TURKMENISTAN: EXCHANGE RATE ILLUSTRATES

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000847 SIPDIS STATE FOR SCA/CEN, EEB E.O. 12958: DECL: 07/06/2019 TAGS: PGOV PREL EFIN AORC TX SUBJECT: TURKMENISTAN: EXCHANGE RATE ILLUSTRATES CORRUPTION PROBLEM IN FINANCIAL SECTOR REF: A. 08 ASHGABAT 523 ¶B. ASHGABAT 17 Classified By: Charge Richard Miles, reasons 1.4 (B) and (D). ¶1. (SBU) SUMMARY: Significant aspects of the dual exchange rate system that existed in Turkmenistan until May 2008 remain a mystery. While people knew that someone or some people profited handsomely from the system, it was not clear who the beneficiaries were. After exchange rate unification, it appeared that the system was gone for good. Recently, however, a source disclosed that government agencies are in fact still using a more attractive exchange rate for official business and paying for gas using the former price. This illustrates Turkmenistan's inclination to maintain the status quo and resist change. Substantial reform will come very slowly as the country holds on to outdated and inefficient practices. END SUMMARY. BACKGROUND ON TURKMENISTAN'S FORMER DUAL EXCHANGE RATE ¶2. (C) The strength of Turkmenistan's currency is tied to revenues generated from the country's large oil and gas deposits, which also support economic activity such as large-scale, prestige-driven construction projects. Until exchange rates were unified by decree in May 2008, the country benefited from its dual exchange rate system by forcing companies to exchange currency at a rate five times lower than was available on the street at unofficial, but tolerated, currency exchange points. How this system worked and why it existed remains largely a mystery, but rumors swirled that the Central Bank -- or personnel within -- profited. In a meeting on June 24, Aina Kekilova of the Asian Development Bank said that a reliable source told her that, under the dual rate system, officials from the Central Bank or other state banks were directly involved in distributing manat by car on a daily basis to the unofficial points. CENTRAL BANK NOT BENEFITING FROM FIXED EXCHANGE RATE ¶3. (C) Today the unified exchange rate remains fixed at 2.85 DTM (denominated manat, the rate in effect since January 2009) per dollar. National Bank of Pakistan General Manager ¶M. Rizwan Khan and Assistant Vice Presidents Asim Nazir and Jamal Malik said in a meeting on June 23 that they do not know who or which government organizations control Turkmenistan's fixed exchange rate. In Khan's opinion, the Central Bank is not benefiting from this manipulation today. When rumors about another exchange rate change swirled around Ashgabat on April 1, Khan said that Central Bank Chairman Geoklenov insisted (during in-person visits to banks) that the banks re-open their exchange booths. (NOTE: Usually rumors about an exchange rate change provoke crowds of people on the streets who seek to exchange all of their manat into dollars, or vice versa. Currency exchange points close in reaction to massive crowds. END NOTE.) This convinced Khan that the Central Bank did not profit from manipulation of the exchange rate. Khan also recalled previous official announcements on Turkmen television and in newspapers made on April 30, 2008, the eve of rate unification, that stated the exchange rate would remain at 14,250 TM per dollar, the purpose of which was to quell fears and any possibility of flooding currency exchange points (Ref A). This suggested to Khan that the Central Bank was determined to avoid public disturbances that could arise from abrupt changes to the exchange rate and that the Bank is not involved in profiteering from ambiguity in the exchange rate system. (NOTE: The exchange rate did remain at this level -- as the government promised and despite periodic rumors -- until redenomination on January 1, 2009 (Ref B). END NOTE.) While the interlocutors expressed the opinion that someone or some people are benefiting from rumors of exchange rate changes, they did not know who that person or people are. ASHGABAT 00000847 002 OF 002 OFFICIAL FIXED EXCHANGE RATE -- BUT GOVERNMENT STILL USES A SECOND RATE ¶4. (C) Ministries may be benefiting from the continuation of a dual exchange rate. Although officially unacknowledged, Kekilova has heard rumors about the existence of a second rate for official government agencies, which is used to make official payments for construction projects. In addition, a driver at the Ministry of Oil and Gas told her that the gas price for official vehicles remains at the former subsidized price, ranging from 0.06-0.08 DTM per liter (i.e, approximately 8 - 11 cents/gallon) depending on the quality. The current public price is 0.62 DTM per liter (approximately 88 cents/gallon) and has been in effect since January 2008. UNOFFICIAL EXCHANGE POINTS AND THE BLACK MARKET THAT DOESN'T (YET) EXIST ¶5. (C) The interlocutors are not aware of the existence of any traditional black market for currency exchange since the January 2009 redenomination. However, a group of Turkmen women consistently provide currency exchange services -- at very close to official rates -- on sidewalks around the Russian Bazaar in downtown Ashgabat. Deloitte Tax representative Ovez Agayev observed that the ladies seem more interested in buying dollars than manat, and thinks that it is possible that they work on behalf of large businesses that want to get rid of manat and keep reserves in dollars. Agayev mentioned that the government has not yet set threshold limits necessitating mandatory documentation of currency exchange transactions for the recently-adopted anti-money laundering law. He said that if the government sets limits that are too low, a black market could develop since money launderers will need to find alternative locations where they can exchange large amounts of money without attracting unwanted attention. Before the exchange rate unification, we heard that the women who exchanged manat near the Embassy, received their daily supply of manat from the Central Bank. ¶6. (C) COMMENT: It is a troubling sign that corruption appears to be almost impossible to root out of this system, and that individuals can always find a way to make illicit profits. The possibility of a second exchange rate still in use by government agencies illustrates Turkmenistan's tendency to maintain the status quo and resistance to change, stemming from isolation, lack of knowledge, and lack of will to allow massive technical assistance that would bring the kind of information to Turkmenistan that donors have offered to the government for years. As long as the country holds onto outdated and inefficient habits, substantial reform will come very slowly. END COMMENT. MILES