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Country Commercial Guides for FY 2000: TurkmenistanReport prepared by U.S. Embassy Ashgabat, Released July 1999 Note* |
Chapter VII: Investment Climate
Openness to Foreign Investment
Turkmenistan wants and needs foreign investment but the Government's heavy-handed controls and the lack of rule of law undercut this goal. Although a number of laws to attract foreign investment have been adopted, effective implementation still is lacking and Turkmenistan's transition to a market economy is proceeding slowly. The state sector still accounts for roughly 80 percent of economic activity and government economic policies are often highly interventionist. According to official statistics, the Government invested USD 5.4 billion in the economy between 1991 and 1997 as well as investing around USD 857 million in 1998. Although there have been some positive results, much of this money has gone, however, to non-profitable projects or projects that were poorly managed.
The Government officially welcomes foreign investment. However, it has not yet put in place the policies and regulatory structure that would create the climate needed to encourage investment and business development, although there has been some progress, notably in the oil and gas sector.
Existing foreign investment legislation features provisions on the government's role in attraction and coordinating foreign investment activity in Turkmenistan. The Law on Foreign Investment, amended in 1993, provides a legal framework for foreign investment protection. An investor must own an average of at least 20 percent of the capital in a company throughout a calendar year to be protected by the Law on Foreign Investment, unless an exception is approved by the Cabinet of Ministers. The Cabinet of Ministers also defines the economic sectors where foreign investors may be engaged in business activities.
In 1993, Turkmenistan introduced the Law on Foreign Concessions. Under this law, foreign concessions can be granted for onshore and offshore areas containing natural resources, and for investment in industrial enterprises that explore, develop, extract and use natural resources. Concessions from 5 to 40 years are granted on a competitive basis. Since the March 1997 passage of a new Law on Hydrocarbon Resources, the Government has granted concessions to several multinational energy companies to participate in the development of Turkmenistan's large oil and gas reserves through production sharing agreements and joint venture agreements).
Since 1991 Turkmenistan has been in the process of privatizing state enterprises involved in services, trade and catering, agriculture, food production and processing, building materials, and various other types of production. The small service sector and trade and catering entities were privatized immediately after independence in 1991. Small and medium-size state industrial enterprises have been offered for auction since 1997 but poor economic conditions along with constantly changing regulations and tax laws restrict the ability of local entrepreneurs to purchase these enterprises. The Government has unsuccessfully tried to attract foreign investment in larger state enterprises because it is attempting to privatize by creating joint ventures in which the state keeps a majority interest.
Turkmenistan tried to introduce competition for state contracts by announcing international tenders for some projects. However, it still lacks the technical and financial experience to manage tenders. In many cases Turkish companies have either become advisors to a resulting joint venture or were awarded contracts. When the World Bank and/or EBRD have been involved, the Government sometimes hired international consultants to provide advice on project tendering.
There have been cases in which trade contracts were granted for purely political reasons, with little regard for feasibility, economic viability, or the ability of the chosen company. There is as yet no broad acceptance of the concept of competition, there is also a noticeable tendency of Government entities, which are expected to produce income, to become involved in profitable new areas of economic activity, sometimes crowding out private sector competitors
Right to Private Ownership and Establishment
The Law on Ownership adopted in 1993 states that the right to ownership of all forms of property is recognized and protected by the state. The law defines three categories of private ownership: by physical persons; by legal persons; and mixed private ownership based on incorporation of properties belonging to physical and legal persons. Foreign citizens and persons without citizenship have the right to own any property except for land. They may be allotted a plot of land for use but without the right of ownership. A Law on Distribution of Land for Private Ownership passed in December 1996 also allows foreign citizens to lease but not to own land. Turkmen citizens are eligible to own up to 50 hectares of land but they cannot sell, exchange, or transfer it.
Soon after Turkmenistan's independence in 1991, the Government recognized the importance of privatization in its transition to a market economy. In November 1991 the Mejlis adopted a Law on Joint Stock Companies and in February 1992 it enacted a Law on De-monopolization and Privatization. Privatization began in earnest in 1993 and focused first on privatizing small-scale service, catering and trading businesses. In 1994, the first full year of the privatization effort, 1,064 entities were privatized. Since then, however, the number of entities privatized decreased to 402 in 1995; 224 in 1996; 138 in 1997; and only 107 in 1998. During January-February 1999 an additional 27 entities were privatized. These figures indicate that the overall pace of privatization has slowed since the privatization of small-scale service, catering, and trade businesses. Medium-sized state-owned enterprises are being privatized more slowly due to high initial prices set for their sale. Large enterprises have not been privatized at all. According to the national institute of statistics and forecasting, at the end of 1998, 78 percent of the Turkmen economy remained either owned or controlled by the government.
