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ZNR UUUUU ZZH
P 021246Z JAN 08
FM AMEMBASSY ASHGABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 9962
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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RHEFDIA/DIA WASHDC
RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEHVEN/USMISSION USOSCE 2051

UNCLAS SECTION 01 OF 12 ASHGABAT 000006 
 
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: 
 
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 00000006  002 OF 012 
 
 
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 00000006  003 OF 012 
 
 
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 00000006  004 OF 012 
 
 
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 00000006  005 OF 012 
 
 
-- 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 00000006  006 OF 012 
 
 
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 tryingQ 
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. 
 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
 
Foreign and domestic private entities in Turkmenistan have the right 
to establish and own business enterprises, though this is associated 
with onerous bureaucratic requirements.  The 2000 Law on Enterprises 
 
ASHGABAT 00000006  007 OF 012 
 
 
establishes state and private businesses in various legal forms 
(state enterprises, sole proprietorships, cooperatives, 
partnerships, corporations and enterprises of non-government 
organizations).  The law allows foreign companies to establish 
subsidiaries, but the Government does not currently register 
subsidiaries.  The Civil Code of Turkmenistan and the Law on 
Enterprises provide for representative and branch offices to operate 
in Turkmenistan; these offices do not have legal entity status, but 
have to be registered at the Ministry of Economy and Finance. 
 
The government prohibits engagement in certain areas of commercial 
activity, such as mass media.  The 1999 Law on Licensing Certain 
Types of Activities lists 65 types of activities that require 
government licenses.  Currently, state entities do not require 
licenses.  Often private entities need to do more than public 
enterprises to access markets and credit. 
 
The Law on Enterprises and the Law on Corporations provide for 
acquisitions and mergers.  However, Turkmenistan's legislation is 
not clear about acquisitions and mergers involving foreign parties, 
nor does it have specific provisions for disposition of interests in 
business enterprises, both local and with foreign participation. 
Government approval is necessary for acquisitions and mergers of 
certain enterprises, specifically those with state shares. 
 
PROTECTION OF PROPERTY RIGHTS 
 
All land is owned by the government.  The 1993 Law on Property 
defines the following types of property:  private, state, 
non-government organizations, cooperative, joint-venture, foreign 
states, legal entities and citizens, international organizations and 
mixed private and state.  Most housing is state-owned and may not be 
resold.  Turkmenistan adopted a new land code in 2004, addressing 
farmers' land rights.  According to the new land law, citizens may 
have rights up to three hectares of land but they cannot sell, 
exchange, or transfer it, except to their children.  Based on the 
law, foreign citizens and stateless persons, foreign states, and 
companies and international organizations may only lease land.  The 
October 1, 2007 amendments to the Land Code provide for up to 
40-year land leases for hotels and recreational facilities in the 
National Tourism Zone (NTZ).  Land and built facilities have to be 
transferred after the expiry of the contract.  According to the Law 
on Foreign Investment, foreign investments in Turkmenistan are not 
subject to nationalization and requisition; foreign properties may 
be confiscated only by a court decision. 
 
The government has enacted laws designed to protect intellectual 
property rights domestically, but these laws are either arbitrarily 
implemented or not implemented at all.  Among them are the 1993 Law 
on the Protection of Scientific Research and the 1993 Patent Law. 
Also in 1993, the government established the Patent Agency.  There 
is no requirement to register with the Patent Agency, but doing so 
gives a company exclusive rights to use the registered material and 
certain tax benefits defined by the Cabinet of Ministers.  However, 
due to significant deficiencies in Turkmenistan's intellectual 
property protection regime, there is an ongoing review of 
Turkmenistan's status as a beneficiary country under the U.S. 
Generalized System of Preferences (GSP) Program.  Turkmenistan has 
been on the SpecialQ1 Watch List since 2000. 
 
