TURKMENISTAN 2008 INVESTMENT CLIMATE REPORT

UNCLAS SECTION 01 OF 06 ASHGABAT 000015

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SIPDIS

STATE FOR SCA/CA AND EB/IFD/OIA; STATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON EFIN OPIC KTDB USTR TX
SUBJECT: TURKMENISTAN 2008 INVESTMENT CLIMATE REPORT


1. (U) Text of Embassy Ashgabat's Investment Climate Statement for
2008 is as follows:

BEGIN TEXT OF PART II OF II:

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Foreign and domestic private entities in Turkmenistan have the right
to establish and own business enterprises, though this is associated
with onerous bureaucratic requirements. The 2000 Law on Enterprises
establishes state and private businesses in various legal forms
(state enterprises, sole proprietorships, cooperatives,
partnerships, corporations and enterprises of non-government
organizations). The law allows foreign companies to establish
subsidiaries, but the Government does not currently register
subsidiaries. The Civil Code of Turkmenistan and the Law on
Enterprises provide for representative and branch offices to operate
in Turkmenistan; these offices do not have legal entity status, but
have to be registered at the Ministry of Economy and Finance.

The government prohibits engagement in certain areas of commercial
activity, such as mass media. The 1999 Law on Licensing Certain
Types of Activities lists 65 types of activities that require
government licenses. Currently, state entities do not require
licenses. Often private entities need to do more than public
enterprises to access markets and credit.

The Law on Enterprises and the Law on Corporations provide for
acquisitions and mergers. However, Turkmenistan's legislation is
not clear about acquisitions and mergers involving foreign parties,
nor does it have specific provisions for disposition of interests in
business enterprises, both local and with foreign participation.
Government approval is necessary for acquisitions and mergers of
certain enterprises, specifically those with state shares.

PROTECTION OF PROPERTY RIGHTS

All land is owned by the government. The 1993 Law on Property
defines the following types of property: private, state,
non-government organizations, cooperative, joint-venture, foreign
states, legal entities and citizens, international organizations and
mixed private and state. Most housing is state-owned and may not be
resold. Turkmenistan adopted a new land code in 2004, addressing
farmers' land rights. According to the new land law, citizens may
have rights 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 only lease land. The
October 1, 2007 amendments to the Land Code provide for up to
40-year land leases for hotels and recreational facilities in the
National Tourism Zone (NTZ). Land and built facilities have to be
transferred after the expiry of the contract. According to the Law
on Foreign Investment, foreign investments in Turkmenistan are not
subject to nationalization and requisition; foreign properties may
be confiscated only by a court decision.

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 them 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 doing so
gives a company exclusive rights to use the registered material and
certain tax benefits defined by the Cabinet of Ministers. However,
due to significant deficiencies in Turkmenistan's intellectual
property protection regime, there is an ongoing review of
Turkmenistan's status as a beneficiary country under the U.S.
Generalized System of Preferences (GSP) Program. Turkmenistan has
been on the Special 301 Watch List since 2000.

The Law on Foreign Investment guarantees the protection of
intellectual property of foreign investors, including literary,

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artistic and scientific works, software, databases, patents and
other copyrighted items, but Turkmenistan has yet to adopt more
explicitly and comprehensive administrative and civil procedures and
criminal penalties for Intellectual Property Rights (IPR)
violations. Turkmenistan has not adopted a separate Copyright Law
and consequently does not provide any protection to foreign sound
recordings or pre-existing works. The 1993 Most Favored Nation
Agreement between the United States and Turkmenistan also provides
for favorable treatment of copyrighted materials. The agreement
envisages Turkmenistan's accession to the Berne Convention of 1971
for the Protection of Literary and Artistic Works and Creation of a
Working Group on Intellectual Property Matters. To date,
Turkmenistan has not joined the Berne Convention nor the Geneva
Phonograms Convention. It is a challenge to purchase legal recorded
material in Turkmenistan. Current border enforcement is weak. As a
result, pirated recordings freely cross into Turkmenistan for sale.
Additional personnel and training courses are needed for more
effective border enforcement. Turkmenistan does not provide for
either civil or criminal ex parte search procedures needed for
effective anti-piracy enforcement.

