Dec 02

Inside Turkmenistan’s Economic Crisis – Part 1

Part 1: Running Out of Cash

Let us start with the vital element in the economy — the currency.

According to the unofficial reports from the capital, the black market USD/Manat rate skyrocketed to over seven in October and up to eight in November, while the official quote is under 3.50 at the state foreign exchange bureaus.

USD/Manat rate is rising in the black market because the state foreign exchange bureaus have stopped converting currency since January 2016. It appears that the government has run out of cash.

There is, of course, one obvious explanation for the shortage of cash in Turkmenistan’s energy-dependent economy. It is the plummeting gas prices that have affected nearly all energy exporting countries. However, the extent of Turkmenistan’s crisis in foreign exchange services seems to be unique in the region. One explanation as to why the financial and banking sectors cannot continue their foreign exchange services possibly has to do with the government’s monetary policy: despite the shortage of foreign currency, the government continues with ‘fixed rates’ policy in the monetary sector. If there was ever a time to relinquish tight control of exchange rates, it was 2015 when China devalued Yuan to increase its exports. Turkmenistan’s neighbour Kazakhstan responded to Chinese devaluation by switching to free-floating currency that led to 23% devaluation of Kazakh Tenge but it was the right decision for any country that trades with China and Russia, where Rouble was also plummeting. Naturally, the 23% devaluation hurt but at least the adjustment kept the lifeline of Kazakh economy beeping.

Turkmenistan stuck to fixed rates and decided to solve the problem by halting foreign exchange services. Needless to say, that has done nothing but made the crisis worse, as the black market attests.

To be fair, Turkmenistan’s monetary policy allowed its economy to boom while gas sold at higher prices. Fixed rates have also benefited private businesses and allowed the growth of entrepreneurship in the private sector. Fixed rates provide security to entrepreneurs who trade imported goods in the local market.

In Turkmenistan, entrepreneurship predominantly involves import and retail of goods from China, Turkey, Russia, and Ukraine. In February 2016, the Strategic Planning and Economic Development Institute of Turkmenistan reported that the private sector accounted for the 92% of retail turnover in 2015. It is hard to verify this data and not much more is available that could indicate the spread of the private sector in the Turkmen economy. The fact is, Berdymukhammedov has made it relatively easier for ordinary people to start a business in construction, trade, food, agriculture, industry, education, tourism, and advertising. Entrepreneurs in the trading sector use USD, exchanged at state exchange bureaus, to buy goods abroad, which they trade in the local market for manats. They go back abroad after having exchanged their manats for USD at the same bureaus. In addition to providing security for the businessmen in the local market, fixed rates have benefitted the state and the average consumer by keeping inflation and prices for consumer products under control.

However profitable fixed rates may have been, such a policy requires timely and surgically precise intervention by the government. It requires the Central Bank to buy the right amount of domestic currency at the right time and to sell it back with the same prudence. Not much is known about the ways in which Turkmenistan’s Central Bank has managed this policy. Among the ‘knowns’, we have the fact that foreign exchange reserves do exist and are available for such operations in sustaining the state’s monetary policy. The unknowns, again, are the locations of such accounts, whether they are actually used for the maintenance of the policy, and the entities in charge of these accounts. More on that below.

Today, the Turkmen currency is devaluing rapidly in the black market due to the deficit of foreign currency reserves. Apart from sticking to fixed rates, the state has taken further measures in the banking and financial sectors that appear to be hurting  ordinary people even more.

It has been reported that the government has severely limited bank services for ordinary people and businessmen. Transactions such as withdrawal and transfer of funds are no longer possible. The authorities are keen to limit the amount of currency leaving the country with Russian dual nationals that are being forced to either leave Turkmenistan or give up their Russian citizenship if they wish to remain, businessmen, students, and tourists. Today, only those who are granted ‘approval’ have access to banking and financial services. It is not known who grants these approvals but the same report indicates that banks provide services to entities involved in the TAPI pipeline development and the projects for the 2017 Asian Olympics to be hosted by Ashgabat.

