banks in 2001. Although<br />
banking supervision is weak, the Central Bank is making an<br />
effort to improve monitoring procedures and the enforcement<br />
of capital requirements. The Central Bank gained relative<br />
autonomy in 1997 as part of an attempt at stabilisation.<br />
However, political appointments have prevented it from fully<br />
exercising this autonomy.<br />
Turkmenistan <strong>Investment</strong> Profile 17
Introduction<br />
Financial sector<br />
Foreign involvement in the banking sector<br />
A number of foreign banks are cooperating with the Central Bank<br />
and others on training and financing activities. The Central Bank<br />
sends Turkmen bankers to Pakistan for international banking<br />
courses organised by the National Bank of Pakistan (NBP) in<br />
Karachi. The NBP has a branch in Turkmenistan providing various<br />
banking services including checking accounts, foreign currency<br />
conversion, letters of credit and interest-bearing foreign exchange<br />
accounts. The course aims to teach Turkmen bankers modern<br />
banking techniques and equip them with skills to mobilise financial<br />
resources derived from oil and natural gas towards developing the<br />
country’s agricultural base.<br />
The Turkmen-Turkish Joint Stock Commercial Bank, founded in 1993<br />
by Turkey’s state-owned Ziraat Bank and the Turkmen state-owned<br />
Daykhanbank, deals with foreign exchange auctions through<br />
Daykhanbank. The bank has correspondent relations with such large<br />
American banks as Chase Manhattan, Citibank and Bank of America<br />
through Ziraat Bank’s branches in Turkey.<br />
In October 2000 Deutsche Bank (Germany) extended a cooperation<br />
agreement, initially signed in 1996, with Turkmenistan. Under the<br />
agreement signed by the German bank, which has a branch in<br />
Ashgabat, and the Turkmen President, a preliminary credit<br />
agreement will be signed to finance a number of investment projects<br />
in the oil and gas sector, including financing of imported equipment<br />
and services. The agreement envisages allocating credits to<br />
Turkmen Vnesheconombank to finance medium-term commercial<br />
deals, as well as training Turkmen bankers in project financing and<br />
bank auditing. Deutsche Bank will also open a credit line to<br />
Turkmenistan for short and long-term commercial transactions<br />
and provide consultancy on certain projects.<br />
Russia’s joint stock Rossiysky Kredit Bank has a branch in<br />
Turkmenistan, which opened in 1995. The bank provides consulting<br />
services on foreign exchange operations, the stock market,<br />
legislation, and taxation and customs regulations, and represents<br />
Turkmen clients’ interests in Russia and the region. It also provides<br />
worldwide money transfers.<br />
18 Turkmenistan <strong>Investment</strong> Profile<br />
In January 2000, President Niyazov set up a new bank, the<br />
President Bank, with US$ 10 million in starting capital to<br />
provide low-interest loans primarily to SMEs. However, only one<br />
loan had been approved by mid-2000, and funding and staffing<br />
of the bank remained unclear. In June 2000, the President<br />
banned citizens living in Turkmenistan from holding foreign bank<br />
accounts and obliged them to transfer money held in foreign<br />
accounts to Turkmen banks within three months.<br />
As the existing trade and foreign exchange controls distort all<br />
economic and banking sector activities, developing an efficient<br />
banking system in Turkmenistan requires major changes,<br />
including liberalisation of the exchange system, introduction<br />
of an independent Central Bank with a focus on effective<br />
supervision, and also further private sector development.<br />
Non-bank financial institutions<br />
There are no non-bank financial institutions in Turkmenistan<br />
apart from the State Insurance Company, which exercises an<br />
absolute monopoly over the limited insurance sector. A number<br />
of banks have started developing leasing activities although<br />
they commit, for the time being, no more than a tiny share of<br />
bank assets. The Central Asian American Enterprise Fund is<br />
the only private venture capital fund active in the country.<br />
There is no stock exchange or capital market in operation,<br />
despite long-standing plans to establish both. A state securities<br />
market established in 1994 has handled small issues of nontradable<br />
treasury bills which provide domestic financing for the<br />
budget, but have no effect on monetary policy.
