Neighbors In Crisis, Uzbekistan Shifts Focus To Investment

Landlocked Uzbekistan is surrounded by crisis. Afghanistan to its immediate south, Ukraine further West to mention just a few. None of it is of their own making, which is the good news. Russia, its biggest trading partner, is being sanctioned to smithereens because of its war in Ukraine. China, the No. 1 source of its imports and No. 3 export destination, is facing a resurgence of Covid-19 in its busiest corporate city – Shanghai. In the middle of this, Uzbekistan decides to throw its first-ever international investor conference.

The Tashkent International Investor Forum took place between March 24 and 26. The meeting was moderated by the Director of Communications of the European Bank for Reconstruction and Development, Jonathan Charles, formerly a well-known BBC World News anchor.

Over the last few years, starting in 2016, President Shavkat Mirziyoyev has launched a series of economic reforms and declared the country open for business. He was joined at the Investment Forum by the leaders of the European Bank of Reconstruction and Development, the Asian Development Bank and by officials from the Asian Infrastructure Investment Bank, among others.

The main topics at the forum were about restoring and stimulating the development of economic activity in post-Covid Uzbekistan; reducing poverty; regulating monetary policy; supporting private business and privatization of state-owned companies and developing the banking sector and the financial market.

“I am a big fan of the new Uzbekistan although it’s still largely unknown to people in the west,” famed investor Jim Rogers told me in August. “It used to be run like a dictatorship, but the new government seems to know what they are doing. What they have achieved in the last few years deserves commendation.”

Some of those achievements include getting rid of forced labor in Uzbekistan’s cotton plantations, privatizing state assets (still in the works) and reforming the judicial system. They debuted their first-ever Eurobond in 2019. Interest rates there are 17%. Their bonds are all double B speculative-grade credit. Twelve-month rolling consumer price inflation is around 9.7% as of February.

On April 13, the International Monetary Fund published a report from their country visit. They said that Uzbekistan has weathered the pandemic “relatively well”.

Strong fundamentals, ample policy buffers (room to cut interest rates), and high gold prices allowed the authorities to take decisive actions to mitigate the social and economic impact of the pandemic, while maintaining economic stability at a time when the world seems to be crumbling all around them.

Suffice to say that Afghanistan is next door.

The economic recovery Uzbekistan started in late-2020 gained momentum in 2021, with growth accelerating to 7.4%.

But just as it appeared that Uzbekistan had moved past the acute phase of the pandemic and was ready to go back to business, the war in Ukraine and the sanctions imposed on Russia have brought new uncertainty and weighed on Uzbekistan’s outlook, the IMF said.

Russia is a large source of remittances from Uzbeks living there and sending money back home. It is also a source of financing, especially in the energy and mining sectors. Spillovers from Russia and Kazakhstan crises, coupled with disruptions in the China supply chain, will mean new headwinds for Uzbekistan at a time when it is over the drama and ready to move on.

“Volatility and uncertainty are expected to remain elevated for some time,” the IMF report stated.

With the new headwinds, Uzbekistan’s growth is expected to slow to 4% this year, down from 6% projected earlier. Inflation will rise again, seen hitting 12% thanks to sanctions on Russian commodity producers and China’s zero Covid policy closing the world’s biggest port.

Everyone wants a breath of fresh air. This is especially true for countries that have been put through the ringer. Uzbekistan has been on pause since the fall of the Soviet Union. It didn’t know what to do with itself. Mirziyoyev who came to power in 2016 is heralded by the West as the man who might change that.

During a March 9 meeting with the Uzbek Foreign Minister Abdulaziz Kamilov, Secretary of State Antony Blinken said, “We appreciate the strategic partnership between Uzbekistan and the United States and all the work that’s being done through that.”

That partnership is about twenty years old now. It still is mainly a political arrangement due to its border with war-torn Afghanistan, its close ties to Russia, and its geostrategic location. However, Washington is also interested in having a friend in a former Soviet space and doing business. That’s something the private sector will have to believe in.