The ban on foreign exchange services and the limitation of banking services have implicated private businesses that import food, clothing, medicine, and other consumer products severely. They have led to the shortage of consumer products, which in turn has added to the price hikes in local markets. Chrono-TM reported that there have been queues in the stores where the stocks were running low in October 2016. Earlier in August, Chrono-TM reported that strict restrictions were imposed on the sale of sugar and vegetable oil. Further proving the state’s attempts to deny and suppress all the signs of crisis, the same article reports that officials ordered the shops not to sell products from the counters if they are not able to replace them; the store counters must not look empty… Could there possibly be a better metaphor for the current economic situation in Turkmenistan than the image of full shelves in an otherwise empty store?

In further measures to combat the crisis, this summer the government imposed strict limitations on transferring money via the Western Union, a popular service for parents to support their children studying abroad and for labour migrants to support their families at home. Now, in order to send money to a student, a parent must present proofs of their income, their children’s enrolment, and their relationship.

Regarding the labour migrants, who mostly work in Turkey, their relatives back home must provide proof of the migrant’s employment, income, and relationship before they can receive money at the Western Union offices. However, most migrants cannot provide the required documents because the predominant majority of Turkmen labourers in Turkey do not work at licensed organisations that can provide employment letters and financial statements, nor do they have the legal status of an immigrant.

The sender cannot transfer an amount that exceeds their monthly income and the same sender cannot transfer money more than once a month. Those who have used Western Union services understand how costly it is to wire money in small amounts.

If we really want to see things from the Turkmen state’s perspective, which is interested in keeping foreign currency in the country, then restricting transfers to students’ is understandable. However, it is still hard to see the prudence in restricting these services for labour migrants. If the state is short on cash, then it makes sense to leave the migrants alone. After all, they send their relatives subsistence money in USD. These relatives then sell the USD at the state exchange bureaus in exchange for Manats to use in the local market or buy property. We could be charitable and posit that the Turkmen state is being just because regulations are being applied universally to all without discrimination; but has the moral maxim been applied elsewhere in Turkmenistan’s social, economic, and political affairs? The Turkmen government is pragmatic, not moral, in its concern with self-preservation, so it does not make sense to limit financial services to labour migrants from this perspective.

Another question that must be raised is how an organisation like the Western Union negotiates such state dictates on requirements for sending and receiving money. In June, Chrono-TM attempted to contact the representative of Western Union for comment without any success. In September, Chrono-TM reported that numerous offices of the organisation have shut down in Turkmenistan.

With or without the Western Union, a lot of these migrants will still find a way to send their relatives money for subsistence. The shuttle traders offer unofficial money transfer services at a risk and cost to the sender, but they still enable migrants to support their families back home. And the economy will be no better off because the current rates at the black market give no incentive whatsoever to sell USD to the state.

The most difficult consequence of the government’s responses to the crisis has hit the police, teachers, doctors, and employees in the regional public sectors. These people have not been paid their salaries throughout this summer. They are not the only victims though. Some foreign contractors have also felt the shortage of cash. Nezavisimaya Gazeta reported that the government has failed to pay the Belorussian contractors building a processing plant in Garlyk, Lebap region scheduled to be completed in March 2017.

Salary shortages indicate that the government has turned to the pockets of ordinary people in order to make up for the holes in the state budget.

According to Alternative News Turkmenistan (ANT), some residents of Dashoguz region have reported that their salaries are withheld or, in some cases, not paid in full amounts. They claimed that the state withheld their salaries to finance the building projects for the upcoming Asian Olympics that will be hosted in Ashgabat in 2017. ANT also reports complaints from the residents of Lebap who claim that they have not been paid for the same reason. Radio Liberty reported complaints that cleaning personnel who make 560 Manats (approximately 160 USD according to the official USD/Manat quote) per month received only three-quarters of their monthly salary because their 200 manats have been withheld to finance the projects in the “Olympic town” as well.

This practice is not uncommon in Turkmenistan. Teachers, doctors, administrative and maintenance personnel in schools and hospitals, and police also financed the monument devoted to Berdymukhammedov and presented to him on 25 May 2015. The monument consists of a 21-meter high statue of the president on an Akhal-Teke horse made of bronze, covered in 24 carat gold, and fixed on a 15-meter high white marble post. The official media reported it as the ‘people’s gift to their Arkadag’ (Arkadag means ‘protector’).

