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 You are in: Under Secretary for Economic, Energy and Agricultural Affairs > Bureau of Economic, Energy and Business Affairs > Finance and Development > Organization > Investment Affairs > Investment Climate Statements: 2006

Turkmenistan

2006 INVESTMENT CLIMATE STATEMENT -- TURKMENISTAN


OPENNESS TO FOREIGN INVESTMENT

Turkmenistan is a relatively small country with approximately five million people and abundant hydrocarbon resources. The government claims it wants to attract foreign investment. However, the government's actions are inconsistent with those statements and the foreign investment climate remains poor. The government selectively chooses its investment partners. In order to function in this peculiar commercial environment a strong relationship with the government is essential. Often, government officials expect a personal gain from allowing or helping foreign investors enter the local market. A vast majority of Turkish construction companies get their contracts through an influential Turkish businessman who is able to arrange the deals with the government due to his good terms with the country’s top leaders. The most promising areas for investment are in the oil and gas sector and projects that President Niyazov has specifically endorsed. Even in those two areas, companies will need to conduct extensive due diligence and should expect a difficult process. The government’s reliance on state control undercuts its desire for foreign investment. According to independent estimates (EBRD Transition Report 2005), the government accounts for 75% of the country’s economic activity. A very restrictive currency exchange system is a major investment inhibitor. Finally, the lack of established rule of law, excessive and inconsistent regulation, and unfamiliarity with international business practices are disincentives to foreign investment.

The government has been most receptive to foreign investment in areas generating state revenue: energy, agriculture, textile and construction, where there is a need for capital investment, state-of-the-art technology, knowledge of international markets and experience in international business practices. Turkmenistan's dependence on oil and gas sales for revenue has allowed modest investment opportunities for foreign firms, but these have largely been limited to facility construction and technology transfer to boost production. Even in these areas, however, the obstacles cited above have impeded foreign investment. The government also screens foreign investments for compliance with the national program entitled "Economic, Political and Cultural Development Strategy for Turkmenistan for the period up to 2020," which gives priority to energy, chemical industry, power generation, mining, metallurgy, textiles, construction, agriculture, transportation, and communication, among other industries. Naturally, the government gives preference to foreign investors that come with an available financial package, as was the case with several textile factories funded by Japanese banks.

The scale of existing foreign direct investment (FDI) in Turkmenistan is small. According to international experts, FDI has varied between 3.2% of GDP in 1999 to 2% in 2003, reaching 2.5% in 2004. (Note: The Government of Turkmenistan has a history of inflating economic statistics to make the economy seem more robust. The GDP cited above is not based on official government statistics.) The government has chosen trade transactions and turnkey projects over long-term foreign investment. In these contracts, the government has chosen both large known U.S. and European firms, and smaller, less well-known companies.

Despite signing the Trade and Investment Framework Agreement (TIFA) with the United States, Kazakhstan, Tajikistan, Kyrgyzstan, and Uzbekistan on June 1, 2004, the Government of Turkmenistan does not actively engage in regional efforts aimed at boosting investment projects. The TIFA agreement establishes a regional forum to discuss ways to create attractive investment climates and expand trade within Central Asia.

Government efforts to privatize former state enterprises have not attracted much foreign investment. Turkmenistan began privatizing state enterprises in 1991, beginning with the service and trade sectors. Small and medium-size state industrial enterprises have been offered for auction since 1997. Poor economic conditions and constantly changing regulations have limited local entrepreneurs' capacity to profit from this opportunity. Many educated ethnic Russians with international business experience have chosen to leave Turkmenistan rather than surrender their Russian citizenship (see "Protection of Property Rights"). Out-dated technology, poor business structures and governmental obstacles have made privatized firms unattractive as outright purchases for foreign investors. The government has had even less success attracting foreign investment in larger state enterprises. To date, it has insisted on maintaining a majority interest in any joint venture. Foreign investors have been reluctant to enter a joint venture controlled by the government. In areas where there is income potential, the government has crowded out the private sector as a competitor. The best example of this is the government’s gradual de-licensing of all Internet service providers (ISP) other then the state-owned ISP. To date, government privatization efforts have been surpassed by its general prejudice against the private sector.

