The Hermit Kingdom Unravels: Subsidies and gas in Turkmenistan

Turkmenistan’s decision to end its subsidy system for utilities indicates the scale of the country’s economic crisis. A2 assesses that subsidy rollback, whilst a positive step at reducing the government’s deficit, has limited utility in this case, as it is not accompanied by any deeper structural changes to the domestic economy.

 

INTRODUCTION

Turkmenistan, a Central Asian country with a long Caspian Sea coastline, has been controlled by one of the world’s most repressive and authoritarian governments since its independence from the USSR in 1991. Freedom of speech, assembly and religion are all suppressed, and the president has dictatorial levels of power. As part of the regime’s long-running strategy of buying off domestic political dissent, Turkmenistan has historically provided a generous subsidy package for its citizenry, providing basic utilities and fuel for free.

Although precise statistics are difficult to obtain, given the country’s secretive nature and its tendency to publish highly unreliable statistics, it appears that the government’s expenditure on subsidies is one of the highest globally in percentage terms of total government revenue.

This scheme has been financially underpinned by the exportation of gas, Turkmenistan’s primary export. Turkmenistan has the fourth-largest gas reserves in the world: U.K.-based energy company BP’s Statistical Review of World Energy (2015) indicated 17.5 trillion cubic metres (tcm) of proven gas reserves.

However, over the past five years the Turkmenistani government has taken increasingly dramatic steps to roll-back its subsidiy programme. In July 2012, it scrapped a subsidy system for flour, and curtailed large fuel subsidies for commercial drivers. In 2014, the government went further, installing gas meters to measure consumption in households and ending unlimited free gas supplies.

The government took its latest step on 7 June 2017, when President Gurbanguly Berdimuhamedov ordered his government to end almost all of the remaining subsidy programme for electricity, gas and water, with only the poorest now receiving state subsidies. Previously, citizens were entitled to 120 litres per month of gasoline, 35 kilowatt hours of electricity per capita per month and 600 cubic metres of natural gas per annum.

The curtailment of the subsidy system, triggered by Turkmenistan’s economic exposure to global gas prices – given its lack of domestic economic diversification – is a positive initial step at reducing the government’s deficit. A2 examines the effects for businesses below.

ANALYSIS

To some extent, subsidy reduction is a necessary step to compensate for declining gas revenues, due to low gas prices. Turkmenistan is almost entirely dependent on gas exportation for its revenue, as other economic sectors – particularly in the service industry – remain severely underdeveloped. High gas prices previously insulated Turkmenistan from this structural economic weakness, as export revenues provided it with the capital required to fund infrastructure projects and maintain its generous subsidy system.

However, the global decline in gas prices has demonstrated the inherent weaknesses of the Turkmenistani economy, and is the prime driver behind the government’s subsidy cuts. There has been a substantial increase in global supply, driven primarily by the ability of new hydraulic fracturing technologies to exploit shale gas reserves, particularly in Canada and the United States.

Increasing demand from Asia-Pacific countries is insufficient to absorb the increased supply-side capacity, leading to a long-term reduction in global gas prices which appears unlikely to reverse within the one-year outlook. This has led gas prices to decline steadily since 2008, when according to the U.S. Energy Information Administration’s statistics they peaked at USD8.86 per million British thermal units (Btu).

This decline in gas prices has deeply affected Turkmenistan. According to the United States-based Massachusetts Institute of Technology’s Observatory of Economic Complexity, gas counts for 80.2 per cent of the country’s total exports. Around 7.7 per cent of the remaining exports are comprised of petroleum products, both crude and refined. This has left the government’s revenue stream highly exposed to fluctuations in the global price of gas, and reliant on external market conditions for its own economic security.

Furthermore, Turkmenistan has lost a number of key importers for its gas over the past year, further contributing to the sharp decrease in its export revenue. According to the country’s own statistics service, foreign trade turnover declined from USD26.21 billion in 2015 to USD20.7 billion in 2016. Russia dropped Turkmenistan as a supplier in April 2017 over a dispute over gas prices, whilst Turkmenistan has stopped supplying gas to Iran over what it claims are unpaid debts. Iran disputes this, and given the improvement of its domestic energy output it would have likely reduced its imports from Turkmenistan over the one-year outlook regardless.

This leaves China as the only major importer of Turkmenistani gas. Turkmenistan exports gas to China for USD185 per thousand cubic metres, well below the USD240 per thousand cubic metres it received from Russia. Given the billions of dollars of Chinese loans to Turkmenistan, a portion of this gas is in turn used to pay off the country’s debt to China, further compromising Turkmenistan’s gas revenue streams.

Subsidy reduction will, to some extent, alleviate pressure on the Turkmenistani government, by reducing its budget deficit. This is in line with an IMF report in March 2017, which recommended ‘significant cuts in public investment expenditures’. The curtailment of state spending provides the government with additional resources which would theoretically allow it to reinvest in the development of alternative industrial programmes.

Turkmenistan has lost a number of key importers for its gas over the past year

In turn, this could provide some scope for businesses to implement market entry strategies within Turkmenistan, potentially unlocking a previously highly underinvested market situated in a strategically promising position between China, Russia and Europe.

The importance of foreign businesses with respect to Turkmenistan’s economic diversification is compounded by the weakness of its own labour force. The World Bank’s 2016 survey estimated only 5.6 million people live in Turkmenistan, around a fifth of whom live in Ashgabat. The small size of the labour force, and low levels of skilled immigration, complicate attempts by the government to develop alternative key sectors.

Furthermore, the labour force suffers from a dearth of highly skilled professionals and technical personnel, due to the poor quality of domestic education and the extreme difficulty local nationals face in acquiring permission to study abroad from the government.

The government has taken some limited steps to appear open to foreign businesses. For example, in January 2013 it created an agency specifically tasked with attracting foreign investment within the country. The government’s current economic development plan, dealing with the period 2011-2030, specifically sets out targets for diversification away from gas, and the encouragement of small-to-medium enterprises (SMEs).

However, the government has so far taken no action to create a more favourable investment climate for foreign businesses. Regulatory law remains vaguely worded, and is not respected by domestic officials or businesses. The judicial system is entirely subordinate to the government, and widespread corruption leaves companies at substantial regulatory risk from anti-corruption authorities abroad, particularly under the U.S.’s Foreign Corrupt Practices Act.

Expropriation remains a major risk. The U.S. Department of State’s 2017 investment climate report identified a pattern of officials seizing local SME businesses and imprisoning the owners on disingenuous security grounds, subsequently allowing the companies to be taken over by individuals closely linked with the government.

This risk also applies to international businesses: in December 2016, for example, the government expropriated Turkish-based Yimpaş Holding’s commercial centre in the capital Ashgabat without compensation.

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