121 - Porter Diamond & CAGE - Turkmenistan
121 - Porter Diamond & CAGE - Turkmenistan
121 - Porter Diamond & CAGE - Turkmenistan
on Turkmenistan
Assignment on International
Business Strategies
Submitted to
Professor Som Sekhar
Bhattacharya
Professor, NITIE, Mumbai
Table of Contents
1.
Introduction
2.
3.
4.
2.1
Factor Conditions
2.2
Demand conditions
2.3
2.4
2.5
Governments role
CAGE Framework
3.1
Cultural Distance
3.2
Administrative Distance
10
3.3
Geographical Distance
10
3.4
Economic Distance
11
Trade relationships
12
4.1
14
4.2
15
References
16
Abstract
The purpose of this document is to highlight and lay emphasis on the economy of
Turkmenistan as a country with reference to the Porters diamond model and the CAGE
framework. Firstly, the countrys economic and general state of affairs are sought to be
explained by means of the four aspects of the Porters diamond model as applied to a
nation. Thereafter, an analysis of the trade relations and cross-border flows of goods and
services in and out of Turkmenistan is undertaken to arrive at the industries prima-facie
supporting the countrys economy. Finally, the CAGE framework is deployed to assess the
distance relationships between India and Turkmenistan with a view to draw conclusions and
suggestions for a more favourable future outlook.
RAHUL RANGANATHAN
1. Introduction
Nestled between Iran, Kazakhstan, Uzbekistan and Afghanistan and bordering the Caspian
Sea with a coastline of around 1,800 kms, Turkmenistan is primarily is a declared
presidential republic. However, Turkmenistan is governed by authoritarian presidential rule
since its Independence on October 27, 1991 consequent to the break-up of the Soviet
Union. Its story so far has been primarily written by two men, Saparmurat Niyazov and
Gurbanguly Berdimuhammedov with both their governments fostering centralized state
control with complete authority over the parliament and judiciary. The country is divided
into 5 provinces, Ahal Welayat, Balkan Welayat, Dashoguz Welayat, Lebap Welayat and
Mary Welayat and 1 independent city of Ashgabat. The 5 regions of the territorialadministrative structure are formed based on tribal characteristics. 80% of the total area of
the country is covered by the Karakum Desert justifying the primarily arid and tropical
desert climate. [9]
The territories of Turkmenistan have been populated since ancient times by one army or
another, most notably, by Alexander the Great when he conquered the region in 4 th century
BC on his way to India. Thereafter, the Arabs conquered the region in 7 th century AD
bringing Islam with them and establishing the country along the famous Silk Road trading
route. In the 12th century, Genghiz Khan took control of the region with the following 7
centuries characterized by constant intertribal wars and a state of instability. It was only in
1894 that imperial Russia took over with Turkmenistan declared as one of the 15 republics
of the Soviet Union in 1924 post the October Revolution in 1917 [1]. After the breakup of the
Soviet Union, the country gained independence with Saparmurat Niyazov becoming the first
president of the new republic.
The Turkmenistan economy has registered consistent double digit growth over the past 3-5
years with growth buoyed primarily by strong terms of trade and sustained demand for
natural gas from China. The below table provides valuable insight into the key economic
indicators for Turkmenistan:
Indicator
GDP in current prices (TMT million)
Rates of growth of production (%)
GDP
Industry
Agriculture, fishery and forestry
Construction
Transportation and communications
Trade and catering
GDP industry structure
Industry
Agriculture, fishery and forestry
COUNTRY REPORT ON TURKMENISTAN
2007
27000
2008
49470
2009
57611
2010
59000
2011
79976
11
10.1
6.1
36.2
17.1
15.4
14.7
7.1
4
129.3
8.7
9.9
6.1
-20.8
8.5
114.4
14.7
27
9.2
8.1
7.8
15.9
12.2
11.3
14.7
24.2
0.1
12.6
8.1
9
36.7
17.8
50.5
10.8
42.7
10.5
39.7
12.8
49.3
10
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Construction
Transportation and communications
Trade and catering
Other services
Exchange rate annualized (TMT/USD)
Revenues of state at current prices (TMT million)
Expenditures of state at current prices (TMT million)
Table 1: Key economic indicators for Turkmenistan
6.4
5.7
9.2
24.2
1.04
4,684
3,629
10.1
4.1
5.3
19.2
2.32
10080
5,375
18.2
5
6.1
17.5
2.85
11,768
10,124
16.1
5.9
7.1
18.4
2.85
10,170
8,878
13.6
4.5
5.9
16.7
2.85
15079
12,180
[6]
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85% of fiscal revenues, a sharp decline in global hydrocarbon prices is the key risk to the
growth projections.
