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Country Commercial Guides for FY 2000: Turkmenistan Report prepared by U.S. Embassy Ashgabat, Released July 1999 Note*

Chapter VIII: Trade and Project Financing

Description of the Banking System

The banking system in Turkmenistan is based on a number of basic laws addressing the financial and monetary policy of the state, including the Law on the Central Bank of Turkmenistan, the Law on Commercial Banks and Banking Activity, the Law on Foreign Exchange Regulation, and the Law on the Monetary Unit of Turkmenistan.

The banking system consists of the State Central Bank of Turkmenistan;
five state banks:
the State Bank for Foreign Economic Affairs (also known as Vnesheconombank),
the State Commercial Bank "Turkmenistan",
the State Commercial Investbank,
the State Commercial Daykhanbank,
and the State Savings Bank (Sberbank);
4 joint stock commercial banks,
and two joint banks with foreign participation.

There are the Iranian Commercial Bank "Saderat" and a representative office of Deutsche Bank operating in Ashgabat.

The Central Bank is the National Bank and acts on behalf of the government. According to the Law on the Central Bank, the Bank is independent from any state power and administrative bodies.

It is responsible for formulating and conducting monetary and foreign exchange policy;
licensing banking activity;
supervision and regulation of the banking system;
management of international financial reserves of the country;
and development of the efficient banking settlement system.

The Central Bank is the banker, advisor and fiscal agent of the Cabinet of Ministers. In addition, the Bank is charged with setting interest rates and for administering subsidies to the priority sectors of the economy.

The Central Bank is also responsible for running the weekly currency exchange auctions in cooperation with the Foreign Exchange Committee chaired by the Deputy Chairman of the Cabinet of Ministers for Banking and Foreign Exchange. The Interbank Commission, chaired by the same Deputy Chairman, controls foreign exchange circulation and distribution and regulates the activities of commercial banks.

The Central Bank is responsible for the supervision of commercial banks. It has implemented a cautious licensing policy and has also closed a number of smaller banks in recent years.

The Bank has introduced regulations on banking supervision including:

a) a minimum capital requirement of 500 million manat for smaller banks and from 500 million manat to 1 billion manat for larger banks. Branches of foreign banks have a minimum capital requirement of USD 1 million;
b) a capital adequacy requirement of 8% of risk-weighed assets, defined in line with internationally accepted standards;
c) a liquidity ratio of 30% of liabilities, to be held in cash deposits with the Central Bank, loans receivable within 30 days, or treasury bills;
d) a concentration risk ratio, limiting loans to a single borrower to 20% of paid-up capital; and
e) loan classification and extension rules based on the duration for which the loan repayment is overdue.

The Central Bank received technical assistance in bank supervision from the World Bank and the International Monetary Fund in 1997-1998.

The State Bank for Foreign Economic Affairs (Vnesheconombank) is the key institution for foreign businessmen and investors, as well as local exporters. It dominates import/export and investment operations and is a member of the International Payment Cards Association.

The Vnesheconombank has signed an agreement with Standard and Poors concerning awarding Turkmenistan an international sovereign credit rating. Vnesheconombank is the primary fiscal agent for the GOTX that secures financing for all government commercial transactions and handles all foreign exchange operations.

Vnesheconombank closely works with SAFI and the state development funds. In 1998, the bank's total assets amounted to USD 1.26 billion. It is the only bank in Turkmenistan that works with VISA cards.

State Commercial Turkmenistan Bank, Investbank, and Daykhanbank focus on certain areas of economic activity; in particular, Turkmenistan Bank deals with financial operations made in social infrastructure; Investbank deals with industrial project financing; and Daykhanbank deals with agricultural transactions. All state entities are ordered to work only with state commercial banks.

Most of the Turkmen commercial banks are small- and medium-sized with almost 100% of the shares in their founding capital belonging to various state enterprises. In addition, the Government has a 50% share in any joint venture with a foreign bank. All banks, including foreign banks, may operate only if they are licensed by the Central Bank of Turkmenistan.

Three state commercial banks, the Joint Stock Commercial Senagat Bank, the International Joint Stock Bank of Turkmenistan for Reconstruction, Development and Promotion of Entrepreneurship, the Joint Stock Commercial Garashsyzlyk Bank, the Turkish-Turkmen Joint Commercial Bank, the Russian-Turkmen Joint Stock "Rossiysky Kredit" Bank, and Sberbank have licenses from the Central Bank enabling them to carry out foreign exchange operations.