EBRD activities<br />
in Turkmenistan<br />
Aral Sea<br />
Turkmenistan<br />
Kazakhstan<br />
Uzbekistan<br />
As at 31 December 2000, the European Bank for Reconstruction and Development (EBRD) had signed five projects in<br />
Turkmenistan, totalling € 165.1 million: a credit line for small and medium-sized enterprises (SMEs); a loan and equity<br />
investment to expand the textile plant created by the Gap Turkmen joint venture; a loan for the development of offshore<br />
hydrocarbon fields; financing for the reconstruction of Turkmenbashi Port; and a further equity investment in Gap Turkmen.<br />
In addition, 29 technical cooperation projects in Turkmenistan<br />
have been completed or approved. The majority of these have<br />
involved studies for infrastructure projects. The EBRD is also<br />
focusing on private investment financing, especially in cases<br />
where it would contribute to key areas of reform, such as the<br />
modernisation of agriculture and oil and gas production.<br />
Overview of EBRD activities and key objectives<br />
Turkmenistan is rich in energy resources and has considerable<br />
export potential in this sector. However, placing all expectations<br />
on energy carries considerable risk. The EBRD’s overriding<br />
medium-term objective, therefore, is to realise Turkmenistan’s<br />
energy export potential to the fullest extent, while diversifying<br />
its economy and promoting non-energy exports with a view to<br />
achieving sustained economic growth and higher living<br />
standards.<br />
At the same time, the EBRD aims to assist in bringing about<br />
policy change and institution-building in Turkmenistan in<br />
conjunction with projects that address critical infrastructure<br />
bottlenecks. The Bank is also maintaining a dialogue with<br />
the country to encourage transition towards economic and<br />
democratic reform, working closely with other international<br />
organisations.<br />
With this in mind, the EBRD intends to concentrate its activities<br />
for the immediate term on the development of the local private<br />
sector and the attraction of foreign private investment.<br />
Development of SMEs<br />
The EBRD is giving priority to the intensive implementation<br />
of a € 34.25 million export-oriented credit line which came into<br />
effect in April 1996 and is intended to encourage small and<br />
medium-sized business development. Modelled on other credit<br />
lines pioneered by the Bank in recent years, it provides hardcurrency<br />
term financing through four selected participating<br />
banks, which on-lend to enterprises in the private sector.<br />
This was not only the first substantial EBRD project in<br />
Turkmenistan, but also the first investment project in the<br />
country by an international financial institution. The Bank<br />
expects to accelerate disbursement of the credit line now that<br />
the private sector is developing.<br />
Private sector development<br />
Special emphasis is now being placed on making further<br />
progress with joint-venture projects, in particular for the textile,<br />
agribusiness, transport, and oil and gas industries. A textiles<br />
project was developed by the EBRD in 1996 with a Turkish<br />
sponsor. This involved the expansion of a recently built denim<br />
weaving plant into a vertically integrated textile company.<br />
The EBRD’s total investment in the project amounts to<br />
€ 34.15 million in debt and equity out of a total project<br />
cost of € 111.57 million.<br />
This is the first private foreign investment joint venture in<br />
Turkmenistan, and the government has used it as a<br />
demonstration project for introducing a wide variety of new<br />
procedures. The EBRD is keen to continue assisting potential<br />
foreign investors to develop project proposals.<br />
Critical infrastructure<br />
Turkmenbashi port<br />
With grant funds from the US government, a phased development<br />
plan for the upgrading of the dry cargo terminal at Turkmenbashi<br />
port was prepared. This study became the basis for EBRD<br />
financing of the reconstruction of the passenger ferry and dry<br />
bulk and general cargo terminals. The project also aims to<br />
improve the legal and operational environment in which the port<br />
operates and to help the Turkmen Sea Administration enhance its<br />
organisational structure and become a commercially oriented<br />
entity. The Bank has provided a loan of € 32.23 million towards<br />
a total project cost of € 48.95 million. This project will have great<br />
significance for a much wider area than Turkmenistan alone.<br />
Oil and gas<br />
The EBRD is encouraging foreign oil companies interested in<br />
establishing a long-term presence in Turkmenistan. This will<br />
result in the introduction of modern technologies and Western<br />
management practices, and make it possible to test alternative<br />
routes for exporting oil by sea, rail and road.<br />
Turkmenistan <strong>Investment</strong> Profile 19
Introduction<br />
EBRD activities in Turkmenistan<br />
A loan facility of € 64.4 million to Dragon Oil in the Cheleken<br />
PSA concession has been signed to support the commercial<br />
development of hydrocarbon reserves in the Turkmen sector of<br />
the Caspian Sea. An associated technical cooperation project<br />
will assist Turkmenistan in preparing a National Oil Spill<br />
Contingency Plan (NOSP).<br />
In the gas industry, the EBRD has carried out a technical<br />
cooperation study for the preparation of a Gas Resource<br />
Development Strategy for Turkmenistan.<br />
Agriculture<br />
In line with government priorities to increase agricultural<br />
diversification, while maintaining a strong cotton sector, the<br />
EBRD is contributing to the attraction of private investments<br />
in processing locally available raw materials. Other areas of<br />
interest are wholesale, packaging, input production, machinery<br />
services and equipment.<br />
20 Turkmenistan <strong>Investment</strong> Profile<br />
Contact names<br />
David Hexter<br />
Business Group Director for Russia and Central Asia<br />
Tel: +44 20 7338 6197<br />
Fax: +44 20 7338 7590<br />
Kazuhiko Koguchi<br />
Country Director for Uzbekistan, Turkmenistan and Tajikistan<br />
EBRD Resident Office<br />
International Financial Centre, 4th Floor<br />
1 Turab Tula Street<br />
700003 Tashkent<br />
Uzbekistan<br />
Tel: +998 71 120 62 79<br />
Fax: +998 71 144 21 65<br />
Jaap Sprey<br />
Head of Resident Office<br />
95 Azadi Street<br />
744000 Ashghabat<br />
Turkmenistan<br />
Tel: +993 12 51 22 63<br />
Fax: +993 12 51 03 18<br />
Signed projects as at 31 December 2000 (in € million, exchange rate as at 31 December 2000)<br />
Name Brief description Total project cost EBRD finance Type of financing<br />
Private<br />
Export-oriented credit line Credit line for SMEs 34.25 34.25 Loan<br />
GAP Turkmen Expansion of existing textile company 18.81 Loan<br />
95.46 11.94 Equity<br />
GAP Turkmen 2 Further equity investment 16.12 3.4 Equity<br />
Dragon Oil Commercial development of<br />
State<br />
off-shore hydrocarbon fields 558.78 64.47 Loan<br />
Turkmenbashi Port Development Upgrading of port 48.95 32.23 Loan<br />
Total signed 753.56 165.1<br />
of which private 81%<br />
of which public 19%