TURKMENISTAN: WHY DEPARTMENT OF TREASURY SHOULD

UNCLAS SECTION 01 OF 03 ASHGABAT 000098 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/CEN AND EEB TREASURY FOR JEFFREY BAKER AND TOM LANIER E.O. 12958: N/A TAGS: PREL ECON EAID EFIN EINV TX SUBJECT: TURKMENISTAN: WHY DEPARTMENT OF TREASURY SHOULD BECOME INVOLVED REF: A. 07 ASHGABAT 0975 ¶B. 07 ASHGABAT 1124 ¶C. 07 ASHGABAT 1230 ¶D. 07 ASHGABAT 1403 ¶E. ASHGABAT 0060 ¶F. 07 ASHGABAT 1308 ¶G. 07 ASHGABAT 1129 ¶H. ASHGABAT 0076 ¶I. 07 ASHGABAT 1239 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: In response to strong encouragement from the West and international financial institutions, the Government of Turkmenistan is finally beginning to pursue a much-needed course of economic and financial reform. President Gurbanguly Berdimuhamedov has shown he is committed to this course and is ordering at-times reluctant officials to move forward as quickly as possible. However, Turkmenistan's officials -- while well-meaning -- have already demonstrated that they, in many cases, lack the capacity to implement potentially complex reforms, and why they should not necessarily "move forward quickly." It is clear that Turkmenistan needs the assistance of the donor community in this process. While EU-Tacis, the World Bank, UNDP, IMF, and USAID are responding to this need, the Embassy also believes that the stakes are high enough -- and the need great enough -- for Department of Treasury involvement as well. A visit by a narrowly focused Treasury assessment team that could spend time at the expert level (more than one day) discussing and agreeing on areas where Treasury assistance might be most needed would be a useful next step. END SUMMARY. ¶3. (SBU) Almost a year ago, Turkmenistan's new president, Gurbanguly Berdimuhamedov, made a commitment to U.S. officials -- and to his own people -- to begin reforming his country, including in the economic, financial, and commercial sectors. While it was not clear how quickly or how far the president would be willing to take reform efforts, the United States government reached a consensus that there are compelling strategic reasons to assist Turkmenistan in its efforts to transform: Turkmenistan is a hydrocarbon-rich state that shares borders with Iran and Afghanistan. It occupies a strategic location in the War on Terrorism and has provided critical support for Operation Enduring Freedom by granting overflight rights to humanitarian airfcraft. Commercially, Turkmenistan's hydrocarbons revenue could make it a lucrative new market for U.S. business, if it improves its dismal foreign investment climate. However, maintaining Turkmenistan's economic stability while encouraging and promoting its transformation to a more market-oriented economy remains a top priority. ¶4. (SBU) Largely in response to Berdimuhamedov's commitment, two Department of Treasury officials visited Ashgabat September 10, 2007, to explore areas where Treasury assistance might be helpful (ref A). While their talks revealed a number of areas where fiscal policy reform was needed and Treasury assistance could be valuable, the Treasury delegation left Turkmenistan uncertain that the will exists within the government to begin implementing reform. The group's meeting with the Central Bank Governor, Geldimurat Abilov, was especially discouraging, with Abilov resisting advice to unify the dual exchange rate and aggressively defending Turkmenistan's extensive system of subsidies. THE PRESIDENT RESOLVES TO BEGIN REFORMS ASHGABAT 00000098 002 OF 003 ¶5. (SBU) That situation has already begun to change. President Berdimuhamedov has made attracting foreign business investment, especially in the hydrocarbon and construction sectors, a cornerstone of his development policy. However, it took his trips to New York in September 2007 and to Brussels in October, as well as the visits of a number of influential international financial institutions throughout the fall, to spur him to action. The message he heard in all his meetings -- that reform is a prerequisite for Turkmenistan's economic development and for attracting outside investment -- seems to have convinced him of the need to act. ¶6. (SBU) Since October, the president has ordered a number of new measures. These include introduction in 2009 of new currency (Ref B.),and unification of the currency exchange rate (Refs. C, D, and E). He is calling on the banking sector to support private sector development by issuing more loans, ordering an increased number of automatic teller machines (ATMs),and calling on banks to work to determine the value of ruble deposits that had been made before the introduction of the manat (all discussed ref F). The president is beginning to stress the need for greater professionalism within banks -- he fired two bank chairmen for incompetence. In addition, he has put the individual the Embassy had identified as the Ministry of Economy and Finance's most impressive and dynamic deputy minister -- Tuvakmammet Japarov -- in charge of the Supreme Auditing Chamber, greatly increasing the credibility and activism of this Government Accountability Office-like body. The president has ordered the Mejlis (Parliament) to speed up efforts to overhaul legislation, reportedly including