Energy-rich Turkmenistan slashes subsidies to consumers

Dec 08, 2014 12:00 AM

The people of Turkmenistan are not accustomed to many freedoms, but one of them is their right to very low cost energy supplies. Whereas most other citizens of the former Soviet Union were introduced to the free market concept of having to pay for basic utilities way back in 1991, Turkmenistan is the one place that maintained their heavy subsidies … but not for much longer.

On Nov. 20 Turkmenistan’s state news service reported that President Gurbanguly Berdymukhammedov during a cabinet meeting noted that Turkmenistan is the only country in the world that offers its population gas, electricity and water free of charge, along a number of other benefits and privileges that have no analogues elsewhere in the world. According to the World Bank Turkmenistan’s government maintains a large portfolio of social transfers and budget subsidies, currently 17 in all.

Turkmenistan holds the world’s fourth-largest natural gas reserves, estimated at 17.5 trillion cubic meters (tcm), greater than the United States (9.4 tcm), exceeded only by Qatar (25.1 tcm), Iran (33.6 tcm) and Russia (48.7 tcm) of an estimated global total of 187.3 tcm.

Natural gas plays a significant role in Turkmenistan’s overall energy consumption, accounting for, approximately 78 percent; unlike its Central Asian neighbors, all of Turkmenistan’s power generation facilities are gas-fired. The country also ranks among the top 10 oil producers in Asia and the Pacific.

The downside for fortunate Turkmen consumers was that Berdymukhammedov’s observations followed a report by Vice Premier Annamikhamed Gochyev, who reported back on Berdymukhammedov’s order to streamline tariffs for electricity consumed by the population over the free limit.

The subsidies formally started in 1993, when Turkmenistan’s first president, self-styled “Turkmenbashi” (“father of the Turkmen”) Saparmurat Niyazov, legalized the de facto free quotas of electricity, gas, water and salt for households that had been in place since the 1991 collapse of the USSR for a decade, and in 2003 subsequently extended the subsidies through 2020.

Three years later Niyazov told his citizens, “This decision will help ensure a carefree life for our people,” adding that the nation had enough hydrocarbons to last 250 years. Niyazov’s ambassador to the UN, Aksoltan Ataeva, explained the rationale behind the massive subsidy program; “This huge social support of the population has allowed safeguarding against social explosions during the transition period and ensuring stable development of the economy.”

When Berdymukhamedov became president following Nizayov’s death on Dec. 21, 2006, the country’s pliant Khalk Maslakhaty (parliament) voted to extend Niyazov’s free energy policy until 2030, with Berdymukhamedov pledged to support that policy. Since then however, the subsidies have been slowly cut back.

In Sept. 2013 the free electricity ration for each citizen was reduced to 25 kilowatt hours (kWh) from 35 kW per month.

On Jan. 18, 2014, Berdymukhammedov informed the citizenry during a televised address that his administration would begin installing gas meters in households, commenting, “The installation of the meters will allow people to economically consume natural gas, while the maximum payment for using the gas will not create difficulties for the population, for each family.”

Each family was to be assigned a free natural gas quota based on how many individuals live in a family. In 2001 Turkmenistan had the dolorous ranking as the third least energy efficient country in the world. Neither Berdymukhammedov nor the country’s state-owned gas company gave a time-frame or a reason behind the policy change. The government also didn’t immediately reveal how much it will charge for gas.

Two weeks later, Turkmen had their answer. On Feb. 1 Berdymukhamedov said in a resolution published in the official government newspaper that each Turkmen would still receive up to 50 cubic meters of gas for free, but anything over that amount would cost $7 per thousand cubic meters.

According to media reports, the gas and electricity restrictions that began in 2013 were due in part to the country’s difficulties in meeting its energy export commitments. At an Oct. 2013 conference attended by Berdymukhammedov, one delegate publicly announced that the country’s free natural gas policy to the nation’s 5.5 million citizens cost the Turkmen treasury $5 billion annually, or nearly $1,000 per citizen. The Asia Development Bank reports that income per capita has increased more than tenfold since independence, to $7,300 in 2013.

Berdymukhammedov’s announcement gives weight to assumptions that the government sees subsidizing its domestic energy market as an increasingly heavy economic burden at a time when it is making profitable energy exports a higher fiscal priority.

Turkmen drivers were also affected. In 2007 Turkmenistan set a monthly limit of 120 free liters of gasoline per passenger car.

