TURKMENISTAN 2008 INVESTMENT CLIMATE REPORT

UNCLAS SECTION 01 OF 12 ASHGABAT 000006

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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:

OPENNESS TO FOREIGN INVESTMENT

Turkmenistan is a relatively large but sparsely inhabited country
(about five million) with abundant hydrocarbon resources. The
government regularly proclaims its wish to attract foreign
investment, but its state-control mechanisms and restrictive
currency-exchange system have created a difficult foreign-investment
climate. Historically, the most promising areas for investment are
in the oil and gas, agricultural and construction sectors. Even in
these areas, companies must conduct extensive due diligence. The
lack of established rule of law, inconsistent regulatory practices,
and unfamiliarity with international business norms are major
disincentives to foreign investment. Although President Gurbanguly
Berdimuhamedov has expressed his intent to improve investment
conditions, to date he has taken no specific related actions.

Turkmenistan's economy depends heavily on production of natural gas,
oil, petrochemicals and, to a lesser degree, cotton and textiles.
The country is the second largest gas producer in the former Soviet
Union. All other existing industrial production, with the exception
of food processing, needs substantial development. The country's
key industries are still state-owned. According to independent
estimates (European Bank of Reconstruction and Development EBRD
Transition Report 2007),the private-sector share in GDP in 2006 was
25%, mostly concentrated in retail trade, services and food
processing.

The top economic development priority of the Government of
Turkmenistan since independence in 1991 has been self-sustainability
in food supplies and an increase in import-substituting production
using hydrocarbon revenues. Other industries where the government
has been most receptive to foreign investment are the textile and
construction sectors, which all acutely need modern technology,
knowledge of international markets and experience in international
business practices. All investment proposals are screened for
compliance with these government priorities. The national program
entitled "Economic, Political and Cultural Development Strategy for
Turkmenistan to 2020" specifies government plans for the petroleum,
chemical, power generation, mining, metallurgy, textiles,
construction, agriculture, transportation, communication and other
industries. In October 2006, Turkmenistan adopted the Oil and Gas
Development Plan for 2007-2030.

Turkmenistan has a closed investment climate. Decisions to allow
foreign investment are politically driven; companies from "friendly"
countries are more successful in winning tenders and signing
contracts. The country has significantly reduced its foreign
borrowing, particularly from international donor organizations,
because of leadership fears that overseas loans may lead to
political dependency on foreign states. However, since
independence, Turkmenistan has accepted financing from IFIs for a
variety of projects. In this environment, where the government
selectively chooses its investment partners, a strong relationship
with the government is essential. Often, government officials
expect personal gain for allowing or helping foreign investors enter
the local market. One way to penetrate the market has been to work
through established foreign businessmen, who arrange deals through
their personal relationship with top leaders, or via high-ranking
foreign officials. Preliminary indications seem to demonstrate that
establishing a personal relationship with the new president will
remain the most direct -- and in some cases, the only -- way to gain
entry to Turkmenistan's market.

Incoming foreign investment is regulated by the Law on Foreign
Investment (last amended in 1993),the Law on Investments (last
amended in 1993) and the Law on Corporations of 1999, with respect
to start-up corporations, acquisitions, mergers and takeovers of

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corporations. Foreign-investment activities are affected by
appropriate bilateral or multilateral investment treaties, the Law
on Enterprises of 2000, the Law on Business Activities (last amended
in 1993),and the Land Code approved in 2004. Foreign investment in
the oil and gas sector is subject to the 1996 Petroleum Law (last
amended in December 2005). The Tax Code provides the legal
framework for the taxation of foreign investment. The 2000 Civil
Code defines what constitutes a legal entity in Turkmenistan, as
well as requirements for registration. Much foreign investment is
governed by project-specific presidential resolutions, which may
grant privileges not provided by the general legislation.

