TURKMENISTAN'S BLACK MARKET IN EXCHANGE -- HOW IT

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000599

SIPDIS

STATE FOR SCA/CEN, EEB
TREASURY FOR LANIER/BAKER

E.O. 12958: DECL: 05/08/2018
TAGS: PGOV ECON EFIN SOCI TX
SUBJECT: TURKMENISTAN'S BLACK MARKET IN EXCHANGE -- HOW IT
WORKS

Classified By: CHARGE SYLVIA REED CURRAN FOR REASONS 1.4 (B) AND (D).


1. (C) SUMMARY: Officials from various of Turkmenistan's
ministries and state enterprises have profited from a system,
run by the Central Bank, where money from dollar denominated
"special" accounts were originally valued at the official
rate and sold at the higher black market or "unofficial
rate." Certain officials in these ministries and enterprises
then pocketed the difference, minus cuts to the numerous
parties that made the system possible. Although the unified
exchange rate decreases the profit margin, the system is
still in place, and ready to provide profits from any
difference between the official rate and the black market
rate for the overvalued manat. END SUMMARY.


2. (C) During the years of the dual exchange rate system and
throughout the unification process, a robust and readily
accessible black market for exchange has thrived. A senior
LE staff member (please protect) with years of experience in
Turkmenistan,s banking industry revealed the details of the
black market system to EmbOff. According to the LE Staff
member, the black market system, while technically illegal,
involves a wide swath of the country,s power elite and
security forces. The absurd exchange rate levels set for the
previous official rate meant that all locals, from day
laborers to the uber-rich, have exchanged money almost
exclusively in the city,s hundreds of informal exchange
points, often under the close protection of uniformed
policemen and always under the control of the Central Bank.

THE BROAD STROKES


3. (C) Turkmenistan,s various ministries and government
enterprises are required to keep the majority of their
operating budgets and proceeds of operations in accounts at
the Central Bank. Because of Turkmenistan,s vast
hydrocarbon exports, the Central Bank is flush with dollars.
According to the LE Staff member, certain dollar denominated
accounts are identified as "special8 by mutual agreement
between the depositing party (the Ministry or enterprise) and
the bank. These &special8 accounts are the source of
Turkmenistan,s broad black market for exchange.


4. (C) Using the example of a 100,000 U.S. dollar account
under the pre-January 2008 exchange rate system, the $100,000
are worth either 520,000,000 manat at the (former) official
rate of 5,200 manat per dollar or 2,400,000,000 manat at the
(former) black market or "unofficial" rate of 24,000 manat
per dollar. Thus, $100,000 removed from the identified
account could be replaced with a 520,000,000 manat payment
and the difference passed on to the numerous parties who made
the system possible.

THE DETAILS


5. (C) Central Bank officials distributed the dollars in the
identified accounts to high-level officials of the ministry
or enterprise holding the original account. These high-level
government officials then divided the funds into smaller sums
and passed them on to facilitators who each run sophisticated
exchange operations. The operations run exactly as
legitimate businesses hiring and retaining staff, providing
facilities and transportation, and returning profit to their
investors. Additionally, they are obliged to pay for
&protection8. Those in charge of supposedly stopping the
illicit activity also receive their &taste.8


6. (C) Because the majority of Turkmenistan,s population is
paid in manat, but requires and wants U.S. dollars, most
Turkmen readily purchase those dollars from their local black
market exchange office at the higher (and more reasonable)
black market rate. While many people also use the black
market dealers to exchange dollars for manat, the flow is

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mostly the other way. The dollars, gobbled-up at the higher
rate, result in massive profits for everyone involved, not
least the Central Bank and ministry officials who provided
access to the funds.

A BRAVE NEW WORLD?


7. (C) COMMENT: While the unification process, financial
panic and the government's new effort to limit exchange, has
changed the rules of the game, the essential elements are
still in place. The new unified rate of 14,250 manat per
dollar still grossly overvalues the manat. Turkmenistan
nationals still require U.S. dollars to transact business and
still save in U.S. dollars. Many of the officials and
&facilitators8 who have profited handsomely over the years
are still in place and operating. Thus far, there has been
little variance between the new unified rate available in
banks and the black market rate. The question remains,
however, how long can the government maintain control when so
many are willing to pay more than 14,250 manat per dollar and
so many stand to profit by meeting that demand. END COMMENT.
CURRAN