TURKMENISTAN 2010 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 14 ASHGABAT 000045

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SUBJECT: TURKMENISTAN 2010 INVESTMENT CLIMATE STATEMENT

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1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) The following is Post's 2010 Investment Climate
Statement for Turkmenistan.

OPENNESS TO FOREIGN INVESTMENT

Turkmenistan is relatively large (slightly larger than
California),but sparsely inhabited (about five million),
with abundant hydrocarbon resources. The government
regularly announces its desire to attract more foreign
investment, but tight state control of the economy, the slow
pace of economic reform, and a restrictive visa regime have
hindered the creation of an attractive foreign investment
climate. Historically, the most promising areas for
investment are in the oil and gas, agricultural and
construction sectors. As a result of President Gurbanguly
Berdimuhamedov's policy of providing "Internet access to
every home, school and kindergarten," the visibility of
Turkmenistan's communication sector has also risen. Even in
these areas, companies must conduct extensive due diligence.
President Berdimuhamedov has expressed his intent to improve
investment conditions, and since the beginning of 2008, the
Government of Turkmenistan (GOTX) has adopted legal reforms
on foreign investment and licensing. Nevertheless, the lack
of established rule of law, inconsistent regulatory
practices, and unfamiliarity with international business
norms are major disincentives to foreign investment.

Turkmenistan's economy depends heavily on production of
natural gas, oil, petrochemicals and, to a lesser degree,
cotton and textiles. The country remains one of the largest
gas producers among the former Soviet republics. All other
existing industrial production, with the exception of food
processing, needs substantial investment. The country's key
industries are still state-owned. According to independent
estimates (European Bank of Reconstruction and Development
(EBRD) Transition Report 2009),the private-sector share of
GDP in 2008 was 25 percent, mostly concentrated in retail
trade, services and food processing.

The top economic development priority of the Government of
Turkmenistan since independence in 1991 has been
self-sufficiency in food supplies and an increase in
import-substituting production using hydrocarbon revenues.
Other industries where the government has been most receptive
to foreign investment are textile and communications, which
acutely need modern technology, knowledge of international
markets and experience in international business practices.
All investment proposals are screened for compliance with
these government priorities. The national program entitled
"Economic, Political and Cultural Development Strategy for
Turkmenistan to 2020" specifies government plans for the
petroleum, chemical, power generation, mining, metallurgy,
textile, construction, agriculture, transportation,
communication and other industries. In October 2006,
Turkmenistan adopted the Oil and Gas Development Plan for
2007-2030.

Turkmenistan currently has a closed investment climate.
Decisions to allow foreign investment are politically driven;
companies from "friendly" countries are more successful in
winning tenders and signing contracts. In this environment,
where the government selectively chooses its investment
partners, a strong relationship with the government is
essential. Often, government officials expect personal gain
for allowing or helping foreign investors enter the local
market. One way to penetrate the market has been to work

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through established foreign businessmen, who arrange deals
through their personal relationship with top leaders, or to
secure the advocacy of high-ranking foreign government
officials in a bilateral context.

Since independence, Turkmenistan has accepted financing from
IFIs for a variety of projects. In 2009, the GOTX accepted a
loan reported at $4 billion from the Chinese Development Bank
and significantly smaller loans for transportation and
communication from the Chinese Export-Import Bank. The GOTX
also accepted a $1 billion dollar loan from the Islamic
Development Bank for road and social infrastructure
construction projects.

Incoming foreign investment is regulated by the Law on
Foreign Investment (last amended in 2008),the Law on
Investments (last amended in 1993) and the Law on
Corporations of 1999, with respect to start-up corporations,
acquisitions, mergers and takeovers of corporations.
Foreign-investment activities are affected by appropriate
bilateral or multilateral investment treaties, the Law on
Enterprises of 2000, the Law on Business Activities (last
amended in 2008),and the Land Code approved in 2004.
Foreign investment in the oil and gas sectors is subject to
the 2008 Petroleum Law. The Tax Code provides the legal
framework for the taxation of foreign investment. The 2000
Civil Code defines what constitutes a legal entity in
Turkmenistan, as well as requirements for registration. Much
foreign investment is governed by project-specific
presidential resolutions, which may grant privileges not
provided by the general legislation.

Legally, there are no limits on foreign ownership or control
of companies. In practice, the government has allowed
fully-owned foreign operations only in the oil sector and, in
one case, in cellular communications (MTS of Russia). There
are various ways for the government to discriminate against
disfavored foreign as well as domestic investors: excessive
tax examinations, license extension denial, and customs
clearance and visa issuance obstacles. Since 2008, a Western
energy company has had difficulty getting Turkmen visas for
its employees, after the GOTX publicly complained about the
energy company's purchase of a smaller foreign firm with
operations in Turkmenistan. The Western energy company
reportedly failed to consult with the GOTX prior to the
acquisition, which involved an existing production sharing
agreement for natural gas development with the GOTX.