Legally, there are no limits on foreign ownership or control of
companies. In practice, the government has allowed fully-owned
foreign operations only in the oil sector and, in one case, in
cellular communications (MTS of Russia). There are various ways for
the government to discriminate against disfavored foreign as well as
domestic investors: excessive tax examinations, license extension
denial, and customs clearance and visa issuance obstacles. Starwood
Hotels and Resorts operated two Sheraton-franchise hotels in
Ashgabat, but left Turkmenistan in 2006 as a result of disagreements
over interpretation of its contract with the government.

In most cases, the government has insisted on maintaining a majority
interest in any joint venture (JV). Foreign investors have been
reluctant to enter JVs controlled by the government, as a result of
competing business cultures and conflicting management styles.
Foreign investors may only sell shares or divest with government
permission, although there is no specific legislation. Coca-Cola
Bottlers has been in Turkmenistan since the mid-1990s in a JV with
the government.

Government efforts since 1991 to privatize former state enterprises
have attracted little foreign investment. Privatization has been
limited to the service and trade sectors, with most industry still
in state hands. Out-dated technology, poor business structures, and
governmental obstacles make privatized firms unattractive as
outright purchases for foreign investors. To date, government
privatization efforts have also been counteracted by lingering
prejudice against the private sector. In cases where there is
income potential, the government has been quick to crowd out the
private sector as a competitor.

All land is government-owned. Neither domestic nor foreign entities
can receive long-term land-use rights for "non-agricultural"
purposes. Private citizens have land rights under specific
circumstances. However, these rights exclude the sale or mortgage
of land. Land rights can only be transferred through inheritance.
Foreign companies or individuals are permitted to lease land for
non-agricultural purposes, but only the president has the authority
to grant the lease.

The government has attempted to introduce an element of competition
for state contracts by announcing international tenders for some
projects. In many cases, Turkish companies have been hired to act
as advisors in the tender process. Typically, these projects are
politically motivated and/or economically unsound, and the tender
process is badly managed and often not transparent, timely,
well-prepared, or accessible. Following the president's
announcement of a potential project, interested foreign investors
and/or suppliers often contact the relevant government agency
directly in case the tender is not announced publicly. There is one
case of a U.S. company being told it was awarded a tender, investing
in initial project design, and then being informed the government
was considering other options. The tender was offered a second
time, and the contract was awarded to a new company at double the
U.S. company's tender price. Investors should always put
agreed-upon terms in writing and never act on verbal promises.

Turkmenistan signed a Trade and Investment Framework Agreement
(TIFA) with the United States, Kazakhstan, Tajikistan, Kyrgyzstan,
and Uzbekistan on June 1, 2004. The TIFA established a regional

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forum to discuss ways to improve investment climates and expand
trade within Central Asia. However, the Government of Turkmenistan
does not actively engage in regional efforts aimed at boosting
investment projects. Turkmenistan sells electricity to Afghanistan
at subsidized rates

Since independence in 1991, Turkmenistan has received an estimated
$2.86 billion in foreign direct investment (FDI) (EIU Turkmenistan
Country Report, October 2006). In October 2006, the Government
stated that Production Sharing Agreement (PSA) operators (Petronas,
Burren Energy, Maersk/Wintershall Consortium, Mitro International of
Austria/Turkmennebit Consortium) had invested $1.34 billion in their
local operations. The EBRD Transition Report Update (May 2006)
projected net FDI for 2006 to total $308 million.

CONVERSION AND TRANSFER POLICIES

The Government of Turkmenistan maintains tight control over the
country's main foreign-exchange flows. There are two de facto
exchange rates. The official rate has remained fixed at 5,200
manats per dollar since 1998; for the last three years the
unofficial rate has hovered around 24,000 manats per dollar. By
presidential decree, as of January 1, the "unofficial" exchange rate
can be no higher than 20,000 manats/dollar . In the latter part of
2006, benefiting from the steady flow of natural gas and oil income,
the government began to allow banks to convert manats from some
commercial entities at a near-unofficial rate of 22,800 manats per
dollar. Foreign bankers considered this newly-permitted
currency-exchange system to be a modest step towards overall
liberalization of the foreign exchange market. The Central Bank is
known to control the unofficial rate by releasing large quantities
of U.S. dollars into the unofficial (but legal) exchange market.