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Turkmenistans vast resources of natural gas put it among the top-five countries in the
world in terms of gas resources. Essentially, the development of the natural gas industry in
Turkmenistan can be described in four stages:
Stage I:
This stage between 1992 and 1996 was characterized by relatively stable production and
export of natural gas to traditional partners like the USSR via a pipeline network owned by
the Soviet Union.
Stage II:
This stage was characterized by a significant decline in the exports and production of natural
gas because of insufficient demand from buyers in Russia.
Stage III:
This stage between 1998 and 2008 represents a significant shift by the Turkmen
government to diversify its exports of natural gas. The construction of the Korpeje-Kurtkui
pipeline opened up an alternate export route of natural gas to Iran.
Stage IV:
This stage is an extension of Stage III with significant diversification in natural gas exports
and substantial increase in export volumes to foreign markets, with particular focus towards
China and agreements to put in place the Turkmenistan-Afghanistan-Pakistan-India (TAPI)
pipeline to pump natural gas to India.
Petroleum and petroleum products
While contributing in small amounts to the total exports of Turkmenistan, the development
of domestic production of interim finished goods, primarily cloth, has given a boost to these
industries.
Other products exported include technical iodine, sodium sulphate, technical carbon, raw
(grege) silk, washed (scoured) wool, and carpets and carpet goods.
COUNTRY REPORT ON TURKMENISTAN
RAHUL RANGANATHAN
Dashoguz and Turkmenbashi. Movement between these 4 cities or between the 5 welayats
remains highly restricted and hence, the need for development of infrastructure in terms of
transportation and highways has not been felt.
Also, in terms of industrial infrastructure development, there remain major infrastructure
and economic hurdles to ensure that energy reserves will be able to be exploited and thus
would translate into sustainable, long-term economic growth for the country.
First and foremost, the country's current production capacity is insufficient and outdated
and would never be able to support the proposed expansion of production. Without new
capital investment inflows, production would not be able to increase despite the available
reserves.
Second, and almost as importantly, the country must continue to diversify and improve its
export pipelines. The completion of the Chinese export pipeline and the expansion of the
Iranian export pipeline open further avenues for export, but Turkmen exports are still
heavily dependent on the Gazprom-owned Russian pipelines, with a limited top export
capacity. Lending agreements with the Chinese will bring in vast amounts of new capital in
return for greater promises of production and export to that country.
Although global prices for natural gas are back up from 200809 crisis lows, they remain
lower than they had been before the global recession and are vulnerable to future slides. If
prices were to drop, the forward impetus for Turkmen economic growth would be severely
compromised. For now, baseline expectations are that in the short term, the Turkmen
outlook will be constrained somewhat by limited domestic extraction and transport
capacity. In the longer term, this capacity is assumed to increase substantially, thus
providing the country with the basis for greater long-term growth.
2.2 Demand conditions
Turkmenistan operates a licensing based regime of sorts similar to that of India pre-1991.
Production orders and domestic prices are heavily centralized and controlled by the state
with high social spending as suggested by Table 1 above. Apart from free education and
COUNTRY REPORT ON TURKMENISTAN
RAHUL RANGANATHAN
healthcare, the citizens pay nominal amounts for natural gas, electricity, water and even
food. Thus, demand conditions are at an artificial high but at a low level of sophistication
for industry and economy to prosper outside of the control of the state. Hence, instead of
analysing domestic demand, if we consider the global demand for oil and gas products, then
a completely different picture emerges. The current state of affairs, in this regard, are that
production infrastructure is outdated and limited which significantly undermines domestic
production capabilities. To enhance the existing infrastructure, influx of foreign capital is
critical. In this context, China has consistently pursued opportunities in the petroleum and
natural gas sectors of Turkmenistan. As an example, in 2007, Turkmenistan extended a
license to explore and extract natural gas in the pre-agreed territory of Bagtyyarlyk, located
on the right bank of the River Amudarya to the Chinese petroleum and natural gas deposit
operator, China National Petroleum Corporation (CNPC). The development of the deposit
and construction of natural gas pipelines was finances by loans issued to Turkmenistan by
China. Similar such efforts by Turkmen officials to draw in more capital inflows to help
improve efficiency and capacity at non-energy production as well.