The government has attempted to introduce an element of competition for state contracts by announcing international tenders for some projects. These projects tend to be politically motivated and economically unsound; the tenders are badly managed. In many cases, Turkish companies have been hired to act as advisors in the tender process or the resulting joint venture. The government has also hired international consultants for the tender process on projects involving the World Bank or EBRD. Regardless, more often than not, the tender process has not been transparent, timely, well prepared, or accessible. Following the President’s casual announcement of potential projects, interested foreign investors and/or suppliers often contact the relevant government agency directly in case the tender is not announced publicly.

There are various ways for the government to discriminate against disfavored foreign investors: excessive tax examinations, license extension denial, and customs clearance obstacles. In 2005, a U.S. telecommunications company experienced problems with extending its license and clearing imported equipment through customs; a government telecommunications company was in the early stages of entering the market.

CONVERSION AND TRANSFER POLICIES

The Government of Turkmenistan maintains a tight control over the country’s foreign exchange flow. Although it generally welcomes the inflow of investment, the conversion regulations make it very difficult for investors to repatriate their profits in the local currency- manat; oil and gas companies operate under the petroleum law and receive their profit share in oil and petroleum products. Many foreign and domestic companies 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. Purchasing petroleum and textile products in manat requires presidential permission.

Turkmenistan imports the vast majority of industrial equipment and consumer goods. The Government of Turkmenistan’s foreign exchange reserves pay for the industrial equipment and various investment projects. The demand for hard currency in Turkmenistan’s private retail sector is fully satisfied by the black market. Certain import-substituting businesses have access to foreign exchange through banks, although the application process is lengthy and cumbersome. The application cannot be submitted until the goods arrive in Turkmenistan and the seller has to accept the risk that the purchaser will be able to obtain the hard currency for payment. Many sellers are unwilling or unable to do so and, instead, arrange a barter deal.

As of January 1, 2006, the official exchange rate remains fixed at 5,200 manats/USD. This has been the official rate since 1998. During 2005, the value of the manat at the unofficial exchange rate fluctuated insignificantly averaging, 24,300 manats/USD. The Central Bank has a history of releasing large amounts of U.S. dollars into the unofficial exchange market, allowing it to control the rate. This enables the Government to pay wages in arrears to government employees.

EXPROPRIATION AND COMPENSATION

The government of Turkmenistan has a history of capricious and arbitrary expropriation of the property of local businesses and individuals. The government has often refused to pay any compensation, much less fair market value, when exercising "the right of eminent domain." A current project to widen Ashgabat’s streets is an example of arbitrary expropriation. Hundreds of homes and some local businesses have been destroyed in the course of "city beautification." Homeowners were given short notice and little, if any, compensation for loss of their dwellings. Foreign investors have not been exempt from such acts. Most notably, the government expropriated a western oil company’s compound in Ashgabat in response to losing an arbitration case with the company in an internationally recognized forum. The Embassy is aware of one U.S. company involved in a joint venture in Turkmenistan that had property expropriated without compensation. The U.S. company has chosen not to pursue the matter because it believes to do so would threaten local business operations.

DISPUTE SETTLEMENT

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 the contract as justification for not paying. Most of the disputes have centered on the government’s inability to pay in hard currency as required by the contract. In cases where the government has not delivered goods or services, it 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 for reevaluating an entire contract, including profit distribution, management responsibilities and payment schedules. There is no track record yet for contracts approved by the State Service for Foreign Investment (SSFI).