In November 2007, President Berdimuhamedov announced his intention
to unify the exchange rate by 2009. The Government of Turkmenistan
also plans to release new, redenominated currency at that time. In
preparation for exchange rate unification, Berdimuhamedov has stated
that Turkmenistan will seek advice from international financial
institutions.

Oil producers operate under the Petroleum Law and receive their
profit share in crude oil, which they ship by tankers to other
Caspian Sea littoral states or swap in Iran or Persian Gulf
countries. In many cases, investors in petrochemicals have
negotiated deals with the Government of Turkmenistan to recoup their
investment in the form of future petroleum products. Foreign
investors generating revenue in foreign currency, such as textile
factories, do not generally have problems with repatriating their
profits. However, some foreign companies receiving income in local
currency, such as Coca-Cola, seek indirect ways to convert local
currency to hard currency through the purchase of petroleum and
textile products in manat for resale on the world market.

Turkmenistan imports the vast majority of its industrial equipment
and consumer goods. The government's foreign-exchange reserves pay
for this industrial equipment and various investment projects. The
demand for hard currency in Turkmenistan's private retail sector
seems to be satisfied by the unofficial but legal exchange market
and the newly-introduced possibility to also buy dollars in banks at
the "near-unofficial" rate.
EXPROPRIATION AND COMPENSATION
Turkmenistan's legislation does not provide for private ownership of
land, and thus offers opportunities for the government to force
investors to vacate their land. Article 21 of the Investment Law
allows investors' property to be confiscated by a court decision.
Although there have been no reported expropriatory actions against
foreign investors in the last year, the Government of Turkmenistan
has a history of arbitrary expropriation of the property of local
businesses and individuals. Under the previous leadership, the
government often refused to pay any compensation, much less fair
market value, when exercising "the right of eminent domain." For
example, as part of a "city beautification" project to widen

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Ashgabat's streets, hundreds of homes and some local businesses were
destroyed. Homeowners were given short notice and little, if any,
compensation for loss of their dwellings. However, during a March
2007 Cabinet of Ministers meeting, President Berdimuhamedov stated
that residents of affected apartments or houses would be provided
with alternative housing before their homes are demolished. In
2007, neighbors who were promised housing six months after their
apartments were to be destroyed appealed to international
organizations in order to obtain new housing immediately, and were
given new apartments shortly thereafter.

DISPUTE SETTLEMENT

Most contracts negotiated with the government have an arbitration
clause. Embassy strongly advises U.S. companies to include an
arbitration clause with a venue outside Turkmenistan.

There have been several commercial disputes over the past few years
involving U.S. and other foreign investors or contractors in
Turkmenistan, though not all the disputes were filed with
arbitration courts. Turkmenistan's investment and commercial
disputes have three common themes: non-payment of debts,
non-delivery of goods or services, and contract renegotiations. The
government may claim the provider did not meet the terms of a
contract as justification for non-payment. Most disputes have
centered on the government's unwillingness to pay in hard currency
as contractually required. In cases where government entities have
not delivered goods or services, the government has often ignored
demands for delivery. Finally, a change in the leadership of a
government agency that signed the original contract often triggers a
government call to re-evaluate an entire contract, including profit
distribution, management responsibilities and payment schedules.

A western oil and gas company and Turkmenneft, the government-owned
oil company, have been in litigation since 1996. Under the auspices
of the International Chamber of Commerce, in 2001 the western
company was awarded of $495 million in damages. In spring 2006, the
U.S. Court of Appeals upheld the 2001 decision and bound the
Government of Turkmenistan to an arbitral award rendered by a
tribunal sitting in Houston, Texas, in favor of a foreign party
against State Concern Turkmenneft. In November 2006, the U.S.
Supreme Court denied Turkmenistan's petition for a writ of
certiorari. The award has not been paid.