Thus, domestic demand conditions can be described as unfavourable and immature for
development of the nation on the whole.
2.3 Firm strategy, structure & rivalry
In terms of industrial development, Turkmenistan has made the slowest progress in
industrial development in almost all of the countries. Only a few state-owned enterprises
have been privatized, and the government remains in firm control of production and exports
of gas, oil, and cotton, as well as some other industries. Although the government has once
again promised a privatization push, this process is extremely unlikely to dramatically alter
the economic landscape. The government continues to control prices. It also sets output
quotas for agricultural production and requires farmers to sell the state's wheat and cotton
orders at low prices. In addition, the government provides extensive subsidies, and soft
budget constraints are still in place via quasi-fiscal credits to selected sectors through the
country's Soviet-style banking system. Welfare spending is extremely high, with the state
guaranteeing free domestic supply of gas, water, and bread.
What then have been the constraining factors for development of the private sector and the
consequent firm rivalry? First of all, the government controls most of the economy and
restricts foreign participation to a few sectors in which investment partners are chosen
selectively and governed by project-specific presidential resolutions. Secondly, the lack of an
established rule of law, complex and arbitrary regulatory framework as well as incompliance
with international business practices have deterred private sector development and FDI. In
this regard, it would be worthwhile to note that Turkmenistan is ranked 168 in the
Transparency International Corruption Perceptions Index comprising 177 countries and
ranked 165 in the EIU Democracy Index 2011 comprising 167 countries. [8]
Hence, in conclusion, firm strategy, structure and rivalry is non-existent to say the least.
2.4 Related & supporting industries
Apart from oil and gas, the government has been keen to bolster the contribution from nonhydrocarbon sectors as well with the principal focus being on cotton and grain. The
COUNTRY REPORT ON TURKMENISTAN
RAHUL RANGANATHAN
government is striving for self-sufficiency in grain and aiming to use cotton production to
develop a viable textile industry further up the value chain by attracting FDI. However,
transportation to key markets and government intervention still remain significant obstacles
for the development of these supporting industries to the economy. Moreover, with all
Central Asian countries in bitter disputes over sharing diminishing sources of water in the
region, attainment of self-sufficiency in food remains a distant dream for the nation.
Moreover, with insufficient and non-existent capabilities to manufacture equipments to
buttress its oil and gas industry aided growth, the economy is going to be increasingly
dependent on imports to sustain high growth levels.
Thus, on an overall level, with respect to the Porters national diamond all the four factors
show unfavourable signs for the progress of the nation of Turkmenistan. Unless the
government undertakes a significant overhaul of the entire system, the dependence on
exports of natural gas for revenues and the associated risks of a slack in the demand or gas
prices globally will continue to persist.
2.5 Governments role
As mentioned earlier, Turkmenistan is essentially an authoritarian state with high
centralized state control. The president himself controls the parliament and judiciary while
there is no freedom of the press and media with the government in full control of all
content. In September 2008, the constitution was amended with a strengthened and
enlarged mejlis or the parliament. Industry is entirely dominated by state owned enterprises
while services have been migrated to the private sector.
From an economic standpoint, the government of Turkmenistan may face the following
significant challenges which are required to be overcome for long term sustainable growth:
Although the current government has hinted at adopting more favourable policies, little
change has been witnessed on the ground. The government needs to re-invent its role in
policy development and governance in order to gain from industrial growth.