Turkmenistan has adopted a number of laws designed to attract foreign investment, but they have not been consistently or effectively implemented. (Note: The concentration of power in the office of the President has undermined effective rule of law. Legislation is regularly made -- or overturned -- by Presidential decree. End note.) This is true for the entire Turkmen legal structure. In addition, laws sometimes contain contradictory clauses. The Law on Foreign Investment, as amended in 1993, is the primary legal instrument for protecting foreign investors. The law only applies to foreign investors owning a minimum average of 20% of the capital in a company during a calendar year, unless the Cabinet of Ministers waives the requirement. Similarly, the Cabinet of Ministers determines the sectors in which foreign investors may operate. Foreign companies are prohibited from investing in mass media. All contracts with foreign participation must be registered with the SSFI and the Chief State Tax Service (CSTS). (Note: According to the 2004 Tax Code, foreign companies operating in Turkmenistan for more than 183 calendar days must register with the CSTS for tax payment purposes. End note.)

The 1996 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 including the Tax Code. The Competent Body for the Use Of Hydrocarbon Resources and Oil Operations Issues under the President of Turkmenistan was set up in 1997 to implement the Petroleum law. The Competent Body has the right to grant production sharing agreement concessions and create joint ventures with presidential approval. The law has undergone changes in 2005 that concern the obligations of the Competent Body.

In October 2004, the People’s Council passed three new codes addressing issues of land reform, tax reform, and water use. October 2005 amendments to the Tax Code granted income, VAT, and property tax privileges to domestic producers. 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.

Currently, there is no legal system in place for the effective enforcement of property and contractual rights. Disputes must be worked out directly between the government and the investor. There is no consistent commercial law enforcement, and regulatory decrees constantly change. A new Civil Code took effect in March 1999. The Code, which was prepared with the advice of western legal experts, addresses ownership, contract rights, mortgage, collateral, deposits, leasing, franchising, copyright and property rights. Officials and businessmen remain unfamiliar with the terms of the new Code and the government appears to lack the political will to implement it.

The Arbitration Court of Turkmenistan considers 13 categories of disputes, both pre-contractual and post-contractual, that include taxation, legal foundations and bankruptcy issues. It does not interfere in enterprises’ economic relations, but considers disputes by request from either party involved.

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) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards or any other internationally recognized arbitration agreement. At an international commercial arbitration forum held in June 2005 in Ashgabat, a representative of the Ministry of Trade and Consumer Cooperation noted during her speech that the Government of Turkmenistan is considering joining the 1958 New York Convention.

Most contracts negotiated with the government have an arbitration clause. Turkmenistan lost a large arbitration case to a western oil company, although the Government has not paid the settlement and continues to negotiate the payment terms. During 2005, a U.S. company filed a lawsuit against the Government at the U.S. Federal Court for non-payment of delivered equipment. The Embassy has heard numerous -- though unconfirmed -- reports that the government is trying to exclude arbitration clauses from new contracts. The Embassy strongly advises U.S. companies to include an arbitration clause with a venue outside Turkmenistan.

PERFORMANCE REQUIREMENTS/INCENTIVES

There are few consistently applied performance requirements imposed on foreign investors for establishing, maintaining, or expanding investment, or for access to tax and investment incentives. Such requirements and incentives are negotiated on a case-by-case basis. There is a general requirement for turnkey construction contracts with foreign companies that 70% of the labor must be allocated to local companies. This requirement rarely is adhered to; the government makes exceptions for foreign construction companies executing large-scale turnkey projects.

The President often issues special decrees granting taxation and other types of privileges to certain investors. 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.

Contractors operating under the Petroleum Law are only subject to income tax and royalties. The tax rate and royalty amounts are set in individual Production Sharing Agreements (PSAs). Operations of PSA holders are mostly regulated by one legislative act- the Petroleum Law. The law has permitted PSA concessions to five foreign energy companies: three offshore and two onshore concessions ranging from 5 to 40 years. All of the existing concessions are in the oil sector.

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. Similar to the government's general legal framework, the legislation is inconsistent and not enforced uniformly. Turkmenistan is not a signatory to and is not in compliance with the Agreement on Trade-Related Investment Measures (TRIMS).