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),WIPO Performances and Phonograms Treaty (WPPT),or
WIPO Internet Treaties.

The Copyright Law was enacted as part of Turkmenistan's Civil Code,
in force since 2000. The Law defines copyrighted products and the
rights of owners of the copyrighted products, and provides their
legal protection. However, there is no agency responsible for
implementing or enforcing the copyright law. Turkmenistan has not
adopted criminal penalties for IPR violations, and currently
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

The government does not use transparent policies to foster
competition and foreign investment. Laws have frequent references
to by-laws that are often not publicly available. Most by-laws are
passed in the form of presidential decrees. Such decrees are not
categorized by subject, which makes it difficult to find relevant
cross references. Previously, government officials acted on the
president's verbal instructions, rather than written orders or
governing legislation. Most often, personal relations with
government officials have played a decisive role in determining how
and when government regulations are applied.

Bureaucratic procedures are confusing and cumbersome. There is no
single body that coordinates registration and activities of domestic
and foreign private companies. The government does not generally
provide information support to investors, and officials use the lack
of information to their personal benefit. Foreign companies may
spend months conducting due diligence in Turkmenistan.

A serious impediment to foreign investment is the lack of knowledge
of internationally-recognized business practices and concepts and of
English speakers. Good quality English-language material on
Turkmenistan legislation is scarce, and there are very few business
consultants to assist investors.

There are no standards-setting consortia or organizations besides
the Turkmen State Standards (TDS) and the relevant licensing
government agency.

There is no independent body for filing complaints.

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Financial-disclosure requirements are not transparent and consistent
with international norms, and government enterprises are not
required to publicize financial statements, even to foreign
partners. Financial audits are often conducted by local auditors,
not internationally recognized firms.

The Law on Petroleum was a partial step toward creating a more
transparent policy in the oil and gas sector; it provides a detailed
legal framework for conducting oil and gas business. Under this
law, three types of licenses can be issued: exploration,
extraction, 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. In 2006, the
Government indicated it was considering the possibility of allowing
joint operations in the gas sector, but no appropriate amendments
have been made to that effect.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Turkmenistan's financial system significantly hinders the free flow
of financial resources. Most numerous and largest in size are the
six state banks: State Bank for Foreign Economic Relations
(Vnesheconombank),Dayhanbank, Turkmenbashy Bank, Turkmenistan Bank,
Halk Bank, and President Bank. These state banks have narrow
specializations-- foreign trade, agriculture, industry, society,
savings and mortgages, respectively. Two additional commercial
banks, one joint (with Ziraat Bank) Turkmen-Turkish bank, and a
branch of the National Bank of Pakistan also operate in
Turkmenistan. Total assets of the country's largest bank,
Vnesheconombank, are estimated at $1.3 billion (2006) at the
official exchange rate of 5,200 manats per dollar. Assets of the
other banks are much smaller.

All banks, including commercial banks, are controlled by the state.
Commercial banks are prohibited from providing services to state
enterprises.

The U.S. Export Import (EXIM) Bank is not currently considering
short and medium-term U.S. export financing for projects in
urkmenistan, although a number of U.S. companies have used EXIM
Bank funds or guarantees in the past to finance their exports to
Turkmenistan. State banks mostly serve state enterprises and
allocate credit on subsidized terms to the state enterprises.
Foreign investors are only able to get credit on the local market
through EBRD equity loans.

There is no capital market in Turkmenistan, although the 1993 Law on
Securities and Stock Exchanges outlines the main principles for
issuing, selling and circulating securities. The Law on
Corporations further provides for issuance of common and preferred
stock, and bonds and convertible securities in Turkmenistan, but in
the absence of a stock exchange or investment company, there is no
market for securities. In the mid 1990's, the government turned
some nearly bankrupt state-run enterprises into corporations.
Foreign entities may theoretically purchase shares in these
companies, but have shown no interest in so doing.