In most cases, the government has insisted on maintaining a
majority interest in any joint venture (JV). Foreign
investors have been reluctant to enter JVs controlled by the
government, as a result of competing business cultures and
conflicting management styles. Foreign investors may only
sell shares or divest with government permission, although
there is no specific legislation. A Western soft drink
company has been in Turkmenistan since the mid 1990s in a JV
with the government, and reported that business has greatly
improved in 2009.

Government efforts since 1991 to privatize former state
enterprises have attracted little foreign investment.
Privatization has been limited to the service and trade
sectors, with most industry still in state hands. Out-dated
technology, poor business structures, and governmental
obstacles make privatized firms unattractive as outright
purchases for foreign investors. To date, government
privatization efforts have also been counteracted by
lingering prejudice against the private sector. In cases

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where there is income potential, the government has been
quick to crowd out the private sector as a competitor.
Despite official comments regarding the priority of the
growth of the private sector, privatization is low on the
government's agenda.

All land is government-owned. Neither domestic nor foreign
businesses can receive long-term land-use rights for
"non-agricultural" purposes. Private citizens have land
rights under specific circumstances. However, these rights
exclude the sale or mortgage of land. Land rights can only
be transferred through inheritance. Foreign companies or
individuals are permitted to lease land for non-agricultural
purposes, but only the president has the authority to grant
the lease.

The government has attempted to introduce an element of
competition for state contracts by announcing international
tenders for some projects. Often these projects are
politically motivated and/or economically unsound, and the
tender process is badly managed and nontransparent, untimely,
ill-prepared, or inaccessible. Following the president's
announcement of a potential project, interested foreign
investors and/or suppliers often contact the relevant
government agency directly in case the tender is not
announced publicly. There is one case of a U.S. company
being told it was awarded a tender, investing in initial
project design, and then being informed the government was
considering other options. The tender was offered a second
time, and the contract was awarded to a new company at double
the U.S. company's tender price. Investors should always put
agreed upon terms in writing and never act on verbal promises.

Turkmenistan signed a Trade and Investment Framework
Agreement (TIFA) with the United States, Kazakhstan,
Tajikistan, Kyrgyzstan, and Uzbekistan on June 1, 2004. In
October 2009, the Turkmen Minister of Economy and Development
participated in the 4th round of the U.S.- Central Asia TIFA
Council meeting held in Washington D.C. The TIFA established
a regional forum to discuss ways to improve investment
climates and expand trade within Central Asia. However, the
GOTX does not actively engage in regional efforts aimed at
boosting investment projects. Turkmenistan does sell
electricity to Afghanistan at subsidized rates.

In November 2009, GOTX officials reported that foreign direct
investment (FDI) during the first nine months of 2009
exceeded $1.8 billion. The EBRD Transition Report 2009
projected net FDI for 2009 to total almost $1.3 billion, per
statistics furnished by Turkmenistan's State Statistics
Committee.

CONVERSION AND TRANSFER POLICIES

The Government of Turkmenistan maintains tight control over
the country's main foreign-exchange flows. On May 1, 2008,
the government introduced a single exchange rate, which
remained fixed at 14,250 Turkmen Manat (TM) per $1 until
January 1, 2009, when it introduced redenominated manat
(Denominated Turkmen Manat, or DTM) at 2.85 manat per $1.
The government also opened more than 100 exchange points all
over the country in May 2008. The GOTX allowed "old" manat
to remain a usable currency until January 1, 2010. Foreign
bankers considered the unified exchange rate and expansion of
currency exchange points modest steps towards overall
liberalization of the foreign exchange market. An unofficial
exchange market still operates on a very small scale, and
provides exchanges at rates that are very close to official

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rates. The current unofficial exchange rate is 2.842 DTM per
$1. The Central Bank controls the fixed rate by releasing
U.S. dollars into the official and unofficial (but legal)
exchange markets. New foreign exchange regulations in June
2008 allow the Central Bank to provide banks with ready
access to foreign exchange. These regulations also allowed
commercial banks to open correspondent accounts. Along with
exchange rate unification on May 1,2008, limits on foreign
exchange transactions were officially lifted.

Oil producers operate under the Petroleum Law and receive
their profit share in crude oil, which they ship by tankers
to other Caspian Sea littoral states or swap in Iran or
Persian Gulf countries. In many cases, investors in
petrochemicals have negotiated deals with the Government of
Turkmenistan to recoup their investment in the form of future
petroleum products. Foreign investors generating revenue in
foreign currency, such as textile factories, do not generally
have problems with repatriating their profits. However, some
foreign companies receiving income in local currency, such as
Coca-Cola, seek indirect ways to convert local currency to
hard currency through the purchase of petroleum and textile
products in manat for resale on the world market.