The Law on Foreign Investment guarantees the protection of 
intellectual property of foreign investors, including literary, 
artistic and scientific works, software, databases, patents and 
other copyrighted items, but Turkmenistan has yet to adopt more 
explicitly and comprehensive administrative and civil procedures and 
criminal penalties for Intellectual Property Rights (IPR) 
violations.  Turkmenistan has not adopted a separate Copyright Law 
and consequently does not provide any protection to foreign sound 
recordings or pre-existing works.  The 1993 Most Favored Nation 
Agreement between the United States and Turkmenistan also provides 
for favorable treatment of copyrighted materials.  The agreement 
envisages Turkmenistan's accession to the Berne Convention of 1971 
 
ASHGABAT 00000006  008 OF 012 
 
 
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 Berne Convention nor the Geneva 
Phonograms Convention.  It is a challenge to purchase legal recorded 
material in Turkmenistan.  Current border enforcement is weak.  As a 
result, pirated recordings freely cross into Turkmenistan for sale. 
Additional personnel and training courses are needed for more 
effective border enforcement.  Turkmenistan does not provide for 
either civil or criminal ex parte search procedures needed for 
effective anti-piracy enforcement. 
 
Turkmenistan signed the World Intellectual Property Organization's 
(WIPO) documents on industrial property rights and patent 
cooperation in 1995.  Turkmenistan has also joined the Eurasian 
Patent Organization that was created as part of the WIPO for the CIS 
countries.  Turkmenistan has not signed the 1996 WIPO Copyright 
Treaty (WCT), WIPO Performances and Phonograms Treaty (WPPT), or 
WIPO Internet Treaties. 
 
The Copyright Law was enacted as part of Turkmenistan's Civil Code, 
in force since 2000.  The Law defines copyrighted products and the 
rights of owners of the copyrighted products, and provides their 
legal protection.  However, there is no agency responsible for 
implementing or enforcing the copyright law.  Turkmenistan has not 
adopted criminal penalties for IPR violations, and currently 
articles such as videos, cassette tapes, and literature are freely 
copied and sold.  In general, state products increasingly dominate 
local markets and are well-protected by law enforcement bodies. 
State products, petroleum and textiles exported from Turkmenistan 
have been assigned trademarks to protect them in foreign markets. 
 
TRANSPARENCY OF THE REGULATORY SYSTEM 
 
The government does not use transparent policies to foster 
competition and foreign investment.  Laws have frequent references 
to by-laws that are often not publicly available.  Most by-laws are 
passed in the form of presidential decrees.  Such decrees are not 
categorized by subject, which makes it difficult to find relevant 
cross references.  Previously, government officials acted on the 
president's verbal instructions, rather than written orders or 
governing legislation.  Most often, personal relations with 
government officials have played a decisive role in determining how 
and when government regulations are applied. 
 
Bureaucratic procedures are confusing and cumbersome.  There is no 
single body that coordinates registration and activities of domestic 
and foreign private companies.  The government does not generally 
provide information support to investors, and officials use the lack 
of information to their personal benefit.  Foreign companies may 
spend months conducting due diligence in Turkmenistan. 
 
A serious impediment to foreign investment is the lack of knowledge 
of internationally-recognized business practices and concepts and of 
English speakers.  Good quality English-language material on 
Turkmenistan legislation is scarce, and there are very few business 
consultants to assist investors. 
 
There are no standards-setting consortia or organizations besides 
the Turkmen State Standards (TDS) and the relevant licensing 
government agency. 
 
There is no independent body for filing complaints. 
Financial-disclosure requirements are not transparent and consistent 
with international norms, and government enterprises are not 
required to publicize financial statements, even to foreign 
partners.  Financial audits are often conducted by local auditors, 
not internationally recognized firms. 
 
The Law on Petroleum was a partial step toward creating a more 
transparent policy in the oil and gas sector; it provides a detailed 
legal framework for conducting oil and gas business.  Under this 
law, three types of licenses can be issued:  exploration, 
 
ASHGABAT 00000006  009 OF 012 
 
 
extraction, 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.  In 2006, the 
Government indicated it was considering the possibility of allowing 
joint operations in the gas sector, but no appropriate amendments 
have been made to that effect. 
 
