Attitude toward Foreign Direct Investment
Turkmenistan 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 created a difficult foreign investment climate. In January 2013, Turkmenistan created the Agency for Protection from Economic Risks to oversee international investments in Turkmenistan. The Agency is responsible for a comprehensive review of foreign companies wishing to enter Turkmenistan’s market that includes assessment of the financial and political risks associated with allowing the company to do business in Turkmenistan. Given the arbitrary nature of this assessment, the agency further increases the already arduous bureaucratic procedures.
Historically, the most promising areas for investment are in the oil and gas, agricultural, and construction sectors. The government seeks foreign technology and investment in order to diversify its economy through the development of domestic chemical and petrochemical industry facilities. As a result of President Gurbanguly Berdimuhamedov’s policy to provide Internet access to every home, school and kindergarten, the visibility of Turkmenistan’s communication sector has also grown. Decisions to allow foreign investment are politically driven; companies from “friendly” countries are generally more successful in winning tenders and signing contracts.
According to government sources, the volume of capital investment amounted to more than 53 billion manat (USD 15.1 billion) in 2015. There is no publicly available information on how much of this amount is foreign direct investment.
In 2012, the government announced that it would invest USD 80.6 billion to construct 450 industrial and social facilities throughout the country by 2020. The capital investment in Turkmenistan reached TMT 51.8 billion (USD 18.2 billion) in 2013 and TMT 54.98 billion (USD 19.3 billion) in 2014. In 2014, according to the State Statistics Committee, 23 percent of capital investment into state enterprises went to support industry development including the energy (4.5 percent), petrochemical (14.5 percent), construction (1 percent) and light industry (1 percent) sectors. According to the national program for the transformation of the rural areas of Turkmenistan, 4.9 billion manat (USD 1.4 billion) was invested in Turkmenistan’s five provinces, including 1,133 million in Ahal, 1,142 million in Balkan, 814 million in Dashoguz, 964 million in Lebap and 850 million manat in Mary.
Despite having the fourth largest natural gas reserves, Turkmenistan ranks only tenth in natural gas production in the world as of the end of 2014. Key industries are state-owned. According to a 2011 EBRD estimate, the private-sector share of GDP in 2010 was 25 percent, mostly in retail trade, services, and food processing. The State Statistics committee reported that the private sector contributed 63 percent of GDP in 2014. The government later reported that the private sector share of GDP (excluding the fuel and energy sector) reached 65.1 percent end of June 2015. The government numbers, however, are misleading since they exclude the hydrocarbon sector, which is the single largest component of GDP. While the government has stated that it seeks to increase the private sector’s participation in the economy to 70 percent by 2020, there are no independent estimates available for the period 2011-15. The top economic priorities for the government remain achieving self-sufficiency in food supplies and an increase in domestic production. Recent emphasis has been placed on transforming Turkmenistan from a commodity producer to a value-added manufacturer. The government has been most receptive to foreign investment in the petrochemical, textile and communication sectors.
In May 2010, the government adopted its National Program for the Socio-Economic Development of Turkmenistan (2011-2030). The program envisages the diversification of the economy and recognizes the importance of market and institutional reform. The program also includes the privatization of small and medium enterprises (SMEs). In October 2006, Turkmenistan adopted an Oil and Gas Development Plan (2007-2030). Despite these initiatives, however, Turkmenistan’s investment climate remains generally closed.
The government selectively chooses its investment partners, making a strong relationship with a government official often essential for commercial success. Officials may seek rents for permitting or assisting foreign investors to enter the local market. Some foreign investors have found success working through foreign business representatives who are able to leverage their personal relationships with senior leaders to advance their business interests.
Turkmenistan has accepted financing from international financial institutions (IFIs) since its independence in 1991. In 2009, the government reportedly accepted a USD 4 billion loan from the Chinese Development Bank (CDB) to develop Galkynysh, the world’s second largest natural gas field, as well as several significantly smaller loans from the Chinese Export-Import Bank for transportation- and communication-related projects. In 2011, Turkmenistan secured a second USD 4.1 billion loan from CDB to further develop the Galkynysh field. The government also accepted a USD 1 billion dollar loan from the Islamic Development Bank in 2010 to fund infrastructure projects. In 2011, the Asian Development Bank (ADB) provided a USD 125 million loan to the government to finance the procurement and installation of power and signaling equipment to a 311-kilometer section of the Kazakhstan–Turkmenistan–Iran railway. Reportedly, in the last few years, Turkmenistan approached a number of international financial organizations and foreign governments in an attempt to secure additional loans to fund large-scale government projects. In November 2013, the Asian Development Bank was appointed a transaction advisor for the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project and will work closely with the TAPI countries to attract foreign investment for the project. TurkmenGas was selected to lead the TAPI consortium in August 2015.