Turkmenistan imports the vast majority of its industrial
equipment and consumer goods. The government's
foreign-exchange reserves and foreign loans pay for this
industrial equipment and various investment projects. The
demand for hard currency in Turkmenistan's private retail
sector seems to be satisfied by the official and unofficial
but legal exchange markets.

EXPROPRIATION AND COMPENSATION

Turkmenistan's legislation does not provide for private
ownership of land, and thus allows the government to force
investors to vacate their land. Article 21 of the Investment
Law allows investors' property to be confiscated via an
official court decision. Although there have been no
reported expropriatory actions against foreign investors in
the last year, the Government of Turkmenistan has a history
of arbitrary expropriation of the property of local
businesses and individuals. Under the previous leadership,
the government often refused to pay any compensation, much
less fair market value, when exercising "the right of eminent
domain." However, during a March 2007 Cabinet of Ministers
meeting, current President Berdimuhamedov stated that
residents of affected apartments or houses would be provided
with alternative housing before their homes were demolished.
In 2007, neighbors who were promised housing six months after
their apartments were to be destroyed appealed to
international organizations in order to obtain new housing
immediately, and were given new apartments shortly
thereafter. In 2009, the GOTX ordered some residents to
vacate their homes in the Berzengi neighborhood of Ashgabat.
Property owners in this neighborhood reportedly have no right
to compensation for improvements since this area was
originally zoned for summer cottages and not for permanent
domiciles.

DISPUTE SETTLEMENT

Most contracts negotiated with the government have an
arbitration clause. Embassy strongly advises U.S. companies
to include an arbitration clause with a venue outside
Turkmenistan.

There have been several commercial disputes over the past few

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years involving U.S. and other foreign investors or
contractors in Turkmenistan, though not all the disputes were
filed with arbitration courts. Investment and commercial
disputes involving Turkmenistan have three common themes:
non-payment of debts, non-delivery of goods or services, and
contract renegotiations. The government may claim the
provider did not meet the terms of a contract as
justification for non-payment. Most disputes have centered
on the government's unwillingness to pay in hard currency as
contractually required. In cases where government entities
have not delivered goods or services, the government has
often ignored demands for delivery. Finally, a change in the
leadership of a government agency that signed the original
contract often triggers a government call to re-evaluate an
entire contract, including profit distribution, management
responsibilities and payment schedules.

A western oil and gas company and Turkmenneft, the
government-owned oil company, have been in litigation since

1996. Under the auspices of the International Chamber of
Commerce, in 2001 the western company was awarded of $495
million in damages. In spring 2006, the U.S. Court of
Appeals upheld the 2001 decision and bound the Government of
Turkmenistan to an arbitral award rendered by a tribunal
sitting in Houston, Texas, in favor of a foreign party
against State Concern Turkmenneft. In November 2006, the
U.S. Supreme Court denied Turkmenistan's petition for a writ
of certiorari; the award has not been paid.

Although Turkmenistan has adopted a number of laws designed
to regulate foreign investment, the laws have not been
consistently or effectively implemented. The concentration
of power in the office of the president has undermined the
rule of commercial law. Legislation is regularly made -- or
overturned -- by presidential decree. The Law on Foreign
Investment, as amended in 2008, is the primary legal
instrument defining the principles of investment. The law
also provides for protection of foreign investors. The
foreign investor is defined in the law as an entity owning a
minimum average of 20% of a company's assets during a
calendar year, unless the Cabinet of Ministers waives the
requirement.

The following is an ad hoc list of relevant legislation
regarding foreign investments:

-- All foreign and domestic companies and foreign investments
must be registered at the Ministry of Economy (MOE).
--The Petroleum Law (Law on Hydrocarbon Resources) regulates
offshore and onshore petroleum operations in Turkmenistan,
including petroleum licensing, taxation, accounting and other
rights and obligations of state agencies and foreign
partners. The Petroleum Law supersedes all other legislation
pertaining to petroleum activities, including the Tax Code.
-- According to the Land Code, foreign companies or
individuals are permitted to lease land for non-agricultural
purposes, but only the president has the authority to grant
the lease. Foreign companies may own real estate property
other than land.
-- Turkmenistan adopted a Bankruptcy Law in 1993.
-- Other laws affecting foreign investors include the Law on
Investments (last amended in 1993),the Law on Corporations
of 1999, the Law on Enterprises of 2000, the Law on Business
Activities (last amended in 1993),the Civil Code enforced
since 2000, and the Law on Property of 1993.