In March 2012 the Turkmen government ceased to distribute coupons for free gasoline and diesel fuel to the owners of trucks.

The following year, according to the opposition group Gundogar, Turkmen authorities used subterfuges to impose restrictions on free gasoline to the owners of private cars, with car maintenance and diagnostics stations creating difficulties when issuing roadworthy inspection certificates, which are necessary for free gasoline coupons.

Finally, on April 29, 2014, Berdymukhammedov ordered an end to the free monthly gasoline handouts to car owners as of July 1, telling his hapless motorists that the abolition of free gasoline aims “to help sustain the growth of the national economy, achieve the efficient use of oil products, and ensure their orderly converting to cash on the domestic market.”

The gradual diminution of subsidies comes even as Turkmenistan dramatically increases its natural gas exports. China began importing Turkmen gas at the end of 2009. The past five years have seen Turkmen natural gas exports expand dynamically, with China displacing Russia as its main export market, now receiving over half of Turkmenistan’s gas exports.

In Sept. Turkmenistan signed a contract that will boost its gas exports to China to 65 billion cubic meters (bcm) per year by 2020, up from 25 bcm this year. Rising natural gas exports have allowed the Turkmen economy in 2013 to sustain strong growth performance, expanding at 10.2 percent.

Pressuring to pare back social programs and subsidies is coming from Turkmenistan’s foreign financial partners. The World Bank, in its April 2014 “Turkmenistan Partnership Program Snapshot” noted, “A more equitable allocation of budget resources may require amendments to the current principles of public spending policy. The cost of the budget subsidies currently provided and the state aid programs may become too high and fiscally unsustainable over time. Thus the current practice of universally providing budget assistance to the entire population should be replaced with targeted social assistance programs only to those in need.”

The Asian Development Bank made similar observations, writing in its “Asian Development Outlook 2014: Fiscal Policy for Inclusive Growth,” “The current magnitude of public investment spending accentuates the need for better control over the efficiency of spending. In addition, the large outlays risk spurring inflation and real appreciation of the Turkmen manat, which may weaken prospects for creating a more broadly competitive and diverse economy.”

One thing is certain – Turkmenistan will not run out of energy exports anytime soon. The country currently operates 153 natural gas fields, of which 142 are onshore and 11 in its Caspian waters, 82 gas condensate fields and 38 oil fields. The majority of the country’s proven energy reserves are in the South Caspian Basin and the western Garashyzlyk onshore region. Adding to these riches are Turkmenistan’s Caspian offshore waters, which the government believes contains over 80 billion barrels of oil. Accordingly, the country’s financial income from energy exports is certain to increase in the future.

But in one neighborhood Turkmen consumers are fighting back. In Aug. residents of the showcase Parahat-7 neighborhood, opened in 2013 and consisting of 9 nine-story residential buildings in the Turkmen capital Ashgabat were told to remove their air conditioners from windows in their apartments overlooking Baba Annanov Street in the city center. While no reason for the municipal order was given, the external units adorning the buildings look decidedly ad hoc, interfering with the buildings’ symmetry, but for residents aesthetic consideration were trumped by the fact that summer temperatures in Ashgabat can reach a scorching 122 degrees Fahrenheit (50 degrees Celsius.) The air conditioners were imported from Turkey, whose booming trade in the equipment reached $2.988 billion in the first eight months of 2014, an increase of 11.8 percent compared to the same period in 2013, Turkmenistan vaunting to Turkey’s seventh largest export market.

When cranes arrived on Aug. 23 to remove the air conditioners, residents blocked the cranes and forced the workers into a tactical retreat.On Nov. 29 the cranes returned, to be met by dozens of Parahat-7 residents again blocking the removal equipment. Frustrated by a second demonstration in the heart of the city, municipal authorities told residents that the order had been cancelled.

Ironically, one of the apartment blocks in Parakhat 7/1 was erected in cooperation with the Ashgabat city administration district under the “Improving Energy Efficiency in the Residential Buildings Sector of Turkmenistan,” implemented by the United Nations Development Program (UNDP) in partnership with the Government of Turkmenistan with financial support from the Global Environment Facility (GEF).

As the government seeks to reduce subsidies, it should, at the very least, take into account what electricity consumers actually want to use their energy to power, as they apparently prefer comfort over artistic design. As for the other subsidies, time will tell.

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