TURKMENISTAN: TAKING STEPS TOWARD A MARKET ECONOMY

UNCLAS SECTION 01 OF 02 ASHGABAT 000370 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB COMMERCE FOR HUEPER TREASURY FOR BAKER/LANIER USAID/W FOR EE/AA E.O. 12958: N/A TAGS: PGOV ECON EINV TX SUBJECT: TURKMENISTAN: TAKING STEPS TOWARD A MARKET ECONOMY REF: ASHGABAT 0369 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (U) SUMMARY: On March 17 President Berdimuhamedov delivered a policy statement on the Government of Turkmenistan's support of advancing entrepreneurship and foreign investment. To solidify his statements on improving the business climate, the president adopted the new "Law on Foreign Investment" (reftel) and amendments to the existing Tax Code of Turkmenistan. He also signed a decree authorizing three commercial banks of Turkmenistan to issue credit lines for prospective private-investment projects. Turkmenistan's intentions are indisputably right. We remind that Berdimuhamedov said in Summer 2007, "The debate is over. We have chosen to be a market economy." But ex-Soviet governments tend to rely too heavily on presidential decrees and the power of law-on-paper. The longer-term monumental task will be to change a century of national political psychology, the entrenched bureaucracy, and the culture of rent-seeking. END SUMMARY. PRESIDENT EXPLAINS WHY TO ENCOURAGE THE PRIVATE SECTOR ¶3. (U) During an extended Cabinet of Ministers meeting on March 17, 2008, President Berdimuhamedov gave a policy speech in support of a flourishing private sector at an extended Cabinet of Ministers meeting held at the National Exhibition Hall. Leading Turkmen entrepreneurs attended, in addition to ministers and heads of government organizations. Berdimuhamedov said that empowered entrepreneurship was the fundamental factor for a gradual transition to an economy based on market principles. In his speech, he constantly referred to the value and practice of entrepreneurship worldwide, saying that it was "the main driving force of reforms," a significant factor for job creation, a boost to personal income, and a catalyst to increase the middle class, which Berdimuhamedov said was an indicator of the country's prosperity. LIFTING IMPEDING BARRIERS ¶4. (U) Berdimuhamedov said that the government should make a comprehensive inventory of relevant legislation in order to eliminate "needless administrative barriers" impeding licensing and registration procedures. He also wants to reduce bureaucracy regarding foreign investment, privatization, and reducing state involvement. Berdimuhamedov signed a number of laws and decrees that support the private sector and foreign investment, such as a new version of the Law on Foreign Investment and various amendments to the existing Tax Code (septel). In addition, he signed a new decree appointing an ad-hoc state commission to review business plans and investment project proposals submitted by private entrepreneurs to determine eligibility for credit lines that have been established specifically to promote private business. The ten-year credit line carries an annual percentage rate of five per cent. Three banks may issue such credit loans: Dayhanbank (state commercial bank for agricultural projects); Senagatbank (commercial joint-stock bank) and Garagumbank (international joint-stock bank for industrial business, such as transportation, communications, services, information technology, and innovation). HAPPY MARRIAGE BETWEEN GOVERNMENT AND PRIVATE BUSINESS ¶5. (U) Minister of Economy and Development Gurbanmuradov stated that the private sector contributes roughly 40 per cent of Turkmenistan's GDP. The president said that this number should increase to 70 per cent by 2020. Berdimuhamedov said that support for private business will eventually resolve a number of state economic issues. The privately owned "Poultry Complex" is an example of a private company that brings significant benefit to the government. Berdimuhamedov said that when performing at its fullest capacity, this agribusiness farm supplies the domestic market with fresh eggs and chicken meat, and also frees "the government from ASHGABAT 00000370 002 OF 002 spending money to import those foodstuffs from abroad." Thus, all ministries and other government entities were instructed to find ways to increase the level of cooperation with and assistance to local businesses. REALITY CHECK FOR ENTREPRENEURS ¶6. (SBU) A handful of private business owners from all regions of Turkmenistan and representing a wide range of industries, such as agriculture, food processing, poultry, carpet and textile manufacturing made presentations at the extended Cabinet of Ministers meeting. (NOTE: The presence of private business owners at a high-level government meeting is unprecedented. Two Cochran Program alumni attended this meeting: cheese producer Dadebay Chowdurbayev and poultry producer Ahmed Charyev. END NOTE.) Berdimuhamedov instructed the relevant officials to include input and proposals from the private sector into the new National Entrepreneurship Development until 2020 Program, which the Government of Turkmenistan will finalize in the near future. Interviews with entrepreneurs who participated in the meeting that appeared in the official Russian-language government newspaper "Neytral'niy Turkmenistan" reflected their optimistic opinions on government initiatives supporting the private sector. However, a few small- and medium-enterprise (SME) owners told PolEcon staff that these reforms, including changes to the legislation and the SME incentives "are not substantive enough to make an impact on their business." ¶7. (SBU) The resident EBRD representative told EconOff that while this reform "superficially" sounds good, the real challenge will be with implementation. He believed bureaucracy will weigh down the lending program as the deputy heads of various ministries, the deputy head of the Central Bank, and the heads of Senagat, Karakum, and Dayhan Banks will all be responsible for the lending program for entrepreneurs. He saw tremendous potential for corruption with the lack of experience in lending and no independent auditor involved. ¶8. (SBU) COMMENT: Turkmenistan's intentions are indisputably right. We recall that Berdimuhamedov said in Summer 2007, "The debate is over. We have chosen to be a market economy." The Government of Turkmenistan clearly sees that encouragement of the private sector will have a positive effect on the country's economy, and we are certain the private sector is more than eager to play its role. But ex-Soviet governments tend to rely too heavily on presidential decrees and the power of law-on-paper. The longer-term monumental task will be to change a century of national political psychology, the entrenched bureaucracy, and the culture of corruption. Breaking old habits and ways of thinking and building confidence among lower-ranked officials to try something new will take time, effort, and monumental patience. END COMMENT. HOAGLAND