Updated: Jan 16, 2020
By: The PH Team
After the collapse of Soviet Union in 1991, the newly independent Turkmenistan began to define their own future for the first time.
During the transition stage, the country suffered from economic hardships due to the decline of industrial production, the reduction of oil and gas production, the crisis of the monetary system, the absence of an effective customs service, lack of appropriate legislative framework, etc. (Proklov, 2008).
At the time of independence, the government of Turkmenistan set a course to isolation and adopted a highly controlled system, on both the political and socio-economic levels. Furthermore, the country adopted a policy of international isolation in the form of 'permanent neutrality.'
While Kazakhstan and Kyrgyzstan gave a green light to relatively liberal reforms to shift towards a market economy, Turkmenistan under the leadership of ‘Turkmenbashi’ (President Niyazov) was reluctant to modernize the economy and followed the Soviet model to ensure the control over the key sectors of the country’s economy (Bendini, 2013).
Some scholars defined the economic order after independence as a state-capitalism, similar to what China’s system is now called (Spechler, Ahrens & Hoen, 2017).
As a result, Turkmenistan's participation in the activities of the Commonwealth of Independent States was also greatly minimized.
At the same time, Turkmenistan was the only country in post-Soviet Central Asia, who did not join some of the key regional blocks lead primarily by China and Russia, such as the CIS Customs Union, Collective Security Treaty Organization (CSTO), and Shanghai cooperation organization (SCO) (Arbebin, 2008).
However, according to the Ria Novosti (2019), Turkmenistan recognized the importance of the latter block and ready for the cooperation with SCO to create a system of sustainable energy routes. (Ria Novosti, 2019)
Turkmenistan: Land of Growth and Prosperity
Economic Growth, Wellbeing and Prosperity are the key words in state official media and government agencies, which are highly controlled by Turkmenistan's government.
The Ministry of Foreign Affairs of Turkmenistan (2019) stated:
Today, Turkmenistan has the diversified, multifunctional economy presented by enterprises of power industry, oil and gas production, oil-processing, chemical and petrochemical field, mechanical engineering and metal-processing, objects for producing building materials, light and food industry. At the end of 2018, dynamic economic growth was ensured in all sectors, the well-being of the people was steadily increasing... The growth rate of Turkmenistan’s GDP in the year of 2018 made up 6,2 %.
2019 started under the grand slogan ‘Turkmenistan – the Home of Prosperity’ emphasizing yet again that Turkmenistan “has a large economic potential due to the socially oriented policies of the Respected President, confidently follows the course of innovation and progress in the name of the prosperity of the Motherland, the well-being of every citizen of the country” (State Migration Service of Turkmenistan, 2019).
Turkmenistan & the World Bank
Since 2012, the World Bank classified Turkmenistan as an ‘Upper Middle-Income country’ based on its GNI per capita.
Turkmenistan however is lagging behind in a number of other international indicators.
Corruption Perceptions Index in Turkmenistan ranked 161 out of 180 in 2018 (Transparency International, 2018).
Turkmenistan’s Economic Freedom Score is 48.4, making its economy the 164th freest in the 2019 Index (Heritage Foundation, 2019).
There is not much quantitative information available on the level of poverty. However, number of independent media sources report poverty, malnutrition, shortage of products, especially in the rural areas.
Nowadays, Turkmenistan faces diverse external and internal challenges that aggravate the economic and social situation.
The high degree of vulnerability of the country is due to internal systemic problems, such as lack of economic diversification, government interventionism, unfavourable business environment, etc.
FDI in Turkmenistan
According to UNCTAD Definitions and Sources (p.245):
Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).
The impact of FDI in developing countries remains a subject of debate. Some argue that it is an important tool for economic development as it transfers technical know-how, boosts productivity and generates business for local firms, as well as creates jobs (World Bank, 2017).
Others say that FDI activities are linked to the depletion of natural resources in developing countries (Caycedo, 2018). The impact of FDI however largely depends on the role of government to redistribute the wealth to all levels of the society.
In the case of Turkmenistan, most of the FDI is surrounded around one major sector - natural gas. Hyper-dependence on revenues from oil and gas, along with state-controlled capitalism makes the country vulnerable to external shocks and fluctuations.
In a way, it follows a classical scenario of many resource-abundant developing states.
Natural gas accounts for roughly 70-80 percent of the country's total exports (Observatory of Economic Complexity, 2017).
The country has the fourth largest natural gas reserves in the world (referring to the BP Statistical Review of World Energy, 2019).
Other sectors of the economy, including textiles, agriculture, chemicals, and construction have been defined as inefficient (Abdimomunova, Boutenko, Chin et al., 2018).
Knowing the attractiveness of the extractive industry for foreign investors, Turkmenistan plans to further develop the industry.
Thus, according to the program for the development of the oil and gas industry of Turkmenistan 2030, it is planned to increase oil production to 110 Mt, and natural gas to 250 billion m3. (Herrick, Horj & Marchal, 2019).
