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RUEHPW RUEHROV RUEHVK RUEHYG
DE RUEHAH #0014/01 0041131
ZNR UUUUU ZZH
P 041131Z JAN 08
FM AMEMBASSY ASHGABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 9987
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 3188
RUEHBJ/AMEMBASSY BEIJING 1003
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RUEHIT/AMCONSUL ISTANBUL 1451
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RHMFIUU/CDR USCENTCOM MACDILL AFB FL
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RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEHVEN/USMISSION USOSCE 2063

UNCLAS SECTION 01 OF 06 ASHGABAT 000014 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CA AND EB/IFD/OIA; STATE PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN OPIC KTDB USTR TX
SUBJECT:  TURKMENISTAN 2008 INVESTMENT CLIMATE REPORT 
 
¶1.  (U) Text of Embassy Ashgabat's Investment Climate Statement for 
2008 is as follows: 
 
BEGIN TEXT OF PART I OF II: 
 
OPENNESS TO FOREIGN INVESTMENT 
 
Turkmenistan is a relatively large but sparsely inhabited country 
(about five million) with abundant hydrocarbon resources.  The 
government regularly proclaims its wish to attract foreign 
investment, but its state-control mechanisms and restrictive 
currency-exchange system have created a difficult foreign-investment 
climate.  Historically, the most promising areas for investment are 
in the oil and gas, agricultural and construction sectors.  Even in 
these areas, companies must conduct extensive due diligence.  The 
lack of established rule of law, inconsistent regulatory practices, 
and unfamiliarity with international business norms are major 
disincentives to foreign investment.  Although President Gurbanguly 
Berdimuhamedov has expressed his intent to improve investment 
conditions, to date he has taken no specific related actions. 
 
Turkmenistan's economy depends heavily on production of natural gas, 
oil, petrochemicals and, to a lesser degree, cotton and textiles. 
The country is the second largest gas producer in the former Soviet 
Union.  All other existing industrial production, with the exception 
of food processing, needs substantial development.  The country's 
key industries are still state-owned.  According to independent 
estimates (European Bank of Reconstruction and Development EBRD 
Transition Report 2007), the private-sector share in GDP in 2006 was 
25%, mostly concentrated in retail trade, services and food 
processing. 
 
The top economic development priority of the Government of 
Turkmenistan since independence in 1991 has been self-sustainability 
in food supplies and an increase in import-substituting production 
using hydrocarbon revenues.  Other industries where the government 
has been most receptive to foreign investment are the textile and 
construction sectors, which all acutely need modern technology, 
knowledge of international markets and experience in international 
business practices.  All investment proposals are screened for 
compliance with these government priorities.  The national program 
entitled "Economic, Political and Cultural Development Strategy for 
Turkmenistan to 2020" specifies government plans for the petroleum, 
chemical, power generation, mining, metallurgy, textiles, 
construction, agriculture, transportation, communication and other 
industries.  In October 2006, Turkmenistan adopted the Oil and Gas 
Development Plan for 2007-2030. 
 
Turkmenistan has a closed investment climate.  Decisions to allow 
foreign investment are politically driven; companies from "friendly" 
countries are more successful in winning tenders and signing 
contracts.  The country has significantly reduced its foreign 
borrowing, particularly from international donor organizations, 
because of leadership fears that overseas loans may lead to 
political dependency on foreign states.  However, since 
independence, Turkmenistan has accepted financing from IFIs for a 
variety of projects.  In this environment, where the government 
selectively chooses its investment partners, a strong relationship 
with the government is essential.  Often, government officials 
expect personal gain for allowing or helping foreign investors enter 
the local market.  One way to penetrate the market has been to work 
through established foreign businessmen, who arrange deals through 
their personal relationship with top leaders, or via high-ranking 
foreign officials.  Preliminary indications seem to demonstrate that 
establishing a personal relationship with the new president will 
remain the most direct -- and in some cases, the only -- way to gain 
entry to Turkmenistan's market. 
 