RAHUL RANGANATHAN
3. CAGE Framework
The CAGE framework consists of four aspects of distances on the basis of cultural,
administrative, geographical and economic factors on which to characterize the relationship
between two countries. Each of these distance aspects are as follows:
3.1 Cultural Distance
Languages
There is strong disparity in terms of languages spoken by the two countries as there is not a
single common language spoken by their respective citizens. The distribution of languages
spoken by the two countries is as shown below:
% of population speaking languages in
India
Hindi
Bengali
Telugu
Marathi
Tamil
Urdu
Gujarati
Kannada
Malayalam
Oriya
Punjabi
Assamese
Maithili
other
Turkmen
Russian
Uzbek
Other
[2]
Religion
Even in this aspect, the two countries are poles apart with the dominant religion in
Turkmenistan being a religion practiced by minorities in India. The distribution of religions
practiced in the two countries is as shown below:
% of population practising religions
in India
Hindu
Muslim
Christian
Sikh
other
unspecified
% of population practising
religions in Turkmenistan
Muslim
Eastern Orthodox
unknown
[2]
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10
Turkmenistan is not a signatory to the CIS Economic Union Agreement executed by nine CIS
countries. However, the country has in place bilateral trade agreements with Azerbaijan,
Georgia, Ukraine and Uzbekistan. Most importantly though, Turkmenistan is a current
signatory to the Commonwealth of Independent States (CIS) although it originally refrained
from doing so.
India, on the other hand, is a signatory to a number of free trade agreements like the Asia
Pacific Trade Agreements (APTA), South Asian Free Trade Agreement (SAFTA) and Global
System of Trade Preferences among Developing countries (GSTP) apart from other bilateral
trade agreements with ASEAN, Singapore, Japan, Chile and the EU.
Thus, there is no match between the two countries in this aspect.
Currency
In terms of currencies of Turkmenistan and India, the Turkmen manat is set at a fixed
exchange rate to the dollar and is set and revised by the Central Bank of Turkmenistan as
and when required. Hence, in effect, the country adopts a fixed peg arrangement. In
addition, conversion from the manat to any other currency other than the US Dollar is not
carried out by the Central Bank of Turkmenistan.
On the other hand, the Indian Rupee is managed on a regular basis by the Reserve Bank of
India upon any outlining effect from the market but the exchange rate if fundamentally
market governed in any case. Thus, India offers a managed float regime and the Indian
Rupee can be freely converted into currency of any other form.
Thus, there is no match between the two countries in this aspect.
Colony/Colonizer
In terms of inheritance of the countrys borders today, although the territories of both the
countries have been inhabited since ancient times, Turkmenistan has inherited a largely
Soviet-era based system on the one hand while India has adopted and refined a British
system after independence.
Corruption
RAHUL RANGANATHAN
11
The two countries of Turkmenistan and India neither share any common borders nor border
the same water body but are relatively close to each other with the distance between their
respective capitals being 2,783 kms.[2]
Land Area
India ranks in at nearly 7 times the size of Turkmenistan with an area of 3,287,263 square
kms compared to that of Turkmenistan at 488,100 square kms. [2]
Climate
Turkmenistan possesses a subtropical desert and arid climate with around 96% of its area
unsuitable for agriculture while India, on the other hand, has a more tropical climate with
48% of its area being arable. [2]
Transportation Infrastructure
Turkmenistans lacklustre transport infrastructure has been highlighted before in this report
with the country possessing a moderate 2,980 kms of railways and 58,592 kms of roadways.
India, on the other hand, has 63,974 kms of railways and an extensive road network of
4,700,000 kms which includes national highways, state highways and other interior and
arterial roads. [2]
3.4 Economic Distance
GDP per capita (USD)
The per capita GDP of Turkmenistan has steadily increased to 6,800 in 2012 compared to
4,400 in 2010 coincident with the GDP growth rate of over double digits during the same
period. [10]
Indias per capita GDP, on the other hand, has remained at the same level of around 1,500
USD during the same timeframe. However, the base effect of higher population also needs
to be incorporated when considering Indias situation into account.
Real GDP growth rate
Indias GDP growth rate has moderated over the last two years around the level of 5-6%
after posting growth rates of 9% during the years before. Turkmenistans economy, on the
other hand, has expanded considerably over the past two years posting growth rates of
above 11% in real GDP. Again, however, the base effect of higher GDP of India needs to be
factored in.[10]
Human Development Index
In terms of the Human Development Index, both the countries fare quite the worse with
Turkmenistan ranked 102 in the index while India ranked still lower at 136. [11]
Internet Penetration
RAHUL RANGANATHAN
12
In order to put the comparisons of the CAGE model into perspective, it can be concluded
that all the four distances are high in case of Turkmenistan and India. The relative effects of
these distances as compared to one another can be exemplified as below:
India
Cultural
8
6
4
2
Economic
Administrative
Geographical
4. Trade relationships
The trade relationships of Turkmenistan are best described by the graphs below
representing the countries to which exports are being directed to and countries from where
goods are being imported. The data are summarized for the year 2010. The graphs illustrate
the dominating influence of Russia, China and Iran on the economy of Turkmenistan.