POLITICAL VIOLENCE

Saparmyrat Niyazov, the president since Turkmenistan received its
independence in 1991, died in December 2006. Since Gurbanguly
Berdimuhamedov's ascension to the presidency in February 2007,
Turkmenistan's political system has showed no sign of immediate
change, though promises to reform the social sector -- education,
health and agriculture -- are promising.

The politically repressive but stable existence Turkmenistan
experienced in its first ten years of independence halted 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

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confessions. Authorities violated the Vienna Convention for
diplomatic immunity when they raided the Uzbekistan Ambassador's
compound in December 2002.

The government prohibits political opposition by banning opposition
parties and 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. The non-transparency of the
economic system provides fertile soil for corruption, and the common
assumption is that nearly any decision desired can be obtained for a
price. 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. It is
most pervasive in the areas of government procurement and
performance requirements. There are several known cases of local
businessmen being arrested without charges until they pay local
officials for their release.

Turkmenistan joined the UN Convention against Corruption in March

2005. The non-government organization Transparency International,
ranked Turkmenistan 162 among 179 countries in the world in its
Corruption Perceptions Index for 2007. President Berdimuhamedov has
restructured some offices in charge of expenditures that appear to
be geared toward rooting out corruption. Formally, the Ministry of
Internal Affairs, the Ministry of National Security, and the General
Prosecutor's Office are responsible for combating corruption.
President Berdimuhamedov has repeatedly stated that corruption will
not be tolerated. Berdimuhamedov replaced the Minister of Internal
Affairs at an April 2007 session of the Cabinet of Ministers and
directed the incoming minister to wipe out corruption. In contrast
to official corruption, violent criminal organizations are largely
non-existent in Turkmenistan.

BILATERAL INVESTMENT AGREEMENTS

The Governments of Turkmenistan and the United States began
negotiations on a bilateral investment treaty after 1991, but talks
were suspended in early 1994. The Government of Turkmenistan
expressed interest in renewing the talks in 1998, but negotiations
have not recommenced. The United States government considers the
Convention with the Union of Soviet Socialist Republics on Matters
of Taxation, which entered into force in 1976, to continue to be in
effect and applicable between the United States and Turkmenistan.
There have been no discussions on a new dual taxation treaty.

Turkmenistan 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.

In 2006, the European Union decided to withdraw from negotiations on
a trade agreement with Turkmenistan, citing the county's poor
human-rights record.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

Turkmenistan signed an Investment Incentive Agreement with the U.S.
government in 1992, but there has been no investment insurance,
investment guarantees or financing provided by the Overseas Private
Investment Corporation (OPIC) for Turkmenistan.

LABOR

Labor matters are governed by the Labor Code of Turkmenistan, the
Law on Leaves of Absence, the Law on Occupational Safety, the Law on
Pensions and a number of regulations approved by presidential
resolutions. Turkmenistan joined the International Labor

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Organization in 1993.

Unemployment and underemployment are major problems. The last
official survey, conducted in 1995, implausibly estimated
unemployment at 3% of the labor force. Current unofficial estimates
are above 50%.

Since 1997, Turkmenistan has introduced "labor exchanges" or
employment offices, operating as self-sustaining entities under
local government offices. Turkmenistan's regulations require that
all vacancies be posted via such labor offices. Although most
vacancies in the labor exchanges' databases are low-skilled jobs,
employment offices have not been an effective tool in reducing
unemployment. Finding suitable candidates via these offices is also
problematic for international companies. Investors recruit
directly, though candidates still pay a nominal fee to the relevant
labor exchange. Although the government requires foreign companies
to have 70% of the local workforce be local citizens, it has made
exceptions for foreign construction companies executing large-scale
turnkey projects. Officials are known to request investors to
employ their relatives and friends.

