Lining Up at Turkmenistan's Opening Door

bloombergAdem Dogan, a Turkish-born used-car salesman, posing in his showroom in Leverkusen, Germany. He opened Turkmenistan's largest poultry farm after learning that nearly all eggs sold in the capital, Ashgabat, were imported from Iran.
ASHGABAT, Turkmenistan -- Adem Dogan, a Turkish-born used-car salesman from Leverkusen, Germany, never thought much about chicken farming until he got to Turkmenistan 10 years ago. Then, while visiting a customer who bought secondhand Mercedes sedans for resale in the country, he stumbled across an opportunity he couldn't resist.

Nearly all of the eggs sold in the capital, Ashgabat, were imported from neighboring Iran. Dogan and his Turkmen host put up $1 million, and soon they were running the country's largest, most modern chicken farm.

Their success did not escape the attention of President Saparmurat Niyazov, the former Communist Party boss who ruled Turkmenistan from 1985 until his death in December 2006. Niyazov harangued ministers, asking them why it took a foreigner to run a successful chicken farm, according to transcripts of Cabinet meetings.

The authorities repeatedly demanded a 50 percent share of the profit, Dogan said. When he refused, they seized property and began dismantling his barns.

"They are systematically destroying the farm," Dogan said. "It's a banana republic. A contract or a minister's signature has no meaning."

Dogan's experience is a cautionary tale for international investors eager to profit as Turkmenistan, the largest producer of natural gas in the former Soviet Union after Russia, begins to open its economy. Since Niyazov's death, energy companies, including BP, Europe's second-largest oil company, and Chevron, the second-biggest U.S. producer, have been jostling to get in the door.

In November, about 500 foreign business and government officials, including U.S. Energy Secretary Samuel Bodman and European Union Energy Commissioner Andris Piebalgs, packed the country's biggest investment conference in a decade.

"This is a critical time in the history of the country," Bodman told the gathering at the gleaming new convention center in Ashgabat. "Opportunities are opening up that could not have been imagined even a year ago."

President Gurbanguly Berdymukhammedov, Niyazov's former personal dentist, is breaking the isolation of his predecessor, who restricted travel, blocked the Internet and scared off investment. Berdymukhammedov, who became president in a February 2007 election that the U.S. State Department called a modest step toward democracy, has taken a dozen foreign trips, including one to New York, and received more than 300 foreign delegations, according to the U.S. Embassy in Ashgabat.

"The old regime was singularly unsuccessful in developing the country," said Steven Mann, a State Department official who served as U.S. ambassador to Turkmenistan from 1998 to 2001. "We're hopeful the new team will take advantage of the opportunities that exist in the global economy."

Volatile Neighborhood



Turkmenistan, a mostly desert country of 5.1 million people that occupies an area larger than California, sits in a volatile neighborhood. Its 488,100 square kilometers stretch from the Caspian Sea on the west to Afghanistan on the southeast, with Kazakhstan and Uzbekistan to the north and Iran on the south.

Given Turkmenistan's location between the energy markets of Europe and Asia, China, Iran, Russia and the United States are vying to build pipelines out of the country.

As Turkmenistan opens up, it is attracting entrepreneurs who are not intimidated by tales of hardship, failure or risk.

Among those eager to get in is Frank Camilleri, a Maltese middleman with interests from agricultural commodities and construction equipment to chemicals and scrap metal who attended November's investment conference. "Turkmenistan gives me very good vibrations," he said.

Camilleri said he had been bringing investors to Libya since the mid-1970s. In Turkmenistan, he wants to arrange financing for the $1 billion tourist center the government plans to build on the Caspian Sea. He figures he has what it will take.

"I've got a tough skin, I never cry, I never complain about the food," he said. "You can't approach markets like Turkmenistan or Libya with your own business culture; you have to adapt to the local customs."

In Libya, Camilleri said, he helped German, Italian and Swiss companies invest in the local power industry and civil aviation. His Msida-based trading and consulting company, Intertecnica (Malta), is now raising funds for a $130 million beetroot-sugar plant south of Moscow, opening a showroom for Chinese sport utility vehicles in Tambov, central Russia, and finding international partners for a Bosnian banking and insurance magnate, he said.


Adem Dogan / Bloomberg
A view of Dogan's poultry farm. Dogan said authorities were "systematically destroying the farm. It's a banana republic."
"Turkmenistan's new president is forward looking," Camilleri said. "It's a stable market as long as he's there."