Following the November 25, 2002 armed attack on his motorcade, President Niyazov created the State Service for Registration of Foreign Citizens, specifically designed to limit foreign access to Turkmenistan. All visitors are required to register upon entry and their movements in Turkmenistan may be monitored by different government agencies. Inviting foreigners can be problematic. Government authorities can -- and do --deny entry visas without explanation. With the new travel strictures, foreign investors trying to enter Turkmenistan for the first time have had a hard time obtaining entry visas unless invited by the President. Even established investors have complained about excessive bureaucratic procedures and delays. Accordingly, the Embassy has heard reports -- though unconfirmed -- that local partners have used visa requirements to deny entry or prohibit extensions to their foreign partners in an attempt to force them out of business. Travel to most border areas within Turkmenistan requires a special permit.

Currently Turkmenistan lists 94 import and nine export goods and materials subject to customs duties. Turkmenistan also imposes excise taxes on eight import and four export goods categories. The goods and materials not included on the lists are subject to a five percent customs duty payment. In regard to exports, customs maintains a list of exported 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.

In November 2004, the government adopted the tax code, establishing: the reduced Value Added Tax at 15% (vice a previous 20%), excises for domestically produced and imported goods, the income tax of 8% for foreign companies and JVs and 20% for state-owned enterprises and other entities (vice a previous 25%). Dividends are taxed at 15%, and the personal income tax is 10%. The 2004 tax code was seen as a step forward to unifying 17 tax-related legislative acts into one law that includes six basic taxes and five local governance taxes. In 2005, the Government of Turkmenistan amended the tax code giving more tax 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%. There were no other tax incentives.

Contractors operating under the petroleum law are only subject to income tax and royalties. The tax rate and royalty amounts are fixed in individual PSAs.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Foreign and domestic private entities in Turkmenistan have the right to establish and own business enterprises, although this is associated with onerous bureaucratic requirements. The legal framework establishing rights to private ownership is convoluted, self-contradictory, and not uniformly applied. In addition, the government routinely interprets laws and regulations as it sees fit, or ignores them when they do not suit the government’s purpose. Often, private entities need to do more than public enterprises to access markets, credit, and other business operations, such as licenses and supplies.

The 2000 Law on Enterprises provides for the establishment of state and private businesses in various forms. The Civil Code enumerates the exact requirements and licenses needed for every business. The 1999 Law on Licensing Certain Types of Activities lists 65 types of activities that require government licenses.

It is theoretically possible to sell business enterprises, but there is no precedent involving a domestic party; government officials are unlikely to allow the process to proceed. In 2005, a branch of a U.S. telecommunications company operating in Turkmenistan was sold to a Russian company. After some disputes regarding revocation of the company’s operating license, the government recognized the new owner.

PROTECTION OF PROPERTY RIGHTS

The right to ownership of all forms of property is recognized and protected by the state. The 1993 Law on Ownership defines three entities that may own property: physical persons, legal persons, and mixed private ownership based on incorporation of properties belonging to physical and legal persons. Ownership rights are limited. For example, a 2003 Presidential Decree canceled the dual citizenship agreement between Turkmenistan and Russia. Exact figures are unclear, but as a result of the decree, many ethnic Russians have chosen to sell their property and move to Russia. Turkmenistan adopted a new land code on October 25, 2004, addressing Turkmen farmers' rights to land ownership. According to the new land law, citizens may own 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 lease land. According to the Law on Foreign Investment, foreign investments in Turkmenistan are not subject to nationalization and requisition. Foreign properties may be confiscated only through referral to a court when a foreign investor undertakes "illegal actions." The government, however, defines illegal actions.

