PDAS MANN BUSINESS ROUNDTABLE: UNEVEN PLAYING FIELD HURTS

UNCLAS ASHGABAT 000592

SIPDIS

SIPDIS

SENSITIVE

STATE FOR SCA/CEN (NICOLAIDIS)

E.O. 12958: N/A
TAGS: PREL PGOV ECON ETRD TX

SUBJECT: PDAS MANN BUSINESS ROUNDTABLE: UNEVEN PLAYING FIELD HURTS
U.S. BUSINESS EFFORTS IN TURKMENISTAN

SUMMARY
--------------


1. (SBU) During a May 30 roundtable with SCA PDAS Steve Mann, a
varied group of expatriate business leaders broadly agreed that
there had been very little change in the foreign business climate in
Turkmenistan since the December death of President Niyazov. All
noted that the Government of Turkmenistan was their main, if not
their exclusive, contracting partner, posing a unique set of
challenges in doing business. The lack of rule of law remained a
fundamental problem: all contracts were considered to be open to
"interpretation" under Turkmenistan's law, which was often
contradictory on material points or which was subject to change with
no warning. While all parties welcomed the idea of increased U.S.
investment in Turkmenistan, the roundtable participants were frank
about the challenges newly arriving businessmen would likely face.
End Summary

PARTICIPANTS
--------------


2. (SBU) The U.S. delegation led by PDAS Steven Mann included the
following members: Wendell Coote, Energy Analyst; Lena Ekimoff,
Department of Energy; Dan Stein, U.S. Trade Development Agency
(USTDA); and Mark Sullivan, U.S. Executive Director for the European
Bank of Reconstruction and Development (EBRD). Business sector
guests included: Vladimir Naumov, Zeppelin (Caterpillar); Jason
Hunt, IPC Agri(John Deere); Akhtar Sharif, Burren Resources; Gurban
Seyitli, Cooper Cameron; Muhammad Rizwankhan, National Bank of
Pakistan; Alexander Zaets, Chevron; Muhammet Cap, Sehil Insaat;
Jamal Ozdemir, Coca-Cola; and Janer Demir, Polimeks. All but
Seyitli are foreign nationals resident in Turkmenistan. The
companies provide goods and services in the petroleum, construction,
agricultural, and financial sectors.

ROLE OF FOREIGN GOVERNMENT ADVOCACY
--------------


3. (SBU) Throughout the ninety-minute meeting, several common
themes emerged from the business leaders' observations.

-- First, since almost all large contracts are signed with the
Govenment of Turkmenistan, instead of with private firms, the
participants concurred that involvement and support of their
governments was crucial for foreign businesses. In most cases,
foreign companies were unable to get high-level meetings with host
government decision-makers without the active involvement of their
own governments and their embassies.

-- Foreign governments often needed to use political persuasion to
advocate for their companies throughout the lengthy, arduous
contract negotiation process, which often took several years to
complete. And some countries -- namely Japan and China -- sweetened
the negotiations by offering advantageous financing options for
their companies that American companies would not be able to offer.
For example, Zeppelin/Caterpillar's country director, Victor Naumov,
noted, his competitor, Komatsu, the Japanese Export/Import Bank had
provided financing support for a sale of Komatsu equipment. U.S.
government delegates noted that the low-interest terms the Chinese
Exim Bank had offered for a loan connected with a fiber-optic deal
appeared to be in violation of World Trade Organization (WTO)
anti-dumping regulations. The Zeppelin/Caterpillar representative
noted that Komatsu had an added advantage because the official in
charge of awarding the contract for petroleum field construction
equipment was Deputy Chairman for Oil and Gas Tachberdi Tagyev, who
sat on the Japanese-Turkmenistani joint economic committee. Mann's
delegation noted that past U.S. experience with similar joint
commissions in other countries suggested that the benefit of these
commissions rarely justified their costs. PDAS Mann noted that the
United States had invited Tagyev to visit to discuss expanding
cooperation in several areas.

-- Finally, participants stressed that, given the limited respect
for rule of law in general in Turkmenistan, foreign companies needed
to have their governments behind them to support their claims in
cases of egregious manipulation of contract terms. Because of the
many internal inconsistencies in Turkmenistan's business and labor
law, contracts were subject to a steady barrage of attempts by
opportunistic officials to alter or "reinterpret" material terms
according to newly discovered, obscure regulations that often
contradicted previously cited regulations. When PDAS Mann asked
whether there was any other Central Asian country, in their opinion,
with a comparable level of state control over its economy, there was
a long silence followed by unanimous agreement that Turkmenistan was
the worst among equals.


SKEWED MARKET DYNAMICS AFFECT CONTRACTS
--------------


4. (SBU) Participants also agreed that another consequence of
foreign companies having to deal almost exclusively with the
Government of Turkmenistan was that market competition factors did
not drive contracts. Whereas private enterprises sought to buy
machines or services that would improve their competitive posture,
state concerns had no internal competition and their production
goals were driven by political, rather than market, considerations.
And this had led -- more than once -- to instances where the
government had chosen cheaper, inferior products and services in a
political effort to enhance relations with specific countries.


5. (SBU) As an example, the Cooper Cameron representative cited the
contract awarded to a Chinese company to work the South Yolaten
field because the firm had submitted a lower bid for its equipment
and services than Western companies. However, this inferior
equipment, operating by workers with inadequate training, had
resulted in a fire that burned for four months and was only brought
under control after the government reached out to Western companies
for help.