Turkmenistan has no tradable financial instruments and no non-bank financial institutions, although insurance companies are gradually developing. The commercial banks play only a minor role in financial intermediation and continue to function more as administrators of public sector financial transactions. Manat credits are financed primarily by the Central Bank and are short-term. There continues to be a general lack of confidence in local banks.

Foreign Exchange Controls Affecting Trade

In the past, foreign companies doing business in Turkmenistan had difficulty converting the national currency into hard currency. Some companies could not even receive manat coverage for a transaction made in Turkmenistan because of a shortage of both local and hard currency. Therefore, most trade transactions in the past were made on a barter basis (usually, payments were made in cotton). Now, all barter transactions are controlled by the Cabinet of Ministers.

In 1997, the foreign exchange rate became single and unified at 5,300 manat against the dollar and was stable until July 1998. At that time, a gap began to develop between the official rate and the black market rate, which peaked at 19,000 manat per dollar in April 1999 and has been fluctuating between 14,000 and 15,000 manat in July. All domestic trade is done in manat.

Foreign companies may convert the manat into hard currency through their commercial banks. There are certain criteria that are taken into consideration when the Central Bank provides foreign exchange through its Interbank Currency Exchange to meet the commercial banks' needs in hard currency. (See paragraph "Conversion and Transfer Policies" in the Investment Climate Statement.) The Central Bank licenses foreign exchange operations by commercial banks and guarantees the security of foreign investors' deposits, stocks, securities and other payment documents kept in commercial banks.

General Financing Availability and Terms of Payment

The Central Bank extends credits in manat to the government and banks, and in manat and foreign currency to non-budget ministries and state enterprises. Most of these credits are interest free.

The internal financial market in Turkmenistan is heavily supported by the state: state entities hold majority shares in most Turkmen commercial banks. However, due to the tough monetary policy of the Central Bank and general improvements made in banking services, most of the banks have increased their own capital.

As a result, commercial banks have activated project or trade financing services. However, there are difficulties that prevent commercial banks from expanding their investment activities.

Among the difficulties are a lack of stimulus for long-term investment; inexperience of heads of enterprises in management, and, at times, their failure to honor contracts; lack of a well-established mechanism of debt payment by enterprises; and a shortage of skilled banking specialists. High interest rates for credits are a significant obstacle for local entrepreneurs in expanding their commercial activities.

A few Turkmen commercial banks are experienced in working with letters of credit (Turkmenbank, Investbank, and Senagat Bank). To date, this method of payment has been the safest one. Payment based on actual shipment of goods or work performance is another method used in Turkmenistan. The Government does not allow commercial banks to service transactions on a prepayment term.

To finance large commercial projects involving foreign and Turkmen state companies, the Government uses foreign credits extended by foreign governments and international financial institutions. Vnesheconombank handles all transactions involving foreign credits.

Types of Export and Project Financing and Insurance Available to U.S. Companies

1. The Export-Import Bank of the United States (U.S. EXIM Bank) is an independent U.S. government agency that provides support for U.S. exports through export credit insurance, loan guarantees, direct loans, working capital guarantees, and project financing. The Bank assists only the export of goods and services with at least 50% U.S. content. Under medium- and long-term programs, if the U.S. export product contains foreign-made components, EXIM Bank will cover up to 100% of the U.S. content, provided EXIM Bank's support does not exceed 85% of the export price. Short- and medium-term export credit insurance and project financing are available to Turkmenistan. So far, for short-term transactions, EXIM Bank has been requiring an ILC or guarantee from the Vnesheconombank and extended $424 million to Turkmenistan. In April 1998, EXIM Bank signed a framework agreement on financing creditworthy projects in Turkmenistan. The agreement envisages that the Bank will provide financing for export projects involving private companies without requiring government guarantees, but to date all financing has required government guarantees.

2. The Overseas Private Investment Corporation (OPIC) is a self-sustaining independent agency of the U.S. government that promotes economic growth in developing countries by encouraging U.S. private investment. OPIC facilitates U.S. investment through the following basic programs: financing of investments through direct loans and loan guaranties; insuring investments against political risks; and providing a variety of investor services. In 1993, Turkmenistan signed an OPIC agreement but, to date, there has been little U.S. direct investment in Turkmenistan and no OPIC program involvement.