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 these laws 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 there are some advantages. A patent document issued in Turkmenistan gives a company exclusive right to use a particular innovation, trademark or technology. (Note: The Embassy does not know the extent of such protection, because there has been no public patent infringement claim.) In addition, a company holding a Turkmen patent is given favorable tax treatment if the company has a government-issued innovation license, and the patent results in a new piece of productive equipment for the company. The Cabinet of Ministers determines the form and size of the favorable tax treatment.

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. The 1993 Most Favored Nation Agreement between the U.S. and Turkmenistan also provides for favorable treatment of copyrighted materials. The agreement envisages Turkmenistan's accession to the Bern Convention of 1971 for the Protection of Literary and Artistic Works and Creation of a Working Group on Intellectual Property Matters; but to date, Turkmenistan has not joined.

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) and WIPO Performances and Phonograms Treaty (WPPT).

The Copyright Law was enacted as part of Turkmenistan's Civil Code in March 1999. The Law defines copyrighted products, the rights of owners of the copyrighted products, and provides their legal protection. There is no agency responsible for implementing or enforcing the copyright law. Turkmenistan has not adopted criminal penalties for intellectual property rights violations. Presently, 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

Although laws are publicized, the regulatory system is not transparent. Most regulations are not publicized, and government officials routinely refuse even to provide a copy of the regulation they are citing. Most often, personal relations with government officials play a decisive role in determining how and when government regulations are applied. There is no independent body for filing complaints. The government rarely invites the public to comment on proposed legislation.

Tax, labor, licensing, environment, and health and safety laws and policies often dissuade investment. Because the government typically views the private sector as a competitor, government entities use laws and regulations as a pretext for restricting private business. The non-transparency of the entire regulatory system is challenging; obeying one law often results in violating another.

The 1996 Law on Hydrocarbon Resources was a partial step toward creating a more transparent policy in the oil and gas sector. This law provides a detailed legal framework for conducting oil and gas business in Turkmenistan. Under this law, three types of licenses can be issued on the basis of tender results or direct negotiations: an exploration license, an extraction license, 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. Much remains non-transparent, however. Government enterprises are not required to publish fiscal accounting data, even to foreign partners.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

There is no private or public capital market in Turkmenistan, although the 1993 Law on Securities and Stock Exchanges outlines the main principles for securities issuance, sale and circulation. There are several closed corporations in Turkmenistan, but their stock does not have a public market. The treasury has not issued any debt instruments since 2003.

All banks, including commercial joint-stock banks, are controlled by the state, and are incapable of playing a key role in capital market development. The four major state banks -- Vneshekonombank (Foreign economic affairs), Turkmenistan, Turkmenbashy, and Dayhanbank -- specialize in foreign trade, society, industry, and agriculture, respectively. The remaining banks are smaller entities licensed to provide banking services for small and medium-scale business projects. Local firms have limited access to U.S. dollar credits from the EBRD (European Bank for Reconstruction and Development) through four participating local commercial banks

From 1991-1994, the government turned some state entities involved in industry, banking, and trade into joint-stock companies by changing names and dividing the enterprises' assets into common stocks. By January 1, 1998, there were 300 joint-stock companies in Turkmenistan. The government remains the majority stockholder and makes all business decisions. Foreign entities may theoretically purchase shares in these companies, but have shown no interest in investing in these nearly bankrupt state-run enterprises.

The U.S. EXIM Bank is not currently considering short and medium-term U.S. export financing for projects in Turkmenistan. A number of American companies have used EXIM Bank funds or guarantees in the past to finance their exports to Turkmenistan, but had difficulties obtaining timely payments for EXIM credits.

POLITICAL VIOLENCE

The politically repressive, but stable, existence Turkmenistan experienced in its first ten years of independence ended abruptly 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. Government officials violated the Vienna Convention for diplomatic immunity when they raided the Ambassador of Uzbekistan’s compound in December 2002. The Government prohibits political opposition by not allowing opposition parties and forcibly requiring registration for all organizations. There have been no incidents involving politically motivated damage to projects or installations.