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
 
Turkmenistan's financial system significantly hinders the free flow 
of financial resources.  Most numerous and largest in size are the 
six state banks:  State Bank for Foreign Economic Relations 
(Vnesheconombank), Dayhanbank, Turkmenbashy Bank, Turkmenistan Bank, 
Halk Bank, and President Bank.  These state banks have narrow 
specializations-- foreign trade, agriculture, industry, society, 
savings and mortgages, respectively.  Two additional commercial 
banks, one joint (with Ziraat Bank) Turkmen-Turkish bank, and a 
branch of the National Bank of Pakistan also operate in 
Turkmenistan.  Total assets of the country's largest bank, 
Vnesheconombank, are estimated at $1.3 billion (2006) at the 
official exchange rate of 5,200 manats per dollar.  Assets of the 
other banks are much smaller. 
 
All banks, including commercial banks, are controlled by the state. 
Commercial banks are prohibited from providing services to state 
enterprises. 
 
The U.S. Export Import (EXIM) Bank is not currently considering 
short and medium-term U.S. export fiancing for projects in 
Turkmenistan, although a number of U.S. companies have used EXIM 
Bank funds or guarantees in the past to finance their exports to 
Turkmenistan.  State banks mostly serve state enterprises and 
allocate credit on subsidized terms to the state enterprises. 
Foreign investors are only able to get credit on the local market 
through EBRD equity loans. 
 
There is no capital market in Turkmenistan, although the 1993 Law on 
Securities and Stock Exchanges outlines the main principles for 
issuing, selling and circulating securities.  The Law on 
Corporations further provides for issuance of common and preferred 
stock, and bonds and convertible securities in Turkmenistan, but in 
the absence of a stock exchange or investment company, there is no 
market for securities.  In the mid 1990's, the government turned 
some nearly bankrupt state-run enterprises into corporations. 
Foreign entities may theoretically purchase shares in these 
companies, but have shown no interest in so doing. 
 
POLITICAL VIOLENCE 
 
Saparmyrat Niyazov, the president since Turkmenistan received its 
independence in 1991, died in December 2006.  Since Gurbanguly 
Berdimuhamedov's ascension to the presidency in February 2007, 
Turkmenistan's political system has showed no sign of immediate 
change, though promises to reform the social sector -- education, 
health and agriculture -- are promising. 
 
The politically repressive but stable existence Turkmenistan 
experienced in its first ten years of independence halted in 
November 2002 with an armed attack against President Niyazov's 
motorcade in central Ashgabat.  The regime reacted with a series of 
mass arrests, show trials and purges of government ministries. 
There were credible reports that torture was employed to gain signed 
confessions.  AutQities violatQhe Vienna Convention for 
diplomatic immunity when they raided the Uzbekistan Ambassador's 
compound in December 2002. 
 
The government prohibits political opposition by banning opposition 
parties and requiring registration for all organizations.  There 
have been no incidents involving politically-motivated damage to 
projects or installations. 
 
CORRUPTION 
 
ASHGABAT 00000006  010 OF 012 
 
 
 
Turkmenistan has legislation to combat corruption, but the laws are 
ineffective and corruption is rampant.  The non-transparency of the 
economic system provides fertile soil for corruption, and the common 
assumption is that nearly any decision desired can be obtained for a 
price.  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.  It is 
most pervasive in the areas of government procurement and 
performance requirements.  There are several known cases of local 
businessmen being arrested without charges until they pay local 
officials for their release. 
 
Turkmenistan joined the UN Convention against Corruption in March 
¶2005.  The non-government organization Transparency International, 
ranked Turkmenistan 162 among 179 countries in the world in its 
Corruption Perceptions Index for 2007.  President Berdimuhamedov has 
restructured some offices in charge of expenditures that appear to 
be geared toward rooting out corruption.  Formally, the Ministry of 
Internal Affairs, the Ministry of National Security, and the General 
Prosecutor's Office are responsible for combating corruption. 
President Berdimuhamedov has repeatedly stated that corruption will 
not be tolerated.  Berdimuhamedov replaced the Minister of Internal 
Affairs at an April 2007 session of the Cabinet of Ministers and 
directed the incoming minister to wipe out corruption.  In contrast 
to official corruption, violent criminal organizations are largely 
non-existent in Turkmenistan.Q 
BILATEQINVESTMENT AGREEMENTS 
 
The Governments of Turkmenistan and the United States began 
negotiations on a bilateral investment treaty after 1991, but talks 
were suspended in early 1994.  The Government of Turkmenistan 
expressed interest in renewing the talks in 1998, but negotiations 
have not recommenced.  The United States government considers the 
Convention with the Union of Soviet Socialist Republics on Matters 
of Taxation, which entered into force in 1976, to continue to be in 
effect and applicable between the United States and Turkmenistan. 
There have been no discussions on a new dual taxation treaty. 
 
