TURKMENISTAN: "IF WE BUILD IT, YOU WILL COME" --

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000968 SIPDIS SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN E.O. 12958: DECL: 09/13/2017 TAGS: PGOV ECON EINV SOCI TU FR RS TX SUBJECT: TURKMENISTAN: "IF WE BUILD IT, YOU WILL COME" -- NOT Classified By: CHARGE RICHARD E. HOAGLAND FOR REASONS 1.4 (B) AND (D) ¶1. (U) SUMMARY: With the reconstruction of Ashgabat continuing apace, President Gurbanguly Berdimuhamedov is beginning to focus on giving the run-down Caspian port city of Turkmenbashy a major facelift that, in theory, would make it into a glitzy tourist destination while boosting employment in the area. During a much-hyped Turkmenistani leadership retreat to Turkmenbashy the weekend of July 21, the French construction company Bouyges presented a proposal for converting Turkmenbashy's Avaza seaside area into a fantasy "free tourist zone." Since then, the government has decided to budget $1 billion for the program, and hopes to be able to persuade foreign investors to fund the rest. Yet, the plan is ripe with pitfalls that have left most foreign construction firms questioning both the plan's feasibility and the wisdom of becoming involved in what could become Turkmenistan's biggest white elephant yet. END SUMMARY. ¶2. (U) On July 21, the Cabinet of Ministers held a retreat in the Caspian Sea port city of Turkmenbashy to discuss future tourism and leisure development of the Avaza seaside area into a "free tourist zone." The envisaged national tourist zone stretches along 16 kilometers on the Caspian coast. Turkish construction companies involved in building the "white city" of Ashgabat were among the reported 40 foreign companies and VIP guests who viewed a very professional multi-media presentation. The president of prominent French construction company Bouygues, Charles Santer, was also present. Turkmen television showed footage of President Berdimuhamedov viewing a large mock-up of Avaza that included 22 miniature models of proposed hotels. TURKMENISTAN BUDGET CONTRIBUTION: $1 BILLION TO START ¶3. (U) The proposal reportedly included about 60 four-star hotels of three to 20 stories, as well as numerous restaurants, sport complexes, tennis courts, spas, pools, water parks, a shopping mall, cultural centers, and a cable car road. At the time of the retreat, work on the first of three stages in the general development plan -- construction of five hotels and health resorts -- was in full swing. At the Cabinet of Ministers retreat, visitors viewed models of infrastructure projects, such as a water desalinization complex with a capacity of 35,000 cubic meters per day, a centralized water reservoir, electric stations, and fire departments. Igor Makarov, CEO of the Russian construction branch of Itera, met with Berdimuhamedov during the retreat and presented two projects: a carbamide factory at a projected cost of $800 million, and a hotel. The government of Turkmenistan plans to budget $1 billion as seed money, and hopes an aggressive international ad campaign and the area's designation as a "free economic zone" can help generate investment interest among foreign companies. OFFERED: TAX BREAKS ¶4. (U) According to a presidential decree published in the July 23 edition of "Neutralniy Turkmenistan," the Ministry of Economy and Finance (MOEF) proposes to offer those involved with contracting or managing the proposed facilities exemption from MOEF registration fees. MOEF also promises to allow full convertibility of all manta-denominated operations earnings into hard currency for amortization of foreign loans, payment for construction work or services, purchase of raw materials, equipment, and goods. The Zone will have a special regime for making cash payments and overseas electronic transfers, and equipment and materials used in facility construction or management will be exempt from ASHGABAT 00000968 002 OF 002 calibration fees in the zone. COMING DOWN TO EARTH ¶5. (SBU) However, construction companies have stated that concerns over the exchange rate could also make the project less attractive to foreign investors. The proposed use of the official exchange rate (about 5,000 manat to one U.S. dollar, as opposed to the unofficial rate of 23,800 manat) for Avaza projects will decrease the project's economic viability, while Turkmenistan's dual exchange rate almost certainly will encourage various arbitrage and corruption schemes. ¶6. (C) Aziz Cengel of the Turkish construction company, GAP Insaat, attended the presentation in Turkmenbashy and told EconOff that the authorities are nowhere near prepared to undertake this task (indeed, MOEF has not yet stated what the actual tax rates for the zone will be). Stating that the project is not attractive to any construction company, the normally buoyant Cengel predicted that work might begin only in five years, at best. (NOTE: "Neutralniy Turkmenistan" quoted his boss, Turkish citizen and head of Chalyk Energy (and former President Niyazov confidante) Ahmet Chalyk, on July 21 as stating: "Today is a significant day in the history of Turkmenistan. This project will declare the name of Turkmenistan to the world. This is a big work that the esteemed President did. We congratulate our motherland Turkmenistan and the Turkmen people on this." END NOTE.) ¶7. (C) COMMENT: The government's plan appears directed toward increasing employment among the city of Turkmenbashy's population at least as much as it is toward offering leisure opportunities and subsidized vacations to Turkmenistani citizens. Commercially, however, the proposed Avaza tourist zone is a huge undertaking. The area is so badly in need of basic infrastructure that a complete overhaul of all city services -- water system, sewage, roads and electricity -- must be well underway even before construction commences. The state's focus on huge, glitzy (and inordinately expensive) structures, rather than promoting a more modest program of development with facilities more economically accessible to the average citizen and based on market-economy principles rather than command-economy fantasy, makes the chances of success doubtful. Finally, foreign tourists are not likely to flock to Avaza until the country implements serious visa regime reform and -- probably -- a major public relations campaign to improve the Turkmenistan's image. All this raises questions about the feasibility of the plan as it is currently conceived -- and about the president's understanding of the challenges ahead if he is to succeed in making over Turkmenistan's largest port city. Septel will report the Mayor of Turkmenbashy's view of the project. END COMMENT. HOAGLAND