CORRUPTION

Turkmenistan has legislation to combat corruption, but the laws are ineffective and corruption is rampant. High-ranking government officials have been relieved on charges of corruption, but many have never been formally charged with a crime. President Niyazov routinely cites cases of corruption on national television. The non-transparency of the system provides fertile soil for corruption and the common assumption is that nearly any decision desired can be obtained for a price. The Ministry of Internal Affairs, the Ministry of National Security and the General Prosecutor’s Office are responsible for combating corruption. Prosecution is politicized and implemented at the President’s instruction. 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. Corruption is most pervasive in the areas of government procurement and performance requirements. There are several known cases of local businessmen being arrested without a charge until they pay local officials for their release. In contrast to official corruption, violent criminal organizations are largely non-existent in Turkmenistan. Turkmenistan joined the UN Convention against Corruption in March 2005. The Embassy is not aware of Turkmenistan’s participation in any other anti-corruption conventions or initiatives. An NGO devoted to combating corruption Transparency International ranked Turkmenistan third worst in the world in its Corruption Perceptions Index for 2005.

BILATERAL INVESTMENT AGREEMENTS

The governments of Turkmenistan and the United States began negotiations on a bilateral investment treaty, but talks were suspended in early 1994. The Turkmen government expressed interest in renewing the talks in 1998, but preparations for restarting negotiations are preliminary. There have been no dual taxation discussions.

The government 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.

The government signed the Trade and Investment Framework Agreement (TIFA) with the United States, Kazakhstan, Tajikistan, Kyrgyzstan, and Uzbekistan in June 2004. The TIFA agreement is designed to establish a regional forum to create attractive investment climates and expand trade in Central Asia. Turkmenistan was represented at the TIFA Ministerial Meeting in May 2005 in Washington, D.C., and the IPR working group meeting in July 2005 in Almaty, Kazakhstan. Though asked, Turkmenistan did not contribute to setting the ministerial meeting's agenda.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

Turkmenistan has signed an agreement with the U.S. Overseas Private Investment Corporation (OPIC) but there has been no OPIC activity in Turkmenistan.

LABOR

Unemployment and underemployment are significant problems. According to the last official sampling in 1995, the unemployment rate was about three percent of the labor force. This is a gross understatement of the situation; the U.N. estimates unemployment at 50%. In recent years, the number of people employed by the public sector has decreased through presidential reductions in personnel. There has been no compensatory rise in employment opportunities in the private sector. In addition, unemployment has risen because the number of years of compulsory education was reduced one year, exacerbating an already significant youth unemployment problem.

A 1997 Presidential decree created "labor exchanges" or employment offices, operating as self-sustaining entities under hakimliks (mayors' or governors' offices in each city, district, or region). Labor exchanges maintain lists of vacancies in the public and private sectors and lists of workers looking for employment. Ministries and organizations are expected to hire from the list of those who have registered at the local labor exchange, however, this has not been an effective tool in reducing unemployment. Mere registration is not sufficient to achieve employment. Non-job related factors such as tribal affiliation (going back three generations) are considered for government employment. Finally, government officials often sell jobs to the highest bidder.

The government has taken an active role in preventing privatization from creating further unemployment. The government has retained the right to control employment in privatized enterprises. The Provision on Privatization of State Industrial Enterprises allows the Ministry of Economics and Finance to mandate the number of workers previously privatized enterprises must employ for a specific time period. There is a general requirement for turnkey construction contracts with foreign companies that 70% of the labor must be allocated to local companies and staff. This requirement is not ironclad; the government makes exceptions for foreign construction companies executing large-scale turnkey projects.

The government has weakened a once strong education system (under the Soviet Union). Public education has been reduced from ten to nine years. Teaching English and other foreign languages has been eliminated from most schools’ curricula. These changes hamper the ability of students to study or work outside Turkmenistan. The adult population of Turkmenistan, educated under the Soviet system, remains well educated, but does not possess many marketable skills, including foreign languages and computer literacy. Unfamiliarity with high technology and market business operations is a weakness within the available labor pool. The lack of quality educational institutions and the government’s unwillingness to support technical training prohibits the development of a work force capable of supporting high-tech foreign investment projects. Local specialists have limited knowledge of English.