Recently, such state-led racket reached private businesses too. In June 2016, Chrono-TM reported that the head of the Union of Industrialists and Entrepreneurs summoned the owners and representatives of mid-range and large businesses and ordered them to transfer an equivalent of US$100.000 to a specified account in order the help the president maintain prosperity in the country. The businessmen were warned that those who will fail to make the transfer will have their ‘oxygen cut off’. Those who know even a few businessmen or shop owners will be quick to point out that this is not the first instance where businessmen had to deal with extortion and harassment by the authorities. All business in Turkmenistan depends on appeasing the local power networks. However, to my knowledge, this is the first occurrence of money extortion with the state allegedly as the recipient for the benefit of the common good and not some official or a network.

Pursuing account holders further up on the scale of affluence, the Turkmen government appears to have set its eye even on late president Saparmurat Niyazov’s offshore fortunes. Berdymukhammedov’s visit to Berlin on 29 August 2016 to meet with Angela Merkel has triggered the speculation that he is trying to seize Niyazov’s accounts at Deutsche Bank. Although the stated objective of the visit was to discuss with Merkel the prospects of gas exports to Europe, Bruce Pannier, Central Asia specialist that leads a blog on the region on RFE/RL website, cites official Turkmen news sources ( to highlight Berdymukhammedov’s meeting with Deutsche Bank AG Executive Director for Central and Eastern Europe Peter Tilles and the Senior Adviser Jurgen Fitchen. Emphasising this meeting as the reason for Berdymukhammedov’s otherwise pointless trip to Berlin, Pannier suggests that the sides discussed banking and that it is possible that Berdymukhammedov is after the funds that were under Niyazov’s control.

Global Witness reported that Niyazov diverted billions from hydrocarbon and cotton revenues to European accounts under his own personal control. One of these banks is the Deutsche Bank, which was reported to manage Turkmenistan’s Foreign Exchange Reserve Fund of about US$2 billion (FERF). According to Khudaiberdy Orazov, the former chairman of the Turkmen Central Bank, the FERF was under Niyazov’s personal control and was used for the late president’s personal expenses (see the GW report, pp.84-85). According to the Global Witness report, an ‘extraordinary 75-80% of government spending was taking place off-budget from such funds, which meant that billions of dollars of national revenue were disappearing into a black hole with no accountability whatsoever’.

While there are reasons that support Pannier’s suggestion, it will do well to note that it is likely that the current Turkmen president might have some banking affairs of his own, as Pannier observes in the same article. He cites a document by the EBRD that reports about the establishment of the so-called ‘stabilisation fund’ in 2008 governed by opaque rules and principles, with undisclosed accounts and amounts of money going through it. It is not yet known which bank holds Turkmenistan’s ‘stabilisation fund’. On March 21, 2014, Global Witness reported that foreign exchange reserve funds have grown substantially since Berdymukhammedov took over: some US$20 billion in 2009. For the time being, it does not look like any of the reserves will be used to rescue the economy.

In the summer of this year, the government has taken another measure that left well-versed commentators perplexed. In line with the massive lay-offs that took place in the energy sector since the beginning of the year, on July 15th, Berdymukhammedov signed a decree that effectively scrapped two main entities in the country’s energy sector: the Oil and Gas Ministry, and the State Agency on Management and Use of Hydrocarbon Resources. As a consequence, the Cabinet of Ministers will take on the functions of the Ministry, leaving Deputy Prime Minister Yashgeldi Kakaev in charge of the energy sector. Turkmennebit and Turkmengaz remain as two main entities in the energy sector and are now under the president’s direct control via the Deputy Prime Minister.

Whether this decision by the president will have any effect on the efficiency of the energy sector is yet to be seen. However, if one were to speculate on the positive side of this decision, it does mean that there will be less money disappearing through the cracks of corruption in the sector. Embezzlement and corruption are not going anywhere anytime soon. Reducing the number of institutions that administer and manage the energy sector effectively reduces the number of desks under which money disappears.

Unfortunately, restructuring the energy sector requires the Turkmen leadership to think carefully about its energy relations and potential investors. Reducing the number of administrative entities is likely to have a positive effect on curtailing corruption; however, the external energy deals provide the cash. In the next part, I will discuss Turkmenistan’s energy sector faces the challenges of dependency on Russia and paying off the debt to China.

* Ronald Watson is the pseudonym for a business/political risk analyst with experience of the Turkmen economy