Consumer service, trade and catering establishments constitute 96 percent of entities privatized since 1993. Only 33 manufacturing enterprises have been privatized, including one knitting factory which was sold for 43.2 billion manats (USD 8.2 million at the official foreign exchange rate). This single transaction represents 42.8 percent of the dollar value of privatized assets. Worker collectives bought 1,484 (76%) of the objects privatized through 1998; 457 were sold at auctions; and seven were privatized through direct negotiated sale. According to official statistics at the end of 1998 there were 24,000 registered small enterprises, up from only 5,360 in 1993 when the country's privatization effort began.
In March 1997 the Government issued a Presidential order and three Presidential decrees allowing privatization of industrial enterprises through the auctioning of small- and medium-size enterprises, the creation of joint stock companies for large enterprises, and the investment tendering of those industrial enterprises requiring capital for reconstruction and modernization. The order permits Turkmen and foreign companies as well as citizens to participate in privatization on an equal basis.
The Government auctions enterprises that have fewer than 100 workers and do not need significant investment. Larger state enterprises with more than 100 workers and significant assets will be transformed into private joint stock companies; the process of creating joint stock companies is still in its infancy.
A Presidential decree dated January 14, 1998, authorized the State Agency for Foreign Investment (SAFI) to handle issues related to the transformation of 18 large industrial enterprises under the Building Material Production Ministry, the Agriculture and Water Resources Ministry, the Textile Ministry, the Energy and Industry Ministry, and the State Food Production Association into open joint stock companies. So far, none have been privatized.
The rate of privatization has slowed noticeably, most of the enterprises that are being privatized require investment for production modernization, and state financing of private investment projects is not easily accessible or provided at high interest rates. High initial prices for privatized entities is only one difficulty. Others include an underdeveloped legal basis for the development of entrepreneurship; a shortage of skilled auditors, managers and consultants; and lack of leasing services. Complexities of registration and licensing of enterprises, especially with foreign participation, manat convertability, and many other factors reduce the attractiveness of privatization for potential investors.
Protection of Property Rights
The Law on Ownership provides guarantees and protection of ownership rights. The Law on Foreign Investment states that foreign investments in Turkmenistan are not subject to nationalization and requisition, therefore foreign properties may be confiscated only through referral to a court when illegal actions are undertaken by the foreign investor.
On September 30, 1993, the Government adopted a Law concerning the Protection of Scientific Research. On October 1, 1993, the Government passed a Patent Law that regulated patents for technical inventions, innovative proposals, and trademarks in the industrial sector and, on June 25, 1993, established the Patent Agency under the Cabinet of Ministers. The Patent Agency provides state policy for protection of industrial property rights, establishes the single patent system, and documents protecting inventions, industrial samples, and trademarks.
There is no requirement to register with the Patent Agency, but there are some advantages to applying for a patent in Turkmenistan. A patent document issued in Turkmenistan gives a company exclusive rights to use a particular innovation, trademark, technology, etc. furthermore, a company holding a patent in Turkmenistan is given favorable tax status provided that: the innovation is used in the company's own production; an innovation license was purchased by the patent holder; the innovation is used after a license has been purchased by the patent holder; and a new machine or piece of equipment was made based on the patented innovation. The Cabinet of Ministers determines the form and size of the favorable tax treatment. The Law on Foreign Investment guarantees the protection of intellectual property of foreign investors including literary, artistic and scientific works, software and databases, patents and other copyrighting for inventions and industrial samples, technology, commercial secrets, and trademarks. Article 8 of the April 1993 most favored nation agreement between the U.S. and Turkmenistan provides for favorable treatment of copyrighted materials. The agreement envisages Turkmenistan's accession to the Bern Convention of 1971 for the protection of literary and artistic works and creation of a working group on intellectual property matters. To date, Turkmenistan has not joined the Bern Convention.
On January 19, 1995, Turkmenistan signed the World Intellectual Property Organization's (WIPO) 1883 Paris Convention on protection of industrial property rights and the international treaty on patent cooperation. Turkmenistan has also joined the Eurasian Patent Organization that was created as part of the WIPO for the CIS countries.
Effective March 1, 1999 a new Copyright Law was enacted as part of Turkmenistan's Civil Code. The law defines copyrighted products, the rights of owners of the copyrighted products, and provides their legal protection. There is, however, no agency responsible for enforcing the Copyright Law. Presently, articles such as videos, cassette tapes, and literature are freely copied and sold. However, both the supply and demand for American copyrighted materials appears to be minimal.