Other Investment Policy Reviews
The Government of Turkmenistan has not undergone an investment policy review by the Organization for Economic Cooperation and Development (OECD) or World Trade Organization (WTO). While Turkmenistan has expressed interest in exploring the WTO accession process and created an intergovernmental commission in January 2013 to review the benefits of accession, the country has not yet formally applied to join the organization.
The United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report (WIR) for 2012 ranked Turkmenistan among the top ten countries in the world in its foreign direct investment (FDI) attraction index. According to the report, the volume of foreign direct investments in Turkmenistan accounted for 15.6 percent of the country’s GDP. The ranking is largely attributable to the USD 8.1 billion in soft loans Turkmenistan received from the Chinese Development Bank. UNCTAD has not evaluated the country’s legal, regulatory and institutional framework for foreign direct investment. UNCTAD’s WIR 2014 reported that FDI in Turkmenistan amounted to USD 3.076 billion in 2013, and the accumulated amount of investment as of 2013 amounted to 56.7 percent of the country’s GDP. According to the WIR 2015 report, FDI inflows into Turkmenistan increased by about 2.8 percent and amounted to USD 3.164 billion in 2014 (with the accumulated amount of FDI at 54.7 percent of GDP). The WIR 2015 report stated that Turkmenistan was not among the top 20 host economies in terms of FDI inflows in 2013-14.
Laws/Regulations on Foreign Direct Investment
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 Joint Stock Societies (1999), which pertains to start-up corporations, acquisitions, mergers and takeovers. Foreign investment activities are affected by bilateral or multilateral investment treaties, the Law on Enterprises (2000), the Law on Business Activities (last amended in 2008), and the Land Code (2004). Foreign investment in the energy sector is subject to the 2008 Petroleum Law (also known as the Law on Hydrocarbon Resources, which was amended in 2011 and 2012). The Tax Code provides the legal framework for the taxation of foreign investment. The Civil Code (2000) defines what constitutes a legal entity in Turkmenistan. The Organization for Security and Co-operation in Europe (OSCE) Center in Ashgabat maintains a database of Turkmenistan’s laws, presidential decrees and resolutions at http://www.turkmenlegaldatabase.info. Since 2014 this information is also available on the Ministry of Justice of Turkmenistan’s website at http://minjust.gov.tm/ru.
The Government of Turkmenistan has taken a number of steps to promote economic reform, including a law to combat money laundering and terrorism financing and a presidential decree that mandates the use of International Financial Reporting Standards (IFRS). In January 2010, Turkmenistan established a Financial Intelligence Unit under the Ministry of Finance to strengthen its anti-money laundering (AML) efforts and its ability to combat the financing of terrorism (CFT). In October 2012, President Berdimuhamedov announced that Turkmenistan would join the Egmont Group, an international organization specializing in the exchange of best practices on AML/CFT. Turkmenistan’s membership, he said, would demonstrate to the international community its commitment to combating money laundering and terrorism financing. Turkmenistan has not yet, however, joined the Egmont Group.
On January 1, 2012, Turkmenistan’s banks switched to International Financial Reporting Standards (IFRS). Government agencies transitioned to National Financial Reporting Standards (NFRS) in January 2014. Despite these positive steps, however, Turkmenistan remains one of the most closed economies in the region.
Most foreign investment is governed by project-specific presidential decrees, which can grant privileges not provided by legislation. Legally, there are no limits on the foreign ownership of companies. In practice, however, the government has allowed fully-owned foreign operations only in the oil sector and, in one case, in cellular communications. (Note: This cellular company reportedly filed an international arbitration case against Turkmenistan when its license was suspended by the government in December 2010. After months of negotiations, the company re-entered the Turkmenistan market in September 2012. Since re-entry, however, the company has struggled to regain the market share it lost to a Turkmen state monopoly in the intervening period. End Note.)