Incoming foreign investment is regulated by the Law on Foreign 
Investment (last amended in 1993), the Law on Investments (last 
amended in 1993) and the Law on Corporations of 1999, with respect 
to start-up corporations, acquisitions, mergers and takeovers of 
 
ASHGABAT 00000014  002 OF 006 
 
 
corporations.  Foreign-investment activities are affected by 
appropriate bilateral or multilateral investment treaties, the Law 
on Enterprises of 2000, the Law on Business Activities (last amended 
in 1993), and the Land Code approved in 2004.  Foreign investment in 
the oil and gas sector is subject to the 1996 Petroleum Law (last 
amended in December 2005).  The Tax Code provides the legal 
framework for the taxation of foreign investment.  The 2000 Civil 
Code defines what constitutes a legal entity in Turkmenistan, as 
well as requirements for registration.  Much foreign investment is 
governed by project-specific presidential resolutions, which may 
grant privileges not provided by the general legislation. 
 
Legally, there are no limits on foreign ownership or control of 
companies.  In practice, the government has allowed fully-owned 
foreign operations only in the oil sector and, in one case, in 
cellular communications (MTS of Russia).  There are various ways for 
the government to discriminate against disfavored foreign as well as 
domestic investors:  excessive tax examinations, license extension 
denial, and customs clearance and visa issuance obstacles.  Starwood 
Hotels and Resorts operated two Sheraton-franchise hotels in 
Ashgabat, but left Turkmenistan in 2006 as a result of disagreements 
over interpretation of its contract with the government. 
 
In most cases, the government has insisted on maintaining a majority 
interest in any joint venture (JV).  Foreign investors have been 
reluctant to enter JVs controlled by the government, as a result of 
competing business cultures and conflicting management styles. 
Foreign investors may only sell shares or divest with government 
permission, although there is no specific legislation.  Coca-Cola 
Bottlers has been in Turkmenistan since the mid-1990s in a JV with 
the government. 
 
Government efforts since 1991 to privatize former state enterprises 
have attracted little foreign investment.  Privatization has been 
limited to the service and trade sectors, with most industry still 
in state hands.  Out-dated technology, poor business structures, and 
governmental obstacles make privatized firms unattractive as 
outright purchases for foreign investors.  To date, government 
privatization efforts have also been counteracted by lingering 
prejudice against the private sector.  In cases where there is 
income potential, the government has been quick to crowd out the 
private sector as a competitor. 
 
All land is government-owned.  Neither domestic nor foreign entities 
can receive long-term land-use rights for "non-agricultural" 
purposes.  Private citizens have land rights under specific 
circumstances.  However, these rights exclude the sale or mortgage 
of land.  Land rights can only be transferred through inheritance. 
Foreign companies or individuals are permitted to lease land for 
non-agricultural purposes, but only the president has the authority 
to grant the lease. 
 
The government has attempted to introduce an element of competition 
for state contracts by announcing international tenders for some 
projects.  In many cases, Turkish companies have been hired to act 
as advisors in the tender process.  Typically, these projects are 
politically motivated and/or economically unsound, and the tender 
process is badly managed and often not transparent, timely, 
well-prepared, or accessible.  Following the president's 
announcement of a potential project, interested foreign investors 
and/or suppliers often contact the relevant government agency 
directly in case the tender is not announced publicly.  There is one 
case of a U.S. company being told it was awarded a tender, investing 
in initial project design, and then being informed the government 
was considering other options.  The tender was offered a second 
time, and the contract was awarded to a new company at double the 
U.S. company's tender price.  Investors should always put 
agreed-upon terms in writing and never act on verbal promises. 
 
Turkmenistan signed a Trade and Investment Framework Agreement 
(TIFA) with the United States, Kazakhstan, Tajikistan, Kyrgyzstan, 
and Uzbekistan on June 1, 2004.  The TIFA established a regional 
 
ASHGABAT 00000014  003 OF 006 
 
 
forum to discuss ways to improve investment climates and expand 
trade within Central Asia.  However, the Government of Turkmenistan 
does not actively engage in regional efforts aimed at boosting 
investment projects.  Turkmenistan sells electricity to Afghanistan 
at subsidized rates 
 
Since independence in 1991, Turkmenistan has received an estimated 
$2.86 billion in foreign direct investment (FDI) (EIU Turkmenistan 
Country Report, October 2006).  In October 2006, the Government 
stated that Production Sharing Agreement (PSA) operators (Petronas, 
Burren Energy, Maersk/Wintershall Consortium, Mitro International of 
Austria/Turkmennebit Consortium) had invested $1.34 billion in their 
local operations.  The EBRD Transition Report Update (May 2006) 
projected net FDI for 2006 to total $308 million. 
 