Adequacy of Laws and Regulation Governing Commercial Transactions
New laws and amendments to existing ones are required in a number of areas including foreign investment, free trade economic zones, standards, customs, trade defense, and laws regulating legal infrastructure and enforcement. The current legal regime governing foreign investment is inconsistent, ambiguous, and inadequate.
The definition of foreign investment does not include other key foreign investors in the Turkmen economy such as lenders, lessors, suppliers, and joint ventures with foreign participation. Therefore, guarantees and benefits extended under existing foreign investment legislation cover only a limited set of foreign investors. There are no clear rules for expropriation, nationalization, and other takings. The legislation also provides no direction to the proper enforcement authority. In practice, the authority in charge is different from the one stipulated in the law. Decisions of international arbitration panels are not generally binding and enforceable in Turkmenistan. The absence of a clear and definitive statement of guarantees to foreign investors in the law conveys an impression to foreign investors of a lack of predictability, uncertainty, and cohesiveness of the legal framework. The existing foreign investment regime does not foster investor confidence and may be viewed as a barrier to market access by foreign service suppliers.
Foreign Trade Zones/Free Port
According to the Law on Economic Zones for Free Entrepreneurship adopted in 1993 and amended in 1994, there are seven economic zones for free entrepreneurship in Turkmenistan including: Mary-Bayramali, Okarem-Cheleken, Turkmenabad-Seidi, Bakharden-Kizylarvat, Dashoguz Airport, Ashgabat-Annau, and Ashgabat-Bezmein. The Ashgabat International Airport, Serakhs, and Guneshli Turkmenistan zones were established later as free economic zones. The Serakhs zone was open in 1996 after construction of the Serakhs-Mashad railway. The International Airport zone in Ashgabat and the Guneshli Turkmenistan zone near Annau, were created in 1997.
The Law on Economic Zones for Free Entrepreneurship determines the legal regime for conducting business in these zones. It guarantees the rights of both foreign and domestic investors, forbids nationalization of enterprises and discrimination against foreign investors, and provides guarantees to foreign investors for repatriating after-tax profits and exporting production. There are no limits on profits a company may earn. Enterprises are permitted to set prices freely for all goods and services there. All enterprises are exempt from profit taxes for the first three years of profitable operation. Enterprises with foreign investment, greater than 30 percent of initial capital, will be charged a 50 percent profit tax rate during the first three years and 30 percent profit tax rate during the next 10 years. Profits reinvested in export-oriented and technically advanced enterprises are exempt from taxation.
The law also ensures a favorable customs regime within the economic zones of free entrepreneurship. Goods and properties imported into and/or exported from the zones are exempted from customs duties except for goods of foreign origin exported from these zones. Exported and imported goods and properties must be declared at the customs. Although customs duties have not been introduced for legal entities, excise taxes for certain goods are charged.
To date, these zones have not been fully operational. Far-reaching government direction of economic activity, a lack of government financial support, under-developed infrastructure, numerous registration procedures, and an embryonic private sector have resulted in very slow movement in developing commercial and business activity in all zones, with the exception of the Ashgabat Airport zone. This zone has a modern airport facility that allows it to develop transit cargo services and trade.
Major Taxation Issues Affecting U.S. Business
Turkmenistan and the U.S. have not negotiated a bilateral dual taxation treaty. So far, the former USSR bilateral double taxation treaty has been honored in Turkmenistan and it will expire until such treaty between the governments of Turkmenistan and the U.S. is signed.
According to the Profit Tax Law, foreign investors with a permanent establishment in Turkmenistan must pay a 25 percent profit tax; a 15 percent tax on income from dividends, interest, copyrights, licenses, leases, royalties, and other income earned in any sector of the economy; and a 6 percent tax on income from international cargo transport. Foreign entities that do not have permanent establishments in Turkmenistan are subject to withholding tax at a rate of 15 percent on most types of income including dividends, interest, royalties, rents and services provided to Turkmen companies. Investors in the oil and gas sector must pay a 25 percent profit tax plus a negotiable royalty sum.
The Law on Foreign Investment states that investors who hold more than 30 percent of hard currency shares in an enterprise's capital fund are exempt from dividend tax. Enterprises are not required to pay the profit tax until the investors have received a full return on their original investment. Additionally, those who reinvest their profits are exempted from tax payments on the reinvestment capital. Customs duties are not charged on foreign investors' imported property if it is designated for production purposes or considered part of the enterprise's capital fund.
Social insurance fund contributions at a rate of 30 percent of local payroll should be remitted to the Tax Inspectorate on the day of payment of salaries to local employees. Salaries paid to expatriate employees are exempt.
The Value Added Tax Law requires foreign and domestic enterprises to pay a 20 percent tax on the volume of goods and services produced and /or sold in Turkmenistan. For imported goods and services, the VAT is charged from the difference between a trade contract price and the value of goods and services sold in Turkmenistan.