Turkmenistan's Gas: The Major Players
The key participants in the occasionally disrupted marathon for Turkmen gas are Russia, China and Iran.
It is a very well-known fact that during the past decade China has been able to outweigh its competitors in the whole region, and Turkmenistan is not an exception.
According to Panier (2019), China has become a main importer of Turkmenistan's gas since 2017. Putz (2019) states “As China’s share of Turkmen gas exports grew, Russia’s declined. At present, Turkmenistan exports between 30 and 40 bcm annually to China via the Central Asia-China pipeline that runs from Turkmenistan.”
Since 2004 when the cooperation agreement between Moscow and Ashgabat came into force (TASS, 2018) and up until 2016 Russia was the key buyer of the Turkmen gas.
Ashgabat’s problems began in 2016 when Russia, its main gas buyer, ceased its purchases due to price disputes. After three-years of rupture, in 2019, Russian energy giant Gazprom finally resumed gas purchases from Turkmenistan.
Some experts evaluate this step as not profitable for Russian the side. Others assume that it has been done to step over the competitors. According to others, Gazprom can deliver Turkmen gas to Europe via the "North stream" or to Asia via the "Power of Siberia" (Prime, 2019).
With continuous cooperation with China and resumed gas purchases by Russia, the Turkmen government could continue living in its comfort zone, as of December 2019, but recently one event has shaken the ‘already poor bargaining position’ of Turkmenistan (Bhutia, 2019).
Russian media reported that China and Russia launched the gas pipeline "Power of Siberia" that became the largest investment project of "Gazprom.
Gazprom and Chinese state-owned CNPC signed a $400 billion contract for a period of 30 years. (RBC, 2019)
While Iran is not as significant for Turkmenistan as its two big brothers China and Russia, the history of relations between Iran and Turkmenistan in the gas sector traces back to 1997.
Until 2006, the supply of Turkmen oil to Iran consistently increased. Since 2006, the long-standing relations started to cool due to the disputes over Iran's non-payment of the gas received, which resulted in Turkmenistan reducing supplies and in 2017 Turkmenistan stopped gas supplies to Iran (Savosin, 2019).
Pipeline Projects in Turkmenistan
TAPI, an ambitious 1800 km-long pipeline traversing Afghanistan, Pakistan and India, is one of the key steps taken by Turkmen government to diversify its energy routes.
There are talks and rumours following the inauguration of the project. Construction is underway, but the Afghan section has constantly raised security concerns.
Xinhua News (2019) reports “a special combat team was created to stabilize the situation in the provinces through which the Turkmenistan — Afghanistan — Pakistan — India (TAPI) gas pipeline will pass.” In addition, some experts are still skeptical about the finalization of the project.
While TAPI started slowly taking its shape, the Trans-Caspian gas pipeline remains on the wish list of Turkmenistan and the EU as a way to diversify their energy routes.
While the legal obstacles related to the status of the Caspian Sea has been finally resolved in 2018 by the Convention on the Legal Status of the Caspian Sea, the economic viability and Russia’s opposition raise the question about the fate of the project.
Yet again, it might be postponed until better times (Tamma, Schaart & Gurzu, 2019).
In addition, the EU seems to be re-orienting itself towards the ‘sustainability mode’. Radical carbon emissions cuts, including investment in clean energy, is the key agenda of the European Green Deal announced by the new European Commission President Ursula von der Leyen (Politico EU, 2019).
China diversified its gas supply routes by signing an agreement with Russian Gazprom. The situation with Iran is on pause, the finalization of the TAPI is uncertain, the future gas project with the EU is abstract.
On the top of this, FDI inflows have been gradually decreasing in recent years accounting for approximately 1.9 billion US dollars.
According to the World Bank Country Snapshot (2019), the weak economic performance of Turkmenistan is linked to the projected decline of the gas price.
In addition, it is estimated that China and Russia will face economic ‘slowdown’ in 2020.
Future of Turkmenistan's Economy
Considering these facts, in the near future, Turkmenistan does not seem to have a comfortable way out.
It is in dire need for economic diversification and increased FDI from new international partners.
To attract more potential investors, the Turkmen government should find a trade-off and commit itself to improve unsatisfactory business environment and minimise the barriers, such as unstable monetary and fiscal policies, failure to implement investment-related legislation and lack of legal infrastructure for foreign investment.
On the one hand, for the potential and current investors, the abundance of the natural resources and relatively stable regime certainly represent an opportunity per se.
However, the multitude of the invisible hindering factors pose risks and problems that make many investors think twice before stepping in to the ‘Land of Prosperity’.
Multiple foreign media outlets reported multiple cases of underpayment and non-payment to some of the foreign companies.
One of the most recent cases include Russian mobile operator MTS that filed a lawsuit with the International Centre for Settlement of Investment Disputes (ICSID) and claimed 1.5 billion US dollars as a loss for the termination of its operation due to government intervention (EBRD, 2019).
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