Although Turkmenistan has adopted a number of laws designed to
regulate foreign investment, the laws have not been consistently or
effectively implemented. The concentration of power in the office
of the president has undermined the rule of commercial law.
Legislation is regularly made -- or overturned -- by presidential
decree. The Law on Foreign Investment, as amended in 1993, is the
primary legal instrument defining the principles of investment. The
law also provides for protection of foreign investors. The foreign
investor is defined in the law as an entity owning a minimum average
of 20% of a company's assets during a calendar year, unless the
Cabinet of Ministers waives the requirement.

The following is an ad hoc list of relevant legislation regarding
foreign investments:

-- All foreign and domestic companies and foreign investments must
be registered at the Ministry of Economy and Finance (MOEF).
--The Petroleum Law (Law on Hydrocarbon Resources) regulates
offshore and onshore petroleum operations in Turkmenistan, including
petroleum licensing, taxation, accounting and other rights and
obligations of state agencies and foreign partners. The Petroleum
Law supersedes all other legislation pertaining to petroleum
activities, including the Tax Code.
-- According to the Land Code, foreign companies or individuals are
permitted to lease land for non-agricultural purposes, but only the
president has the authority to grant the lease. Foreign companies
may own real estate property other than land.
-- Turkmenistan adopted a Bankruptcy Law in 1993.

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-- Other laws affecting foreign investors include the Law on
Investments (last amended in 1993),the Law on Corporations of 1999,
the Law on Enterprises of 2000, the Law on Business Activities (last
amended in 1993),the Civil Code enforced since 2000, and the Law on
Property of 1993.

The commercial-law enforcement system includes the Arbitration Court
of Turkmenistan (Arachy Kazyyet) which tries 13 categories of
disputes, both pre-contractual and post-contractual, including
taxation, legal foundations and bankruptcy issues. The court does
not interfere in enterprises' economic relations, but considers
disputes by request from either party involved. Appeals on
decisions of the Arbitration Court can be filed at the Arbitration
Committee of the Supreme Court of Turkmenistan.

Turkmenistan has not become a Party to the Convention on the
Settlement of Investment Disputes Between States and Nationals of
Other States (also known as the Washington Convention) or the New
York Convention of 1958 on the Recognition and Enforcement of
Foreign Arbitral Awards or any other internationally recognized
arbitration agreement.

PERFORMANCE REQUIREMENTS/INCENTIVES

Foreign investors are disadvantaged by higher tax rates than most
local companies. The Tax Code adopted in 2004 was amended three
times, in 2005, 2006 and 2007, but with most tax rates remaining
unchanged. The Value Added Tax is 15%, an income tax of 8% is
applied to JVs and an income tax of 20% to wholly-owned foreign
companies and state-owned enterprises. Dividends are taxed at 15%,
and the personal income tax is 10%. In 2005, the government of
Turkmenistan amended the tax code, giving more concessions to
domestic private companies. The Code exempted domestic private
companies from the VAT and property tax and reduced the income tax
from 8% to 2%. In August 2006, Turkmenistan increased its excise
tax on imported beer (50%) and wine (100%). Similar taxes on
domestically produced beer and hard liquor remain at previous rates:
10% and 15%-40% respectively.

In May 2007 Turkmenistan introduced a National Tourism Zone (NTZ) to
promote tourism development on the Caspian Sea coast. Tax and other
incentives are provided in the new legislation passed on October 1,
but only to those willing to invest in construction of hotels and
recreational facilities. The amendments to the Tax Code passed on
October 1 exempt construction and installation of tourist facilities
in the NTZ from the VAT. Various services of tourist facilities,
including catering and accommodation, are also VAT-exempt. Income
tax on accommodation and catering of tourist facilities will not be
levied for the first 15 years.

Equipment purchased by the investor as part of the registered
capital, other assets to be used in production, and personal
household effects of investors' employees are duty free.