CONVERSION AND TRANSFER POLICIES 
 
The Government of Turkmenistan maintains tight control over the 
country's main foreign-exchange flows.  There are two de facto 
exchange rates.  The official rate has remained fixed at 5,200 
manats per dollar since 1998; for the last three years the 
unofficial rate has hovered around 24,000 manats per dollar.  By 
presidential decree, as of January 1, the "unofficial" exchange rate 
can be no higher than 20,000 manats/dollar .  In the latter part of 
2006, benefiting from the steady flow of natural gas and oil income, 
the government began to allow banks to convert manats from some 
commercial entities at a near-unofficial rate of 22,800 manats per 
dollar.  Foreign bankers considered this newly-permitted 
currency-exchange system to be a modest step towards overall 
liberalization of the foreign exchange market.  The Central Bank is 
known to control the unofficial rate by releasing large quantities 
of U.S. dollars into the unofficial (but legal) exchange market. 
 
In November 2007, President Berdimuhamedov announced his intention 
to unify the exchange rate by 2009.  The Government of Turkmenistan 
also plans to release new, redenominated currency at that time.  In 
preparation for exchange rate unification, Berdimuhamedov has stated 
that Turkmenistan will seek advice from international financial 
institutions. 
 
Oil producers operate under the Petroleum Law and receive their 
profit share in crude oil, which they ship by tankers to other 
Caspian Sea littoral states or swap in Iran or Persian Gulf 
countries.  In many cases, investors in petrochemicals have 
negotiated deals with the Government of Turkmenistan to recoup their 
investment in the form of future petroleum products.  Foreign 
investors generating revenue in foreign currency, such as textile 
factories, do not generally have problems with repatriating their 
profits.  However, some foreign companies receiving income in local 
currency, such as Coca-Cola, seek indirect ways to convert local 
currency to hard currency through the purchase of petroleum and 
textile products in manat for resale on the world market. 
 
Turkmenistan imports the vast majority of its industrial equipment 
and consumer goods.  The government's foreign-exchange reserves pay 
for this industrial equipment and various investment projects.  The 
demand for hard currency in Turkmenistan's private retail sector 
seems to be satisfied by the unofficial but legal exchange market 
and the newly-introduced possibility to also buy dollars in banks at 
the "near-unofficial" rate. 
EXPROPRIATION AND COMPENSATION 
Turkmenistan's legislation does not provide for private ownership of 
land, and thus offers opportunities for the government to force 
investors to vacate their land.  Article 21 of the Investment Law 
allows investors' property to be confiscated by a court decision. 
Although there have been no reported expropriatory actions against 
foreign investors in the last year, the Government of Turkmenistan 
has a history of arbitrary expropriation of the property of local 
businesses and individuals.  Under the previous leadership, the 
government often refused to pay any compensation, much less fair 
market value, when exercising "the right of eminent domain."  For 
example, as part of a "city beautification" project to widen 
 
ASHGABAT 00000014  004 OF 006 
 
 
Ashgabat's streets, hundreds of homes and some local businesses were 
destroyed.  Homeowners were given short notice and little, if any, 
compensation for loss of their dwellings.  However, during a March 
2007 Cabinet of Ministers meeting, President Berdimuhamedov stated 
that residents of affected apartments or houses would be provided 
with alternative housing before their homes are demolished.  In 
2007, neighbors who were promised housing six months after their 
apartments were to be destroyed appealed to international 
organizations in order to obtain new housing immediately, and were 
given new apartments shortly thereafter. 
 
DISPUTE SETTLEMENT 
 
Most contracts negotiated with the government have an arbitration 
clause.  Embassy strongly advises U.S. companies to include an 
arbitration clause with a venue outside Turkmenistan. 
 
There have been several commercial disputes over the past few years 
involving U.S. and other foreign investors or contractors in 
Turkmenistan, though not all the disputes were filed with 
arbitration courts.  Turkmenistan's investment and commercial 
disputes have three common themes:  non-payment of debts, 
non-delivery of goods or services, and contract renegotiations.  The 
government may claim the provider did not meet the terms of a 
contract as justification for non-payment.  Most disputes have 
centered on the government's unwillingness to pay in hard currency 
as contractually required.  In cases where government entities have 
not delivered goods or services, the government has often ignored 
demands for delivery.  Finally, a change in the leadership of a 
government agency that signed the original contract often triggers a 
government call to re-evaluate an entire contract, including profit 
distribution, management responsibilities and payment schedules. 
 
