Previous Quarterly Editions
Expropriation Risk: 65 65 66 68 Political Violence Risk: 33 33 33 34 Terrorism Risk: 48 45 45 46 Exchange Transfer and Trade Sanction Risk: 68 67 68 68 Sovereign Default Risk: 55 56 58 56
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Turkmenistan sits on some of the largest reserves of natural gas in the world but in recent years its only substantial customer has been China. This is because sales to Russia have dwindled with falling demand for energy from its sluggish economy, although Ashgabat’s hopes of competing with Russian gas sales to Europe was also a factor. Turkmenistan also has the more practical problem that most of the established pipelines from the country run towards China. Although President Gurbanguly Berdymukhamedov reached agreement with President Rouhani in March 2018 on a deal under which Iran will supply oil to Armenia on Turkmenistan’s behalf, direct sales between the two countries remain in limbo because of the long dispute over how much Iran owes Turkmenistan for gas purchased a decade ago. The row has led Ashgabat to halt gas sales to Iran, a serious move for a country for whom hydrocarbon sales account for 80% of revenue, and the dispute has now gone to the International Court of Arbitration. Despite an elaborate ceremony in Herat early in 2018 to mark the start of work on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, which would allow Turkmenistan to export gas to the south, little of the financing that the project requires is firmly in place even though the cost has now been reduced from 10 to 7 billion dollars. A final investment decision is not expected before the middle of 2019. Recognising Ashgabat’s limited options, Beijing has driven down the price it pays for Turkmen gas, and much of the revenue that Turkmenistan receives from these sales now goes to service Chinese loans. However, Russia’s Gazprom has recently said that it will start buying Turkman gas again, although there have been few details on either the timing or the amounts involved. The move may be another attempt to discourage Turkmenistan from contemplating sales to Europe via a Trans-Caspian pipeline that is yet to be built, and instead concentrate Ashgabat’s attention on the existing Central Asia-Centre pipeline connecting it with Russia, which has not been used since 2016. The presidents of the five Caspian littoral states signed an agreement on jurisdiction over its coastal waters in 2018. Although welcomed in Ashgabat, the agreement has not solved its territorial dispute with Iran over oil and gas reserves. However, a new round of talks held in Tehran at deputy foreign minister level in January suggests that bilateral relations may improve during 2019. This would be good news for President Berdymukhamedov, re-elected in 2017 for an extended term of seven years, who is under growing economic pressure. With no progress towards a market economy, unemployment is estimated to be somewhere between 40-60%. Some 85% of those who are employed still work in the public sector, where job cuts have already begun.
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With revenue from gas exports falling, foreign companies are finding it increasingly difficult to get paid for state contracts. The government is still launching new tenders as it attempts to improve the country’s gas processing facilities, but wariness among foreign construction companies is hampering the development of new facilities for the hydrocarbons sector. With China effectively the only client for gas exports, there is limited investment interest from the major energy companies despite the tentative government steps in recent years to suggest a more welcoming environment. The heavy dependence on gas sales to China is also a disincentive for investors in other areas of the economy.
In 2017 the government placed limits on its long-standing policy of providing households with free electricity, gas and water, and these ceased completely at the start of 2019. Having been signalled well in advance, the move did not immediately produce public protests because of the tight internal security situation. However, it will deepen the widespread frustration with the state of the economy. The president has been responding by dismissing ministers for corruption when the provision of public services falls short, but there is a limit to this strategy.
In what would be the first step towards a mobilisation of army reserves, there were reports in January that officials have been conducting house-to-house checks on the availability of men aged up to 50. This is apparently a response to concerns about the southern border with Afghanistan. Although the threat of a Taliban invasion across this particularly difficult terrain is minimal, Taliban forces are active in north-western Afghanistan and engage in occasional skirmishes with Turkmen border guards. Turkmenistan's armed forces are weak and the country's isolationist policy has left it without security allies; it would be most likely to turn to Russia in the event of a major military threat. An improvement in relations with Tehran, which has enough leverage with militants in Afghanistan to create problems for Ashgabat if it wishes, could reduce the limited threat from the Taliban.
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The black market continues to support the informal economy because the manat is not fully convertible and the ability to buy foreign currency is heavily restricted. The official dollar exchange rate has remained unchanged since the 2015 devaluation at 3.5 to the dollar but the rate on the black market is coming close to 20 to the dollar. Although the IMF has recommended a further devaluation, the government remains resistant to the idea. The lack of dollars has made business increasingly difficult for importers and exacerbated the shortage of consumer and commercial goods.
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As with much else in the country, the economy remains opaque at best. However, figures from the IMF suggest that the government has been running a current account deficit of more than 10% in recent years. An enforced reduction in government spending should have helped to reduce the deficit slightly during 2018, especially if the government tapped the country’s sovereign wealth fund. However, there is still little sign of any scaling back of the large-scale prestige projects that have become a hallmark of the regime. It is not clear when the government will consider trading greater transparency about the economy for help from international financial institutions.
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