Previous Quarterly Editions
Expropriation Risk: 65 66 68 70 Political Violence Risk: 33 33 34 35 Terrorism Risk: 45 45 46 46 Exchange Transfer and Trade Sanction Risk: 67 6 68 70 Sovereign Default Risk: 56 58 56 58
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In a crucial move for its economy, Turkmenistan was finally able to resume gas sales to Russia in April. The country sits on some of the largest reserves of natural gas in the world and Russia was traditionally its major export destination. But Gazprom began a sharp cutback in purchases in 2009 as its own production increased and Russian domestic demand slowed, forcing Ashgabat to look eastwards to China which was prepared to fund and build the pipelines needed to import Turkmen gas. However, recognising its position as Ashgabat’s sole customer, Beijing has driven down the price it pays and much of the revenue that Turkmenistan receives from these gas sales now goes to service Chinese loans. Moreover, Chinese demand has been falling as the pace of economic growth steadies. Gazprom is likely to have struck an advantageous deal, but Moscow will also be glad that re-opening Turkmenistan’s traditional export route to the north will cast further doubt on an ambitious long-term plan backed by the EU that would pipe Turkmen gas under the Caspian Sea and through Turkey to Europe, where it would ultimately compete for sales with Gazprom. Afghan and Turkmen officials recently signed more agreements on the long-discussed Turkmenistan-Afghanistan-Pakistan-India Pipeline project, on which Turkmenistan says it has started work, but this is also a very long-term undertaking that remains threatened by, among other things, the security situation in Afghanistan. The country’s modest oil exports faced disruption earlier this year following an attempt to re-route exports through Russia rather than using the traditional route by tanker to Azerbaijan. 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. The dispute has now gone to the International Court of Arbitration with a ruling expected in 2020, but there are signs that bilateral relations may be warming as both countries are part of the growing economic and logistical cooperation in the Caspian region. In August, Ashgabat hosts the next meeting of the Caspian Economic Forum, which includes Azerbaijan, Iran, Kazakhstan and Russia. After a successful meeting at deputy foreign minister level in January, this may produce further progress with Iran, which has an incentive to cooperate as US sanctions bite. President Gurbanguly Berdymukhamedov, re-elected in 2017 for an extended term of seven years, is also 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. After a visit to the country in March, the IMF team reported that falling levels of public investment are holding down growth. With little effective effort being made to attract new foreign investment and domestic demand falling as inflation and unemployment rise, dependence on hydrocarbons exports will only increase.
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With foreign companies finding it increasingly difficult to get paid for state contracts, wariness among foreign construction companies is hampering the development of new facilities for the hydrocarbons sector. Companies from Russia, Belarus, Germany and Turkey, among others, are now taking legal action against Turkmenistan for issues that have arisen since the economy suffered a sharp decline in 2016. In April, MTS, the Russian mobile phone operator, said that it has now lost 1.5 billion dollars after the authorities in Ashgabat stopped it from providing service in Turkmenistan in 2017. It has taken the case to the World Bank’s International Centre for Settlement of Investments Disputes (ICSID). The heavy dependence on China, together with the country’s chronic shortage of foreign exchange, is also a disincentive for investors in other areas of the economy.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.
The government’s long-standing policy of providing households with free electricity, gas and water ceased completely at the start of the year. Having been signalled well in advance and phased in over two years, 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.
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Turkmenistan’s steadfast determination to remain independent from alliances or commitments means that its refusal to accept Russian military assistance continues. However, it is increasingly concerned about the situation on its border with Afghanistan. In March, the Taliban chased units of the Afghan army across the border from Badghis province into Turkmenistan, capturing 150 Afghan soldiers. Although the threat of a large-scale and deliberate incursion is minimal, Ashgabat worries about militant infiltration. 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.
Falling export revenues in recent years have exacerbated the shortage of foreign currency. 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 manat to the dollar but the rate on the black market is coming close to 20 to the dollar. Although the IMF recommends 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.
As with much else in the country, the economy remains opaque. While official figures remain optimistic, those from the IMF and elsewhere suggest that the government has been running a current account deficit of more than 10% in recent years. An enforced reduction in government spending will help to reduce this, especially if the government is now tapping the country’s sovereign wealth fund, but at the expense of stimulating growth. 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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