A western oil and gas company and Turkmenneft, the government-owned 
oil company, have been in litigation since 1996.  Under the auspices 
of the International Chamber of Commerce, in 2001 the western 
company was awarded of $495 million in damages.  In spring 2006, the 
U.S. Court of Appeals upheld the 2001 decision and bound the 
Government of Turkmenistan to an arbitral award rendered by a 
tribunal sitting in Houston, Texas, in favor of a foreign party 
against State Concern Turkmenneft.  In November 2006, the U.S. 
Supreme Court denied Turkmenistan's petition for a writ of 
certiorari.  The award has not been paid. 
 
Although Turkmenistan has adopted a number of laws designed to 
regulate foreign investment, the laws have not been consistently or 
effectively implemented.  The concentration of power in the office 
of the president has undermined the rule of commercial law. 
Legislation is regularly made -- or overturned -- by presidential 
decree.  The Law on Foreign Investment, as amended in 1993, is the 
primary legal instrument defining the principles of investment.  The 
law also provides for protection of foreign investors.  The foreign 
investor is defined in the law as an entity owning a minimum average 
of 20% of a company's assets during a calendar year, unless the 
Cabinet of Ministers waives the requirement. 
 
The following is an ad hoc list of relevant legislation regarding 
foreign investments: 
 
-- All foreign and domestic companies and foreign investments must 
be registered at the Ministry of Economy and Finance (MOEF). 
--The Petroleum Law (Law on Hydrocarbon Resources) regulates 
offshore and onshore petroleum operations in Turkmenistan, including 
petroleum licensing, taxation, accounting and other rights and 
obligations of state agencies and foreign partners.  The Petroleum 
Law supersedes all other legislation pertaining to petroleum 
activities, including the Tax Code. 
-- According to the Land Code, foreign companies or individuals are 
permitted to lease land for non-agricultural purposes, but only the 
president has the authority to grant the lease.  Foreign companies 
may own real estate property other than land. 
-- Turkmenistan adopted a Bankruptcy Law in 1993. 
 
ASHGABAT 00000014  005 OF 006 
 
 
-- Other laws affecting foreign investors include the Law on 
Investments (last amended in 1993), the Law on Corporations of 1999, 
the Law on Enterprises of 2000, the Law on Business Activities (last 
amended in 1993), the Civil Code enforced since 2000, and the Law on 
Property of 1993. 
 
The commercial-law enforcement system includes the Arbitration Court 
of Turkmenistan (Arachy Kazyyet) which tries 13 categories of 
disputes, both pre-contractual and post-contractual, including 
taxation, legal foundations and bankruptcy issues.  The court does 
not interfere in enterprises' economic relations, but considers 
disputes by request from either party involved.  Appeals on 
decisions of the Arbitration Court can be filed at the Arbitration 
Committee of the Supreme Court of Turkmenistan. 
 
Turkmenistan has not become a Party to the Convention on the 
Settlement of Investment Disputes Between States and Nationals of 
Other States (also known as the Washington Convention) or the New 
York Convention of 1958 on the Recognition and Enforcement of 
Foreign Arbitral Awards or any other internationally recognized 
arbitration agreement. 
 
PERFORMANCE REQUIREMENTS/INCENTIVES 
 
Foreign investors are disadvantaged by higher tax rates than most 
local companies.  The Tax Code adopted in 2004 was amended three 
times, in 2005, 2006 and 2007, but with most tax rates remaining 
unchanged.  The Value Added Tax is 15%, an income tax of 8% is 
applied to JVs and an income tax of 20% to wholly-owned foreign 
companies and state-owned enterprises.  Dividends are taxed at 15%, 
and the personal income tax is 10%.  In 2005, the government of 
Turkmenistan amended the tax code, giving more concessions to 
domestic private companies.  The Code exempted domestic private 
companies from the VAT and property tax and reduced the income tax 
from 8% to 2%.  In August 2006, Turkmenistan increased its excise 
tax on imported beer (50%) and wine (100%).  Similar taxes on 
domestically produced beer and hard liquor remain at previous rates: 
 10% and 15%-40% respectively. 
 
In May 2007 Turkmenistan introduced a National Tourism Zone (NTZ) to 
promote tourism development on the Caspian Sea coast.  Tax and other 
incentives are provided in the new legislation passed on October 1, 
but only to those willing to invest in construction of hotels and 
recreational facilities.  The amendments to the Tax Code passed on 
October 1 exempt construction and installation of tourist facilities 
in the NTZ from the VAT.  Various services of tourist facilities, 
including catering and accommodation, are also VAT-exempt.  Income 
tax on accommodation and catering of tourist facilities will not be 
levied for the first 15 years. 
 
