TURKMENISTAN: SCENESETTER FOR U/S REUBEN

UNCLAS SECTION 01 OF 05 ASHGABAT 000455

SIPDIS

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, E, EEB

E.O. 12958: N/A
TAGS: PGOV PREL ECON EPET TX
SUBJECT: TURKMENISTAN: SCENESETTER FOR U/S REUBEN
JEFFERY'S VISIT, APRIL 20-21, 2008

REF: A. ASHGABAT 0363

B. ASHGABAT 0219


1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: Embassy Ashgabat warmly welcomes your
visit to Turkmenistan as an important opportunity to advance
our bilateral dialogue on energy and economic reform issues.
President Bush met briefly with President Gurbanguly
Berdimuhamedov on April 3 at the NATO Summit in Bucharest.
Other high-level U.S. meetings with him were Senator Richard
Lugar in January, Energy Secretary Bodman in November 2007,
and Secretary Rice in September 2007 during the UNGA in New
York. Coordinator for Eurasian Energy Diplomacy Ambassador
Steven Mann meets with Berdimuhamedov regularly, most
recently on February 28. Into the second year of his
presidency, Berdimuhamedov is increasingly self-confident and
will not hesitate to speak his mind. We believe his economic
instincts are right, even if his understand is elementary.
In Summer 2007, he told U.S. visitors, "The debate is over.
We have chosen to be a market economy." But he's starting
from almost zero with very few on his team who have the
experience and capacity to implement the reforms he says he
wants. Like many ex-Soviet governments, Turkmenistan relies
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.

TURKMENISTAN POST-NIYAZOV


3. (SBU) A little more than a year into the new era, it is
clear Turkmenistan is becoming significantly different from
the international bad-joke pariah state it was under former
President-for-Life Niyazov. But precisely what Turkmenistan
is becoming is still a work in progress. Evidence
increasingly suggests it could well one day become a
responsible partner for the United States and a normal
international player. As detailed in both reftels,
Berdimuhamedov's fundamental policies have been promising:
reform education, health care and the social sector; initiate
financial reform and work toward becoming a market economy;
draft or rewrite more than 30 laws -- including the laws on
religion and civic organizations and the criminal and
criminal procedures codes -- to bring them up to
international standards, re-establish international relations
and become a cooperative regional player; and open its vast
hydrocarbon sector to international investment.


4. (SBU) But Turkmenistan's history means this is an up-hill
battle. Despite its hydrocarbon wealth, it is in many ways
where the other countries of the region were at their
independence in 1991, and even worse because of the
destructive policies of the Niyazov era. Before 1991, it had
70 years of exclusively Soviet experience that pulled it out
of the Middle Ages, but this didn't prepare it to be a
modern-state member of the international community. And so
now, Turkmenistan has little to draw on other than its past
as it seeks to move into the 21st century. The United
Nations, Turkmenistan's partner of choice, voices many
feel-good bromides but provides relatively little concrete
development assistance, due in part to a a lack of funding.
The European Union is increasing its engagement with
Turkmenistan, but some individual states still have scruples
about engaging with a former police-state dictatorship.
Russia has made its intentions clear: it is determined
Turkmenistan will be part of its "exclusive sphere of
influence," primarily, but not exclusively, through Gazprom
IFIs like the World Bank, International Monetary Fund, Asian
Development Bank and European Bank for Reconstruction and
Development (EBRD) are gearing up to assist Turkmenistan's
economic and financial reforms, but they are moving at a
deliberate pace.

U.S.-TURKMENISTAN RELATIONS: PUSHING WHERE DOORS ARE OPENING

ASHGABAT 00000455 002 OF 005




5. (SBU) U.S. policy in Turkmenistan is three-fold:

-- Encourage democratic reform and increased respect for
human rights and fundamental freedoms, including support for
improvements in the education and health systems;

-- Promote economic reform and growth of a market economy and
private-sector agriculture, as well as diversification of
Turkmenistan's energy export options; and

-- Expand security cooperation.


6. (SBU) Following Niyazov's death at the end of 2006, the
United States offered to re-engage with Turkmenistan without
preconditions. With about 30 delegations in the first year
-- more in that year than in the previous six years combined
-- we proposed multi-sector cooperation, and the embassy's
access at the working level has been increasingly productive,
especially in the fields of basic democratic/legislative and
economic reforms. Turkmenistan matters because it is a
Caspian littoral state important to the West for energy
security. It could become like Azerbaijan and Kazakhstan --
generally independent of Russia and willing to work with the
West. It also has strategic importance because of its long
shared borders with Iran and Afghanistan (terrorism and
narcotics),as well as its historic and potentially
suffocating relationship with Russia. The fundamentals
underlying our first year of re-engagement have been correct:
push where the doors are opening, but do not try to force
open doors that are not ready to open for us. We are
achieving progress: we want to build on and enlarge that
progress.