The commercial law enforcement system includes the
Arbitration Court of Turkmenistan (Arachy Kazyyet) which

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tries 13 categories of disputes, both pre-contractual and
post-contractual, including taxation, legal foundations and
bankruptcy issues. The court does not interfere in
enterprises' economic relations, but considers disputes by
request from either party involved. Appeals on decisions of
the Arbitration Court can be filed at the Arbitration
Committee of the Supreme Court of Turkmenistan.

Turkmenistan has not become a Party to the Convention on the
Settlement of Investment Disputes between States and
Nationals of Other States (also known as the Washington
Convention) or the New York Convention of 1958 on the
Recognition and Enforcement of Foreign Arbitral Awards or any
other internationally recognized arbitration agreement.

PERFORMANCE REQUIREMENTS/INCENTIVES

Foreign investors are more disadvantaged by higher tax rates
than most local companies. The Tax Code adopted in 2005 was
amended three times, in 2006, 2007 and 2008, but most tax
rates remained unchanged. The Value Added Tax (VAT) is 15
percent, an income tax of 8 percent is applied to JVs and an
income tax of 20 percent is applied to wholly-owned foreign
companies and state-owned enterprises. Dividends are taxed
at 15 percent. The personal income tax rate is 10 percent.
In 2005, the government of Turkmenistan amended the tax code,
giving more concessions to domestic private companies. The
Code exempted domestic private companies from the VAT and
property tax and reduced the income tax from 8 percent to 2
percent. In August 2006, Turkmenistan increased its excise
tax on imported beer (50 percent) and wine (100 percent).
Similar taxes on domestically produced beer and hard liquor
remain at previous rates: 10 percent and 15-40 percent
respectively.

In May 2007, Turkmenistan introduced the Awaza (or Avaza)
Tourist Zone (ATZ) to promote tourism development on the
Caspian Sea coast. Tax and other incentives are provided in
legislation passed on October 1, 2007, but only to those
willing to invest in construction of hotels and recreational
facilities. The amendments to the Tax Code passed on October
1, 2007, exempt construction and installation of tourist
facilities in the ATZ from the VAT. Various tourist
facilities services, including catering and accommodation,
are also VAT-exempt. Income tax on accommodation and
catering of tourist facilities will not be levied for the
first 15 years.

Equipment purchased by the investor as part of the registered
capital, other assets to be used in production, and personal
household effects of investors' employees are duty free.

In general, tax and investment incentives can be negotiated
on a case-by-case basis. The president has often issued
special decrees granting taxation exemptions and other
privileges to specific investors while recouping the initial
investment. Assets and property of foreign investors should
be insured with the State Insurance Company of Turkmenistan
(Article 53 of the Petroleum Law Article 3 of Insurance Law).
National accounting and financial reporting requirements
also apply to foreign investors. All contractors operating
in Turkmenistan for a period of at least 183 days a year must
register at the Main State Tax Service. There is a general
requirement for foreign investors that 70 percent of the
company's personnel be local. The government can make
exceptions for foreign construction companies executing
large-scale turnkey projects. Turkmenistan requires that all
export and import contracts and investment projects be

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registered at the State Commodity and Raw Materials Exchange
(SCRME) and the Ministry of Economy. The procedure applies
not only to the contracts signed at the SCRME, but also to
contracts signed between third parties. The SCRME is
government-owned and is the only exchange in the country.
The contract registration procedure includes an assessment of
"price justification." All import contracts must be
registered before goods are delivered to Turkmenistan.

The government mostly favors long-term investment projects
that do not require regular hard-currency purchases of raw
materials from foreign markets. Textile factories operated
by Turkish companies using domestic resources and labor serve
as model investment projects supported by the government.
These companies encounter relatively few currency conversion
problems and enjoy tax breaks; otherwise, there are no set
requirements for local sourcing or exporting specific
percentages of output.

Production Sharing Agreement (PSA) holders are mostly
regulated by the Petroleum Law. They are subject to a 20
percent income tax and royalties ranging from 1 percent to 15
percent, depending on the level of production. The social
welfare tax, 20 percent of the total local staff payroll, is
also payable by all foreign investors and their
subcontractors. PSA holders' employees and their
subcontractors pay a personal income tax of 10 percent.
Under the Petroleum Law, PSA concessions have been made to
eight foreign energy companies: five offshore and three
onshore concessions for 20-25 years. Six of the existing
concessions are in the oil sector and two in the gas sector.

Subcontractors of PSA holders can bring their equipment into
the country only for the duration of a valid contract. There
is no appropriate legislation that regulates operations of
oil and gas subcontractors.