6. (SBU) The John Deere representative also noted a similar dynamic
with agricultural equipment sales: equipment from Russia and Belarus
was significantly cheaper to buy, though it was technologically
inferior and could not compete with John Deere in terms of
durability or output. The government had made a political decision
to buy a number of Belarusian tractors, which often broke down
within a year. As a side note, however, he also stated that, even
when the government made the decision to go with the more expensive
but higher-grade U.S. equipment, producers could not fully
capitalize on increased agricultural yields from using the superior
equipment because of poor internal transportation and distribution
infrastructure.

NEED FOR CONVERTIBLE CURRENCY
--------------


7. (SBU) According to participants, the existence of a vastly
inflated official exchange rate for manat to dollars also
complicated business operations. Although the official rate was
5200 manat to the dollar, and the market rate fluctuated slightly
between 23,600 to 23,900 manat to the dollar. Under the law,
government payments for purchases or services within Turkmenistan
had to be in manat, at the official rate. To get around this,
companies purchased goods offshore in dollars and factored the
shipping cost into the contract. Local representatives still faced
the challenge of spending down the manat received in payment for
related service contracts. In large quantities, manat were
difficult to reconvert to dollars, so service payments were
generally used to sustain local country office operations and were
not expected to be exported.


8. (SBU) The National Bank of Pakistan representative noted
additional constraints due to local laws requiring all foreign money
transfers to be routed through the Central Bank of Turkmenistan,
which took a cut of each transaction. The Burren representative
said that his company had faced problems with the Ministry of Labor,
which insisted that his employees, whose contracts stipulated that
they be paid in dollars, were not making minimum wage under local
law, when the salaries were converted at the official rate.
(Comment: Embassy's consular section reports that local
administrative staff of the companies represented, on average, earn
three to four times the salary of mid-level government employees.
End Comment.)

HUMAN RESOURCE CAPACITY
--------------


9. (SBU) Another challenge foreign companies faced was finding and
hiring well-educated English speakers. The decline in the
educational system over the last several years had produced a
generation of locals who were not educated to international
standards. While English was taught in local schools, the quality
of teaching was often very poor. English, the businessmen agreed,
was the international language of business and was more important to
them than Russian language ability, which would facilitate regional
business transactions only. Interestingly, the businessmen
generally agreed that there was a larger pool of educationally
qualified, motivated female job applicants than male.


10. (SBU) While roundtable participants agreed that the proposed
plan to send local students to the West for university-level

training was a good start, they felt the damage was so severe that
it would take years for those efforts to pay off. In the meantime,
noted the Zeppelin representative, "When you find a good person, the
other foreign companies lure (him/her) away!" In response to a
question from PDAS Mann, the businessmen affirmed that conditions
for citizens of Turkmenistan were still bad and educated young
people with options had little incentive to return following
education abroad. With the new administration following the death
of President Niyazov, participants sensed a general hope that the
employment situation might improve, but few believed change would be
quick and dramatic.

BUREAUCRACY, BUREAUCRACY, BUREAUCRACY
--------------


11. (SBU) The arcane and dysfunctional bureaucratic practices of
almost every branch of the government -- from the Labor Ministry to
the Central Bank to the State Service for the Registration of
Foreigners (SSRF) -- were not only a source of frustration, but also
a source of increased costs for doing business in Turkmenistan.
Officials who were used to extracting bribes from locals to complete
necessary paperwork proved unhelpful to foreign companies that could
not pay the bribes.


12. (SBU) As an example, participants pointed to the Soviet-legacy
visa regime. Even in cases where the government had a clear desire
to facilitate travel, its bureaucracy was not set up to fast-track
clearances. While requests for letters of invitation (LOIs),the
prerequisite for visa issuance, to be approved by the government
generally took three weeks or so, the National Bank of Pakistan
representative reported that he was able to get "expedited" LOIs for
a delegation in 8 to 14 days. (Comment: Embassy continues to lobby
the government to address problems in the LOI/visa system, which are
exacerbated by the fact that the Foreign Affairs Ministry controls
the visa regime, while the SSRF controls the obligatory LOI regime.
When problems arise, neither accepts responsibility. End Comment.)

TRANS-CASPIAN PIPELINE TO BTC WOULD HELP
--------------


13. (SBU) The businessmen were hopeful that the long-discussed
Transcaspian pipeline linkage of Turkmenistan to the
Baku-Tbilisi-Ceyhan pipeline might gain some movement under
Berdimuhammadov. Such a project would necessarily bring in more
Western companies and expose the government to the benefits that
neighboring countries, like Azerbaijan and Kazakhstan, had seen from
western investment in their petroleum sectors.

COMMENT: HOPEFUL BUT REALISTIC
--------------


14. (SBU) Despite the frustrations and challenges faced by foreign
companies operating in Turkmenistan, most of those attending the
roundtable have found ways to prosper even within the existing
system. Nonetheless, a higher volume of foreign investment would
give investors, as a group, more power in pushing the government
toward market practices and rule of law. But, as noted by the Bank
of Pakistan representative, the problems in the business environment
here must be addressed systemically and holistically -- from the
banking system to the educational system to the legal system. Rapid
change in one area without change in others would simply create a
different set of problems. End Comment.

BRUSH