Foreign entities must pay the property tax of 1 percent of the net book value of assets and the excess wage tax of 50-60 percent of local payroll above low statutory limits.
Performance Requirements and Incentives
There are no consistently applied performance requirements imposed on foreign investors for establishing, maintaining, or expanding investment, or for access to tax and investment incentives. Contract provisions are generally negotiated on a case-to-case basis. The only general requirement is that construction contracts with foreign companies must include provisions allocating 30 percent of the contract value to local contractors. There are exceptions to this requirement, though: foreign construction companies executing large-scale projects for the government, such as the French company "Bouygues," currently building the Palace of Congresses in Ashgabat and several ministry buildings, are exempted by the Government from this requirement. All contracts with foreign participation must be registered with the Chief Tax Inspectorate.
There are no requirements set for local sourcing or exporting specific percentages of output. Each contract is different depending on the sector and the political climate when the contract is negotiated. Thus far, primarily because there are few private enterprises in Turkmenistan, a government partner has been included in all joint ventures and joint stock companies.
Transparency of the Regulatory System
The government's desire to regulate economic and commercial transactions creates impediments to investment. Personal relations with Government officials often play a decisive role in acquiring a contract or running a successful business. Since investment contracts are concluded on a case by case basis, it is difficult for the investor to identify a clear set of rules that apply and that will apply over the term of the investment.
A Law concerning Hydrocarbon Resources adopted in March 1997 was a step toward creating a more transparent policy in the oil and gas sector. This law provides a detailed legal framework for conducting oil and gas business in Turkmenistan. Under this law, three types of licenses can be issued on the basis of tender results or direct negotiations: an exploration license, an extraction license, and a single exploration and extraction license. Two types of agreements can be signed for oil production: a production sharing agreement and a joint venture agreement.
The 1997 privatization order and decrees are the government's attempt to outline the basic principles of Turkmenistan's privatization process and procedures and to make them publicly accessible. Although these measures appear transparent, they have not, for reasons discussed above, been effective in promoting medium- and large-scale privatization.
Corruption
Turkmenistan does not have laws, regulations or penalties to combat corruption effectively. High-ranking government officials have been replaced ostensibly because of corruption but most have never been formally charged with a crime. Violent criminal organizations, that often interfere in the conduct of normal business affairs, although found elsewhere in other CIS countries, do not operate in Turkmenistan.
U.S. firms have identified widespread government corruption, usually in the form of bribe requests, as an obstacle to investment and business throughout all economic sectors and regions. Several cases are known when local authorities kept local businessmen imprisoned without any charge until authorities received money.
Labor
As of January 1, 1999, Turkmenistan's population was officially 4,993,500 which is 12 percent higher than 1995. The actual population figure could be much less than the above figure due to the continuing migration of the Russian speaking population from Turkmenistan and a reduction of the birth rate caused by worsening economic conditions.
According to official statistics, for 1998, 41.5% of the working population was employed in state enterprises and organizations, 25.9% in peasant amalgamations (former kolkhozes and sovkhozes), 1.4% in state consumer cooperatives, 6.7% in private enterprises, 0.1% in private cooperatives, 0.3% in public organizations, 0.7% in joint ventures, 19.2% in subsidiary small-holding, and 4.2% self-employed.
About 44.7% or 2,234.5 thousand people reside in cities and small towns and 55.3% or 2,759 thousand in rural areas. There are 1,146.8 thousand people living in the Mary Velayat, the most populated region in Turkmenistan, and 424.7 thousand in the Balkan Velayat, the least populated region.
Turkmenistan inherited a trade union system from the Soviet Union. The role of these professional unions in society and economic activity, however, is very limited. The Government is concerned about unemployment and underemployment. To avoid unemployment while beginning mass privatization, the Government has retained the right to control employment in privatized enterprises.
The provision on privatization of state industrial enterprises states that the Ministry of Economics and Finance is authorized to mandate minimum quantities of workers that must be maintained by new owners of privatized enterprises for a specified period of time.
According to the last census, in 1995, the unemployment rate was about 3 percent of the labor force.
Although the official employment rate is low, there is considerable disguised unemployment. The U.N. estimates unemployment at 50 percent. Moreover, one reason that employment in agricultural sector remains high is that alternative opportunities are lacking. Although there are no official statistics on youth employment, it is of increasing concern.
In 1997, a Presidential decree created "labor exchanges" or employment offices to maintain a data bank on vacancies available in various state organizations and enterprises and to register people looking for jobs. The labor exchanges operate as self-sustaining entities under Khakimliks (mayors' or governors' offices in each city, district, or region). Ministries and organizations are expected to hire from the list of those who have registered at a local labor exchange. As of December 1, 1998, there were 72,281 people registered with labor exchanges in Turkmenistan.