Currently, Turkmenistan lists 49 import and 20 export goods
and materials subject to customs duties. Goods and materials
not on the lists are subject to a 0.2 percent customs fee
payment and a charge of $1.76 to the Customs Official for
every hour he/she spends inspecting the imported goods. In
regard to exports, customs maintains a list of goods subject
to customs duty payment. State enterprises often receive
preferential treatment; for example, wool carpets produced at
state factories are exempt from customs duties. In contrast,
private carpet producers have to pay $20 per square meter of
carpet in customs duties in order to export carpets.

Foreign investors are required to adhere to the sanitary and
environmental standards of Turkmenistan. Foreign investors'
products should be of equal or higher quality than prescribed
in national standards.

Turkmenistan, while not a member of the World Trade
Organization (WTO),has enacted a number of laws in key areas
relevant to the WTO: investment, banking, intellectual
property rights, customs, and privatization. However, the
legislation is not enforced uniformly. Turkmenistan is not a
signatory to and is not in compliance with the Agreement on
Trade-Related Investment Measures (TRIMS).

The State Migration Service was created in 2003 with the
specific aim of controlling access to the country and
movement of foreign citizens within Turkmenistan. All
visitors are required to register upon entry, and travel to
most border areas requires a special permit. Inviting
foreigners is often problematic because authorities can and

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do deny entry visas without explanation. With these travel
strictures, foreign investors trying to enter Turkmenistan
for the first time have difficulty obtaining entry visas
unless invited by the government. Even established investors
continue to complain about bureaucratic procedures and delays
in this context.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Foreign and domestic private entities in Turkmenistan have
the right to establish and own business enterprises, though
this is associated with onerous bureaucratic requirements.
The 2000 Law on Enterprises establishes state and private
businesses in various legal forms (state enterprises, sole
proprietorships, cooperatives, partnerships, corporations and
enterprises of non-government organizations). The law allows
foreign companies to establish subsidiaries, but the
Government does not currently register subsidiaries. The
Civil Code of Turkmenistan and the Law on Enterprises provide
for representative and branch offices to operate in
Turkmenistan, and enterprises have to be registered with the
Registration Chamber at the Ministry of Economy.

The government prohibits engagement in certain areas of
commercial activity, such as mass media. The 2008 Law on
Licensing Certain Types of Activities lists 44 types of
activities that require government licenses. Currently,
state entities do not require licenses. Often private
entities need to do more than public enterprises to access
markets and credit.

The Law on Enterprises and the Law on Corporations provide
for acquisitions and mergers. However, Turkmenistan's
legislation is not clear about acquisitions and mergers
involving foreign parties, nor does it have specific
provisions for disposition of interests in business
enterprises, both local and with foreign participation.
Governmental approval is necessary for acquisitions and
mergers of certain enterprises, specifically those with state
shares.

PROTECTION OF PROPERTY RIGHTS

All land is owned by the government. The 1993 Law on
Property defines the following types of property: private,
state, non-government organizations, cooperative,
joint-venture, foreign states, legal entities and citizens,
international organizations and mixed private and state.
Most housing is state-owned and may not be resold.
Turkmenistan adopted a new land code in 2004, addressing
farmers' land rights. According to the new land law,
citizens may have rights up to three hectares of land but
they cannot sell, exchange, or transfer it, except to their
children. Based on the law, foreign citizens and stateless
persons, foreign states, and companies and international
organizations may only lease land. The October 1, 2007
amendments to the Land Code provide for up to 40-year land
leases for hotels and recreational facilities in National
Tourist Zones. Land and built facilities have to be
transferred after the expiry of the contract. According to
the Law on Foreign Investment, foreign investments in
Turkmenistan are not subject to nationalization and
requisition; foreign properties may be confiscated only by a
court decision.

The government has enacted laws designed to protect
intellectual property rights (IPR) domestically, but these
laws are either arbitrarily implemented or not implemented at

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all. Among them are the 1993 Law on the Protection of
Scientific Research, the 1993 Patent Law and the December
2008 regulation, which includes the Law on Inventions and
Industrial Designs and the Law on Trade and Service Marks and
Places of Origin. The new regulation provides legal
protection of intellectual property upon its registration
with the Patent Agency, which was established in 1993.
However, due to significant deficiencies in Turkmenistan's
intellectual property protection regime, there is an ongoing
review of Turkmenistan's status as a beneficiary country
under the U.S. Generalized System of Preferences (GSP)
Program. Turkmenistan has been on the Special 301 Watch List
since 2000.

