Previous Quarterly Editions
Expropriation Risk: 66 68 70 70 Political Violence Risk: 33 34 35 34 Terrorism Risk: 45 46 46 44 Exchange Transfer and Trade Sanction Risk: 68 68 70 72 Sovereign Default Risk: 58 56 58 58
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Turkmenistan’s usually static political environment was thrown into some disarray during July and August as President Gurbanguly Berdymukhamedov failed to appear in public for more than a month. Rumours of his death spread as state media continued to air only stock footage of his previous activities. The president re-emerged in mid-August to give a speech to the Caspian Economic Forum (CCF) that was broadcast live. He was also seen talking with Russian Prime Minister Dmitry Medvedev, whose unexpected presence at the event appeared to be a show of support for Berdymukhamedov. It appears likely that the president, who is only 62, experienced a recurrence of kidney problems. Given the extent to which he controls the regime and the possibility that his illness may be more serious, his absence has raised the question of succession for the first time. The president appears to favour his son, Serdar, who has been heavily promoted in recent years. However, Serdar is distinctly unpopular among Turkmenistan’s ruling elite, which is likely to favour someone with the maturity to guarantee policy continuity. Both Russia and China, the country’s main trading partners, will also want their interests considered. Turkmenistan, which sits on some of the largest reserves of natural gas in the world, was finally able to resume gas sales to Russia this spring, although in much smaller volumes than previously. It is struggling to break its dependence on oil exports to China. After Gazprom started to cut back its gas purchases a decade ago, Ashgabat embraced Chinese readiness to fund and build the pipelines needed to import Turkmen gas. However, recognising its position as Ashgabat’s primary customer, Beijing drove down the price it pays, and much of the revenue from these exports still goes to service Chinese loans. While renewed sales to Russia are welcome, Ashgabat will be disappointed that, at the August CCF meeting, Moscow joined Iran in opposing the latest plan for a pipeline to bring Turkmen gas to Europe via Azerbaijan and Turkey. The long-discussed Turkmenistan-Afghanistan-Pakistan-India Pipeline project continues to develop on paper, but it remains a very long-term undertaking that is threatened by, among other things, the security situation in Afghanistan. Gas sales to Iran remain in limbo because of Turkmenistan’s claim that it is still owed 1.8 billion dollars for supplying gas to north-east Iran in 2007 and 2008. A ruling from the International Court of Arbitration is due in 2020. At home, chronic mismanagement of the country’s natural resources and endemic corruption have resulted in a steady decline in growth since 2012. The subsequent collapse of commodity prices and a series of weak harvests then pushed the country into a severe economic crisis that continues to deepen. The government’s insistence on maintaining the exchange rate has resulted in a widespread scarcity of goods and driven up inflation, which is officially above 9% but likely to be much higher. While the government has made some high-profile efforts to attract investment, the environment remains extremely challenging for foreign companies. Meanwhile, with no progress towards a market economy, unemployment is estimated to be somewhere between 40-60%, with most of those in work still employed by the public sector.
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The perennial concerns about delayed government payments for state contracts are reaching new levels. Turkish construction companies, which have traditionally prospered in Turkmenistan, are the latest to complain about non-payment for new and existing projects. The government in Ankara is now warning Turkish firms of raids on foreign businesses and the elevated risk of expropriation in Turkmenistan, and five cases are pending against Ashgabat in the International Court for the Settlement of Investment Disputes. Against this background, companies not directly involved in the energy sector are leaving the country and this is making it difficult for the government to develop initiatives such as privatising the state transport system, which was announced at the start of this year.
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The worsening economic conditions have forced the state to make extensive cuts to public services. It ended the free provision of utilities to households last year and has adopted price regulation and even rationing. The government has also restricted the travel of migrant workers to traditional destinations such as Turkey and the UAE, cutting access to a critical source of remittance income for many families. While there is little available evidence to suggest any growing risk of political violence, the state appears to be taking pre-emptive measures to prevent disturbances with new limits on internal movement. Draconian measures against individuals who express dissent have stifled any potential source of popular opposition, and the growing black market is more likely to foster criminal rather than political activity.
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The relocation of many Islamic State fighters to northern Afghanistan from Iraq and Syria is a major concern for the government in Ashgabat. Although it continues to avoid international alliances, it has actively developed a way to cooperate with its Central Asian neighbours through a UN effort to combat radicalisation. The government is also working with the OSCE to develop its counter terrorism capacity.
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Lower commodity prices and disruptions to gas exports have contributed to an effective devaluation of the manat. However, the government’s determination to maintain the 2015 exchange rate of 3.5 to the dollar has meant major shortages of foreign exchange. Consumer and commercial goods have become scarce and the informal exchange rate is five times higher than the official figure. The moves to limit access to jobs abroad, together with international calls in June for a boycott of Turkmenistan’s cotton trade over labour abuses, are likely to worsen the currency situation.
While the opaque nature of government finances makes it difficult to make a true assessment of Turkmenistan’s debt position, IMF data suggest that public sector external debt will hit 27% of GDP in 2019, up from 21% in 2015. The government will try to limit the growth of the current account deficit by reducing spending on capital projects but, combined with weak private investment, this risks a further setback to hopes of growth.
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