Particularly, the increasing role of China is to be taken note of as it expands its presence in
the country and gain a strong foothold in the share of natural gas exports.
Also, the graphs indicate the marginal position of India in terms of trade with Turkmenistan.
RAHUL RANGANATHAN
13
TURKMENISTAN EXPORTS
Asia
CIS
NA
Europe
China
Iran
United Kingdom
Afghanistan
Russia
Italy
Turkey
TURKMENISTAN IMPORTS
Europe
NA
SA
Russia
Asia
CIS
Turkey
China
Germany
Iran
Figure 3: Imports & Exports of Turkmenistan by country
[7]
In terms of the diversity of its trade, the following graphs illustrate the dominating role of
petroleum products in Turkmenistans exports. The imports however, are quite diversified in
terms of goods and services.
RAHUL RANGANATHAN
14
Turkmenistan's Exports
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
Other moving,
Wool
Petroleum jelly
Self-propelled bulldozers,
Cars
Petroleum coke
T-shirts
Electrical energy
House linen
Peat
Cotton raw
Petroleum gases
0.00%
Polymers of propylene or
5.00%
Machines and
Worked monumental
Apples
Medicaments, packaged
Other moving,
Self-propelled
Electrical transformers
Telephones
Prefabricated buildings
Floating or
Cement
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Turkmenistan's Imports
[7]
RAHUL RANGANATHAN
15
Cotton raw
2%
2%
5%
2%
Medicaments, packaged
2% 2% 1% 1%
2%
27%
Refrigerators, freezers
7%
Centrifuges
8%
Worked monumental or building stone
(except slate)
19%
9%
10%
[7]
According to the Indian Ministry of External Affairs, total trade between the two countries
stood at $42.69 million in 2010-11 with exports from India contributing to $ 29.51 million
and $13.18 million worth of imports from India.
4.2 Bilateral relationship with India
2012 marked the 20th anniversary of establishment of political ties between India and
Turkmenistan on a formal note but the two countries have maintained close and friendly
ties historically with the Turkmen Gate built in Delhi in the 1650s. Two notable outcomes
of the bilateral relationship have been the conception of the TAPI pipeline project in 2010
and the conclusion of an agreement on free visa entry for Diplomatic Passport holders in
2011.
RAHUL RANGANATHAN
16
Several delegates have visited from both countries since 1995 with the most notable ones
being the visit of Prime Minister P V Narasimha Rao in 1995 and the visit of Petroleum &
Natural Gas minister Mr Jaipal Reddy in 2012 on the Indian side. From Turkmenistan, both
President Saparmurat Niyazov and Gurbanguly Berdimuhamedov have visited India in 1997
and 2010 respectively.
Also, there is a healthy exchange of people from the two countries with approximately 100
Turkmen students studying in India and about 1,800 Indian nationals plying their trade in
Turkmenistan, mostly in the Oil and Gas industry.
References
1. Background Notes on the Countries of the World: Turkmenistan, January 2012, pp
1-1
2. CIA World Factbook 2013, Central Intelligence Agency, USA
3. Crabtree S., Esipova N., Gallup Presents: Inside Turkmenistan, Harvard
International Review, Summer 2011, pp 72-76
4. Country Intelligence Report: Turkmenistan, IHS Global Insight, October 2013
5. Emerging Europe Monitor: Russia & CIS, Business Monitor International, Vol 17,
Issue 8, August 2013
6. Jumayev I., Foreign Trade of Turkmenistan: Trnds, Problems and Prospects,
Working paper No. 11, Institute of Public Policy and Administration, University of
Central Asia, 2012
7. The Observatory of Economic Complexity, http://atlas.media.mit.edu/, Massachusetts
Institute of Technology, 2010
RAHUL RANGANATHAN