Tax and investment incentives can be negotiated on a case-by-case
basis. The president has often issued special decrees granting
taxation exemptions and other privileges to specific investors while
recouping the initial investment.
Assets and property of foreign investors should be insured with the
State Insurance Company of Turkmenistan (Article 53 of the Petroleum
Law, Article 3 of Insurance Law). National accounting and financial
reporting requirements also apply to foreign investors. All
contractors operating in Turkmenistan for a period of at least 183
days a year must register at the Main State Tax Service. There is a
general requirement for foreign investors that 70% of the company's
personnel be local. The government can make exceptions for foreign
construction companies executing large-scale turnkey projects.
Turkmenistan requires that all export and import contracts and
investment projects be registered at the State Commodity and Raw
Materials Exchange (SCRME) and the Ministry of Economy and Finance.
The procedure applies not only to the contracts signed at the SCRME,
but also to contracts signed between third parties. The SCRME is

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government-owned and is the only exchange in the country. The
contract registration procedure includes an assessment of "price
justification." All import contracts must be registered before
goods are delivered to Turkmenistan.

The government mostly favors long-term investment projects that do
not require regular hard-currency purchases of raw materials from
foreign markets. Textile factories operated by Turkish companies
using domestic resources and labor serve as model investment
projects supported by the government. These companies encounter
relatively few currency conversion problems and enjoy tax holidays.
Otherwise, there are no set requirements for local sourcing or
exporting specific percentages of output.

Production Sharing Agreement (PSA) holders are mostly regulated by
the Petroleum Law. They are subject to a 20% income tax and
royalties ranging from 1% to 15%, depending on the level of
production. The social welfare tax, 20% of the total local staff
payroll, is also payable by all foreign investors and their
subcontractors. PSA holders' employees and their subcontractors pay
a personal income tax of 10%. Under the Petroleum Law, PSA
concessions have been made to six foreign energy companies: three
offshore and three onshore concessions for 20-25 years. Five of the
existing concessions are in the oil sector and one in the gas
sector.

Subcontractors of PSA holders can bring their equipment into the
country only for a duration of a valid contract. There is no
appropriate legislation that regulates operations of oil and gas
subcontractors

Currently, Turkmenistan lists 94 import and nine export goods and
materials subject to customs duties. Goods and materials not on the
lists are subject to a 5% customs duty payment. In regard to
exports, customs maintains a list of goods subject to customs duty
payment. Export of fertilizers, non-ferrous metals, their alloys,
and products made of non-ferrous metals is prohibited. State
enterprises often receive preferential treatment; for example, wool
carpets produced at state factories are exempt from customs duties.
In contrast, private carpet producers have to pay 100% customs
duties for exporting carpets.

Foreign investors are required to adhere to the sanitary and
environmental standards of Turkmenistan. Foreign investors'
products should be of equal or higher quality than prescribed by the
national standards.

Turkmenistan, while not a member of the World Trade Organization
(WTO),has enacted a number of laws in key areas relevant to the
WTO: investment, banking, intellectual property rights, customs,
and privatization. However, the legislation is not enforced
uniformly. Turkmenistan is not a signatory to and is not in
compliance with the Agreement on Trade-Related Investment Measures
(TRIMS).

The State Service for Registration of Foreign Citizens was created
in 2003 with the specific aim of controlling access to the country
and movement of foreign citizens within Turkmenistan. All visitors
are required to register upon entry, and travel to most border areas
requires a special permit. Inviting foreigners often is
problematic, because authorities can and do deny entry visas without
explanation. With these travel strictures, foreign investors tryingQ
to enter Turkmenistan for the first time have difficulty obtaining
entry visas unless invited by the government. Even established
investors continue to complain about bureaucratic procedures and
delays in this context.

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

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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 SpecialQ1 Watch List since 2000.

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

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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.
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,

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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 fiancing for projects in
Turkmenistan, 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
confessions. AutQities violatQhe 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

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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.Q
BILATEQINVESTMENT 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
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

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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
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,

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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.
HOAGLAND