The normal workday in Turkmenistan is eight hours and the standard workweek is 40 hours. The minimum age for employment of children is 16; in a few heavy industries it is 18. Labor Law prohibits youths aged 16 through 18 from working more than 6 hours a day and then only with the permission of the trade union and their parents. During the cotton harvesting season, teenagers often work in the fields.
The Law on the Legal Status of Foreign Citizens in Turkmenistan permits foreigners to reside permanently in Turkmenistan if they have government permission and a residence permit issued by the police. Unless otherwise specified by law, foreigners can be employed based on the same rules and regulations governing Turkmen citizens' employment in the country. Foreigners can also possess a house or any other property in Turkmenistan except land. The Ashgabat mayor's office recently began selling apartments available in the capital; foreigners may buy them.
Turkmenistan joined the International Labor Organization in 1993.
Efficiency of Capital Markets and Portfolio Investment
There is no private capital market in Turkmenistan. There are several state investment funds created to accumulate and reinvest hard currency for the oil and gas industry and mineral resources, agriculture, telecommunication and transportation, education, and healthcare. None of these funds is permitted to issue securities for public distribution. These investment funds work closely with SAFI and Vnesheconombank, the primary fiscal agent of the Government for foreign investment and import/export projects.
The Law on Securities and Stock Exchanges, adopted in 1993, outlines the main principles of securities issuance and circulation and addresses basic provisions on stock exchange operations. It orders that securities must be registered with the Ministry of Economics and Finance.
Since there are no stock exchanges established, securities can be bought or sold through the State Commodity and Raw Materials Exchange (SCRME), though this has yet to occur. So far, more than 120 securities and bonds have been issued in Turkmenistan.
State bonds and securities can be obtained from authorized commercial banks such as Turkmenvnesheconombank, Bank "Turkmenistan", Investbank, Daykhanbank, Bank "Rossiyskiy Kredit", and Sberbank (Savings bank). Although the Central Bank and some commercial banks, have attempted to issue government and commercial bonds, the low purchasing power of the population and distrust of local banks have made such transactions unpopular and not commercially lucrative.
All Turkmen banks are state owned, including commercial joint stock banks, and are not capable of playing a key role in the capital market development. Three major state banks--Turkmenistan, Investbank, and Daykhanbank-- are specialized in social, industrial, and agricultural areas, respectively. The remaining Turkmen banks are small entities licensed to provide banking services for small and medium-scale business projects.
Local firms, in theory, have access to credits from local commercial banks, but these banks have made few loans. The Central Asian-American Enterprise Fund (CAAEF) and the European Bank for Reconstruction and Development (EBRD) have both opened credit lines for Turkmen private enterprises.
During the first wave of the government's attempts to move toward market economy in 1991-1994, the Government turned some state entities involved in industry, banking, and trade into joint stock companies by simply changing names and dividing the enterprises' assets into common stocks and by January 1, 1998, there were 300 joint stock companies in Turkmenistan. Due to continuing government controls, they could not fully benefit from the right to issue stock.
According to the privatization and state property administration, in 1998 three joint stock companies were created. The Ministry of Economics and Finance, a founder and a stockholder of these companies, may sell stocks to private Turkmen and foreign entities as well as individuals. So far, foreign companies have shown no serious interest in investing capital in virtually bankrupt local enterprises. The development of a successful securities market will depend on the success of the privatization process, on the establishment of new viable private firms, on development of the banking sector, and on overall economic reforms.
The U.S. EXIM Bank does not consider short and medium-term U.S. export financing for projects in Turkmenistan without a sovereign guarantee from the Turkmen Government. A number of American companies have used EXIM Bank funds or guarantees in the past to finance their sales to Turkmenistan.
Conversion and Transfer Policies
The Foreign Exchange Regulation Law determines general principles of foreign exchange operations, the authority of state bodies in foreign exchange regulation, and the rights of residents and non-residents regarding foreign exchange ownership and usage. According to this law, non-residents may freely convert the national currency, the manat, to hard currency without limitations or unreasonable delays, provided the amount is needed to pay for transactions made with Turkmen residents.
The law also permits non-residents to repatriate capital goods previously imported into Turkmenistan, provided such goods were declared to customs upon entry. In practice, however, due to the shortage of hard currency the Central Bank provides commercial banks with limited amounts of foreign exchange to convert cash and non-cash manat sums. Not all requests for manat convertability are serviced timely and in full amounts. That results in delays in receiving hard currency incomes and impedes doing business.
