SIM REPORT: Middle East and Central Asia, Issue 1
Turkmenistan is currently experiencing slowing economic growth because of reduced revenues from gas sales. This has hampered its ambition to kick-start its gas sector which has struggled over the past four years due to reduced market demands and lower prices, which have dropped by more than 25 per cent since 2016.
Turkmenistan holds the world’s fourth-largest natural gas reserves, with most of it untapped, and the commodity accounts for more than 80 per cent of government revenue. The government has made it a priority to upgrade its export infrastructure. However, unlike neighboring gas exporting countries such as Azerbaijan and Kazakhstan, the Turkmenistan government has historically focused its opening to direct foreign investment to China and Russia, rather than American and European businesses.
The government has failed to carry out structural reforms on its economy, meaning that a downturn of energy prices will make its economy vulnerable. In 2014, a decline in energy prices, caused the country’s real economic growth to decline from 10 per cent in to to 6.7 per cent the following year. Energy prices have continued to remain low since 2014, reducing the government’s revenues.
In July 2019, Russia's Gazprom renewed a contract for state owned Türkmengaz, however the shipments to Russia are projected to be lower than the years preceding a suspension of gas imports – after a mysterious pipeline explosion in 2009 amid a price dispute between the two countries – with Russia buying 60 billion cubic meters (bcm) out of a total output of 70 bcm prior to 2009. Since 2009, most of the country’s’ gas goes to China, around 40 bcm. A large, but an undisclosed portion of the revenue generated from the gas exports to China has gone towards paying down USD3 billion in debt to China which was part of a loan given for the development of the giant South Iolotan gas field in the east of the country in 2009. In addition, in 2017, Turkmenistan stopped selling its gas to Iran, over disputes concerning gas deliveries. This forced Turkmenistan to reorient itself towards Beijing as an export growth market.
China has continued to increase its investments in Central Asia in order to reduce its dependency on energy imports transiting via maritime vessels through the Strait of Malacca in Southeast Asia. Piping gas directly overland to China significantly reduces delivery costs However, the exports to Beijing have been unable to make up for the loss of sales to Moscow, with Turkmenistan’s revenue dropping to USD8 billion in 2016-17, half of what it was between 2000 and 2014.
Turkmenistan’s overtures towards China intensified in 2013 under President Gurbanguly Berdimuhamedow in a bid to reduce reliance on Russia. However, both countries’ ambitions could be offset by resistance to China’s growing influence in Turkmenistan. There have been a series of targeted protests against Chinese contractors over the past two years, which could affect Chinese operations in the country.
Many Turkmen nationals – most of whom are ethnic Turks – have been angered by Beijing’s treatment of the Uyghurs, a Turkic minority in Xinjiang Uyghur Autonomous Region in western China. Human rights activists estimate China is holding more than one million predominantly Muslim Uyghurs interned in ‘re-education’ camps there. This has fuelled growing antagonism towards Chinese presence, leading to several protests in 2019. If further demonstrations occur, this could damage medium- to long-term performance projections, potentially leading to less government revenue and a growing need for new credit, most likely from China. If the threat of anti-Chinese protests is not effectively managed, this could lead to operational disruptions for the energy industry. Chinese investment is likely to be directly impacted, but the risk would spillover to non-Chinese foreign investors.
Lack of sufficient revenue from gas exports and growing anti-Chinese sentiment are unlikely to reverse the slowing economic growth in the one-year outlook. The economy’s dependency on hydrocarbon, and gas sales to Beijing is a cause for concern for foreign investors looking to make market entry. Returns on projects in Turkmenistan are likely to suffer in the one-year outlook. Gas investors considering market entry should continue to monitor the turbulent macroeconomic environment and assess how this will likely impact operations.
WANT TO READ MORE ANALYSIS IN THIS LATEST SIM EDITION ...
TURKEY: Major car manufacturer delays decision to build factory, as reputational risks continue to grow
LEBANON: Mass protest against political establishment imperil the banking sector