There are no legal guarantees entitling workers to form or join unions. The central trade union, the Association of Trade Unions of Turkmenistan, is the successor to the Soviet-era system of government-controlled trade unions. The Association’s unions are divided along both sectoral and regional lines, and unions may not form or join other associations. The role of these professional unions in social and economic activity is limited.

The normal workday in Turkmenistan is eight hours and the standard workweek is five 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 six hours a day and only with parental and trade union permission. To avoid international criticism, in February of 2005 the government adopted the law "About Guarantees of the Right of Youth to Work", which banned the use of schoolchildren for state-run agricultural works. Until 2005, during the cotton harvest season, child labor laws were regularly ignored and schools were closed so children could pick cotton. Health and safety regulations exist but are not enforced. Foreigners with government permission to reside in Turkmenistan may work and are subject to the same labor regulations as Turkmen citizens unless otherwise specified by law.

Turkmenistan joined the International Labor Organization in 1993.

FOREIGN TRADE ZONES/FREE PORTS

The Law on Economic Zones for Free Entrepreneurship 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 the 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, and

-- Set product prices.

There are ten zones in Turkmenistan: Mary-Bayramaly, Ekerem-Hazar, Turkmenabat-Seydi, Bakharly-Serdar, Ashgabat-Anew, Ashgabat-Abadan, Serakhs, 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.

FOREIGN DIRECT INVESTMENT STATISTICS

The government maintains three foreign direct investments for offshore oil development, several FDIs for textile production, one for soft drink production and one for cellular communication. The government reported in June 2004 that Turkmenistan signed contracts worth $4.1B with 67 foreign companies from 26 countries. However, the majority of these contracts are for service fees and equipment and materials costs, which the government incorrectly identifies as FDIs.

The following list of FDI is not exhaustive:

-- Caterpillar makes necessary investments in buildings, training, and maintenance facilities in five regions of Turkmenistan to service construction equipment and engines sold as part of a multimillion-dollar long-term cooperation agreement signed in September 2002.

-- Coca-Cola established a joint venture with the State Food Production Association to form Coca Cola Bottlers Ltd. Coca Cola has invested about $25M to refurbish an old bottling facility.

-- Barash Communications Technologies Inc. invested approximately $22M in developing cellular and paging service in Turkmenistan. During 2005, Russian telecommunications company Mobile TeleSystems bought 100% of BCTI stocks for the total of $46.55M.

-- John Deere & Co. and Case have invested in maintenance facilities in all five regions of Turkmenistan to service agricultural equipment, regularly purchased by the government of Turkmenistan.

Foreign entities with direct investment in Turkmenistan through 2005 include:

-- Dragon Oil, an oil company incorporated in Ireland but with 70% ownership by the Emirate National Oil Company, has invested about $405M in the development of 2 offshore oil fields in the Caspian Sea (Block II) since 1993.

-- Burren Energy Group, a U.K. oil company, has invested $250M in the development of the Burun oil field since 1997.

-- Petronas, a Malaysian oil company developing three offshore oil fields in the Caspian Sea (Block I) since 1996 invested $ 386M in 2002-2005.

-- Maersk Oil Turkmenistan (Denmark) signed a PSA in 2002 to develop Blocks 11 and 12 in the Caspian Sea and has invested about $23M in a 2D seismological survey.

-- Chalik Group (Turkey) as part of a joint venture invested $25M in the shares of the GAP Turkmen textile complex in Ruhabat Etrap. EBRD provided a loan of $28M and equity investments of $17M, and the Ministry of Textile of Turkmenistan invested $42M in equity.

-- Adjanta Pharma Ltd., an Indian company, spent $2.5m to build a new pharmaceutical plant in Ashgabat.



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