A company may apply to a commercial bank to cover the amount of money to be converted with the following documents:
- an application indicating the amount of hard currency to be purchased;
- a trade contract where payment terms envisage either payment for actual shipment of goods or letter of credit (contracts where prepayment terms are envisaged are not considered);
- a customs declaration confirming cargo availability;
- a banking document confirming currency availability in either local or foreign bank accounts.The commercial banks licensed to deal in hard currency submit their applications for money convertibility to the Interbank Foreign Exchange (IFE).
A Presidential Decree issued on December 3, 1998 has stopped free currency exchange and approved a temporary provision limiting hard currency exchange operations. The provision provides rules and regulations concerning cash and non-cash hard currency exchange for individuals and legal entities in Turkmenistan.
According to the provision, only three categories of Turkmen citizens are eligible to exchange manats into hard currency in cash at the official exchange rate in commercial banks. (Note: As of August 1, 1999, the official exchange rate in the Central Bank was 5,200 manats against dollar. End note.)
These categories are:
(1) sick people who need clinical treatment outside of Turkmenistan providing a person is enrolled in a list made by the expert commission of the Ministry of Healthcare and Medical Industry;
(2) students who study abroad providing the Education Ministry confirms their enrollment; and
(3) state employees who go abroad for a business trip providing a letter from an appropriate ministry or state organization approved by an appropriate Deputy Chairman of the Cabinet of Ministers is provided. For the rest of the population, the gray market is the only option for hard currency.The Central Bank allows commercial banks to sell non-cash foreign exchange at the official exchange rate to legal entities that are resident in Turkmenistan only for the following purposes:
(1) to pay off foreign credits extended to Turkmenistan under the Turkmen government sovereign guarantee;
(2) to repatriate foreign investments and profits providing an investment projects registered with the State Foreign Investment Agency (SAFI) and the Chief State Tax Inspectorate (CSTI);
(3) to purchase medicines and medical items that are listed in a list approved by the Cabinet of Ministers;
(4) to purchase raw materials and other products needed for production of goods and services;
(5) to pay off debts on foreign credits for the promotion of private goods and services production in Turkmenistan and for the purchase of raw materials, products and spare parts needed for projects that are implemented under these credit lines; and
(6) to purchase consumer goods and food products (except for spirits, alcohol and tobacco) by special-purpose shops provided an obligatory contract on daily sales proceeds transfer is signed between these shops and commercial banks.From 1996 until late 1998, the official foreign exchange rate has remained relatively stable at 5,100-5,300 manat to the dollar. As of October 1998, however, an active manat/dollar parallel market has arisen; this rate has gone as high as 19,000 manat/dollar in April and was 14,500 manat in August.
Expropriation and Dispute Settlement
Turkmenistan's outstanding investment and commercial disputes have three common themes: non-payment of debts, non-delivery of goods or services, and contract renegotiations. Turkmenistan's unfamiliarity with international commercial norms means that contract terms and definitions must be spelled out in great detail.
Such precautions have not prevented the Government from reevaluating signed contracts and insisting on renegotiation of profits, management relationships, and payment schedules. In the past, if the individual Minister or Deputy Chairman of the Cabinet of Ministers who signed the contract was replaced, all contracts signed by that individual were subject to reexamination. There is no track record yet for contracts approved by the State Agency for Foreign Investment (SAFI). To date, the Government has not expropriated property of foreign investors.
There have been a number of disputes between the Government and U.S. companies that sell equipment and services. All of these disputes are linked to the government's decision not to honor signed contracts as originally written. Almost all involve the Ministry of Agriculture and the Ministry of Oil and Gas Industry and Mineral Resources, two areas of focus for U.S. company dealings in Turkmenistan.
Currently, there is no legal system in place for the effective enforcement of property and contractual rights. Therefore, disputes must be worked out directly between the Turkmen Government and the investor.
The Government has adopted a new Civil Code which took effect March 1, 1999. The Code, which was prepared with the advice of western legal experts, addresses such issues as ownership, contract rights, mortgage, collateral, deposits, leasing, franchising, copyright and property rights. Turkmen officials and businessmen are not yet familiar with the terms of the new code.
Time and training will be necessary if the code is to be effectively applied. As a first step, a Presidential decree of July 17, 1998 ordered a public register body to be formed for the purpose of assigning rights of real estate ownership. It will become operational by January 1, 2000 and the Cabinet of Ministers will work on adjusting existing legal acts and rules to the standards of the Civil Code. The weakness of legal rights in Turkmenistan means, however, that the Government is still able to do what it chooses regardless of formal protections.
Turkmenistan is not a member of the International Center for the Settlement of Investment Disputes or the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards. However, most contracts negotiated with the Government do have an arbitration clause.