Turkmenistan does not have a business registration website that could be used by domestic or foreign companies. Depending on the type of business activity a foreign company seeks in Turkmenistan, registration with Turkmenistan’s Main State Tax Service, the Local Statistics Office, the Agency for Protection from Economic Risks, the Registration Department under the Ministry of Economy and Development, and the State Commodity and Raw Materials Exchange of Turkmenistan could all be required. Business registration usually takes about six months and often depends on personal connections in various government offices.
Development and implementation of public policies to attract foreign investment, investment coordination, and assistance to foreign investors are carried out by the Cabinet of Ministers of Turkmenistan and its authorized state body. The Agency for Protection from Economic Risks under the Ministry of Economy and Development makes a decision on providing any investment-related services to potential foreign investors based on criteria such as the financial status of the investor.
Turkmenistan’s Law on State Support to Small and Medium Enterprises (adopted in August 2009) defines small and medium enterprises as follows: small enterprises are those with an average staff number of up to 50 people employed in industry, power generation, construction, gas and water supply and up to 25 people in other sectors; medium enterprises are those with an average staff number of up to 200 people employed in industry, power generation, construction, gas and water supply and up to 100 people in other sectors. However, the benefits of the Law on State Support to Small and Medium Enterprises do not apply to: 1) state-owned enterprises; 2) enterprises with foreign investment carrying out banking or insurance activities; and 3) activities related to gambling and gaming for money.
In 2007, Turkmenistan created the Awaza Tourist Zone (ATZ) to promote tourism and the development of its Caspian Sea coast. It granted some tax incentives to those willing to invest in the construction of hotels and recreational facilities. Amendments to the Tax Code in October 2007 exempted construction and tourist facilities in the ATZ from Value Added Tax (VAT). Services offered at tourist facilities, including catering and room accommodations, are also exempt from VAT until 2020. In general, tax and investment incentives for the ATZ can be negotiated on a case-by-case basis. Turkmenistan has also adopted multiple year national development programs in various sectors of economy, which might include separate sub-sections on attracting investment in these sectors. However, information on these programs is not publicly available.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are no legal limits on the foreign ownership or control of companies. In practice, the government has only allowed fully-owned foreign operations in the oil sector and, in one case, in cellular communications. Foreigners may establish and own businesses and also engage in business activities within the boundaries of domestic laws, but repatriation of revenues is very challenging as currency conversion remains a major issue in the country. The nature of government-awarded contracts may vary in terms of the requirements for ownership of local enterprises. All contractors operating in Turkmenistan for a period of at least 183 days a year must register at the Main State Tax Service. National accounting and international financial reporting standards apply to foreign investors. In the energy sector, Turkmenistan precludes foreign investors from investing in the exploration and production of its onshore gas resources. All land in Turkmenistan is government-owned. As of May 2015, the State Migration Service of Turkmenistan requires that citizens of Turkmenistan make up eighty percent of the workforce of a company owned by a foreign investor.
Moreover, there are several ways for the government to discriminate against investors, including excessive tax examinations, license extension denial, and customs clearance and visa issuance obstacles. In most cases, the government has insisted on maintaining a majority interest in any joint venture (JV). A Western soft drink company opened a factory in Turkmenistan in the mid-1990s through a JV with the government. Foreign investors have been reluctant to enter JVs controlled by the government, because of competing business cultures and conflicting management styles. Although there is no specific legislation requiring foreign investors to receive government approval to divest, in practice they are expected to coordinate such actions with the government. The court system is subject to government interference.
Private entities in Turkmenistan have the right to establish and own business enterprises. The 2000 Law on Enterprises defines the legal forms of state and private businesses (state enterprises, sole proprietorships, cooperatives, partnerships, corporations and enterprises of non-government organizations). The law allows foreign companies to establish subsidiaries, though the government does not currently register subsidiaries. The Civil Code of Turkmenistan and the Law on Enterprises govern the operation of representative and branch offices in Turkmenistan. Enterprises must be registered with the Registration Department of the Ministry of Economy. The 2008 Law on the Licensing of Certain Types of Activities (last amended in November 2015) lists 44 activities that require government licenses. The Law on Enterprises and the Law on Joint Stock Societies allow acquisitions and mergers. Turkmenistan’s legislation is not clear, however, about acquisitions and mergers involving foreign parties, nor does it have specific provisions for the disposition of interests in business enterprises, both solely domestic and those with foreign participation. Governmental approval is necessary for acquisitions and mergers of enterprises with state shares.
