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UNCLAS SECTION 01 OF 05 ASHGABAT 000455 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, E, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET TX
SUBJECT:  TURKMENISTAN:  SCENESETTER FOR U/S REUBEN 
JEFFERY'S VISIT, APRIL 20-21, 2008 
 
REF: A. ASHGABAT 0363 
     ¶B. ASHGABAT 0219 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  Embassy Ashgabat warmly welcomes your 
visit to Turkmenistan as an important opportunity to advance 
our bilateral dialogue on energy and economic reform issues. 
President Bush met briefly with President Gurbanguly 
Berdimuhamedov on April 3 at the NATO Summit in Bucharest. 
Other high-level U.S. meetings with him were Senator Richard 
Lugar in January, Energy Secretary Bodman in November 2007, 
and Secretary Rice in September 2007 during the UNGA in New 
York.  Coordinator for Eurasian Energy Diplomacy Ambassador 
Steven Mann meets with Berdimuhamedov regularly, most 
recently on February 28.  Into the second year of his 
presidency, Berdimuhamedov is increasingly self-confident and 
will not hesitate to speak his mind.  We believe his economic 
instincts are right, even if his understand is elementary. 
In Summer 2007, he told U.S. visitors, "The debate is over. 
We have chosen to be a market economy."  But he's starting 
from almost zero with very few on his team who have the 
experience and capacity to implement the reforms he says he 
wants.  Like many ex-Soviet governments, Turkmenistan relies 
too heavily on presidential decrees and the power of 
law-on-paper.  The longer-term monumental task will be to 
change a century of national political psychology, the 
entrenched bureaucracy, and the culture of rent-seeking.  END 
SUMMARY. 
 
TURKMENISTAN POST-NIYAZOV 
 
¶3.  (SBU) A little more than a year into the new era, it is 
clear Turkmenistan is becoming significantly different from 
the international bad-joke pariah state it was under former 
President-for-Life Niyazov.  But precisely what Turkmenistan 
is becoming is still a work in progress.  Evidence 
increasingly suggests it could well one day become a 
responsible partner for the United States and a normal 
international player.  As detailed in both reftels, 
Berdimuhamedov's fundamental policies have been promising: 
reform education, health care and the social sector; initiate 
financial reform and work toward becoming a market economy; 
draft or rewrite more than 30 laws -- including the laws on 
religion and civic organizations and the criminal and 
criminal procedures codes -- to bring them up to 
international standards, re-establish international relations 
and become a cooperative regional player; and open its vast 
hydrocarbon sector to international investment. 
 
¶4.  (SBU) But Turkmenistan's history means this is an up-hill 
battle.  Despite its hydrocarbon wealth, it is in many ways 
where the other countries of the region were at their 
independence in 1991, and even worse because of the 
destructive policies of the Niyazov era.  Before 1991, it had 
70 years of exclusively Soviet experience that pulled it out 
of the Middle Ages, but this didn't prepare it to be a 
modern-state member of the international community.  And so 
now, Turkmenistan has little to draw on other than its past 
as it seeks to move into the 21st century.  The United 
Nations, Turkmenistan's partner of choice, voices many 
feel-good bromides but provides relatively little concrete 
development assistance, due in part to a a lack of funding. 
The European Union is increasing its engagement with 
Turkmenistan, but some individual states still have scruples 
about engaging with a former police-state dictatorship. 
Russia has made its intentions clear:  it is determined 
Turkmenistan will be part of its "exclusive sphere of 
influence," primarily, but not exclusively, through Gazprom 
IFIs like the World Bank, International Monetary Fund, Asian 
Development Bank and European Bank for Reconstruction and 
Development (EBRD) are gearing up to assist Turkmenistan's 
economic and financial reforms, but they are moving at a 
deliberate pace. 
 
U.S.-TURKMENISTAN RELATIONS:  PUSHING WHERE DOORS ARE OPENING 
 
ASHGABAT 00000455  002 OF 005 
 
 
 
¶5.  (SBU) U.S. policy in Turkmenistan is three-fold: 
 
-- Encourage democratic reform and increased respect for 
human rights and fundamental freedoms, including support for 
improvements in the education and health systems; 
 
-- Promote economic reform and growth of a market economy and 
private-sector agriculture, as well as diversification of 
Turkmenistan's energy export options; and 
 
-- Expand security cooperation. 
 
