REDENOMINATION OF NATIONAL CURRENCY IN TURKMENISTAN

UNCLAS SECTION 01 OF 03 ASHGABAT 000017 SENSITIVE SIPDIS STATE FOR SCA/CEN STATE FOR NEA/SCA/EX, OBO/OM/AM/SCA, SCA/CEN BANGKOK FOR USDO E.O. 12958: N/A TAGS: PGOV ECON EFIN AMGT AFIN TX SUBJECT: REDENOMINATION OF NATIONAL CURRENCY IN TURKMENISTAN REF: (A) 08 ASHGABAT 1083 (B) 08 ASHGABAT 551 ¶1. (SBU) SUMMARY: On January 1, 2009 the Government of Turkmenistan began a redenomination of its national currency, the Manat (TM). The new currency, or Denominated Turkmen Manat (DTM),maintains the U.S. dollar exchange rate established in the summer of 2008 (Ref. A). Current USD-TM exchange rates are as follows: 1 USD = 14,250 TM, 1 USD = 2.85 DTM. Both currencies are to remain in circulation until January 1, 2010. All vendors, both government and independent, appear to accept either currency. One source said that the government distributed 30-35 million DTM in preparation for the rollout of the new currency. While it is still too early to asses the true effect of the redenomination on the local economy, Post expects short-term inflationary pressure to impact its already tight operating budget. END SUMMARY. TWO CURRENCIES IN CIRCULATION ¶2. (SBU) On January 1, 2009 the Government of Turkmenistan began a redenomination of its national currency, the Turkmen Manat (TM). The new currency, or Denominated Turkmen Manat (DTM),maintains the U.S. dollar exchange rate established in the summer of 2008 (1 USD = 14,250 TM, 1 USD = 2.85 DTM). Both currencies are to remain in circulation until January 1, 2010. Contrary to generally accepted redenomination practice, Turkmenistan did not simply drop zeros from its currency and reprint. Instead, under the new system 1 TM in the new currency is equal to 5,000 TM in the old currency. ¶3. (SBU) The new currency notes are issued in seven denominations: 1, 5, 10, 20, 50, 100, and 500 Manat. The new coin denominations are: 1, 2, 5, 10, 20, and 50 tenge. As opposed to the old bills, all of which portrayed the now diseased "President for Life" and "Father of All Turkmen" Saparmurat Niyazov Turkmenbashy, the new bills depict various national heroes. Only the largest denomination, 500 Manat, still carries the portrait of Turkmenbashy. IMPLEMENTATION ON THE GROUND ¶4. (SBU) An Embassy employee noted on January 6 that various exchange points in Ashgabat exchanged 2.8429 DTM for $1. These exchange points will not give old Manat in exchange for dollars, or old Manat for new Manat -- but will accept old Manat if the customer wants to buy dollars. The exchange points all made available to clients free brochures with full-color portrayals of the new bills and coins -- and including an explanation of the old-to-new Manat exchange rate -- under the official redenomination slogan "New Manat, New Life." THE REALITY IN BAZAARS: ROLLING OUT AS PLANNED ¶5. (SBU) Items for sale in bazaars are marked with two price tags, in TM and DTM. Vendors are quoting prices in TM when asked for a price, but are accepting both TM and DTM and give change in either TM or DTM, depending on the customer's preference and the vendor's DTM availability. Small privately-owned kiosks are currently displaying prices in TM only, but will accept payment in DTM. These kiosks do not all have a sufficient supply of DTM on hand in order to give change yet. MODES OF PUBLIC TRANSPORTATION ACCEPT BOTH CURRENCIES, TOO ¶6. (SBU) Tickets for all modes of public transportation, including buses, trains, and airplanes are marked in TM and DTM and payment is accepted in either currency. Many Turkmen visited exchange points around the city in the two weeks leading up to January 1, with the goal of exchanging TM for dollars, apparently believing that keeping money in dollars was more secure than TM. As of January 6, private taxi drivers prefer to charge clients in TM but will accept DTM when asked. ASHGABAT 00000017 002 OF 003 GOVERNMENT MAKES SOCIAL PAYMENTS IN NEW CURRENCY ¶7. (SBU) Locally engaged staff at Post report that all government agencies paid wages, pensions, stipends, and other social payments for the months of December in DTM, beginning January 1, 2009. SOME COMPLICATIONS BUT LOCAL EXPERT SAYS IT'S "NORMAL" ¶8. (SBU) A member of the international financial community in Ashgabat said that his offices worked through the New Year's holiday weekend in order to be prepared to open for business on January 4. He noted that although the government distributed 30-35 million DTM to government shops in preparation for redenomination, a lack of sufficient supply of tenge coins has forced consumers to either leave a store without the change or to buy small unwanted objects (such as chewing gum). This expert predicted that both currencies will remain in circulation throughout 2009 as the presidential decree mandates. Nevertheless, he claimed that the government has accepted, in theory, his suggestion that it remove old currency from circulation as soon as possible. In general, he felt that the transition has been smooth, apart from some confusion on prices when cashiers have to convert from DTM to TM in shops, which he called "normal." He also predicted that the government may adjust the DTM-dollar exchange rate in the next few months, to an even 2 or 3 DTM per $1. He noted that Turkmen government employees are expecting that the President will announce a new salary raise package soon. OLD CURRENCY PROBLEMS ¶9. (SBU) Turkmenistan remains a cash only society. The country's still underdeveloped banking system does not yet share the full faith and trust of the majority of the citizenry. Most local nationals do not have bank accounts or credit cards. Antiquated and sometimes capricious banking laws and regulations discourage the use of local bank accounts by business. Prior to the redenomination, Manat were issued in paper notes and coins, with the largest available being the 10,000 TM printed note. The old currency exchange rate is 1 USD to 14,215 TM, meaning that the largest bill circulating in the old currency is equal to 0.70 USD. With the old currency, even small purchases require literal piles of notes. Larger purchases and regular or reoccurring business expenses are impossible to conduct in old Manat, necessitating the routine use of U.S. dollars by all businesses and government agencies. IMPACT ON POST OPERATIONS ¶10. (SBU) Although the prospect of no longer carrying large bags of money to the market appears appealing, there is widespread anxiety over the implementation of the redenomination and the potential for inflation. LE Staff, vendors, and contractors have all expressed a fear that the nonstandard conversion rate will lead to confusion at the cash register and in the bazaars, creating an opportunity for cheating customers. Such behavior would only add to an already inflationary economic climate where vendors and contractors routinely approach Post's Procurement Unit to renegotiate or unilaterally raise prices, despite valid contracts and agreements. ¶11. (SBU) COMMENT: Under the most transparent of conditions, redenominations are difficult to implement, often resulting in significant short-term inflation. The international financial expert Post spoke with said that effects of the new currency on the inflation rate will be known in 15-20 days. Given the Government of Turkmenistan's decision to complicate the redenomination process by not simply dropping zeros, and the likelihood of inflation, Post management expects pressure to renegotiate contracts with local vendors and landlords to increase. Previous periods of sharp inflation surrounding moments of uncertainty in the local currency (Ref. B) have shown that vendors and landlords have little respect ASHGABAT 00000017 003 OF 003 for agreements. As Post has little realistic recourse through the local justice system and few options in Turkmenistan's limited marketplace, it is likely that we will be forced to acquiesce to vendor demands. END COMMENT. MILES