The Law on Foreign Investment guarantees the protection of
intellectual property of foreign investors, including
literary, artistic and scientific works, software, databases,
patents and other copyrighted items, but Turkmenistan has yet
to adopt more explicit and comprehensive administrative and
civil procedures and criminal penalties for Intellectual
Property Rights (IPR) violations. Turkmenistan has not
adopted a separate Copyright Law and consequently does not
provide any protection to foreign sound recordings or
pre-existing works. The 1993 Most Favored Nation Agreement
between the United States and Turkmenistan also provides for
favorable treatment of copyrighted materials. The agreement
envisages Turkmenistan's accession to the Berne Convention of
1971 for the Protection of Literary and Artistic Works and
Creation of a Working Group on Intellectual Property Matters.
To date, Turkmenistan has not joined the Berne Convention or
the Geneva Phonograms Convention. It is a challenge to
purchase legally recorded material in Turkmenistan. Current
border enforcement is weak. As a result, pirated recordings
freely cross into Turkmenistan for sale. Additional
personnel and training courses are needed for more effective
border enforcement. Turkmenistan laws do not provide for
either civil or criminal ex parte search procedures needed
for effective anti-piracy enforcement.

Turkmenistan signed the World Intellectual Property
Organization's (WIPO) documents on industrial property rights
and patent cooperation in 1995. Turkmenistan has also joined
the Eurasian Patent Organization that was created as part of
the WIPO for the CIS countries. Turkmenistan has not signed
the 1996 WIPO Copyright Treaty (WCT),WIPO Performances and
Phonograms Treaty (WPPT),or WIPO Internet Treaties.

The Copyright Law was enacted as part of Turkmenistan's Civil
Code, in force since 2000. The Law defines copyrighted
products and the rights of owners of the copyrighted
products, and provides their legal protection. There is a
Patent Department in the Ministry of Economy and Development
which issues patents on intellectual property, but it does
not enforce copyright law. Turkmenistan has not adopted
criminal penalties for IPR violations, and currently articles
such as videos, cassette tapes, and literature are freely
copied and sold. In general, products manufactured by
government-owned entities increasingly dominate local markets
and are well-protected by law enforcement bodies. These
government produced products including, petroleum products
and textiles exported from Turkmenistan have been assigned
trademarks to protect them in foreign markets.

TRANSPARENCY OF THE REGULATORY SYSTEM

The government does not use transparent policies to foster
competition and foreign investment. Laws have frequent
references to by-laws that are often not publicly available.

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Since 2007, some progress has been made toward eliminating
by-laws when President Berdimuhamedov announced legal system
reforms. Most by-laws are passed in the form of presidential
decrees. Such decrees are not categorized by subject, which
makes it difficult to find relevant cross references.
Previously, government officials acted on the president's
verbal instructions, rather than written orders or governing
legislation. Most often, personal relations with government
officials have played a decisive role in determining how and
when government regulations are applied.

Bureaucratic procedures are confusing and cumbersome. There
is no single body that coordinates registration and
activities of domestic and foreign private companies. The
government does not generally provide information support to
investors, and officials use the lack of information to their
personal benefit. Foreign companies may spend months
conducting due diligence in Turkmenistan.

A serious impediment to foreign investment is the lack of
knowledge of internationally-recognized business practices
and concepts, as well as few English speakers. Good quality
English-language material on Turkmenistan legislation is
scarce, and there are very few business consultants to assist
investors.

There are no standards-setting consortia or organizations
besides the Turkmen State Standards (TDS) and the relevant
licensing government agency.

There is no independent body for filing complaints.
Financial disclosure requirements are neither transparent nor
consistent with international norms. Government enterprises
are not required to publicize financial statements, even to
foreign partners. Financial audits are often conducted by
local auditors, not internationally recognized firms.

The Law on Petroleum was a partial step toward creating a
more transparent policy in the oil and gas sector; it
provides a detailed legal framework for conducting oil and
gas business. Under this law, three types of licenses can be
issued: exploration, extraction, and a single exploration
and extraction license. four types of agreements can be
signed for hydrocarbon production: a production sharing
agreement, a joint operation agreement (also called joint
venture agreements),risk service agreements, and concession
agreements with royalties and taxes.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Turkmenistan's financial system significantly hinders the
free flow of financial resources. Most numerous and largest
in size are the following six state banks: State Bank for
Foreign Economic Relations (Vnesheconombank),Dayhanbank,
Turkmenbashy Bank, Turkmenistan Bank, Halk Bank, and
President Bank. These state banks have narrow
specializations-- foreign trade, agriculture, industry,
social infrastructure, savings and mortgages, respectively.
There are two smaller state banks: Senagat Bank and Garagun
Bank which provide general banking services only. There are
also four foreign commercial banks in the country: a joint
Turkmen-Turkish bank (with Ziraat Bank),a branch of the
National Bank of Pakistan also operate in Turkmenistan, and
the German Deutsche and Commerz banks. The two German banks
provide European bank guarantees for companies and for the
GOTX; they do not provide general banking services. Total
assets of the country's largest bank, Vnesheconombank, are
estimated at $1 billion (2007) at the then official exchange

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rate of 5,200 manats per dollar. Other banks' assets are
much smaller.