Equipment purchased by the investor as part of the registered 
capital, other assets to be used in production, and personal 
household effects of investors' employees are duty free. 
 
Tax and investment incentives can be negotiated on a case-by-case 
basis.  The president has often issued special decrees granting 
taxation exemptions and other privileges to specific investors while 
recouping the initial investment. 
Assets and property of foreign investors should be insured with the 
State Insurance Company of Turkmenistan (Article 53 of the Petroleum 
Law, Article 3 of Insurance Law).  National accounting and financial 
reporting requirements also apply to foreign investors.  All 
contractors operating in Turkmenistan for a period of at least 183 
days a year must register at the Main State Tax Service.  There is a 
general requirement for foreign investors that 70% of the company's 
personnel be local.  The government can make exceptions for foreign 
construction companies executing large-scale turnkey projects. 
Turkmenistan requires that all export and import contracts and 
investment projects be registered at the State Commodity and Raw 
Materials Exchange (SCRME) and the Ministry of Economy and Finance. 
The procedure applies not only to the contracts signed at the SCRME, 
but also to contracts signed between third parties.  The SCRME is 
 
ASHGABAT 00000014  006 OF 006 
 
 
government-owned and is the only exchange in the country.  The 
contract registration procedure includes an assessment of "price 
justification."  All import contracts must be registered before 
goods are delivered to Turkmenistan. 
 
The government mostly favors long-term investment projects that do 
not require regular hard-currency purchases of raw materials from 
foreign markets.  Textile factories operated by Turkish companies 
using domestic resources and labor serve as model investment 
projects supported by the government.  These companies encounter 
relatively few currency conversion problems and enjoy tax holidays. 
Otherwise, there are no set requirements for local sourcing or 
exporting specific percentages of output. 
 
Production Sharing Agreement (PSA) holders are mostly regulated by 
the Petroleum Law.  They are subject to a 20% income tax and 
royalties ranging from 1% to 15%, depending on the level of 
production.  The social welfare tax, 20% of the total local staff 
payroll, is also payable by all foreign investors and their 
subcontractors.  PSA holders' employees and their subcontractors pay 
a personal income tax of 10%.  Under the Petroleum Law, PSA 
concessions have been made to six foreign energy companies:  three 
offshore and three onshore concessions for 20-25 years.  Five of the 
existing concessions are in the oil sector and one in the gas 
sector. 
 
Subcontractors of PSA holders can bring their equipment into the 
country only for a duration of a valid contract.  There is no 
appropriate legislation that regulates operations of oil and gas 
subcontractors 
 
Currently, Turkmenistan lists 94 import and nine export goods and 
materials subject to customs duties.  Goods and materials not on the 
lists are subject to a 5% customs duty payment.  In regard to 
exports, customs maintains a list of goods subject to customs duty 
payment.  Export of fertilizers, non-ferrous metals, their alloys, 
and products made of non-ferrous metals is prohibited.  State 
enterprises often receive preferential treatment; for example, wool 
carpets produced at state factories are exempt from customs duties. 
In contrast, private carpet producers have to pay 100% customs 
duties for exporting carpets. 
 
Foreign investors are required to adhere to the sanitary and 
environmental standards of Turkmenistan.  Foreign investors' 
products should be of equal or higher quality than prescribed by the 
national standards. 
 
Turkmenistan, while not a member of the World Trade Organization 
(WTO), has enacted a number of laws in key areas relevant to the 
WTO:  investment, banking, intellectual property rights, customs, 
and privatization.  However, the legislation is not enforced 
uniformly.  Turkmenistan is not a signatory to and is not in 
compliance with the Agreement on Trade-Related Investment Measures 
(TRIMS). 
 
The State Service for Registration of Foreign Citizens was created 
in 2003 with the specific aim of controlling access to the country 
and movement of foreign citizens within Turkmenistan.  All visitors 
are required to register upon entry, and travel to most border areas 
requires a special permit.  Inviting foreigners often is 
problematic, because authorities can and do deny entry visas without 
explanation.  With these travel strictures, foreign investors trying 
to enter Turkmenistan for the first time have difficulty obtaining 
entry visas unless invited by the government.  Even established 
investors continue to complain about bureaucratic procedures and 
delays in this context. 
END TEXT OF PART I OF II. 
HOAGLAND