At the forum last month, Mirziyoyev basically took the time to describe an ancient world trying to get plugged into the new one.

“We’ve been known since ancient times for the fact that there were caravan routes connecting different parts of the world,” he said. “There was a mutual enrichment of civilizations and cultures formed in China, India, Iran, Byzantium, and Egypt. Our country with more than 3,000 years of statehood, has long been one of the world’s highly developed centers of trade, economy, science, culture, and art.”

For the history buffs in the market, Mirziyoyev mentioned Abu Ali Ibn Sino — or Avicenna as he is called in Europe. He was one of the early founders of modern medicine and implemented the practice of quarantine.

Muhammad Khwarizmi was an early mathematician, and the term algorithm is linked to him.

The local ruler, a grandson of Tamerlane, and the founder of an observatory Mirzo Ulugbek built an observatory in Samarkand in the 15th century.

That was then.

Uzbekistan now is a frontier market for alternative investors and risk-takers like Rogers.

Business has picked up. Volume of annual foreign direct investments tripled since Mirziyoyev took over in 2016. He is the country’s second president. FDI reached $25 billion last year, with about 59 thousand investment projects implemented over the last six years and more than 2.5 million new jobs created as a result of this opening up, according to government numbers.

Over the next five years, Uzbekistan’s government says it aims to reach a $100 billion GDP, double exports to exceed $30 billion, and have 80% of GDP produced by the private sector. By 2030 or earlier, Uzbekistan wants to join WTO, and become a country with GDP per capita in the upper middle-income level. That’s only 8 years from now. If they were to do that, they would have to become the Singapore of Central Asia.

Global corporations and dealmakers see the country as a promising opportunity zone in Eurasia, as all new markets are.

The country recently got on Europe’s generalized system of preferences (GSP+) for certain products that can be shipped will lower duty costs.

Privatization of state assets in more than 25 sectors is expected to occur between now and 2026.

For the locals, there has been a reduction in the total number of taxes from 13 to 9. And the property tax rates have been reduced by over three times from 5% to 1.5%. Personal income taxes went from a whopping 40% down to 20%. Capital gains taxes are around 10%, based on PriceWaterhouseCoopers data.

“Our work over the past 5 years has yielded positive results,” Mirziyoyev told forum participants from some 50 different countries. The average annual growth of the economy under this new government has been around 5%, with industrial growth averaging around 8%. Their central bank’s foreign currency reserves rose from $27 billion to $35 billion, which is still small, but is equal to around $1,000 per person. In Brazil, central bank reserves are equal to around $1,600 per person, with total reserves of $357.8 billion as of February.

In 2020, in the midst of the coronavirus pandemic, Uzbekistan’s economy did much better than Brazil’s, which saw negative GDP. Last year, GDP growth in Uzbekistan exceeded 7%.

“This inspires us to go after new frontiers,” Mirziyoyev said at the conference. He wants Uzbekistan to be a transportation corridor to export goods east, via a railroad to Kyrgyzstan and China, south via Afghanistan, and west via a multi-modal transportation corridor through the South Caucasus.

Uzbekistan reportedly signed deals and investment agreements worth $7.8 billion at the forum, including preliminary agreements, or memorandums of understanding, estimated to be worth $3.5 billion.

Of course, China was there with their Uzbek-Chinese sideline forum titled “Industrial Cooperation. New Opportunities.”

Russia remains a problem, however.

And neighboring Kazakhstan is in crisis. Their First Deputy Foreign Minister Akan Rakhmetullin said to the European media in mid-April that “The United States has imposed unprecedented sanctions on Russia. We have deep integration with Russia, as well as the longest land border, and cannot not feel the impact of these sanctions.”

Some global investors remain upbeat on Uzbekistan.

“The economy has finally opened up and I am sure international investors will use this opportunity to tap into its growth potential,” Rogers says. “I’ll be watching closely.”

Uzbekistan intends to make this an annual investor event for Central Asia.