ECONOMY AND FINANCE


7. (SBU) Turkmenistan's economy is closely controlled by the
state and is heavily dependent on hydrocarbon revenue.
Unemployment, which we estimate could be as high as 60%,
remains a major challenge. Underemployment is also a
challenge. The president has laid out a very ambitious
program of economic development that continues his
predecessor's massive building program in Ashgabat,
establishes a luxury but certainly white-elephant tourist
zone ("Avaza") on the Caspian coast, and generally develops
infrastructure. But Turkmenistan does not have the funds it
needs to accomplish all this and increase production in the
hydrocarbon sector. Turkmenistan remains reluctant to take
on increased debt: uncontrolled borrowing in the 1990's led
to a massive debt level (for Turkmenistan, at that time) of
an estimated $1.6 billion. Although Turkmenistan has
gradually paid its debt down to a more manageable level, a
lack of human capacity in the debt and asset management
sector, combined with remnant biases against debt, have
limited Turkmenistan's assumption of new debt.


8. (SBU) President Berdimuhamedov has stated repeatedly, in
many fora, that he wants to develop an international-standard
market economy and to promote foreign investment. To those
ends, he has placed a new priority over the past eight months
on promoting economic and financial reform. Turkmenistan has
announced that it will redenominate its currency in 2009,
lopping off three zeros, and has slowly begun to unify the
country's dual exchange rates. The president has stated that
some state enterprises will be privatized -- though not in
"strategic" sectors like oil and gas, electricity, textiles,
construction, transportation, and communications. He has
signed a new foreign investment law, which, among other
things, guarantees resident foreign businessmen and their
families one-year, multi-entry visas, and approved changes to
the tax code. The president divided the overworked Ministry
of Economy and Finance into two bodies -- a Ministry of
Economy and Development, and a Ministry of Finance, and he
has created a Supreme Auditing Chamber with the goal of
providing transparency in the budget process. In a notable
development, the president also announced that he will

ASHGABAT 00000455 003 OF 005


abolish the opaque extrabudgetary funds that were prone under
his predecessor to misuse and corruption. Finally, although
the Central Bank Chairman continues in meetings with
westerners to promote the virtues of maintaining state
subsidies, the state slowly began to raise the price of
electricity and price of vehicle fuel. These measures may be
part of an early effort to gradually phase out the state's
extensive and tremendously expensive subsidies system.


9. (SBU) Even though the president has reshaped his
bureaucracy, put in place the structures that theoretically
should help promote a market economy, and opened Turkmenistan
to cooperation with IFIs, the lack of basic understanding and
bureaucratic capacity remains an enormous impediment to
change. New reforms are being rolled out with inadequate
preparation, understanding of their consequences and
explanation -- and are leading to increased public
dissatisfaction. USAID is working through its contractor,
BearingPoint, to implement a new program to increase
bureaucratic capacity and to support growth of private
business in Turkmenistan. Department of Treasury
representatives will also visit Turkmenistan soon to identify
areas where Treasury might play a role in promoting reform,
should funding be available.

NEXT STEPS


10. (SBU) In raising economic reform with Turkmenistan
officials, we recommend you consider congratulating President
Berdimuhamedov for embarking on market-economy reforms, and
express understanding for what a historic, monumental, and
long-term task this is. You should encourage him to stay on
course and to develop a strategic plan that will lead to a
more sustainable and internationally competitive economy.
You might consider recommending that he

-- Continue and conclude the process of unifying the dual
exchange rates;

-- Continue ongoing close engagement with the International
Monetary Fund and the World Bank; and

-- Have his Ministry of Economy and Development begin work on
USAID's Investor Roadmap Program because it offers a
superlative opportunity to identify what the government needs
to do to improve Turkmenistan's foreign investment climate.


11. (SBU) You might also want to recognize the president's
recent efforts to foster private-sector entrepreneurship.
Additional steps could include:

-- Make the budget more transparent and eliminate
extrabudgetary funds.

-- Reform Turkmenistan's banking sector to come closer to
international standards.

-- Eliminate unnecessarily intrusive and arbitrary
inspections of private businesses.

-- Establish a "one-stop shop" for licenses and permissions
to establish and register new privatQusinesses.


12. (SBU) It would be useful for you to know that earlier
this year the World Bank conducted anti-money-laundering and
Financial Intelligence Unit workshops. There is a
possibility the parliament will pass an anti-money-laundering
law in October, and the government plans to establish a
Financial Intelligence Unit. The International Monetary Fund
will be in Turkmenistan for two weeks in April to work on the
Article 4 Report. The International Finance Corporation
(IFC) is coming at the end of April to discuss with the
National Statistics Institute how to improve the business
environment. The IFC will survey several thousand small and
medium business owners, and will discuss the Law on Foreign
Investment wQ the Ministry of Economy and Development.

