Turkmenistan: Corruption, Risk and Reward

While recent improvements have been made, extreme caution and sound risk management are still advised.

In January 2016, Human Rights Watch, Freedom House and Transparency International released their 2015 reports on human rights, political freedom and corruption, respectively. All three reports bring into focus the pervading situation across Central Asia: the ubiquity of severe human rights violations, a blatant disregard for democratic values, and an ineffective fight against corruption at government and corporate level.

Freedom House named Turkmenistan and Uzbekistan among “the worst of the worst” with regard to political rights and civil liberties, while Transparency International placed Turkmenistan 154th out of 167 on its annual Corruption Perception Index. Human Rights Watch stated Turkmenistan’s “atrocious” record had actually worsened in 2015.

The International Monetary Fund visited Turkmenistan in November last year and immediately lowered its forecast for 2016 GDP growth by 2.9% to 6%. The general message on the state of Turkmenistan’s government and economy is unequivocally negative.

After the collapse of the Soviet Union there was a strong belief that Turkmenistan would quickly undergo a transition to democracy and free market economics but owing to its historical dependency on Russia and other authoritarian regimes with no tradition of democracy, political pluralism or the rule of law, the transition was de facto doomed. As a result, the investment climate for international companies has remained limited and extremely risky.

But we are observing small green shoots of change. In July 2015 the Turkmen President Gurbanguly Berdymukhammedov dismissed several high ranking government officials for various crimes. This March, the President publicly raised serious concerns over the level of graft in the domestic oil and gas industry, a clear response to the exit of Germany’s DEA Deutsche Erdoel AG, citing corruption and bureaucratic delays. In the same month, the World Bank held a practical training session on fiscal policy and macroeconomic management.

We might therefore conclude that Turkmenistan’s leadership has understood that real and lasting change must be carried out: the rule of law, the free economy and anti-corruption measures must be significantly strengthened before the country may make full use of its natural resources, develop its attendant industries, and deliver substantial economic growth.

Currently the main foreign investors in Turkmenistan are its neighbours, politically and geographically – China, Russia, Kazakhstan and Uzbekistan. A wider audience should understand Turkmenistan’s fantastic potential, but while the potential rewards are great, Central Asia’s authoritarian regimes are not an easy sell in the boardrooms of the west.

CNS Risk has a deep understanding of how business is done in the country and specifically how its oil and gas industry functions; while we acknowledge that this is a difficult country for western corporates to operate in, we have the experience and capability on the ground to help steer businesses through this often hostile environment.

For a demonstration of how we can help, please contact our Former Soviet Union (FSU) & Central Asia team directly. The team is led by Gareth Babbs, a skilled navigator of the bureaucracies of the FSU with 20 years of direct experience as MD/CEO of multinational businesses across the regions.

A.H.

References:

HRW: https://www.hrw.org/world-report/2016/country-chapters/turkmenistan.

Freedom House: https://freedomhouse.org/report/freedom-world/freedom-world-2016.

TI: http://www.transparency.org/cpi2015/

Kazakh Privatization: Ensuring Safe Investment

On December 25, 2015, the Kazakh National Economy Ministry published a list of large state-owned organizations to be privatized during 2016 – 2020. These include Temir Zholy, the Kazakh railway company; KAzMunaiGaz, an oil and gas company; Samruk-Energy, a company engaged in the production, transmission, distribution, and sale of electricity; Kazachstan Gharysh Sapary, focusing on development of space activity in Kazakhstan; Kazgeologiya, the national geological exploration company; the Kazakh sovereign wealth fund Samruk-Kazyna; and the Astana international airport.[1] According to the Minister, large-scale privatization is a priority of the Kazakh government in 2016.

Given the global relevance of the Kazakh market, many international corporations are expected to participate in this privatization: last month the country became the 162nd member of the WTO, recent trade and investment deals were signed with the UK,[2] US and China[3], and Kazakhstan has been for several years developing a national FDI strategy.

Privatization, as one of the market reforms, often aims at improving economic efficiency by reducing the role of the state. Yet, the process of privatization, which is the cornerstone for prospective efficiency, has to be carried out with great care.

Corruption, which in the words of Joseph Stiglitz, represents “perhaps the most serious concern with privatization, as it has so often been practiced ….”[4] might greatly impair those involved – both the state and the competing investors.

Corruption continues to represent not only a moral disgust, but also a substantial economic burden on corporations. Furthermore, often neglected are the tremendous legal risks for individuals and their respective corporations.

It is of the utmost importance that all companies that take part in this privatization invest considerable time and resources in corruption prevention measures. To that end, deep-dive legal and risk due diligence must be undertaken, and strategic business intelligence must be collected and studied before making any commitment to the undoubted opportunities presented by Kazakh privatization.

CNS Risk has deep and varied experience of advising international corporates in Kazakhstan. Contact us directly to learn how we can help your company.

A.H.

[1] A complete list of the state-owned companies that will be offered for privatization can be found at: http://economy.gov.kz/upload/Files/Celevie_indikat_real_komp_plana_privatiz_na_2016-2020g_ru.doc.

[2] See e.g. https://www.gov.uk/government/world/kazakhstan.

[3] See e.g. http://thediplomat.com/2015/03/china-kazakhstan-sign-23-billion-in-deals/.

[4] See Stiglitz, J., Globalization and Its Discontents, 58 (2002, Allen Lane the Penguin Press, UK).

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