The main problem may be an excess of ambition: The government's Caspian resort plan, inspired by the success of Dubai in becoming an international tourist center, calls for the construction of 60 hotels in five years.

"The strategic idea isn't only the goal of developing tourism and attracting foreign investors but giving visible, practical contours to our declarations of the country's greater openness," Berdymukhammedov said in a speech to investors at the Eurasia Group consulting firm in New York in September.

Proving to investors that things really are changing may take some doing. During his visit to Ashgabat in November, Camilleri found that the only Internet access at the Grand Turkmen Hotel was via a lone computer with a dial-up connection. At a hotel where he stayed on the Caspian, he was appalled to find a "1 inch by 1 inch" bar of soap in his luxury suite.

"They just don't appreciate that behind such a project is much more than just building hotels," Camilleri said of the officials promoting the tourism project.

Niyazov distinguished himself by establishing a cult of personality resembling the one created by late North Korean leader Kim Il Sung, said Alexei Malashenko, a Central Asia analyst at the Carnegie Moscow Center.

"They both had totalitarian regimes that included persecution of the political opposition," Malashenko said.

Niyazov carried the title of "Turkmenbashi," or leader of the Turkmens, and ruled by fiat. He erected gold statues of himself around Ashgabat and propagated his teachings to the largely Sunni Muslim nation in a spiritual guide called "Ruhnama." Niyazov also trimmed a year off public schooling, making the educational system incompatible with any other.

Marble-Clad Towers



Under Niyazov, Paris-based Bouygues, the world's second-largest construction company behind France's Vinci, won contracts for the most prestigious government buildings; Turkish builders got projects to replace the aging Soviet housing stock. Ashgabat, about 30 kilometers north of the border with Iran, shed its image as a dusty Russian colonial backwater and emerged as a metropolis of white, marble-clad towers and oversize monuments.

U.S. energy companies largely abandoned Turkmenistan by 2000. Unocal, now part of Chevron, withdrew from plans to build a gas pipeline to southern Asia across Afghanistan in 1998. Burren Energy, a London-based exploration company, bought Mobil's stake in a joint oil project after the U.S. company merged with Exxon in 1999 to form ExxonMobil, the world's biggest oil company.

A project led by Royal Dutch Shell, Europe's largest oil company, to build a link under the Caspian Sea with U.S. companies General Electric and Bechtel Group was put on hold in 2000 after talks with Niyazov reached a dead end.

In the absence of Western multinationals, lesser-known producers such as Burren and Dragon Oil, majority-owned by the government of Dubai and registered in Ireland, have been developing fields under production-sharing agreements.

Malaysia's Petronas won Turkmenistan's first such agreement in 1996 and has since been drilling offshore for oil and gas. In August, Berdymukhammedov personally presented China National Petroleum, the largest Chinese oil producer, with a license to produce gas for a planned pipeline to China.

Niyazov's death sparked new interest in the country, with executives from BP, Chevron and France's Total visiting Ashgabat to drop in on Berdymukhammedov.

"The government is very open and receptive to concrete proposals," said Ian MacDonald, the head of Chevron's Russian operations.

Lukoil, Russia's largest independent oil company, is seeking to complete a deal for offshore fields in the Caspian. Eni, Italy's largest oil company, bought 25 percent of Burren in December and made an offer to acquire the rest of the company.

Security for Investors



Sealing new international partnerships will require overhauling the country's laws to provide security for investors, Berdymukhammedov told the Eurasia Group during his New York visit. Bayrammurad Muradov, the president's point man on the oil and gas industry, reinforced that commitment at the November investor conference.

"The main task before the government is to complete this legislation," Muradov said.


Nyse Euronext / AP
Turkmen President Gurbanguly Berdymukhammedov visiting the New York Stock Exchange in September last year.
The entrepreneurs with visions of riches in Turkmenistan are willing to give the government the benefit of the doubt, at least for now.

"It's going to take this government some time," said Neel Duncan, a U.S. oilman who met Muradov during a visit by an official Turkmen delegation to Houston in September. "In the first half of '08, we'll start to see some movement."

Duncan and his business partner, Christopher Saye, founded an exploration company dedicated to Turkmenistan two months after Niyazov's death. The two men, who have both worked in the oil industry of former Soviet republics since the early 1990s, are counting on their contacts and experience to give their Caddo Exploration a competitive edge.

"You go through phases of frustration and excitement," Duncan said. "Patience is the key."