ASHGABAT 00000455 004 OF 005



ENERGY


13. (SBU) Turkmenistan has world-class natural gas reserves,
but Russia's near monopoly of its energy exports has left
Turkmenistan receiving much less than the world price and
overly beholden to Russia, although Gazprom has agreed to pay
"world price" starting in 2009. Pipeline diversification,
including both a pipeline to China proposed for 2009 and the
possibility of resurrecting plans for Trans-Caspian and
Trans-Afghanistan pipelines that would avoid the Russian
routes, and construction of high-voltage electricity lines to
transport excess energy to Turkmenistan's neighbors,
including Afghanistan, would not only enhance Turkmenistan's
economic and political sovereignty, but also help fuel new
levels of prosperity throughout the region. Berdimuhamedov
has told U.S. interlocutors he recognizes the need for more
options and has taken the first steps to this end, but he
also took the steps needed to increase the volume of gas
exports to Russia, signing an agreement (with Russia and
Kazakhstan) in Moscow in December 2007 to enlarge and rebuild
a non-functioning Soviet-era Caspian littoral pipeline. He
will require encouragement and assistance from the
international community if he is to maintain a course of
diversification in the face of ongoing Russian efforts to
keep Turkmenistan from weaning itself away from Russia.


14. (SBU) One of the biggest challenges that Turkmenistan's
hydrocarbon sector will have to face, if it is to succeed in
pipeline diversification, is the need for increased
natural-gas production. Turkmenistan produced a reported
72.3 billion cubic meters (bcm) in 2007, a figure that barely
meets its existing domestic needs and export commitments.
The president directed that production should increase to
81.5 bcm in 2008. Even larger increases will be needed as/if
new pipelines come online. While Turkmenistan has welcomed
foreign companies to work its offshore (primarily oil)
Caspian blocks, it has up to now largely rejected allowing
foreign energy companies to work its onshore gas fields,
maintaining that it can handle the drilling itself. But
onshore natural gas production offers some tough challenges,
including high-pressure, high-sulphur, sub-salt drilling,
which requires special skills and technologies and lots of
investment. One Western analyst suggested that costs could
run as high as $100 billion over the next five years. No one
outside of the Turkmen government believes Turkmenistan has
either the skills or the investment needed. U.S. policy has
been to promote onshore production by major western oil
companies. We know there has been huge debate within the
government about this, and we have watched views evolve. We
believe, in the end, there will be major Western companies
working onshore -- but we aren't there yet. (NOTE: A
separate cable updating energy developments will follow this
scenesetter. END NOTE.)

FOREIGN POLICY


15. (SBU) Despite his statements that he plans to continue
the "neutrality" policies of his predecessor, Berdimuhamedov
has put an unprecedented emphasis on foreign affairs to
repair Turkmenistan's international and regional relations
and to become a respected player on the international stage.
Under the president's leadership, Turkmenistan has reached
out to participate actively in regional organizations. He
has met with all the leaders in the region, as well as with
those of other countries of importance to Turkmenistan.
China has a strong and growing commercial presence in
Turkmenistan, and continues to court the president through a
series of high-level commercial and political visits,
including a July 2007 Berdimuhamedov trip to Beijing focused
on natural gas and pipeline deals. Presidents Berdimuhamedov
and Gul (Turkey) have exchanged visits, but bilateral
relations continue to be colored more by the image of
Turkey's lucrative trade and construction contracts that are
eating up large amounts of money from the national budget.
Berdimuhamedov has held positive meetings with high-level

ASHGABAT 00000455 005 OF 005


leaders of international organizations (including both the UN
and the Organization for Security and Cooperation in Europe)
and IFIs that have led to productive, cooperative
relationships. The UN High Commissioner on Human Rights,
Louise Arbour, visited Turkmenistan in May 2007, and the High
Commissioner on Religion will visit in September.


16. (SBU) Berdimuhamedov has held positive meetings with
high-level U.S. officials and is well-disposed toward the
United States. He made his first trip to the United States
as president to participate in the UNGA session in September
2007, where he also met with Secretary of State Rice. In
November 2007, Secretary of Energy Bodman met with
Berdimuhamedov in Ashgabat, and Berdimuhamedov's meeting with
President Bush during the April Bucharest NATO summit
received extensive and very positive media coverage in
Turkmenistan. Berdimuhamedov made his first visit to EU and
NATO headquarters in Brussels in November 2007.

SECURITY


17. (SBU) The U.S. security relationship with Turkmenistan
continues to unfold, with slow but consistent cooperation.
Although basing is not an option, Turkmenistan remains an
important conduit for the U.S. military to Afghanistan.
Maintaining blanket overflight permission and the military
refueling operation at Ashgabat Airport remains a key U.S.
goal. CENTCOM and Turkmenistan's military maintain an active
military-to-military cooperation plan, and CENTCOM and the
Nevada National Guard (operating through the State
Partnership Program and CENTCOM's military cooperation
program) have a productive counter-narcotics program that has
funded training and completion of two border-crossing
stations on the Iranian and Afghan borders and the
construction of three more checkpoints, including one
currently underway on the Uzbekistan border. With the
assistance of the Embassy's EXBS program, the Embassy works
to strengthen Turkmenistan's border security and to increase
its ability to interdict smuggling of weapons of mass
destruction.
HOAGLAND