3. The International Finance Corporation (IFC), an independent member of the World Bank Group, is the largest source of direct project financing for private investment in developing countries. In the CIS countries, IFC normally invests in projects with a total cost greater than $25 million and requires that a project generate hard currency. In 1996, Turkmenistan joined the International Finance Corporation, but is not a member of the Multilateral Investment Guarantee Agency.

4. The U.S. Trade and Development Agency (TDA) is an independent U.S. government agency that provides non-reimbursable grants for U.S. firms to carry out feasibility studies for both public and private sector projects. In Turkmenistan, TDA has extended grants in the oil and gas, minerals and telecommunications sectors.

5. The European Bank for Reconstruction and Development (EBRD) is a multilateral financial institution that lends and invests exclusively in the countries of Central and Eastern Europe. The bank provides advice, loans, equity investments and debt guarantees in order to foster the transition toward open market-oriented economies and to promote private and entrepreneurial initiative. In Turkmenistan, EBRD has opened a $35 million credit line available for small- and medium-size project financing. The bank has invested its equity in a textile production complex, and arranged tenders for a number of projects in Turkmenistan.

6. Central-Asian American Enterprise Fund (CAAEF) has an office in Ashgabat which provides assistance to businesses through three primary activities: direct investment program including direct investments and loans to qualified private enterprises and start-up ventures; joint ventures; and small business loan program. The Fund's investments range from a minimum of USD 100,000 to a maximum of USD 5,000,000 with both transactions combining both loans and equity. CAAEF also offers various forms of technical assistance, including business plan development, to new private businesses.

7. The U.S. Caspian Finance Center was opened in Ankara, Turkey, to assist American companies to enter the energy rich market of the Caspian region. The center handles businesses of three U.S. trade and finance agencies: U.S. TDA, U.S. EXIM Bank, and OPIC. Working with the commercial and economic officers of the Departments of Commerce and State, the multi-agency trade finance team offers services designed to maintain U.S. commercial interests in the region and better position U.S. firms over foreign competition.

Types of Projects Receiving Financing Support

Turkmen official 1998 statistics state that only 2% of total credit extended in the national currency to local state and private enterprises by Turkmen commercial banks were for a term of 5 to 7 years and 98% were short term (from one month to 3 years). It should be noted that, so far, state enterprises have dominated the economic structure of Turkmenistan. T Therefore, most credits have been granted to state enterprises. Short-term credits have been provided to primarily small- and medium-size state and private enterprises. About 28.4% of short-term credits covered agricultural production projects, 25.3% industrial production, 6.6% trade transactions, and 2% construction projects.

EBRD has extended an ECU 32 million credit line for small and medium-size enterprises since 1996. It provides hard currency term financing through selected participating banks including Investbank, Senagat Bank, and Garashsyzlyk Bank. Priority is given to industrial, agricultural, textile and various service development projects.

During 1998 and the first half of 1999, Central Asian-American Enterprise Fund disbursed USD 4.3 million to private Turkmen firms through local banks including Daykhanbank, Investbank, Senagat Bank, and Turkmenistan Bank. The CAAEF provides financial support (the preferred size is from USD 50,000 to USD 300,000) to businesses involved in primarily food processing, consumer goods production, services, and light manufacturing.

List of Banks with Correspondent U.S. Banking Arrangements

(Full contact information is provided in Appendix E: U.S. and Turkmenistan Contacts.

Central Bank - Chase Manhattan, New York
- Citibank N.A., New York
- Deutsche Bank, New York

Vnesheconombank - American Express Bank Ltd., New York
- Bank of America Int'l, New York
- Bankers Trust Company, New York
- Bank of New York, New York
- Chase Manhattan Bank, New York
- Chemical Bank, New York
- Citibank N.A., New York
- Credit Lyonnais, New York
- Republic National Bank of New York, New
York

Investbank - Bank of America Int'l, New York
- Chase Manhattan Bank, New York
- Citibank N.A., New York and Frankfurt/Main, Germany
Turkmenbank - Citibank N.A., New York
- Bankers Trust Company, New York

Daykhan Bank - Citibank N.A., New York
- Bank of New York, New York
- Chase Manhattan Bank, New York