Turkmenistan: Ashgabat Sidesteps Global Credit Crisis, But Faces Inflation Fight

While other countries in the Caucasus and Central Asia grapple with the global financial crisis, Turkmenistan seems set to sidestep trouble. But this is not because Turkmenistan's leaders have been particularly savvy, prudent or even lucky, analysts say. Rather it is the insular attitude of the gas-rich state's leadership -- past and present -- that is protecting Ashgabat.

"The global economic crisis will have a much lesser effect in Turkmenistan. The simple reason for this is the country hasn't integrated with the global economy," said Michael Dennison, a global risks analyst with Control Risks, an independent consultancy group based in London. "The financial sector [in Turkmenistan] is much less developed than in other states of the Former Soviet Union and as such global currents are less applicable."

"The country hasn't borrowed heavily and it's used its external rents gained from gas exports to finance development. It's not indebted like other states, most notably Kazakh banks, which are likely to owe anything up to $10 billion by the end of the year," he added.

The Turkmen government announced in mid-October that it was establishing a stabilization fund, which President Gurbanguly Berdymukhamedov portrayed as a move intended to foster the security of future generations. But Dennison characterized the initiative as PR-driven, designed to impress a domestic audience and promote the government as responsible caretakers of the nation's assets. It was not emergency action needed to buttress a faltering economy, he added.

"I would sense it's more of a confidence-building measure. ... I don't foresee heavy demands on it," he said.

While perhaps safe from the credit crisis, Turkmenistan nevertheless must contend with some major economic challenges. Falling energy prices are likely to be a mixed blessing for the country. On the one hand, the drop in the price of natural gas, Turkmenistan's chief export, will mean substantially less money flows into government coffers. On the other, the costs associated with the ongoing development of the country's energy sector stand to slacken.

Dennison suggested that Ashgabat may have seriously miscalculated in its gas export negotiations with Russia. "Significantly no price has been agreed with Gazprom for 2009," Dennison said. "The Turkmen were going to hold on and push that as late as they could and then try to chisel out the best deal they could from the Russians. But whether or not that's a good tactic, or whether they should have locked up the prices mid-year is debatable," he said.

An ailing Russian economy could have a profound impact on Central Asian states, including Turkmenistan, insofar as rising unemployment will reduce the volume of remittances sent from migrant workers and force some to return home.

"There will be a ripple effect on the Turkmen economy from the Russian economy more generally," Dennison said. "One of those effects might well be on remittances and on Turkmens who are working in Russia. If the construction sector slows down, these people are either not sending money back, or they have to come back and be absorbed into the local economy."

Additionally, rising inflation and the formalization of the manat-dollar exchange rate earlier this year have already hit Turkmens hard, devaluing savings and increasing the cost of everyday essentials. The government's motivation in carrying out the currency reform was to narrow the gap between the unofficial exchange rate of 24,000 manat to the dollar, and the long-standing official rate of 5,000 to the dollar. Officials picked a figure near the middle, settling on a rate of 14,250 to the dollar.

"What that did however was erase many of the savings held in dollars by people, the savings people in dollars kept at home as a hedge against rainy days were reduced in value quite significantly," Dennison said.

This de facto hard currency confiscation, not the global financial crisis, is the source of greatest immediate concern to the government in Ashgabat.

While the population is feeling genuine pain, economists generally approve of the changes, saying they enable them to get a more accurate picture of Turkmenistan's economy. Dennison pronounced the economic statistics produced by the government during former president Saparmurat Niyazov's tenure to be "ridiculous."

Inflation is likely to slow by the end of this year, not because of proactive government measures, but because the global downturn will have a spill-over effect in Central Asia, keeping a lid on prices. Under Berdymukhamedov, the government is projecting more realistic numbers - a 7 percent growth rate, with inflation ranging between 7 percent and 10 percent. But, according to Dennison, "it's still difficult to gauge how accurate those figures are."

Whether the existing inflation figures are accurate or not, there's little doubt that many in Turkmenistan are suffering. "It's a potential issue of social discontent and possibly isolated flare-ups of over rising prices of bread in particular," Dennison cautioned.