a number of laws that could improve the investment climate. EU-Tacis has been told Turkmenistan hopes to finalize an international arbitration law soon and could ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) by March 2008 (ref G). Most recently, the president has also approved a move that could be a first step toward phasing out gasoline subsidies (ref H). EVEN REFORM-ADVERSE OFFICIALS MUST SIGN ONTO THE PROGRAM ¶7. (SBU) It is clear that not all officials uniformly support the president's reform agenda. Post has found support for change among Central Bank officials below Abilov, for example, while Abilov himself seems to be reform-adverse. With the president driving the changes, however, even unenthusiastic officials are being forced to sign onto the reform program or risk being fired for incompetence or insubordination. BUT HAVE SOUGHT TO DO SO IN A DO-IT-YOURSELF WAY ¶8. (SBU) Unfortunately, although the president has called on economic and financial agencies to work closely with experts and international financial institutions to implement these measures safely, there has been up to now a mindset that Turkmenistan should "consult" with would-be donors, but then seek to implement programs in its own way. This way of thinking has been especially prevalent in those sectors where donor assistance has yet to be locked in place. And, while there are good, capable, well-meaning people in Turkmenistan's legislative, economic, and finance sectors, there are not enough with sufficient knowledge of international best practices to prevent the government from implementing changes that do not actually improve the situation. ¶9. (SBU) The danger of Turkmenistan's do-it-yourself ASHGABAT 00000098 003 OF 003 approach is that things could go badly wrong. One such example is an apparent early effort in November to begin merging the official and unofficial exchange rates (ref I) that was insufficiently thought out. The move spurred speculation and created a run to change dollars to manat that left the dollar at half its previous value against the manat in a matter of hours, and ended up hurting many panicked citizens, who decided to convert their dollar savings into manats and pay off loans at what turned out to be a substantially below-par exchange rate. Unless the just-announced measure to establish a quota-based fuel-distribution system is implemented very carefully, it will further stoke the inflation which has become an increasingly painful reality here and will lead to further corruption. The potential for a destabilizing disaster will increase as Turkmenistan seeks to increase the number of reforms that it is juggling. THE ARGUMENT FOR U.S. INVOLVEMENT ¶10. (SBU) Despite Turkmenistan's preference to manage its reform process on its own, officials' attitudes seem to be changing, and donors have been making progress in gaining agreement to implement those programs. EU-Tacis, the World Bank, UNDP, and USAID, among others, are beginning to respond to this new spirit of cooperation by bringing new assistance programs. Treasury can bring valuable skills in a number of areas of need to Turkmenistan, including budget, monetary and pension reform, anti-money laundering capacity building, development of a government debt strategy, and issuance of government securities. Many donors have also suggested that the long-term (or even long TDY) assignment of an experienced Treasury official to work as an advisor at one of the three agencies -- the Central Bank, Ministry of Economy and Finance and/or the Mejlis (Parliament) -- central to Turkmenistan's economic transformation would offer the U.S. government a better chance to survey the overall situation, overcome suspicion, influence policy-making at an earlier stage, and more efficiently target training and assistance. Although some in the government might be reluctant to agree to such a program (some might argue against having a "spy" in their midst),President Berdimuhamedov might agree to such a proposal on a trial basis if asked, and this could offer a foot in the door for the program's subsequent expansion. ¶11. (SBU) Of course, any Treasury programs would need to be complementary to, rather than duplicative of, existing and planned programs. In particular, USAID hopes to introduce a new regional program this year, known as Economic Reforms to Enhance Competitiveness, focused on strengthening institutional capacity for fiscal management and regulatory and oversight capacity. Yet all agree there is more work than can be handled by the handful of donors currently here, and Treasury's acknowledged reputation in the region for assisting with economic transitions could make it an invaluable partner in the reform process. ¶12. (SBU) COMMENT: With compelling U.S. interests arguing in favor of assisting Turkmenistan with its reform process and Turkmenistan's government now increasingly focused on promoting economic change, post believes that now is a good time to reexamine the possibility of Treasury involvement. A visit by a narrowly focused Treasury assessment team that could spend considerably more time at the expert level discussing and agreeing on areas where Treasury assistance might be most needed would be a useful next step. END COMMENT. HOAGLAND