Global Economics

Turkmenistan: Investment for Thrill-Seekers


The energy-rich Caspian nation is keen to attract more foreign capital, but its business rules remain murky and the risks to investors are high

Turkmen officials went on a courting trip to Abu Dhabi early this month, hosting a forum there for potential investors.

Following up on his vow to bring the country into line with international standards and to open up the economy to investment, President Gurbanguly Berdymukhammedov sent a large retinue of ministers to the forum, who in turn mingled with a long list of representatives of foreign companies.

Under his predecessor, the eccentric Saparmurat Niyazov, Turkmenistan had followed an isolationist path and, with the exception of a few gas and construction companies, was mostly closed to foreign businesses. When he took office in January 2007, Berdymukhammedov promised to change all that.

“All of our efforts are aimed at bringing Turkmenistan’s economic development up to the world level, gaining equality in international relationships, deepening bilateral relations with other states, ensuring more effective investment management, and encouraging foreign investments,” the president wrote in a statement for the forum participants.

To that end, the government has announced large-scale construction plans for the next two years at a cost of $23.6 billion. Government officials point to expanding relations with foreign countries, such as the opening of new embassies in the capital and construction of hotels and exhibition and conference centers for stepped-up events in cooperation with international organizations such as the UN and OSCE. Berdymukhammedov’s building boom even exceeds that of his predecessor. If Niyazov had tens of millions of dollars for the construction of a building, the current president is spending by the hundreds.

The government’s budget for 2010 is approximately $16 billion. It is not clear how these projects are going to be financed, although Ashgabat hopes to increase its revenues from gas sales and from increased national and foreign investments to various parts of the Turkmen economy.

Foreign direct investment in Turkmenistan is mainly in gas and oil, but the numbers are respectable. In 2008 the country attracted about $820 million in FDI, according to the UN Conference on Trade and Development. That’s about 8 percent of all FDI into the Commonwealth of Independent States and about 40 percent of all of the country’s investment into long-term business needs such as factories, buildings, and equipment.

The key areas targeted for new investment are textiles, telecommunications, tourism, and small and medium size enterprises.

At least one forum participant, a representative of a construction company who asked to remain anonymous, was keeping an open mind.

“I think the forum was useful,” he said. “Today large international companies have begun showing interest in Turkmenistan. [It] has not really been affected by the global crisis and there are now guarantees for return of foreign capital, but legal reforms are necessary for creating better conditions for investment.” He predicted that investors will continue to focus on the gas industry but said the new Avaza tourism zone along the Caspian is starting to get interest from outside investors as well.

“They are now studying other countries’ legal regulations and they have pushed education to the fore in such a way that it will address the foreign investors’ needs. They offer trade and business incentives, guarantees in the form of laws, putting emphasis on the stability and security of the country and its policy of neutrality,” said Mehmet Seyfettin Erol, a professor of international relations at Gazi University in Ankara, Turkey.

But Turkmenistan has chosen a difficult time to open for business.

“The foreign direct investment in the region is not strong due to the worldwide economic downturn, and Turkmenistan is no exception,” Neil McKain, senior banker and the head of the European Bank for Reconstruction and Development office in Ashgabat, said.

There are other problems as well. Potential investors fear a climate where rules are not clear and risk is high.

“The lack of established rule of law, inconsistent regulatory practices, and unfamiliarity with international business norms are major disincentives to foreign investment,” according to the U.S. State Department 2008 Investment Climate Statement on Turkmenistan.

The 2010 Index of Economic Freedom by the Heritage Foundation and The Wall Street Journal ranked Turkmenistan 171st of 179 countries. “Its score is 1.7 points lower than last year, reflecting reduced scores particularly in investment freedom and monetary freedom,” the index says.

Specifically, the index’s authors cited government control of the economy and restrictions on what industries foreign investors can enter. More damningly, they paint a picture of a kind of investor hell: “The government chooses its investment partners selectively, and personal contact with high political officials is the best guarantor of approval. Other investors, foreign and domestic, face significant discrimination. The bureaucracy is non-transparent and politicized, and procedures are confusing and cumbersome. Inconsistent rule of law and high levels of corruption are strong disincentives to investment. Foreign exchange accounts require government approval, as do all payments and transfers. Capital transactions face restrictions and central bank approval in some cases. All land is owned by the state.”

Nevertheless, some economists note that since Niyazov’s days some reforms have been carried out, such as unification of the exchange rate, currency convertibility, and changes in banking regulations, that are designed to integrate Turkmenistan into the global economy. In addition, a law on foreign investment was introduced in 2008 and prices have been liberalized. Reflecting on these developments McKain says the investment climate is improving gradually. “But also the technical skills of managers, entrepreneurs, and civil servants need to improve. EBRD is supporting this process by, for example, working with the government on small and medium sized enterprise development policy and legislation, with entrepreneurs on good governance, and with banks on trade finance and accounting standards,” McKain wrote in an e-mail.

There are some efforts to make the government’s economic activities more transparent. “They are making some progress on budget reforms such as the closure of some off-budget funds and the creation of a more transparent Stabilization Fund,” McKain said. “The IMF has praised these steps and the UN [Development Program] and the EU are working with Turkmenistan on expanding the budget reform program. However, while there have been very positive changes, Turkmenistan has still a long way to go.”

Some observers say the Turkmen economy remains over-politicized, and the judicial system must change as well.

Richard Pomfret, an economist at the University of Adelaide, said the reforms have not been far-reaching enough, leaving him pessimistic about the country’s development. “The government maintains a tight grip over the economy as a whole and particularly the financial sectors, farmers, and small and medium-size enterprises.” The level of difficulty in starting new businesses makes the economy less diverse and more dependent on raw material and gas exports than it should be, he said.

Erol, the international relations professor, warned, “Those foreign companies that go to Turkmenistan to invest with great expectations of profit and beyond realistic calculations about doing business in Turkmenistan are sure to be disappointed. The Turkmen government has a development plan that foresees the construction of new buildings and the creation of new workplaces and wants to promote investments accordingly. If these companies take all their profit with them, how can they modernize their facilities and how can they increase their business activities?”

The government wants investments mainly from countries such as Iran and China, which have no democratic agenda or human rights concerns, according to Hudayberdi Orazov, the former head of the Turkmen Central Bank. “The government officials are interested most of all in investments from sources that willingly agree with the policies and that won’t create any problems for them,” he said.

For Turkish-born businessman and car dealer Adem Dogan from Leverkusen, Germany, who started a private chicken farm with his Turkmen partner 10 years ago in Turkmenistan, the situation remains unchanged under Berdymukhammedov. Dogan’s losses have run into millions of euros due the Niyazov-era closure of his farm and confiscation of his property in Turkmenistan, and he has taken the case against the Turkmen government to an international court of arbitration. His case has been raised in high-level diplomatic and economic talks between Germany and Turkmenistan, according to his lawyers.

Turkmenistan has denied that it violated any contractual obligations toward the investor.

“If an investor is successful, the Turkmen government seems to think that it is entitled to simply take a share of the investments,” Stephan Wilske, one of Dogan’s lawyers, said, noting that this attitude does not seem to have changed under the new president.

Wilske said medium-size investments of between $10 million and $60 million were the most frequent prey, adding that it is mainly large multinational corporations with substantial bargaining power and good political relations who are interested in doing business in Turkmenistan.

“The problem is the arrogance of power,” he said.


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