EurasiaNet Business & Economics - Turkmenbashi Maintains Multi-Billion Dollar Slush Fund

BUSINESS & ECONOMICS

TURKMENBASHI MAINTAINS MULTI-BILLION DOLLAR SLUSH FUND – REPORT
4/24/06

Mercurial dictator Saparmurat Niyazov has a multi-billion-dollar slush fund, which he uses to maintain his personality cult in natural gas-rich Turkmenistan, according to a report issued April 24 by the watchdog group Global Witness. European Union nations, in particular Germany, are helping conceal the way Niyazov is using Turkmenistan’s energy revenues, the report asserts.

The Global Witness paper -- titled Funny Business in the Turkmen-Ukraine Gas Trade -- estimates that Turkmenistan earns more than $2 billion per year from natural gas exports, a large share of which goes to Western Europe via Russia and Ukraine. The report states that a significant portion of revenue never finds its way into state coffers. Instead, Niyazov parks much of the money in foreign bank accounts under his direct control. "A horrifying 75 percent of the state’s spending ... appears to take place off [the government’s] budget," the report says. It goes on to cite "several credible estimates" in valuing Niyazov’s slush fund at over $3 billion, "some $2 billion of which appears to reside in the Foreign Exchange Reserve Fund at Deutsche Bank in Germany."

The report states there is no effective way to track the Turkmen government’s management practices. "Citizens have no information as to where that money [gas income] is going because revenues are managed in a completely opaque way," the report said. "It is clear that the money is not being spent on them: standards of health, education and living quality have plummeted since independence."

Niyazov appears to lavish a large share of the revenue on "an increasingly bizarre personality cult," the report suggests, adding that "his [Niyazov’s] picture is everywhere in Turkmenistan: on public buildings, on packets of salt and tea, bottles of vodka and even floats eerily in the corner of television broadcasts."

The report characterized Turkmenistan as dysfunctional, and in imminent danger of becoming "a fully fledged failed state with massive unemployment, widespread heroin addiction and woeful educational and health care systems." The report goes on to criticize the Ruhnama -- the book of values supposedly authored by Niyazov – for claiming that country’s natural resources are "the people’s natural wealth." Such assertions sound "ever more hollow as time passes," the report states. "It is time for Europe, Ukraine and Russia to act."

A large part of the report is devoted to examining the murky interactions involving Western European states, Ukraine and Russia in the export of Turkmen natural gas. For over a decade, the exports have been controlled by a string of shadowy intermediary companies. "These companies have often come out of nowhere, parlaying tiny amounts of start-up capital into billion-dollar deals," the Global Witness report says. The structure of these companies has been obscured by "complex networks" of holding companies and trusts. "It is nigh on impossible to discover who sits at the center of these corporate webs, and thus to whom the profits from the transportation and sale of natural gas are going," the report said. An investigation of four intermediary companies raised "troubling questions about transparency and governance," the report added.

The latest in the succession of intermediary companies is RosUkrEnergo, of which the Russian conglomerate Gazprom and Austria’s Raiffeisen Zentralbank are shareholders. The Austrian entity acts as a manager for "a consortium of Ukrainian businessmen who have refused, despite fierce controversy in Ukraine, to disclose their identities," according to the report. It stressed that RosUkrEnergo has not been firmly tied to any illegal dealings, yet unanswered question continue to hover over the entity’s operations.

RosUkrEnergo played a central role in a pricing dispute in early 2006 between Ukraine and Russia that briefly interrupted energy supplies to Western Europe. [For background see the Eurasia Insight archive]. When the two sides settled their differences, RosUkrEnergo ended up "becoming the exclusive supplier of Turkmen gas to Ukraine," the report said.

That deal deviated "sharply from industry best practices," the report asserted. The contract covering deliveries and pricing issues is "a mere two sheets of paper" and is thus overly vague. The pricing of Turkmen gas, for instance, appears open to broad interpretation, the report suggests. "The possibility of further, unexpected price hikes is obviously not good for the energy security of Ukraine or gas customers downstream in [Western] Europe."

Global Witness called for greater transparency in Turkmen natural gas dealings. It specifically urged Russia and Ukraine to adopt international reporting standards established under the Extractive Industries Transparency Initiative and/or the International Monetary Fund’s Guide on Resource Revenue Transparency. It added that the Russian parliament should ratify the Energy Charter Treaty, which provides for "more transparent transit arrangements and a rules-based approach to dispute resolution."

The EU likewise must take "much greater interest in the problem of energy and transparency than it has to date," the report says. Brussels has a variety of instruments at its disposal -- including diplomatic pressure, economic assistances and trade incentives/sanctions – to encourage greater transparency. "Europe could also do much more to build the capacity of local civil society groups to monitor the flow of revenues," the report says.

In addition, the report is highly critical of the German banking sector. "It is hard to see how Germany’s vital interest in the security of energy supply can be reconciled with a preparedness by Germany’s biggest and most prestigious bank to act as a banker to an unhinged tyrant," the report says. It recommends that the EU condition its future economic dealings with Turkmenistan on a move by Niyazov to "show measurable progress" in promoting transparency.

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