All banks, including commercial banks, are regulated by the
state. Commercial banks are prohibited from providing
services to state enterprises.

The U.S. Export Import (EXIM) Bank announced on January 4,
2010, that it had extended its available financing to include
long-term public sector transactions in Turkmenistan.
Previously, EXIM had only been open for short- to medium-term
public sector financing. Short-term financing is available
for up to two years, medium-term up to seven years, and
long-term up to 18 years. State banks mostly serve state
enterprises and allocate credit on subsidized terms to the
state enterprises. Foreign investors are only able to get
credit on the local market through EBRD equity loans.

There is no capital market in Turkmenistan, although the 1993
Law on Securities and Stock Exchanges outlines the main
principles for issuing, selling and circulating securities.
The Law on Corporations further provides for issuance of
common and preferred stock, and bonds and convertible
securities in Turkmenistan, but in the absence of a stock
exchange or investment company, there is no market for
securities. In the mid 1990's, the government turned some
nearly bankrupt state-run enterprises into corporations.
Foreign entities may theoretically purchase shares in these
companies, but have shown no interest in so doing.

POLITICAL VIOLENCE

Since President Berdimuhamedov came to power in February
2007, the only instance of violence that the Turkmenistan
Government publicly acknowledged was in September 2008 in
Ashgabat's Khitrovka neighborhood. After more than a
day-long standoff with a small group of well-armed
individuals, more than 20 government personnel were
reportedly killed before the group was subdued. Government
statements claimed that the group was involved in narcotics
trafficking, and that all members of the group had been
arrested or killed. Although the Turkmenistan Government is
engaging with foreign governments to train law enforcement
officials, law enforcement agencies remain small and uneven
in quality.

Turkmenistan's Government strictly controls all aspects of
society, limiting any group's ability to organize. The
authoritarian political system prohibits political opposition
by banning opposition parties and requiring registration for
all organizations. The government also controls all local
media and restricts the distribution of foreign publications.

CORRUPTION

Turkmenistan has legislation to combat corruption, but the
laws are not enforced and corruption is rampant. Formally,
the Ministry of Internal Affairs, the Ministry of National
Security, and the General Prosecutor's Office are responsible
for combating corruption. President Berdimuhamedov has
publicly stated that corruption will not be tolerated.
Turkmenistan joined the UN Convention against Corruption in
March 2005, but the non-transparency of the economic system
provides fertile soil for corruption. The non-government
organization, Transparency International, ranked Turkmenistan
168 among 180 countries in the world in its Corruption
Perceptions Index for 2009.


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The common assumption is that nearly any decision desired can
be obtained for a price. U.S. firms have identified
widespread government corruption, usually in the form of
bribe requests, as an obstacle to investment and business
throughout all economic sectors and regions. It is most
pervasive in the areas of government procurement and
performance requirements. In contrast to official
corruption, violent criminal organizations are largely
non-existent in Turkmenistan.

BILATERAL INVESTMENT AGREEMENTS

The Governments of Turkmenistan and the United States began
negotiations on a bilateral investment treaty after 1991, but
talks were suspended in early 1994. The Government of
Turkmenistan expressed interest in renewing the talks in
1998, but negotiations have not recommenced. The United
States government considers the Convention with the Union of
Soviet Socialist Republics on Matters of Taxation, which
entered into force in 1976, to continue to be in effect and
applicable between the United States and Turkmenistan. There
have been no discussions on a new dual taxation treaty.

Turkmenistan has signed bilateral investment agreements with
Turkey, China, France, Malaysia, Pakistan, Romania, Slovakia,
the United Kingdom, Northern Ireland, Egypt, India,
Uzbekistan, Iran, Armenia, Georgia, Germany, Ukraine, and the
United Arab Emirates.

In July 2009, EU Ministers passed a trade agreement with
Turkmenistan reasoning that economic and trade engagement
with the country would stimulate political reforms in
Turkmenistan.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

Turkmenistan signed an Investment Incentive Agreement with
the U.S. government in 1992, but there has been no investment
insurance, investment guarantees or financing provided by the
Overseas Private Investment Corporation (OPIC) for
Turkmenistan.

LABOR

Labor matters are governed by the Labor Code of Turkmenistan,
the Law on Leaves of Absence, the Law on Occupational Safety,
the Law on Pensions and a number of regulations approved by
presidential resolutions. Turkmenistan joined the
International Labor Organization in 1993.

Unemployment and underemployment are major problems. The
last official survey, conducted in 1995, implausibly
estimated unemployment at 3% of the labor force. Current
unofficial estimates are above 50 percent, while the Ministry
of Finance maintains the percentage is between 5 and 10
percent.

