After growing at an average rate of 2.3% during the 1980s, the industrial sector declined after the breakup of the Soviet Union. Industrial output declined by 15% in 1992, and fell 25% in 1994 when it became clear that Turkmenistan gas exports were going to be diverted from hard currency markets, and therefore from external sources of capital finance. After a further decline of 7% in 1995, gross industrial output reportedly surged ahead 17.9% in 1996, despite a 7.7 decline in the wider economy, as agreements were reached for gas supplies to the Ukraine and the Transcaucasus. However, in 1997 deepening financial problems stemming from Russia's cutoff of Turkmenistan's access to its Gazprom lines over a price dispute, arrears in payments from its ex-Soviet customers, and declines in cotton processing helped to produce a fall in industrial production of 29.3%. From this low point, however, industrial output has expanded consistently. In December 1997 the $190 million, 124 mile Korpezhe-Kurt Kui pipeline connecting to Iran's gas pipeline system was completed, and in 1998 access was restored to the Gazprom's pipelines.
Industrial production increased 1% in 1998, damped by the effects of the Russian financial crisis, but then rose 16% in 1999, 29% in 2000, and 8% in 2001. Nevertheless, the Turkmenistan economy remains dominated by primary production—gas, oil and cotton—and there has been little privatization of medium and large enterprises that might promote industrial development. Industry as a percent of the GDP has declined over this period from 50% to 45%, and industrial workers as a percent of the labor force has declined from 19% to 15%. Economic reforms have been held back by the deliberately gradualist approach adopted by the government, which has left over 90% of economic activity in government hands. Industrial development is a secondary goal, subordinated to the primary objectives of gradualism, maintaining state leadership of the economy and maintaining a comprehensive welfare program. As part of the government's economic diversification policies, investment from the public sector and foreign exchange earnings have been used to build textile and garment manufacturing plants, often in joint ventures with Turkish partners. From 1995 to 2000 the share of the textile sector in total industrial production increased from 10.4% to 26%, while the share of cotton processed domestically rose from 3% to 35%. However, the commercial viability of these joint ventures is difficult to assess because of the implicit subsidies provided by the Turkmenistan government, multiple exchange rates, and incomplete data. Evidence is that in the shortfall in cotton production in 2002, where only a fourth of the government's target of two million tons was met, priority is being given to supplying Turkmenistan's textile industry over meeting export demand, even though cotton is an important foreign exchange earner.
Turkmenistan's leading industries are those related to its main raw material exports. Most of country's plants and infrastructure continue to rely on Soviet-style equipment and technology. The textile industry is dominated by large state-owned enterprises (SOEs). As of 1998, only 33 manufacturing enterprises had been privatized, including one knitting factory whose sales price of 43.3 billion manats (about $8.2 million at official exchange rates) constituted over 40% of the value of all privatized assets. Turkmen carpets are known world wide for their quality and are a source of national pride: ornaments of Turkmen carpets are components of the national flag and the national emblem of Turkmenistan. They are sometimes erroneously identified in Western markets by the label "Bukhara," which is actually just the Uzbekistan city where the carpets are sold. Turkmen carpets feature deep red wool, with stylized geometric patterns.
Fuel-related production (mainly gas and oil) is the second-largest component of the industrial sector, accounting for about 22% of total sector output in value terms. Turkmenistan has two oil refineries and plans for building a third. The older one at Turkmenbashi (formerly Krasnovodsk) has a 116,500 bbl/d capacity and is currently undergoing a $1.46 billion upgrade and modernization with financing from Germany and Japan. In April 2001, a $300 million catalytic cracking unit was launched, engineered by France's Technip Geoproductions Company, and Iran's. The unit, with a capacity of 36,150 bbl/d, is designed to produce high octane gasoline, diesel fuel, heating oil and liquefied petroleum gas. Technip was also awarded a contract to build a lubricants and polymers to world standards. Turkmenistan's record, slightly larger, 120,150 bbl/d capacity Chardzou refinery at Seidi was not completed until 1991, but is also slated for modernization and expansion. The Chardzou refinery depends on Russian oil piped in from Western Siberia, and has been operating at about half capacity. In 2002, the president solicited bids for a third 100,000 bbl/d refinery. Food processing (especially meat and dairy processing), construction materials, and electricity generation account for about 20% of total industrial output. Chemicals and machinery are other important manufacturing subsectors.