Efforts to privatize former state enterprises have attracted little foreign investment. Privatization has been limited by the government to the service, trade, and agricultural sectors; most industry remains under state control. Outdated technology, poor infrastructure, and bureaucratic obstacles make privatized enterprises unattractive for foreign investors.
In November 2012, Turkmenistan adopted a national program related to the privatization of state-owned enterprises and facilities. The document identifies the main goals and procedures for privatizing state property. The program is scheduled to be implemented in three phases: in 2013 (privatization of small enterprises), during the period 2014-2015 (privatization of mid-size enterprises), and 2016 (privatization of large enterprises). The privatization of state enterprises in the sectors of construction, transportation, communications, and the creation of joint stock companies are part of the program. The privatization is ongoing and the government has already reorganized a number of state enterprises and created closed joint stock companies in the telecommunication, maritime trade, insurance, and air transportation sectors. Strategic facilities, as identified by the government, are not subject to privatization, including those related to natural resources. Other property not subject to privatization includes objects of cultural importance, the property of the Armed and Security Forces, government institutions, research institutes, the facilities of the Academy of Sciences, the integrated energy system, and the public transportation system.
The rules and procedures governing privatization in Turkmenistan lack transparency, leading to corruption. Foreign investors are allowed to participate in the bidding process only after they have been approved by the State Agency for Protection from Economic Risks under the Ministry of Economy and Development. In December 2013, the parliament passed the Law on the Denationalization and Privatization of State Property, which took effect in July 2014. Notwithstanding, many enterprises are being sold through closed processes. The Ministry of Economy and Development reported that 36 facilities and were privatized in 2015 under the State Program for Privatization of Enterprises and Objects of State Property in Turkmenistan for 2013-2016.
Despite official comments regarding the priority of the growth of the private sector, supporting privatization has been low on the government’s agenda. All land is government-owned, for example, and neither domestic nor foreign businesses can receive long-term land-use rights for “non-agricultural” purposes. While private citizens have some land usage rights, these rights exclude the sale or mortgage of land. Land rights can be transferred only 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 driven by political rather than economic considerations. The tender process, however, is often badly managed and nontransparent. On December 20, 2014, Turkmenistan adopted the Law on Tenders that went into effect on July 1, 2015. The law seeks to develop competition among bidders, ensure transparency and effective implementation of tender procedures, and compliance with international standards.
Screening of FDI
The government seeks to attract FDI to Turkmenistan and tends to support companies wishing to invest in the country. Consequently, foreign companies with approved government contracts generally do not face problems or significant delays when registering their operations in Turkmenistan. Under Turkmenistan’s law, all local and foreign entities operating in Turkmenistan are required to register with the Registration Department under the Ministry of Economy. Before the registration is granted, however, an inter-ministerial commission that includes the Ministry of Foreign Affairs, the Agency for Protection from Economic Risks, law enforcement agencies, and industry-specific ministries has to approve it.
Foreign companies without approved government contracts that seek to establish a legal entity in Turkmenistan must go through a lengthy and cumbersome registration process involving the inter-ministerial commission mentioned above. The commission evaluates foreign companies based on their financial standing, work experience, reputation, and perceived political and legal risks.
In order to participate in a government tender, the companies are not required to be registered in Turkmenistan. However, a company interested in participating in a tender process must submit all the tender documents to the respective ministry or agency in person. Many foreign companies with no presence in Turkmenistan provide a limited power of attorney to local representatives who then submit tender documents on their behalf. A list of required documents for screening is usually provided by the state agency announcing the tender.
Before the contract can be signed, the State Commodity and Raw Materials Exchange, the Central Bank, the Supreme Control Chamber, and the Cabinet of Ministers must approve the agreement. The approval process is not transparent and is often politically driven. There is no legal guarantee that the information provided by companies to the Government of Turkmenistan will be kept confidential.
While Turkmenistan does not have a specific law that governs competition, Article 17 (Development of Competition and Antimonopoly Activities) of the Law on State Support to Small and Medium Enterprises seeks to promote fair competition in the country.