TURKMENISTAN - The Economic Base.

Turkmenistan used to be one of the poorest and least developed parts of the world during the Soviet era. Things have improved since April 1999, when world oil prices began rising (see omt12TurkmPros-Sep18-06). The economy relies heavily on oil and natural gas production.

In 1997, Turkmenistan had a 25.9% drop in its real GDP as Russia closed off its gas pipeline network, Turkmenistan's sole gas export option at the time. Since the resolution of a price dispute with Russia, Turkmenistan's gas exports have increased dramatically, spurring the country's economy to seven straight years of double-digit real GDP growth. The GDP in 2003 rose 23.1%. On Dec. 30, 2003, President Niyazov at a cabinet meeting said: "We increased the GDP to 82 trillion manat". (The official exchange rate on Dec. 30, 2003, was 5,200 manat to the US dollar). He said "The annual economic growth in Turkmenistan has not been lower than 20% - see background in Vol. 63, DT No. 12).

President Niyazov, a mercurial dictator (see profile in DT No. 14), has a multi-billion-dollar slush fund which he uses to maintain his personality cult in gas-rich Turkmenistan, according to a report issued on April 24, 2006, by the watchdog Global Witness. The report said EU states, in particular Germany, were helping conceal the way Niyazov was using Turkmenistan's energy revenues.

The Global Witness paper - titled "Funny Business in the Turkmen-Ukraine Gas Trade" - estimates that Turkmenistan earned more than $2 bn per year from natural gas exports, a large share of which goes to Western Europe via Russia. The report stated that a significant portion of revenue never found its way into state coffers. Instead, Niyazov put much of the money in foreign bank accounts under his direct control. The report added: "A horrifying 75 percent of the state's spending...appears to take place off [the government's] budget".

The report went on to cite "several credible estimates" in valuing Niyazov's slush fund at over $3 bn, "some $2 billion of which appears to reside in the Foreign Exchange Reserve Fund at Deutsche Bank in Germany". The report stated that there was no effective way to track the Turkmen government's management practices, adding: "Citizens have no information as to where that [gas income] money is going because revenues are managed in a completely opaque way. It is clear that the money is not being spent on them: standards of health, education and living quality have plummeted since independence".

The report said Niyazov appeared to lavish a large share of the revenue on "an increasingly bizarre personality cult", adding that "his picture is everywhere in Turkmenistan: on public buildings, on packets of salt and tea, bottles of vodka and even floats eerily in the corner of television broadcasts".

The report characterised Turkmenistan as dysfunctional, and in imminent danger of becoming "a fully fledged failed state with massive unemployment, widespread heroin addiction and woeful educational and health care systems". The report went on to criticise the Ruhnama - the book of values supposedly authored by Niyazov - for claiming that the country's natural resources were "the people's natural wealth". It said such assertions sounded "ever more hollow as time passes".

The report stated: "It is time for Europe, Ukraine and Russia to act". A large part of the report was devoted to examining the murky interactions involving West European states, Ukraine and Russia in the export of Turkmen natural gas. For over a decade, it said, the exports had been controlled by a string of shadowy intermediary companies. It added:

"These companies have often come out of nowhere, parlaying tiny amounts of start-up capital into billion-dollar deals". The structure of these companies had been obscured by "complex networks" of holding companies and trusts. "It is nigh on impossible to discover who sits at the center of these corporate webs, and thus to whom the profits from the transportation and sale of natural gas are going".

An investigation of four intermediary companies raised "troubling questions about transparency and governance". It noted that the "latest in the succession of intermediary companies" was RosUkrEnergo, of which the Russian conglomerate Gazprom and Austria's Raiffeisen Zentralbank are 50-50 shareholders. It said the Austrian entity acted as a manager for "a consortium of Ukrainian businessmen who have refused, despite fierce controversy in Ukraine, to disclose their identities".

It stressed that RosUkrEnergo had not been firmly tied to any illegal dealings, yet unanswered questions continued to hover over the entity's operations. RosUkrEnergo played a central role in a pricing dispute in early 2006 between Ukraine and Russia which briefly interrupted gas supplies to West Europe. It said that, when the two sides settled their differences, RosUkrEnergo ended up "becoming the exclusive supplier of Turkmen gas to Ukraine". That deal deviated "sharply from industry best practices", the report asserted.

The report said the contract covering gas deliveries and pricing issues was "a mere two sheets of paper" and was thus overly vague. It said the pricing of Turkmen gas, for instance, appeared "open to broad interpretation". It said: "The possibility of further, unexpected [Turkmen gas] price hikes is obviously not good for the energy security of Ukraine or gas customers downstream in [West] Europe".

Global Witness called for greater transparency in Turkmen natural gas dealings. It specifically urged Russia and Ukraine to adopt international reporting standards established under the Extractive Industries Transparency Initiative and/or the IMF's Guide on Resource Revenue Transparency. It added that the Russian parliament should ratify the Energy Charter Treaty, which provided for "more transparent transit arrangements and a rules-based approach to dispute resolution".

The report said the EU likewise had to take "much greater interest in the problem of energy and transparency than it has to date". (Brussels has a variety of instruments at its disposal - including diplomatic pressure, economic assistances and trade incentives/sanctions - to encourage greater transparency). The report said: "Europe could also do much more to build the capacity of local civil society groups to monitor the flow of revenues".

In addition, the report was highly critical of the German banking sector, saying: "It is hard to see how Germany's vital interest in the security of energy supply can be reconciled with a preparedness by Germany's biggest and most prestigious bank to act as a banker to an unhinged tyrant".

The report recommended that the EU conditioned its future economic dealings with Turkmenistan on a move by Niyazov to "show measurable progress" in promoting transparency.

Despite the rise in Turkmenistan's export revenue, President Niyazov is not really popular as he does not favour political or economic reform and is opposed to privatisation of the oil and gas industry until at least 2015. His erratic behaviour has angered Western aid donors and caused major oil companies to abandon Afghanistan.

In April 2000 the European Bank for Reconstruction and Development (EBRD), the multilateral project financier for the FSU, suspended public sector loans to Turkmenistan in protest at Niyazov's anti-democracy policies. The move increased the international political and economic pressures on Niyazov.

The EBRD acted after Niyazov refused to meet its delegation, headed by the bank's first vice president Charles Frank. Frank later said Turkmenistan's foreign exchange and trade regimes were highly distorted, its economic reforms very hesitant and there was no progress towards a democratic political system.

It was the first time the EBRD took such a tough action against any of its 26 aid recipients since 1991, when it briefly stopped public sector loans to Russia following a coup against Mikhail Gorbachev.

A partial exception is Belarus, where the EBRD in practice has no public sector programme, though it has never taken a decision to avoid such lending (see Vol. 59, DT No. 15).