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