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Long isolated from international markets, Turkmenistan is starting to reform, but it will be several years before it appears on investors' radars.

A new report from investment bank Renaissance Capital points out that Turkmenistan is one of the world's wealthiest countries in terms of natural resources, with 4.3% of global gas reserves. However, "The main problem Turkmenistan faces is unlocking this potential - both in terms of encouraging the population's entrepreneurship and exporting the country's mineral resource wealth," the bank says in its report, "Turkmenistan: Hidden potential".

Former president Saparmurad Niyazov entertained international observers with his bizarre personality cult, but his 20-year rule set back the country's development so much that by the time of his death in late 2007, Turkmenistan was arguably in a worse state than in the late Soviet period. Revenues from hydrocarbons exports have been raised, with oil alone bringing in an estimated $1bn a month for a country of 5m people. However, much of Turkmenistan's huge foreign exchange reserves have been spent on grandiose construction projects. "Ashgabat on the surface at least appears an extremely prosperous city," notes the report. "Nonetheless, walking through the city very few buildings appear to be using electricity, an indication perhaps that few people can actually afford to inhabit the city's elite new buildings."

The current president, Gurbanguly Berdymukhamedov, in power since Niyazov's mysterious death in 2006, has initiated reforms, leading to a gradual opening up of the economy. The government aims to almost quadruple gas production by 2020, and to increase the share of the private sector in GDP from the low single digits today to 70% by the same date. In October 2008, the concepts of private property, a market economy and independent enterprises were recognised for the first time. Other changes made by Berdymukhamedov's government include abolishing the dual exchange-rate system, legalising bureaux de changes and introducing a formal state budget process.

Isolated

Despite these changes, Turkmenistan remains almost completely isolated, which helped the country to maintain positive GDP growth in 2008, though it is expected to see a decline of over 4% in 2009 - mainly due to the halt in gas exports to Russia. "It seems incredible to us that a country that derives 70% of its income from exports of hydrocarbons and is so intrinsically tied into the global demand for natural resources could have survived the financial crisis relatively unscathed," says Renaissance Capital's report. "That it did survive is a reflection of just how far removed the country is from the global financial system."

Ashgabat is, however, keen to increase international cooperation in the hydrocarbons sector and to diversify its gas export routes. Its main route is to Russia through the Central Asia Centre pipeline, but it also exports to Iran and - since December - to China through the newly opened Central Asia-China pipeline. "The country has very limited options as far as the export of hydrocarbons is concerned, and recent disputes with Gazprom, following a blast and the subsequent shutdown of exports at its principal Central Asia Centre pipeline, have highlighted the strategic importance of a more diversified approach to exports," says the report.

Other new pipelines on the cards are the Trans-Caspian pipeline to Baku, and the Trans-Afghanistan pipeline, which would deliver gas to India and Pakistan via Afghanistan.

While Ashgabat has been keen to build international links in the hydrocarbons sector, the opening of the economy to international investors is still a long way off. Since Eni's takeover of Burren Energy, Renaissance Capital says the "realistic potential investment universe" is limited to Dragon Oil. The lack of large-scale privatisation has severely limited opportunities for investment. "It's inevitable that, if the spread of economic reforms is sustained, introduction of adequate retail and wholesale large scale privatisation and establishing financial markets will have to follow," says Renaissance Capital. "We believe this will be when Turkmenistan appears on investors' horizons, trading exotic stocks and bonds, but that is probably some years away. For now, the potential to gain exposure to Turkmenistan is limited."