¶6.  (SBU) Following Niyazov's death at the end of 2006, the 
United States offered to re-engage with Turkmenistan without 
preconditions.  With about 30 delegations in the first year 
-- more in that year than in the previous six years combined 
-- we proposed multi-sector cooperation, and the embassy's 
access at the working level has been increasingly productive, 
especially in the fields of basic democratic/legislative and 
economic reforms.  Turkmenistan matters because it is a 
Caspian littoral state important to the West for energy 
security.  It could become like Azerbaijan and Kazakhstan -- 
generally independent of Russia and willing to work with the 
West.  It also has strategic importance because of its long 
shared borders with Iran and Afghanistan (terrorism and 
narcotics), as well as its historic and potentially 
suffocating relationship with Russia.  The fundamentals 
underlying our first year of re-engagement have been correct: 
 push where the doors are opening, but do not try to force 
open doors that are not ready to open for us.  We are 
achieving progress:  we want to build on and enlarge that 
progress. 
 
ECONOMY AND FINANCE 
 
¶7.  (SBU) Turkmenistan's economy is closely controlled by the 
state and is heavily dependent on hydrocarbon revenue. 
Unemployment, which we estimate could be as high as 60%, 
remains a major challenge.  Underemployment is also a 
challenge.  The president has laid out a very ambitious 
program of economic development that continues his 
predecessor's massive building program in Ashgabat, 
establishes a luxury but certainly white-elephant tourist 
zone ("Avaza") on the Caspian coast, and generally develops 
infrastructure.  But Turkmenistan does not have the funds it 
needs to accomplish all this and increase production in the 
hydrocarbon sector.  Turkmenistan remains reluctant to take 
on increased debt:  uncontrolled borrowing in the 1990's led 
to a massive debt level (for Turkmenistan, at that time) of 
an estimated $1.6 billion.  Although Turkmenistan has 
gradually paid its debt down to a more manageable level, a 
lack of human capacity in the debt and asset management 
sector, combined with remnant biases against debt, have 
limited Turkmenistan's assumption of new debt. 
 
¶8.  (SBU) President Berdimuhamedov has stated repeatedly, in 
many fora, that he wants to develop an international-standard 
market economy and to promote foreign investment.  To those 
ends, he has placed a new priority over the past eight months 
on promoting economic and financial reform.  Turkmenistan has 
announced that it will redenominate its currency in 2009, 
lopping off three zeros, and has slowly begun to unify the 
country's dual exchange rates.  The president has stated that 
some state enterprises will be privatized -- though not in 
"strategic" sectors like oil and gas, electricity, textiles, 
construction, transportation, and communications.  He has 
signed a new foreign investment law, which, among other 
things, guarantees resident foreign businessmen and their 
families one-year, multi-entry visas, and approved changes to 
the tax code.  The president divided the overworked Ministry 
of Economy and Finance into two bodies -- a Ministry of 
Economy and Development, and a Ministry of Finance, and he 
has created a Supreme Auditing Chamber with the goal of 
providing transparency in the budget process.  In a notable 
development, the president also announced that he will 
 
ASHGABAT 00000455  003 OF 005 
 
 
abolish the opaque extrabudgetary funds that were prone under 
his predecessor to misuse and corruption.  Finally, although 
the Central Bank Chairman continues in meetings with 
westerners to promote the virtues of maintaining state 
subsidies, the state slowly began to raise the price of 
electricity and price of vehicle fuel.  These measures may be 
part of an early effort to gradually phase out the state's 
extensive and tremendously expensive subsidies system. 
 