Since 1997, Turkmenistan has introduced "labor exchanges" or
employment offices, operating as self-sustaining entities
under local government offices. Turkmenistan's regulations
require that all vacancies be posted via such labor offices.
Although most vacancies in the labor exchanges' databases are
low-skilled jobs, employment offices have not been an
effective tool in reducing unemployment. Finding suitable
candidates via these offices is also problematic for
international companies. Investors recruit directly, though
candidates still pay a nominal fee to the relevant labor
exchange. Although the government requires foreign companies

ASHGABAT 00000045 013.2 OF 014


to have 70% of the local workforce be local citizens, it has
made exceptions for foreign construction companies executing
large-scale turnkey projects. Officials are known to request
investors to employ their relatives and friends.

The Association of Trade Unions of Turkmenistan -- successor
to the Soviet-era system of government-controlled trade
unions -- is the only trade union allowed in the country.
The Association's unions are divided along both sectoral and
regional lines.

The normal workday in Turkmenistan is eight hours, and the
standard workweek is 40 hours over five days. In practice,
government and many private sector employees are required to
work 10 hours a day or a sixth day without compensation.
The minimum age for employment of children is 16. In a few
heavy industries the minimum age is 18. The labor law
prohibits 16-18 year-olds from working more than six hours a
day, and only with parental and trade union permission.
Health and safety regulations exist, but are commonly not
enforced. Foreigners with government permission to reside in
Turkmenistan may work, but are subject to the same labor
regulations as citizens unless otherwise specified by law.

FOREIGN TRADE ZONES/FREE PORTS

The Law on Economic Zones for Free Enterprise was enacted in

1993. The law guarantees the rights of businesses -- foreign
and domestic -- to operate in these zones without profit
ceilings. The law forbids nationalization of enterprises
operating in the zones and discrimination against foreign
investors. Other rights guaranteed include:

-- Preferential tax status, including exemption from profit
tax if profits are reinvested in export-oriented, advanced
technology enterprises;
-- Repatriation of after-tax profits;
-- Exemption from customs duties, except on product of
foreign origin;
-- Export of products;
-- Setting product prices.

There are ten such zones in Turkmenistan: Mary-Bayramaly,
Ekerem-Hazar, Turkmenabat-Seydi, Bakharly-Serdar,
Ashgabat-Anew, Ashgabat-Abadan, Saragt, Guneshli, Ashgabat
International Airport, and Dashoguz Airport. The zones have
not been successful in drawing increased economic activity.
Despite the legal guarantees, the government continues to
meddle in business decisions even for firms located in these
zones. The zones have not been financially supported by the
government and lack infrastructure, such as advanced
telecommunications, to attract businesses. The
infrastructure at Ashgabat International Airport is more
developed and has modern cargo transit facilities.

In July 2007, President Berdimuhamedov announced the creation
of the Avaza free tourist zone along 16 kilometers of the
Caspian Sea coast. The Ministry of Economy and Development
(MOED) promised exemption from MOED registration fees and
Value Added Tax (VAT) to contracting and management
companies, full convertibility of all manat-denominated
operations earnings into hard currency for amortization of
foreign loans, payment for construction work or services,
purchase of raw materials, equipment, and goods. This zone
will have a special regime for making cash payments and
overseas electronic transfers, and equipment and materials
used in facility construction or management will be exempt
from calibration fees in the zone. Amendments to the Land

ASHGABAT 00000045 014.2 OF 014


Code passed in October 2007 include a provision for 40-year
land leases for construction of tourism facilities and
five-year leases for retail and services points, warehouses
and car parking lots. Tourism-related services such as
catering and hotels -- but not casinos -- are also granted
VAT exemption. Construction equipment used in the Zone will
not be subject to the one percent property tax. In addition,
the government will not levy income taxes related to tourist
accommodations and catering for the first 15 years.

FOREIGN DIRECT INVESTMENT STATISTICS

State data on many economic indicators, including Foreign
Direct Investment (FDI) remain unreliable and mostly
unavailable. However, according to various independent
analysts, most foreign investment is directed toward the
country's oil and gas sector. Such investments include three
onshore Production Sharing Agreements (PSAs): the Nebitdag
Contractual Territory operated by Burren Energy UK/ENI, the
Khazar project operated jointly by the Turkmennebit state oil
concern and Mitro International of Austria, and the
Bagtyarlyk Contractual Territory operated by the Chinese
National Petroleum Corporation (CNPC). In addition, there
are five PSAs for offshore operations: the Cheleken
Contractual Territory operated by Dragon Oil (UAE),Block 1
operated by Petronas of Malaysia, Blocks 11 and 12 operated
jointly by Maersk Oil of Denmark and Wintershall of Germany,
Block 23 operated by RWE of Germany, and Block 21 operated by
Itera of Russia.
CURRAN