TURKMENISTAN: ELITE APARTMENTS - II

UNCLAS SECTION 01 OF 02 ASHGABAT 000739 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB E.O. 12958: N/A TAGS: PGOV ECON SOCI KCOR TX SUBJECT: TURKMENISTAN: ELITE APARTMENTS - II REF: ASHGABAT 0514 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (U) SUMMARY: The Government of Turkmenistan is acknowledging the emerging problem of skyrocketing real estate prices. New elite apartments that have yet to be built are now selling for 2.4 - 3.2 billion manats (the equivalent of $164,000 - $225,000) in a country where the average monthly salary is 2.8 million manats or $200. Despite the government's efforts to renegotiate the price of residential construction projects with Turkish construction companies, the cost of elite apartments continues to escalate, and the surge in prices is affecting modest Soviet-era housing as well. Although the government is committed to economic reform and a market economy, the housing sector illustrates the toxic brew of command economy and corruption that will need to be overcome. END SUMMARY. OLYA'S STORY ¶3. (SBU) In June 2007, a local embassy employee signed a contract with TurkmenGallaOnumleri, Turkmenistan's Wheat Products Association, to purchase a two-bedroom elite apartment, the construction of which had only just begun. The total cost, including all the fees, came to 1.2 billion manats. (NOTE: The price was equivalent to $51,000 at the 23,000-manats-to-the-dollar exchange rate in effect at that tim. END NOTE.) The embassy employee was required to pay 55% of the price up front, with the remaining 45% payable upon completion of the building. In May 2008, the employee spoke to the department head at the Wheat Products Association who was responsible for overseeing the apartment building's construction. The department head told the employee that, due to the drop of the dollar-to-manat exchange rate from 23,000 to 14,250 manats, the association was re-negotiating the price of the apartments with the contractor, the Turkish construction company "Bozdemir." The department added that the remaining 45% of the apartment price might cost the employee less than she expected. "Even if the price does not change, I still know that it was a good investment," said the employee. "People have approached me asking to buy my $51,000 apartment for $120,000." ESCALATING REAL ESTATE PRICES ¶4. (SBU) Apart from government efforts to bring down the price of elite apartments by re-negotiating prices with contractors, Post is aware of other stories that contradict the notion that prices would drop. Numerous Embassy contacts reported that the price of the new 1,764 elite apartments the government said would be built by February 2010 (reftel) will be at least twice the price. For example, one embassy contact, who has been trying to buy an elite apartment for the last three years, said the official price of a Ministry of Water Management elite apartment, the construction of which has not even begun, will be 2.4 billion manats ($168,000 at the current exchange rate) for a four-bedroom unit. Another contact reported that a four-bedroom elite apartment being offered by one of Turkmenistan's state banks was being offered for 3.2 billion manats, or $225,000. ¶5. (SBU) An employee of a particular government agency is allowed to purchase one of the agency's elite apartments at a 50% discount and can obtain a 30-year, one-percent interest rate mortgage (reftel). However, this kind of subsidized program with favorable conditions is available only to employees who have worked for the government for five or more years. Even so, not all employees are easily able to acquire such an apartment. Extensive corruption pervades the program. One has to pay large sums to the agency head to have his/her name included on the list of those awaiting new apartments. The agency head does not take bribes directly from the buyer, but rather employs several middlemen in the process. As a result, the cost of "shapka," the ad-hoc bribe needed to get an elite apartment, has now risen from $15,000 to $25,000. SPECULATION DRIVES THE PRICE INCREASE ASHGABAT 00000739 002 OF 002 ¶6. (SBU) One factor driving the escalating prices is the influx of foreign businessmen to Ashgabat. Although each ministry sets aside a certain number of apartments in each building for its own employees, the remaining apartments are put onto the open market to finance the subsidies on the ministry apartments. Real estate companies with plenty of money are speculating by buying up apartments all over the city, fixing them up, then reselling them to foreigners, who are now allowed to own real estate in Turkmenistan. TURKISH COMPANIES HAVE SOMETHING TO SAY ¶7. (SBU) The general manager of one of the prominent Turkish construction companies operating in Turkmenistan said that the fact that Turkmenistan is trying to renegotiate apartment prices and is not reliable in terms of payment overall is driving Turkish companies out of the apartment-building business. Although Chinese companies are slowly entering the market, he expressed concern that the Chinese companies would not build with the same quality as the Turkish firms. OLD SOVIET APARTMENT PRICES ALSO ON THE RISE ¶8. (SBU) Skyrocketing prices for elite apartments are also directly impacting prices for existing Soviet-era apartments. For the last two months, a local employee has called several real estate agents and searched advertisements for a small two-bedroom apartment in one of the old buildings. She learned that apartments valued at $20,000 to $25,000 two months ago are now priced at $30,000-$35,000. One real estate agent that she spoke with suggested she wait until next year to buy an apartment, when national currency re-denomination occurs, hoping real estate prices will fall. ¶9. (SBU) COMMENT: The price tag on an elite apartment is in no way commensurate with the earnings of an average citizen, suggesting that a very significant percentage of Turkmenistan's economy is gray. The housing sector illustrates the toxic brew of command economy and corruption. All new apartment buildings are financed and built by government ministries and agencies. There is no housing project we are aware of that is private-sector investment. Turkish contractors and diplomats have told us the over-invoicing, corner-cutting, and off-takes for each individual building can be as much as 30%. And that's only the first step in a long and corrosive chain of corruption. The government of Turkmenistan is engaged in economic reform and moving toward a market economy, but in reality these goals will be met neither quickly nor easily. END COMMENT. HOAGLAND