¶9.  (SBU) Even though the president has reshaped his 
bureaucracy, put in place the structures that theoretically 
should help promote a market economy, and opened Turkmenistan 
to cooperation with IFIs, the lack of basic understanding and 
bureaucratic capacity remains an enormous impediment to 
change.  New reforms are being rolled out with inadequate 
preparation, understanding of their consequences and 
explanation -- and are leading to increased public 
dissatisfaction.  USAID is working through its contractor, 
BearingPoint, to implement a new program to increase 
bureaucratic capacity and to support growth of private 
business in Turkmenistan.  Department of Treasury 
representatives will also visit Turkmenistan soon to identify 
areas where Treasury might play a role in promoting reform, 
should funding be available. 
 
NEXT STEPS 
 
¶10.  (SBU) In raising economic reform with Turkmenistan 
officials, we recommend you consider congratulating President 
Berdimuhamedov for embarking on market-economy reforms, and 
express understanding for what a historic, monumental, and 
long-term task this is.  You should encourage him to stay on 
course and to develop a strategic plan that will lead to a 
more sustainable and internationally competitive economy. 
You might consider recommending that he 
 
-- Continue and conclude the process of unifying the dual 
exchange rates; 
 
-- Continue ongoing close engagement with the International 
Monetary Fund and the World Bank; and 
 
-- Have his Ministry of Economy and Development begin work on 
USAID's Investor Roadmap Program because it offers a 
superlative opportunity to identify what the government needs 
to do to improve Turkmenistan's foreign investment climate. 
 
¶11.  (SBU) You might also want to recognize the president's 
recent efforts to foster private-sector entrepreneurship. 
Additional steps could include: 
 
-- Make the budget more transparent and eliminate 
extrabudgetary funds. 
 
-- Reform Turkmenistan's banking sector to come closer to 
international standards. 
 
-- Eliminate unnecessarily intrusive and arbitrary 
inspections of private businesses. 
 
-- Establish a "one-stop shop" for licenses and permissions 
to establish and register new privatQusinesses. 
 
¶12.  (SBU)  It would be useful for you to know that earlier 
this year the World Bank conducted anti-money-laundering and 
Financial Intelligence Unit workshops.  There is a 
possibility the parliament will pass an anti-money-laundering 
law in October, and the government plans to establish a 
Financial Intelligence Unit.  The International Monetary Fund 
will be in Turkmenistan for two weeks in April to work on the 
Article 4 Report.  The International Finance Corporation 
(IFC) is coming at the end of April to discuss with the 
National Statistics Institute how to improve the business 
environment.  The IFC will survey several thousand small and 
medium business owners, and will discuss the Law on Foreign 
Investment wQ the Ministry of Economy and Development. 
 
ASHGABAT 00000455  004 OF 005 
 
 
 
ENERGY 
 
¶13.  (SBU) Turkmenistan has world-class natural gas reserves, 
but Russia's near monopoly of its energy exports has left 
Turkmenistan receiving much less than the world price and 
overly beholden to Russia, although Gazprom has agreed to pay 
"world price" starting in 2009.  Pipeline diversification, 
including both a pipeline to China proposed for 2009 and the 
possibility of resurrecting plans for Trans-Caspian and 
Trans-Afghanistan pipelines that would avoid the Russian 
routes, and construction of high-voltage electricity lines to 
transport excess energy to Turkmenistan's neighbors, 
including Afghanistan, would not only enhance Turkmenistan's 
economic and political sovereignty, but also help fuel new 
levels of prosperity throughout the region.  Berdimuhamedov 
has told U.S. interlocutors he recognizes the need for more 
options and has taken the first steps to this end, but he 
also took the steps needed to increase the volume of gas 
exports to Russia, signing an agreement (with Russia and 
Kazakhstan) in Moscow in December 2007 to enlarge and rebuild 
a non-functioning Soviet-era Caspian littoral pipeline.  He 
will require encouragement and assistance from the 
international community if he is to maintain a course of 
diversification in the face of ongoing Russian efforts to 
keep Turkmenistan from weaning itself away from Russia. 
 