Political Violence
Turkmenistan's eight years of independence have been marked by political stability. There have been no incidents of politically motivated damage to projects or installations. There is no organized political opposition and there are no nascent insurrections.
Bilateral Investment Agreements and OPIC Programs
The Governments of Turkmenistan and the U.S. began negotiations on a Bilateral Investment Treaty, but talks were suspended in early 1994. In early 1998, the Government expressed its interest in renewing the talks, but preparations for commencing negotiations are only at the very initial stage. Turkmenistan has also expressed interest in signing a Dual Taxation Treaty with the U.S., but to date no discussions have taken place.
Turkmenistan has signed an agreement with the U.S. Overseas Private Investment Corporation (OPIC). Thus far, there is no OPIC activity in Turkmenistan, although some OPIC involvement is expected in connection with the construction of a Trans-Caspian gas pipeline.
Major Foreign Investors
The Government does not publish statistics on direct foreign investment in Turkmenistan. Turkmen officials generally blur the line between trade and investment. In fact, there are very few "investors" in the sense of having an equity share in a local enterprise. Below is a general picture of foreign investment activity in Turkmenistan with estimated figures provided primarily by local newspapers.
Among the major foreign traders and investors doing business in Turkmenistan, Turkish construction firms rank among the most active. According to the Turkmen press, in 1998, more than 150 construction projects estimated at USD 3.6 billion were carried out in the country. The largest projects (70 percent of the total) are in the oil and gas, textile, and food production industries. Out of the USD 3.6 billion, only 10.9 percent is foreign direct investment.
To date, American companies have primarily been active in exporting U.S. goods and services to Turkmenistan. Most of the trade transactions between the two countries are in the agriculture, transportation and energy sectors. Thus far, there have been few direct U.S. investments in Turkmenistan.
In 1998, Mobil Oil in alliance with Monument Oil (Great Britain) signed a production sharing agreement with the State Turkmenoil company and invested more than USD 40 million in the development of the Burun oil field in western Turkmenistan.
In July 1999 Mobil received a license to explore the Garashsyzlyk oil field and plans to increase its investment in Turkmenistan to up to USD 500 million in the future.
In 1998, Coca Cola invested USD 13.85 million in a joint venture "Turkmenistan Coca Cola Bottlers Ltd." with the State Food Production Association to reconstruct the Ashgabat beverage production plant to produce Coca-Cola brand beverages in Turkmenistan.
There are other foreign companies that have invested in Turkmenistan. The Malaysian oil company Petronas has invested around USD 60 million since 1996 to explore and develop three offshore oil fields in the Caspian sea (Block I).
The Chinese Oil Corporation invested USD 14 million to restore and overhaul 30 oil wells. Monument Oil plans to invest USD 55 million in 1999 in the development of the Burun and Garashsyzlyk oil fields.
Since 1993, Dragon Oil, an Irish company, has invested around USD 125 million in the Larmag Cheleken joint venture with the State Turkmenoil company to develop two offshore oil fields in the Caspian Sea (Block II).
In 1996, EBRD became a part of the first private foreign investment joint venture investing ECU 28 million to expand a textile plant created by GAP-Turkmen joint venture. Adjanta Pharma Ltd., an Indian company, built a new pharmaceutical plant in Ashgabat and invested USD 2.5 million in this project.
Turkmenistan's official 1998 statistics on construction projects with foreign investment reported the following projects:
- Kotam Enterprises (Turkey) invested about USD 16 million in construction of a terry fabric production factory in Bayramali;
- Ahmet Chalik Group (Turkey) invested USD 44 million in construction of a textile complex in Ashgabat etrap;
- Nikisi (Iran) invested USD 152 million in construction of the Korpedje-Kurt Kui gas pipeline.Among the foreign companies working in Turkmenistan, Turkmen newspapers list such companies as the German Mannesman, Siemens and Alcatel;
the French Centrocommerce International and Bouygues; the Israeli Merhav; the Turkish Alarko, Mensel, Polimex, and Akhmed Chalyk Group;
the British John Laing and Monument Oil;
the Malaysian Petronas; the American Exxon, Mobil, Pipeline Solution Group (PSG), Halliburton, Western Atlas, Boeing, John Deere and J.I. Case; and the Japanese Chiodo and Nichimen.On February 19, 1999, the Government chose PSG, a joint venture between Bechtel and GE Capital, to lead the Trans-Caspian Pipeline (TCP) consortium. The TCP will transport natural gas 1,800 kilometers from Turkmenistan westward under the Caspian Sea across Azerbaijan and Georgia to Turkey. PSG and its consortium partner, Royal Dutch/Shell Exploration, are expected to arrange financing and manage construction of the estimated USD 2.5 billion project.
