Previous Quarterly Editions
Expropriation Risk: 65 65 65 66 Political Violence Risk: 33 33 33 33 Terrorism Risk: 50 48 45 45 Exchange Transfer and Trade Sanction Risk: 70 68 67 68 Sovereign Default Risk: 56 55 56 58
TREND ▲ OUTLOOK ▲
Although President Gurbanguly Berdymukhamedov reached agreement with Iran’s President Rouhani in March on a deal under which Iran will supply oil to Armenia on Turkmenistan’s behalf, little progress was made on resolving how much Iran owns Turkmenistan for gas purchased a decade ago. Turkmenistan says it is owed 1.8 billion dollars, which Iran says it has already paid. 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. In August, Tehran indicated that the dispute was going to international arbitration, suggesting an eventual solution. However, a new problem for relations between Ashgabat and Tehran emerged the same month, when the presidents of the five Caspian littoral states signed an agreement on the sea's status and jurisdiction over its coastal waters. This has been unresolved since the Soviet coastline was distributed among Russia, Kazakhstan, Azerbaijan and Turkmenistan in 1991. While welcome, the convention does not resolve the critical issue of territorial division, largely because Iran believes that Turkmenistan, together with Azerbaijan, has tried to seize oil and gas reserves that are rightfully Iranian. Its attempts to persuade the others to adopt an approach on demarcation that maximises Iran's slice of seabed resources will be resisted by Turkmenistan, at the risk of further damage to bilateral relations. With its gas sales to Russia tapering off for both political and economic reasons, Turkmenistan is now reliant on China as its main customer. Recognising Ashgabat’s limited options, Beijing has driven down the price it pays and most of the revenue that Turkmenistan receives from these gas sales now goes to service Chinese loans. The Tajikistan-Kyrgyzstan leg of a new Turkmenistan-China pipeline was shelved indefinitely in 2017, further limiting the country’s export options. Despite an elaborate ceremony in Herat in February to mark the start of work on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline for exporting Turkmen gas, little of the 10 billion dollars in financing that the project needs is yet in place. The Asian Development Bank and the Islamic Development Bank are each contributing a billion dollars, and Ashgabat indicated in May that it was talking to a number of European export credit agencies. The project has now been split into two stages to make financing easier but further delays seem likely for a project first proposed in 1997. Meanwhile, Turkmenistan is still in dispute with Azerbaijan over the Kapaz/Serdar oil and gas deposit, while Russia and Iran both object to the planned Trans Caspian gas pipeline that would take Turkmen gas through Turkey and on to Europe. Against this background, Berdymukhamedov, who was re-elected in 2017 for an extended term of seven years, faces growing economic pressure. With no progress towards a market economy, unemployment is estimated at 40-60% and, of these employed in the formal economy, 85% still work for the public sector where job cuts have already begun.
TREND ▲ OUTLOOK ►
As export revenues fall, foreign companies are finding it increasingly difficult to get paid for state contracts, particularly in the construction sector. Despite this, the government is still launching new tenders, but the knock-on effects are hampering the development of new facilities for hydrocarbons production. With China effectively the only client for gas exports, there is limited investment interest from the major energy companies despite the tentative steps taken by Ashgabat in recent years to suggest a more welcoming environment. The heavy dependence on China is also a disincentive for investors in other sectors.
TREND ► OUTLOOK ▲
The government’s decision to end its long-standing policy of providing households with free utilities is likely to be followed by a rise in fuel prices from their traditionally negligible levels. This is unlikely to produce overt public protests because of the tight internal security situation, but it will increase the frustration with the state of the economy. The president has recently been dismissing ministers for corruption when the provision of public services falls short, but there is a limit to this strategy.
Assurances from the two main Taliban factions in February that they would not harm construction of the TAPI through Afghanistan have little credibility, and six workers who were clearing mines from its proposed route were killed by unknown gunmen in May. Iran, which opposes the TAPI and has strained relations with Ashgabat, has enough leverage with Afghan militants to create problems if it wishes. Although Turkmenistan has a long-standing aversion to joining regional blocs such as the Moscow-led Collective Security Treaty Organisation, this may change with the fear of renewed Taliban activity on its border with Afghanistan.
The black market continues to support the informal economy because the manat is not fully convertible and buying foreign currency is increasingly restricted. The official dollar exchange rate has remained unchanged since the 2015 devaluation at 3.5 to the dollar but the black market rate is now approaching 20 to the dollar. The IMF is recommending a further devaluation, but the government is resistant. The lack of dollars has made business increasingly difficult for importers and exacerbated the shortage of consumer and commercial goods.
Although the economy remains opaque at best, figures from the IMF suggest that the government has been running a current account deficit of more than 10% in recent years. A reduction in government spending should see the deficit fall slightly in 2018, especially if the country’s sovereign wealth fund is tapped. However, there has been little sign of any scaling back in 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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