Turkmenistan has signed bilateral investment agreements with Turkey, 
China, France, Malaysia, Pakistan, Romania, Slovakia, the United 
Kingdom, Northern Ireland, Egypt, India, Uzbekistan, Iran, Armenia, 
Georgia, Germany, Ukraine, and the United Arab Emirates. 
 
In 2006, the European Union decided to withdraw from negotiations on 
a trade agreement with Turkmenistan, citing the county's poor 
human-rights record. 
 
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
 
Turkmenistan signed an Investment Incentive Agreement with the U.S. 
government in 1992, but there has been no investment insurance, 
investment guarantees or financing provided by the Overseas Private 
Investment Corporation (OPIC) for Turkmenistan. 
 
LABOR 
 
Labor matters are governed by the Labor Code of Turkmenistan, the 
Law on Leaves of Absence, the Law on Occupational Safety, the Law on 
Pensions and a number of regulations approved by presidential 
resolutions.  Turkmenistan joined the International Labor 
Organization in 1993. 
 
Unemployment and underemployment are major problems.  The last 
official survey, conducted in 1995, implausibly estimated 
unemployment at 3% of the labor force.  Current unofficial estimates 
are above 50%. 
 
Since 1997, Turkmenistan has introduced "labor exchanges" or 
employment offices, operating as self-sustaining entities under 
local government offices.  Turkmenistan's regulations require that 
 
ASHGABAT 00000006  011 OF 012 
 
 
all vacancies be posted via such labor offices.  Although most 
vacancies in the labor exchanges' databases are low-skilled jobs, 
employment offices have not been an effective tool in reducing 
unemployment.  Finding suitable candidates via these offices is also 
problematic for international companies.  Investors recruit 
directly, though candidates still pay a nominal fee to the relevant 
labor exchange.  Although the government requires foreign companies 
to have 70% of the local workforce be local citizens, it has made 
exceptions for foreign construction companies executing large-scale 
turnkey projects.  Officials are known to request investors to 
employ their relatives and friends. 
 
The government had greatly weakened Turkmenistan's education system. 
 Under President Niyazov, mandatory secondary education was reduced 
from 10 to 9 years, further contributing to unemployment.  However, 
in February 2007, Turkmenistan's newly-elected President, Gurbanguly 
Berdimuhamedov, announced the reinstatement of 10 years' mandatory 
education starting with the 2007-2008 academic year.  The president 
also increased higher education from two to five years and medical 
training to six years.  After years when teaching of English and 
other foreign languages had little part in most schools' curricula, 
President Niyazov in 2006 reinstated mandatory English-language 
training.  The general lack of foreign language learning has 
hampered the ability of students to study outside Turkmenistan and 
work with international companies.  The adult population of 
Turkmenistan was relatively well-educated under the Soviet system, 
but lacked various marketable skills, including foreign languages 
and computer literacy.  The lack of quality educational institutions 
and the government's unwillingness, until recently,to support 
technical training has impeded the development of a work force 
capable of supporting high-tech foreign investment projects.  Lack 
of familiarity with modern technology and business practices has 
been an additional weakness within the available labor pool, but the 
recent reforms should begin to address these shortcomings. 
 
The Association of Trade Unions of Turkmenistan -- successor to the 
Soviet-era system of government-controlled trade unions -- is the 
only trade union allowed in the country.  The Association's unions 
are divided along both sectoral and regional lines, and all social 
and economical activities are limited. 
 
The normal workday in Turkmenistan is 8 hours, and the standard 
workweek is 5 days/40 hours.  In practice, many employees are 
required to work at least half a day on a sixth day.  The minimum 
age for employment of children is 16.  In a few heavy industries it 
is 18.  The labor law prohibits 16-18 year-olds from working more 
than 6 hours a day, and only with parental and trade union 
permission.  Health and safety regulations exist, but are commonly 
not enforced.  Foreigners with government permission to reside in 
Turkmenistan may work, but are subject to the same labor regulations 
as citizens unless otherwise specified by law. 
 