Turkmenistan Contact Information for Investment-Related Inquiries
U.S. companies are recommended to contact the State Agency for Foreign Investment for trade and/or investment project registration at the following address:
Mr. Yolly Gurbanmuradov, Director
Tel: (993)(12)35-04-10, 35-04-16
Fax: (993)(12)35-04-11, 35-03-23
Mr. Dovlet Khojamukhamedov, Deputy Director (oil and gas projects)
Tel: (993)(12)35-03-15
Mr. Emir Kuliev, deputy director (industrial, agricultural, telecommunications and other sectors, registration issues)
Tel: (993)(12)39-10-54
53 Azadi Street, Ashgabat, Turkmenistan 744000Oil and gas business proposals should be addressed to the following ministries and agencies:
Mr. Rejepbay Arazov, Executive Director
Mr. Rashid Rejepov, Deputy Director
Competent Body for Hydrocarbon Resource Development
53 Azadi Street, Ashgabat, Turkmenistan 744000
Tel/Fax: (993)(12)35-03-16, 35-04-14, 35-04-15Mr. Rejepbay Arazov, Minister
Ministry of Oil and Gas Industry and Mineral Resources
28 Neutral Turkmenistan Street
Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-35-31
Fax: (993)(12)51-04-43Mr. Saparmurad Veliev, State Minister, Chairman
State Turkmenoil Company
49 Makhtumkuli Street, Nebitdag, Turkmenistan
Tel/Fax: (993)(12)51-15-81, 39-38-34Mr. Guychnazar Tachnazarov, State Minister, Chairman
State Turkmengas Company
1 Mollanepes Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-59-59
Fax: (993)(12)35-72-81Mr. Rejepdurdy Ataev, State Minister, Chairman
State Turkmennebitgasgurlyshyk Company (oil and gas construction)
5 Mollanepes Street
Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-58-65, 35-60-01
Fax: (993)(12)51-04-66Mr. Berdymurad Rejepov, State Minister, Chairman
State Oil and Gas Trade Corporation
28 Neutral Turkmenistan Street
Ashgabat, Turkmenistan 744000
Tel: (993)(12)39-38-35, 51-04-60
Fax: (993)(12)39-59-70Trade and investment projects involved in agriculture, food, fruit and vegetable production and processing, telecommunications, electrical energy generation, chemical industry, healthcare and medical industry, rail and highway construction, autotransportation, textile industry, tourism and other industries should be addressed to the following government ministries and agencies:
Mr. Serdar Babaev, Minister
Agriculture and Water Resources Ministry
63 Azadi Street, Ashgabat, Turkmenistan 744000
Tel/Fax: (993)(12)35-66-91, 35-36-32Mr. Kakajan Ovezov, Head
Food Production Association
109 Makhtumkuli Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-18-25
Fax: (993)(12)51-19-82Mr. Durdy Karov, Head
Fruit and Vegetable Production Association
3 Tretya Pyatiletka Street, Ashgabat, Turkmenistan 744000
Tel/Fax: (993)(12)32-54-89Mr. Rovshan Kerkavov, Minister
Communications Ministry
40 Neutral Turkmenistan Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-21-53
Fax: (993)(12)39-04-20Mr. Saparmurad Nuriev, Minister
Energy and Industry Ministry
6 Pomma Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)51-08-82, 35-38-70
Fax: (993)(12)39-06-82Mr. Kurbanguly Berdimukhamedov, Minister
Healthcare and Medical Industry Ministry
90 Makhtumkuli Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-10-63
Fax: (993)(12)35-50-32Mr. Senaguly Rakhmanov, Minister
Autotransportation Ministry
2 Baba Annanov Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)47-49-92, 47-40-31
Fax: (993)(12)47-94-80Mrs. Djamal Geoklenova, Minister
Textile Ministry
52 Annadurdyev Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)35-25-88, 35-54-42
Fax: (993)(12)35-32-28Mr. Mered Gutlyev, Head
National Railroad Company
7 Turkmenbashi Street, Ashgabat, Turkmenistan 744000
Tel/Fax: (993)(12)35-55-45, 47-39-37Mr. Toyli Kurbanov, Head
State Tourist Corporation "Turkmensiyakhat"
17 Pushkin Street, Ashgabat, Turkmenistan 744000
Tel: (993)(12)39-86-91
Fax: (993)(12)39-67-40Mr. Nurmurad Kulmuradov, State Minister, Chairman
State Highway Construction Company
"Turkmenautoyollary" First Kilometer of Firuzinskoe Shosse
Ashgabat, Turkmenistan 744000
Tel: (993)(12)34-84-16
Fax: (993)(12)34-84-92
[end of document]
Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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