¶14.  (SBU) One of the biggest challenges that Turkmenistan's 
hydrocarbon sector will have to face, if it is to succeed in 
pipeline diversification, is the need for increased 
natural-gas production.  Turkmenistan produced a reported 
72.3 billion cubic meters (bcm) in 2007, a figure that barely 
meets its existing domestic needs and export commitments. 
The president directed that production should increase to 
81.5 bcm in 2008.  Even larger increases will be needed as/if 
new pipelines come online.  While Turkmenistan has welcomed 
foreign companies to work its offshore (primarily oil) 
Caspian blocks, it has up to now largely rejected allowing 
foreign energy companies to work its onshore gas fields, 
maintaining that it can handle the drilling itself.  But 
onshore natural gas production offers some tough challenges, 
including high-pressure, high-sulphur, sub-salt drilling, 
which requires special skills and technologies and lots of 
investment.  One Western analyst suggested that costs could 
run as high as $100 billion over the next five years.  No one 
outside of the Turkmen government believes Turkmenistan has 
either the skills or the investment needed.  U.S. policy has 
been to promote onshore production by major western oil 
companies.  We know there has been huge debate within the 
government about this, and we have watched views evolve.  We 
believe, in the end, there will be major Western companies 
working onshore -- but we aren't there yet.  (NOTE:  A 
separate cable updating energy developments will follow this 
scenesetter.  END NOTE.) 
 
FOREIGN POLICY 
 
¶15.  (SBU) Despite his statements that he plans to continue 
the "neutrality" policies of his predecessor, Berdimuhamedov 
has put an unprecedented emphasis on foreign affairs to 
repair Turkmenistan's international and regional relations 
and to become a respected player on the international stage. 
Under the president's leadership, Turkmenistan has reached 
out to participate actively in regional organizations.  He 
has met with all the leaders in the region, as well as with 
those of other countries of importance to Turkmenistan. 
China has a strong and growing commercial presence in 
Turkmenistan, and continues to court the president through a 
series of high-level commercial and political visits, 
including a July 2007 Berdimuhamedov trip to Beijing focused 
on natural gas and pipeline deals.  Presidents Berdimuhamedov 
and Gul (Turkey) have exchanged visits, but bilateral 
relations continue to be colored more by the image of 
Turkey's lucrative trade and construction contracts that are 
eating up large amounts of money from the national budget. 
Berdimuhamedov has held positive meetings with high-level 
 
ASHGABAT 00000455  005 OF 005 
 
 
leaders of international organizations (including both the UN 
and the Organization for Security and Cooperation in Europe) 
and IFIs that have led to productive, cooperative 
relationships.  The UN High Commissioner on Human Rights, 
Louise Arbour, visited Turkmenistan in May 2007, and the High 
Commissioner on Religion will visit in September. 
 
¶16.  (SBU) Berdimuhamedov has held positive meetings with 
high-level U.S. officials and is well-disposed toward the 
United States.  He made his first trip to the United States 
as president to participate in the UNGA session in September 
2007, where he also met with Secretary of State Rice.  In 
November 2007, Secretary of Energy Bodman met with 
Berdimuhamedov in Ashgabat, and Berdimuhamedov's meeting with 
President Bush during the April Bucharest NATO summit 
received extensive and very positive media coverage in 
Turkmenistan.  Berdimuhamedov made his first visit to EU and 
NATO headquarters in Brussels in November 2007. 
 
SECURITY 
 
¶17.  (SBU) The U.S. security relationship with Turkmenistan 
continues to unfold, with slow but consistent cooperation. 
Although basing is not an option, Turkmenistan remains an 
important conduit for the U.S. military to Afghanistan. 
Maintaining blanket overflight permission and the military 
refueling operation at Ashgabat Airport remains a key U.S. 
goal.  CENTCOM and Turkmenistan's military maintain an active 
military-to-military cooperation plan, and CENTCOM and the 
Nevada National Guard (operating through the State 
Partnership Program and CENTCOM's military cooperation 
program) have a productive counter-narcotics program that has 
funded training and completion of two border-crossing 
stations on the Iranian and Afghan borders and the 
construction of three more checkpoints, including one 
currently underway on the Uzbekistan border.  With the 
assistance of the Embassy's EXBS program, the Embassy works 
to strengthen Turkmenistan's border security and to increase 
its ability to interdict smuggling of weapons of mass 
destruction. 
HOAGLAND