Turkmenistan, though one of the poorest and least developed of the former members of the Soviet Union, boasts rich deposits of oil, gas, potassium, sulfur, and salts. It is the fourth-largest producer of natural gas in the world with proven reserves of about 2.9 trillion cu m (101 trillion cu ft), and 17 new deposits discovered in the last 10 years. Proven oil reserves are 541 million barrels, with possible reserves as high as 1.7 billion. Despite this wealth of industrial raw materials, the labor force remains dominantly in agriculture, which, with forestry, generated an estimated 27% of the 2000 GDP. Turkmenistan is the world's tenth-largest cotton producer. Industry contributes about 48% of the GDP and occupies 15% of the labor force.
Turkmenistan's transition from a command economy to a free market economy was initially cushioned by its relatively low level of development, as well as by the central government's plans for a gradual reform over a 10 year period with the state continuing to play strong directive and protective roles in the economy. In 2002, the Asian Development Bank (ADB) estimated that poverty incidence in Turkmenistan was lowest among the transitional economies of Central Asia. Extensive subsidies in a budget nearly 80% directed towards welfare services plus double digit GDP growth since 1999 have reduced absolute poverty to negligible levels. On the other hand, the slow pace of privatization and reliance on central directives has meant that much of the economy has not been exposed to market disciplines, and remains subject to the inefficiencies and distortions inherent in central controls. Although evidence suggests that living standards remain low and that structural development has been impeded, assessment is difficult because the government continues to treat economic statistics like state secrets.
Turkmenistan became independent in October 1991. The initial decontrol of prices resulted in a 90% increase in retail prices in 1991, followed by a megasurge of 800% in 1992. Contraction in output occurred mainly in industrial output while growth in the agricultural and transportation sectors—the latter particularly due to increased government investment—lessened the rate of decline in the overall economy. Enlarged subsidies, increased wages and family allowances, and the reinstatement of some price controls were used to offset the impact of rising prices and the potential for social unrest, particularly in light of the eruption of violence in Tajikistan and other former SSRs. In November 1993 Turkmenistan dropped out of the ruble-based monetary union and introduced its own currency, the Turkmeni manat. In the same month, Russia, on whose Gazprom pipelines Turkmenistan relied to take its natural gas to market, cut Turkmeni access to the hard currency markets of Western Europe, diverting its competitor's gas instead to the cash-strapped markets of the Ukraine and the ex-SSRs of the Transcaucasus. The result was one of the worst bouts of hyperinflation experienced by one of the newly independent states. The manat, introduced at two to a dollar, was at 125 to the dollar before the end of 1994, with unofficial rates often three times as high. In November 1995, with inflation at over 1000% for the year and the Turkmeni government threatening to cut off gas to its late paying customers, an agreement was reached with Russia for the creation of a joint stock company Turkman RosGaz (TRAO)— 51% Turkmen, 44% Gazprom, and 5% Itera International Energy Corp. (U.S.)—whereby Gazprom would purchase and transport all the gas that Turkmenistan could sell to the Ukraine and the Transcaucasus countries. This did not solve Turkmenistan's basic problem of getting hard currency export earnings to back its currency. Azerbaijan, Kazakhstan, and the Ukraine had all run up substantial gas debts. Aggravating the situation, a below average cotton harvest extended poor economic conditions into 1996, as inflation raged on at about 992% for the year. GDP continued its post-independence slide, registering a decline in GDP of -8.2% in 1995 and -7.7% in 1996. Gross domestic product plunged further (-25.9%) in 1997 when Russia cut off access to its pipelines in a dispute over prices to be paid for Turkmeni gas. External debt, which had already increased 86.5% from $401 million to $750 million 1995 to 1996, jumped 136% to $1.77 billion in 1997 as the government was forced to borrow to cover shortfalls in export payments. More promising were the effects of reforms in monetary and fiscal policy adopted in 1996 and 1997.