Duncan first visited Turkmenistan during the November conference, which Caddo helped sponsor alongside BP and Chevron. Duncan quit a managerial job at BP's Russian venture, TNK-BP, to follow in the footsteps of his late father, who ran an independent oil outfit in New Mexico. With several project requests still under consideration by the Turkmen authorities, Duncan declines to provide details.

"If you want to get real returns, you've got to take some risks," he said. "I don't think they're unbearable."

Elsewhere in the region, governments are renegotiating the production-sharing agreements they signed in the 1990s, when oil traded for as little as one-tenth of the $100 per barrel it reached last month.

In Russia, Shell and Japanese partners Mitsubishi and Mitsui agreed in December 2006 to sell Gazprom half of their stakes in the Sakhalin-2 oil and gas development north of Japan. The agreement gave Gazprom a controlling interest in the $20 billion project. It followed months of government threats to block investment plans and cancel building permits on environmental grounds.

In Kazakhstan, the second-biggest oil producer in the former Soviet Union after Russia, an Eni-led group agreed last month to give the government a larger stake in the Kashagan field, the world's biggest oil discovery in 30 years, after a dispute stalled development in 2007.

Berdymukhammedov's government has not revisited past production-sharing agreements. Record energy prices and international oil companies' global search for new reserves will let Turkmenistan negotiate future deals from a position of strength.

Shutting Off Iran



In November, Berdymukhammedov used high prices and growing foreign interest in his country's resources to help negotiate a graduated 50 percent price increase for gas sold to Russia in 2008. Eleven years ago, Gazprom, which controls the Soviet-era pipeline out of Turkmenistan, cut off access to its network after Niyazov demanded a higher price. Niyazov responded by opening a pipeline to neighboring Iran.

Berdymukhammedov shut down that pipeline, which supplies 5 percent of Iran's gas consumption, during price negotiations in late December. The closing, and strong domestic demand because of cold weather, led Iran to cut supplies to Turkey, which reduced shipments to Greece to make up for the shortfall.

With western Siberia's largest gas fields in decline, Gazprom increasingly relies on Central Asian gas to keep its export obligations. Russia, which supplies more than one-quarter of Europe's natural gas, secured an agreement in December to construct a pipeline from Turkmenistan and Kazakhstan.

The accord came after those countries considered a U.S. plan to build a link below the Caspian Sea to feed into a southern energy corridor to Azerbaijan and on to Turkey, breaking Russia's control over exports. While agreeing to the Russian pipeline, Berdymukhammedov also has been increasing pressure on Gazprom by seeking closer contacts to Azerbaijan and committing gas volumes to a pipeline to China.

"They're keeping their options open, seeing who can make the best deal on their terms," said Richard Hoagland, the acting U.S. ambassador in Ashgabat. "Turkmen gas is going to be essential to Europe."

Inviting in foreign money presents a dilemma for the government, since it means opening up an economy that the European Bank for Reconstruction and Development in a 2006 report called the least reformed in the former Soviet Union.

"Most of the country's production is still state-owned, state-directed and state-controlled," said a Western diplomat in Ashgabat, speaking on the condition of anonymity because he was not authorized to critique the government publicly.

The government has also subsidized housing, energy and staple foodstuffs. And it has maintained an artificially strong exchange rate for its currency, the manat, that masks a real average monthly income of $150, according to World Bank data.

Berdymukhammedov's first moves this year were to decree the opening of money-changing offices, devalue the official rate to 6,200 manat per dollar from 5,200 and establish a commercial rate of about 20,000 manat per dollar. The actions were aimed at helping to bring the official exchange rate in line with the black market rate.

"Without a doubt, this is the biggest reform," the diplomat said. "The next challenge is to bring in new forms of ownership."

A Matter of Trust



For foreign investors, the test will ultimately come down to how much they trust Berdymukhammedov. On his visit to New York last fall, he promised, "I, as the president of Turkmenistan, am the guarantor of the safety of your future investments."

That's little comfort to Dogan, the chicken farmer, who said the regime's global publicity campaign did not mean its ways of doing business have changed. Numerous appeals lodged by the German government and EU on his behalf have fallen on deaf ears, he said.

With his remaining hens reaching the end of their productive lives and a ban on the import of chicks in effect, his farm may soon have to close, Dogan said. He and his Turkmen business partner have already prepared for their venture's demise.

They've invested $2 million in a chicken farm in neighboring Uzbekistan.