FOREIGN TRADE ZONES/FREE PORTS 
 
The Law on Economic Zones for Free Enterprise was enacted in 1993. 
The law guarantees the rights of businesses -- foreign and domestic 
-- to operate in these zones without profit ceilings.  The law 
forbids nationalization of enterprises operating in the zones and 
discrimination against foreign investors.  Other rights guaranteed 
include: 
 
-- Preferential tax status, including exemption from profit tax if 
profits are reinvested in export-oriented, advanced technology 
enterprises; 
-- Repatriation of after-tax profits; 
-- Exemption from customs duties, except on product of foreign 
origin; 
-- Export of products; 
-- Setting product prices. 
 
There are ten such zones in Turkmenistan:  Mary-Bayramaly, 
Ekerem-Hazar, Turkmenabat-Seydi, Bakharly-Serdar, Ashgabat-Anew, 
 
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Ashgabat-Abadan, Saragt, Guneshli, Ashgabat International Airport, 
and Dashoguz Airport.  The zones have not been successful in drawing 
increased economic activity.  Despite the legal guarantees, the 
government continues to meddle in business decisions even for firms 
located in these zones.  The zones have not been financially 
supported by the government and lack infrastructure, such as 
advanced telecommunications, to attract businesses.  The 
infrastructure at Ashgabat International Airport is more developed 
and has modern cargo transit facilities. 
 
In July 2007, President Berdimuhamedov announced the creation of the 
Avaza free tourist zone along 16 kilometers of the Caspian Sea 
coast.  The Ministry of Economy and Finance (MOEF) promised 
exemption from MOEF registration fees and Value Added Tax (VAT) to 
contracting and management companies, full convertibility of all 
manat-denominated operations earnings into hard currency for 
amortization of foreign loans, payment for construction work or 
services, purchase of raw materials, equipment, and goods.  This 
zone will have a special regime for making cash payments and 
overseas electronic transfers, and equipment and materials used in 
facility construction or management will be exempt from calibration 
fees in the zone.  Amendments to the Land Code passed in October 
2007 include a provision for 40-year land leases for construction of 
tourism facilities and five-year leases for retail and services 
points, warehouses and car parking lots.  Tourism-related services 
such as catering and hotels -- but not casinos -- are also granted 
VAT exemption.  Construction equipment used in the Zone will not be 
subject to the one percent property tax.  In addition, the 
government will not levy income taxes related to tourist 
accommodations and catering for the first 15 years. 
 
FOREIGN DIRECT INVESTMENT STATISTICS 
State data on many economic indicators, including Foreign Direct 
Investment (FDI) remain unreliable and mostly unavailable.  However, 
according to various independent analysts, most foreign investment 
is directed toward the country's oil and gas sector.  Such 
investments include three onshore Production Sharing Agreements 
(PSAs):  the Nebitdag project operated by Burren Energy UK, the 
Khazar project operated jointly by the Turkmenneft state concern and 
Mitro International of Austria, and a PSA signed with the China 
National Petroleum Corporation (CNPC) in 2007.  The remaining three 
PSAs are offshore operations, including the Cheleken project 
operated by Dragon Oil of the United Arab Emirates, the Block-1 
project operated by Petronas of Malaysia and the Blocks 11, 12 
project operated jointly by Maersk Oil of Denmark and Wintershall of 
Germany. 
 
By early 2007, Dragon Oil has invested a total of  $618 million.  It 
has estimated that its  investment for 2007 will total about $250 
million and its investment in 2008 will be $500 million.  Petronas' 
total investment by the beginning of 2007 amounted to $705 million. 
Petronas intends to invest $600 million in 2007.  Burren and Mitro 
have invested $450 and $225 million respectively.  Although, these 
investment statistics are incomplete, they represent at least a 
two-fold increase over the $418 million foreign investment figure in 
2005 (The EBRD Transition Report 2007). 
Other potential investors, including Chevron, BP, Lukoil and 
ConocoPhillips, are holding high-level discussions with the 
Government of Turkmenistan. 
END TEXT. 
HOAGLAND