Although not officially under an IMF program, the government voluntarily undertook to follow IMF recommendations about controlling credit expansion, reducing budget deficits, and liberalizing foreign exchange. From this point inflation began a steady retreat, falling to 84% in 1997, to about 20% in 1998 and 1999, to 14% in 2000, and to a reported 6% in 2001. However, internal evidence from the government's published figures suggest a resurgence of inflation in double digits in 2002. Another positive development in 1997 was the completion in December of the $190 million, 24 mile Korpedzhe Kurt-Kui pipeline connecting Turkmenistan to the Irani gas pipeline system. In 2001 agreement was reached on a route whereby Turkmenistan gas could be delivered to Armenia through a still-to-be-built Iran-Armenian pipeline. Work on the Armenian section, after delays, is scheduled to begin in 2003, though it is not clear if the scheme will be exempt from US sanctions on countries dealing with Iran. A more ambitious project is the Trans-Afghanistan pipeline, called the Central Asia Gas Pipeline (or Centgas) that would run 1440 km (900 mi) from the Daulet Abad gas field in Turkmenistan through Kandahar, Afghanistan and end at Multan in Pakistan. The Centgas consortium was set up by Unacol in October 1997, but suspended 22 August 1998 in the face of a lack of success in obtaining funding, continuing civil war in Afghanistan (and opposition in the United States to Unacol negotiations with the unrecognized Taliban regime), and, finally, US cruise missile attacks against al-Qaeda training camps.
In May 2002, Turkmenistan led the reopening of discussions on the Trans-Afghan pipeline, now generally referred to as the TAP, and on 27 December 2003 the leaders of Turkmenistan, Pakistan and Afghanistan reached an agreement in principle to build the $2.5 billion plus project. The ADB was enlisted to carry out a six-month feasibility study, and a summit is planned for September 2003 to put together the consortium that will build the TAP. In February 2003, the three TAP countries extended an invitation to India to join the project, estimated now to cost $3.2 billion, apparently on the realization that its viability would depend on access to the Indian market. India, not wanting to work with Pakistan, did not accept the offer. A further cloud was cast over the TAP project by the death of the Afghani negotiator, its minister for mines and industries, in a suspect plane crash later in the month. In 2003 the future of the TAP depends on regional situation following the war in Iraq. In any case, the 1997 opening of the pipeline connection to Iran helped make 1998 the last year of post-independence decline in Turkmen GDP, which reportedly fell only 1% despite of the ongoing Russian financial crisis, although earlier reports had put this decline at closer to 11%. Decisive in restoring the economy to growth was the reopening of access to the Russian gas lines in 1998 following the resolution of their price dispute. There followed four years of double digit growth: 16% in both 1999 and 2000, 20.5% in 2001 and a projected 13% in 2002.
By the agreement reached with Russia in 1998, Turkmenistan was supposed export 20 billion cu m (706 billion cu ft) of natural gas to Russia by 2000 and increase this figure by 10 billion cu m (353 billion cu ft) per year until a level of 50–60 billion cu m (1,765–2,118 billion cu ft) was reached in 2004 or 2005. These levels have not been achieved and in 2003 Russia was seeking a new agreement with Turkmenistan. A condition accepted by the Russians for the negotiation with some apparent reluctance was agreement that a coup attempt 25 November 2002 against President Niyazov, who now prefers to be called Turkmenbashi or Father of the Turkmen, was not staged as a means eliminating political opponents. The Turkmeni economy by US government estimates had reached about 70% of its preindependence level by 2001. The country's production of natural gas in 2001 was at about 60% of its preindependence level in 2001. Unemployment has apparently declined sharply during the last several years, dropping from 24% in 1998 to 14% in 2001, though this series of data incomplete. In the meantime, payments problems with gas customers have continued. In May 1999, Turkmenistan suspended natural gas exports to the Ukraine (for the second time) over arrears of $281 million, and did not agree to restore supply until October 2000.
On 14 May 2001 Turkmenistan and the Ukraine reached an agreement for the supply of natural gas between 2002 and 2006 in exchange for 60% payment in cash and the rest in participation in 20 construction and industrial projects in Turkmenistan worth $412 million. In May 2002, with the Ukraine still owing $46 million in cash, President Niyazov expressed concern that work on the projects was progressing too slowly. In the meantime, cotton production experienced an unprecedented shortfall in 2002. Government planners had set an ambitious target of 2 million tons of cotton for the 2002 harvest despite the fact that the level had fallen from 1.3 million tons to1.136 million tons (12.6%) from 2000 to 2001. To achieve the envisioned 80% increase the government agreed to sign contracts only with farmers achieving a yield of more than 30 centners (about 1.65 tons) per hectare. The area under cotton cultivation was to be reduced to 750,000 ha in 2002, having been expanded from 570,00 ha in 2000 to 770,000 in 2001. The plan called for 90,000 tons of cotton seed to be sown in 2002, down from 100,000 tons in 2001. The 2002 harvest in fact came in at only 500,000, 25% of the government's target and 56% below the previous year. A problem seems to have been an unusually wet spring, but the President Niyazov blamed "incompetent, irresponsible and dishonest officials," and dismissed a number of people from their jobs, including four regional leaders. The government's long-range targets for cotton 3 million tons of cotton by 2010 processed into 900,000 tons of cotton fiber.