The government had greatly weakened Turkmenistan's education system.
Under President Niyazov, mandatory secondary education was reduced
from 10 to 9 years, further contributing to unemployment. However,
in February 2007, Turkmenistan's newly-elected President, Gurbanguly
Berdimuhamedov, announced the reinstatement of 10 years' mandatory
education starting with the 2007-2008 academic year. The president
also increased higher education from two to five years and medical
training to six years. After years when teaching of English and
other foreign languages had little part in most schools' curricula,
President Niyazov in 2006 reinstated mandatory English-language
training. The general lack of foreign language learning has
hampered the ability of students to study outside Turkmenistan and
work with international companies. The adult population of
Turkmenistan was relatively well-educated under the Soviet system,
but lacked various marketable skills, including foreign languages
and computer literacy. The lack of quality educational institutions
and the government's unwillingness, until recently, to support
technical training has impeded the development of a work force
capable of supporting high-tech foreign investment projects. Lack
of familiarity with modern technology and business practices has
been an additional weakness within the available labor pool, but the
recent reforms should begin to address these shortcomings.

The Association of Trade Unions of Turkmenistan -- successor to the
Soviet-era system of government-controlled trade unions -- is the
only trade union allowed in the country. The Association's unions
are divided along both sectoral and regional lines, and all social
and economical activities are limited.

The normal workday in Turkmenistan is 8 hours, and the standard
workweek is 5 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 6 hours a day, and only with parental and trade union
permission. Health and safety regulations exist, but are commonly
not enforced. Foreigners with government permission to reside in
Turkmenistan may work, but are subject to the same labor regulations
as citizens unless otherwise specified by law.

FOREIGN TRADE ZONES/FREE PORTS

The Law on Economic Zones for Free Enterprise 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 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

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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;
-- Setting product prices.

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

In July 2007, President Berdimuhamedov announced the creation of the
Avaza free tourist zone along 16 kilometers of the Caspian Sea
coast. The Ministry of Economy and Finance (MOEF) promised
exemption from MOEF registration fees and Value Added Tax (VAT) to
contracting and management companies, full convertibility of all
manat-denominated operations earnings into hard currency for
amortization of foreign loans, payment for construction work or
services, purchase of raw materials, equipment, and goods. This
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 calibration
fees in the zone. Amendments to the Land Code passed in October
2007 include a provision for 40-year land leases for construction of
tourism facilities and five-year leases for retail and services
points, warehouses and car parking lots. Tourism-related services
such as catering and hotels -- but not casinos -- are also granted
VAT exemption. Construction equipment used in the Zone will not be
subject to the one percent property tax. In addition, the
government will not levy income taxes related to tourist
accommodations and catering for the first 15 years.

FOREIGN DIRECT INVESTMENT STATISTICS
State data on many economic indicators, including Foreign Direct
Investment (FDI) remain unreliable and mostly unavailable. However,
according to various independent analysts, most foreign investment
is directed toward the country's oil and gas sector. Such
investments include three onshore Production Sharing Agreements
(PSAs): the Nebitdag project operated by Burren Energy UK, the
Khazar project operated jointly by the Turkmenneft state concern and
Mitro International of Austria, and a PSA signed with the China
National Petroleum Corporation (CNPC) in 2007. The remaining three
PSAs are offshore operations, including the Cheleken project
operated by Dragon Oil of the United Arab Emirates, the Block-1
project operated by Petronas of Malaysia and the Blocks 11, 12
project operated jointly by Maersk Oil of Denmark and Wintershall of
Germany.

By early 2007, Dragon Oil has invested a total of $618 million. It
has estimated that its investment for 2007 will total about $250
million and its investment in 2008 will be $500 million. Petronas'
total investment by the beginning of 2007 amounted to $705 million.
Petronas intends to invest $600 million in 2007. Burren and Mitro
have invested $450 and $225 million respectively. Although, these
investment statistics are incomplete, they represent at least a
two-fold increase over the $418 million foreign investment figure in
2005 (The EBRD Transition Report 2007).
Other potential investors, including Chevron, BP, Lukoil and
ConocoPhillips, are holding high-level discussions with the
Government of Turkmenistan.
END TEXT OF PART II OF II.
HOAGLAND