TURKMENISTAN: SUDDEN DROP IN UNOFFICIAL DOLLAR

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 001239 SIPDIS SIPDIS STATE FOR SCA/CEN E.O. 12958: DECL: 11/15/2017 TAGS: PGOV PREL EFIN ECON TX SUBJECT: TURKMENISTAN: SUDDEN DROP IN UNOFFICIAL DOLLAR EXCHANGE RATE LEADS TO PANIC TRADING DURING TIOGE REF: ASHGABAT 1230 Classified By: Charge Richard E. Hoagland for reasons 1.4(B) and (D). ¶1. (C) SUMMARY: The unofficial exchange rate for the U.S. dollar in Ashgabat suddenly dropped sharply -- around 40% -- November 13 and 14, leading to panic in the city as individuals who had been exchanging their manat savings into dollars for more convenient storage in their homes (nobody here trusts banks) sought to pay off outstanding debts before the dollar dropped too low. Nobody knows for sure what caused the dollar's sudden drop, although few attributed it to the dollar's declining value in world markets. Whether the cause was an inept government effort to begin to respond to IMF recommendations made the previous week, would-be speculators seeking to make some money by manipulating the dollar market, or the result of a panic that grew out of control by dollar savers, it raised questions about Turkmenistan's fiscal stability during one of Turkmenistan's biggest international events ever -- the November 13-15 oil and gas exhibition. Although the exchange rate had moved closer to its previous level by November 16, there may be repercussions within the government, with Central Bank Chairman Abilov possibly one of the first to go. END SUMMARY. ¶2. (SBU) Following the president's televised November 12 instruction to the Central Bank and Ministry of Economy and Finance to begin drafting a plan to unify Turkmenistan's dual currency exchange rate (the official rate is approximately 5000 manat to $1, while the unofficial rate up to now has been largely stable at approximately 23,800 manat to $1) (reftel),the unofficial rate unexpectedly began to move the afternoon of November 13. By the close of business November 13, the rate was approximately 22,500 manat to $1. By approximately 11:00 am November 14, the rate had risen even further to 18,000 manat to $1, and by 2:00 pm unofficial exchange vendors closed their facilities as the exchange rate hit 12,000 manat per dollar. Police directed people and cars out of the usually quiet money changing block as heated exchanges among confused citizens took place on sidewalks. As of 4:00 pm, the unofficial vendors had reopened, and were selling at a rate of 17,000 manat to the dollar. Vnesheconom bank contacts told post they expected the rate to drop to 15,000 manat per dollar over the coming week or two, then to climb back. Notably, the Euro exchange rate remained roughly stable through November 14, but there is little or no currency exchange activity in Ashgabat using Euros (and there is only one Euro exchange rate - the official one). Equally notable, the panic in Ashgabat did not take place elsewhere in Turkmenistan. ¶3. (SBU) On November 15, the unofficial exchange vendors reopened, with the dollar selling at a rate of 18,000-20,000 manat per dollar. On November 16, the dollar increased to 22,000. However, vendors are continuing only to buy dollars at these rates; they have not yet started selling dollars to individuals wanting to get rid of their manat. THE EFFECT ON PRICES ¶4. (C) Prices in the markets started jumping November 14 amid panic buying, and many shop owners responded to these most recent events by closing early. Embassy employees also saw Turkmenistani citizens flooding into banks in order to pay off their private loans (calculated in manat),panicking that the dollars they had been storing in their mattresses were losing their value. When the markets reopened on November 15, goods were again selling at "normal" prices, though Embassy staff reported fewer shoppers than usual. Those who went out shopping November 15 were all talking about the previous day's events, and all believed the dollar would return to nearly its pre-November 14 exchange rate. ASHGABAT 00001239 002 OF 002 GOVERNMENT INVOLVEMENT? ¶5. (C) Nobody knows for sure the reasons for the manat's sudden rise. The European Bank for Reconstruction and Development (EBRD) country director believes that the Central Bank of Turkmenistan (CBT) and the Ministry of Economy and Finance (MOEF) engineered this event because an International Monetary Fund (IMF) delegation which had visited Turkmenistan the previous week had emphasized the ridiculousness of pegging an "unofficial" exchange rate of 23,600 manat to an ever-falling dollar. (NOTE: EBRD insists that the unofficial exchange rate actually is an official exchange rate controlled by the MOEF and CBT. END NOTE.) The IMF reportedly also told the MOEF and CBT that the unofficial exchange rate had caused recent inflation, as shown by the estimated 25 percent rise in food prices from September to September. The EBRD country manager said that the danger of giving advice in this country is the possibility of a too-literal interpretation. ¶6. (C) EBRD also acknowledges the possibility that the MOEF and the CBT may have interpreted President Berdimuhamedov's request for a plan to unify the exchange rates by 2009 as a specific plan followed by a specific action. In any case, EBRD does not believe that the actions of individual speculators instigated the rapid change, as a sharp change such as this would only occur after taking a massive amount of manat off of the market, which only the Central Bank has access to. To illustrate the scale implied by "massive," EBRD mentioned that while expatriate residents in Turkmenistan usually exchange $100 at a time, Turkmenistanis exchange $10 or $20 at a time. Adding that while significant amounts of dollars are exchanged in Ashgabat every day, it is a completely different story in other areas of Turkmenistan. In Turkmenbashy, a request to exchange $5,000 would cause "hysterics," because no money changer would have that amount of manat at the ready. In short, there is no way that a depreciation of 25 percent -- hyperinflation -- could have occurred overnight without direct market intervention by state financial institutions, he argued. If the rate falls to 15,000 manat to the dollar, the dollar depreciation will hit 36 percent. ¶7. (C) An employee at the World Bank (please protect) suggested that the fall might have been the result of some individuals -- possibly high-level government officials -- seeking to take advantage of both the president's announcement and the presence of many foreign guests (see para 8) to make money. If the drop was the result of an opening effort to begin to unify the exchange rate, he added, it was very poorly handled. ¶8. (C) COMMENT: While some may have made a fortune off of the events of November 14, the many more who sought to pay off their loans or to change their dollar savings into manat were badly hurt. With consumers still shaky about the events of the last few days, people will likely resist making major new financial commitments. All agree that the government's actions over the coming days will help to shed some light on what happened. And, at least on November 15, it appeared that the Central Bank may indeed have intervened to stabilize the situation. However, the bank's intervention may have been too late to avoid any possible repercussions for the individual most likely to be blamed for this debacle: Central Bank Chairman Abilov. Whether it also will take the edge off of the president's enthusiasm for currency unification remains to be seen. HOAGLAND