SOME INSIGHTS INTO HOW TURKMENISTAN SUPPORTS THE

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000849

SIPDIS

STATE FOR SCA/CEN, EEB

E.O. 12958: DECL: 07/06/2019
TAGS: PGOV PREL EFIN EIND TX RU PK CH IR
SUBJECT: SOME INSIGHTS INTO HOW TURKMENISTAN SUPPORTS THE
MANAT

REF: A. ASHGABAT 619

B. ASHGABAT 462

Classified By: Charge Richard Miles, reasons 1.4 (B) and (D).


1. (SBU) SUMMARY: The cost of living in Turkmenistan has
risen dramatically since exchange rate unification and
redenomination, without an improvement in the standard of
living. According to the International Monetary Fund and
financial experts in Ashgabat, the Turkmen manat is strong
due to a huge trade surplus, which is impossible to estimate
because so few contracts have Letters of Credit from
international banks. These financial experts say that the
country will likely review the exchange rate and spending at
the end of 2009. Turkmenistan is for the first time taking
out loans from international financial institutions, which
could point to some need for cash. However, another source
says that Turkmenistan holds 120 percent of its Gross
Domestic Product in foreign currency reserves, which makes it
possible for Turkmenistan to continue spending at current
levels indefinitely. The many variables -- and lack of
information flow -- make predictions almost impossible at
this time, but provide context for what could happen in the
next six months. END SUMMARY.

HUGE EXPORT SURPLUS MAKES MANAT VERY STRONG


2. (C) Since exchange rate unification and redenomination,
the cost of living in Turkmenistan has noticeably risen and
the manat is stronger, but the quality of life has remained
the same. 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 Turkmenistan's
huge export surplus -- due to billions in annual oil and gas
exports -- has resulted in a very strong manat. Members of
the International Monetary Fund's Article IV Review Mission
agreed with this in May 2009, and stated that Turkmenistan
may have to further strengthen the manat due to the strength
of the oil and gas sector (Ref A). However, Khan guessed
that a managed flow exchange rate would result in a rate of
four or five manat for one dollar. He also said that the
official inflation rate is 12 or 13 percent, but estimates
the actual inflation rate at 36 or 37 percent.

NATIONAL TRADE LEVEL UNKNOWN


3. (C) Various interlocutors agreed in meetings on June 23
and 24 that the government seems to be propping up the manat
against the dollar by spending money from its foreign
currency reserves, but no one could estimate how much money
Turkmenistan is spending to prop up the rate. One method of
estimating reserves and cash flow is based on estimated
national trade flows. National Bank of Pakistan's Khan
explained that statisticians can usually estimate national
trade levels by adding together the value of transactions
cited on Letters of Credit. However, he explained, the
Central Bank of Turkmenistan handles financial arrangements
for government contracts, and very few entities conduct trade
in Turkmenistan using Letters of Credit -- therefore, trade
flow information is kept from the private banking industry
and no one knows for sure what Turkmenistan's trade levels
are.

WHEN WILL TURKMENISTAN BE FORCED TO CUT BACK SPENDING?


4. (C) With the curtailment of gas exports to Russia (Ref
B),little revenue is flowing into Turkmenistan. The
National Bank of Pakistan representatives and Ovezmurad
Agayev of Deloitte Tax's office in Turkmenistan believe that
Turkmenistan may review its support of the fixed exchange
rate and spending habits, in light of the reduction of gas
flows to Russia, at the end of 2009. Factors include
possible resumption of gas exports to Russia, assuming that
Turkmenistan's receivables increase to former levels.

ASHGABAT 00000849 002 OF 002


National Bank of Pakistan's Khan added that this is logical
timing for a rate review because every country reviews
receivables and deliverables at the end of its fiscal year.
He noted that an increase of certain imports -- especially
consumer products, automobiles, construction materials,
investment in capital projects, recently-announced Belarusian
deals worth $30-40 million, and investment from Iranian
construction companies for projects in the Avaza Tourist Zone
-- may have some but not a complete equalizing effect on the
trade balance, and could necessitate a review of the exchange
rate. Deloitte's Agayev said that Turkmenistan continues to
receive some income from its export of gas to Iran. Still,
that amounts to only about ten percent of the total volume of
gas that was exported prior to the gas pipeline explosion.
Agayev agreed that Turkmenistan may try to wait out a cash
shortage until the end of the year, pointing out that gas
should begin flowing to China at that time.

EBRD'S VIEW


5. (C) Head of the European Bank for Reconstruction and
Development's Resident Office in Ashgabat Neil McKain said on
July 2 that Turkmenistan holds 125 percent of its Gross
Domestic Product in foreign currency reserves, adding that no
other country in the world can boast of this. Given these
reserves, the country can hold onto current spending levels
for quite a long time. He suggested that government
officials are concerned about their reliance on Russia and
see the benefits of improving relations with other countries,
hence Foreign Minister Meredov's visit to Washington on June
22-23 and other visits to Brussels.

POTENTIAL DANGER SIGNS: FIRST LOAN, SLOWING DOWN AT AVAZA


6. (C) Agayev noted that Turkmenistan is for the first time
borrowing money from a foreign lender: USD four billion from
China to develop onshore fields in Yolotan -- which may
include a clause for the use of Chinese equipment -- but
could also be a warning sign of a shortage of foreign
reserves. Turkmenistan Airlines employees have informed
Boeing Sales Representative Serdar Gurz that the airline has
not signed a contract for new aircraft, pending since March,
because it is waiting for an influx of money from an Islamic
Development Bank loan. Agayev hypothesized that the
government might be stalling development of the Avaza Tourism
Zone because of a cash shortage: the government recently
signed only three contracts for Avaza projects and is behind
on the development of the area. Anecdotal evidence also
points to cash flow problems: Kekilova mentioned that her
husband had to leave his job at a local construction company,
because the government is behind on making payments, and the
company owed him three months in back pay. (NOTE: Post has
regularly heard for the past year that Turkmenistan is behind
on payments for a variety of construction projects, such that
this is the norm rather than the exception. END NOTE.)


7. (C) COMMENT: Khan's judgment that a floating manat would
be much less strong than the fixed rate was most likely based
on the premise that consumer confidence also plays a role in
exchange rates, regardless of Turkmenistan's ability to prop
the manat using foreign currency reserves. It is too early
to predict how much gas Turkmenistan will be able to send to
China at the end of 2009 -- if, of course, the pipeline is
ready and functional at that time. Even a trickle of gas
flowing would increase receivables, which the government
would welcome. However, the many variables -- and lack of
information flow -- make predictions almost impossible at
this time. END COMMENT.
MILES