Uzbekistan Wants New Trade Relationship With U.S. To Compensate For Russia Sanctions

What did Russia lose this year, China risks losing, and Uzbekistan wants? It’s most favored nation trade status, best known as Permanent Normal Trade Relations. Russian sanctions have hurt Uzbekistan, and as they’re just getting started on a path to a more modern economy, the land-locked, low-income Central Asian nation says it faces collateral damage caused by the sanctions regime.

A most-favored-nation (MFN) clause requires a country providing a trade concession to one trading partner to extend the same treatment to all. Used in trade treaties for hundreds of years, the MFN clause and its principle of universal, equal treatment underpin the World Trade Organization. For the U.S., such status is only given to WTO members.

Uzbekistan is not a member yet. It has only relatively recently opened up to the world, after many years of living in an autarky, with borders closed and non-convertible currency under former President Islam Karimov until 2016. Since then, the current President Shavkat Mirizyoyev has been successfully playing catch up. Covid and sanctions against Russia have put up detours.

The Uzbek government created a Working Group to get into the WTO in June after first engaging with the body back in the late 1990s. It is rare that a non-WTO member will ever get preferential trade treatment with the U.S. China got it only once becoming a WTO member was a sure thing. Russia lost it this year as punishment for its war with Ukraine.

However, the war in Ukraine, U.S. competition with China, and U.S. interests in Central Asia may allow Washington to accelerate Uzbekistan’s access to WTO and grant it PNTR sooner rather than later. But this is the best-case scenario.

“(We are) fully focused on delivering a program of reforms that will usher in a new era of macroeconomic stability and prosperity for all Uzbeks,” says Jamshid Kuchkarov, Deputy Prime Minister.

Uzbekistan Looks to DC for Helping Hand

The war in Ukraine has dimmed prospects of a post-pandemic economic recovery for emerging and developing economies in Central Asia.

China’s Zero Covid policy has also been a headwind for Uzbekistan; unable to source supplies and finding weaker markets in China for their exports.

Economic ties to Russia have suffered, but GDP growth in Uzbekistan has remained positive. It is likely to reach 5.3% this year, according to the World Bank. The economy is doing better than most in the region. Their 5.3% growth trajectory for this year is down from 7.4% last year.

As a result of the slowdown, fiscal policy measures meant in part to please the WTO and international bondholders is now expected to be delayed in order to protect social programs needed in response to food inflation.

Increased logistical challenges linked to sanctions on Russia are expected to dent private consumption growth into 2023. Uzbekistan officials are arguing that the country, a reliable partner for the U.S. during the Afghanistan war, is suffering due to the West’s Russian sanctions policy.

In order to ensure compliance with sanctions, government agencies and Uzbekistan banks say they are “managing risks associated with any business or transactions with sanctioned individuals or entities”. They claim to have introduced new oversight mechanisms at state banks to prevent transactions with sanctioned Russians and companies, though this likely means transactions conducted in dollars.

Uzbek banks have also established new controls on exported goods that can be used for military purposes, as listed by the Commerce Department’s Bureau of Industry and Security.

“Uzbekistan business is facing some collateral effects of sanctions,” said a government officer who wished to remain anonymous due to talks with U.S. on this issue. “There have been challenges related to importing raw materials and components from Russia because these transactions and payments for these raw materials have been frozen by the Treasury Department,” this person said.

Uzbekistan business interests, with the help of the state, know that Permanent Normal Trade Relations may be unlikely before WTO ascension. They are looking for normal trade relations treatment especially for at least one product – textiles. This is a sector that has almost completely vanished in the United States and is reliant on China, India and Central America for yarns and finished product.

Uzbekistan isn’t near any major ports. So getting exports to Europe and the U.S. would rely on rail-to-port and air cargo. There is a railroad project connected to Afghanistan and Pakistan in the works, but both countries have had on-again, off-again political crises that make this project unreliable.

Last year, the U.S. Department of Labor removed Uzbekistan cotton from its forced labor watch list, which is likely to lead to new markets for the Uzbeks. Uzbekistan can play a key role in the supply chain of American textile apparel companies, especially for brands manufacturing in India, as China will likely stick to its own cotton, despite Xinjiang-based cotton being banned from U.S. supply chains because of alleged prison labor.

In 2020, the U.S.’s main import from Uzbekistan was silver, pepper and some chemicals. Uzbekistan is one of the few countries in which the U.S. has a trade surplus. Our biggest exports are farm equipment and delivery vans. Last year’s surplus with Uzbekistan was $213.9 million.

Regarding the next moves for Uzbekistan’s WTO Working Party, chairman Taeho Lee of the Republic of Korea left further dates for discussion open and pending Uzbekistan’s progress in bilateral market access negotiations. Once they’re in, Uzbekistan will get what Russia once had, Permanent Normal Trade Relations. It may take some time, but it will happen. Former Soviet Republics, Kazakhstan, Kyrgyz Republic and Tajikstan are all members.

For now, Uzbekistan is likely to accelerate access into Europe and India textile markets, building new supply chains that could lead to the U.S.

Uzbekistan’s biggest foreign export market is the U.K., followed by Russia and China. Most of its imports come from Russia, China, Kazakhstan, and South Korea.

But Russia is the lynchpin in the story. Uzbekistan had the wind at its backs post-Karimov, then got hit with a pandemic and supply chain disruptions affecting China, and a war spurred on by Russia.

Despite this, inflation is holding up pretty well, at around 12% and steady. It was higher in 2018. Compare that to the U.K., which just released 12-month rolling inflation numbers of 11% on Nov. 17.

“Interest in Uzbekistan is improving with more visibility, market accessibility and Foreign Direct Investment under President Mirziyoyev,” says Mikhail Volodchenko, an emerging markets bond fund manager for AXA Investment Management. “They had some social unrest during the summer after a planned curtailment of autonomy in the Karakalpakstan region of the country, but Uzbekistan remains generally stable, and reform continues and has been improving since 2016,” he says. “Within the region, we prefer Uzbekistan.”

Suppose the Eurasian landmass and the countries in it are going to be the next big frontier, spurred along by China investment via its One Belt One Road projects. In that case, Uzbekistan has a young population, solid economic growth, and still has leadership committed to bringing the country up the economic food chain.

On the geopolitical front, expectations are that Uzbekistan will maintain its neutral, balanced foreign policy, looking East and West, while expanding ties to India in the South.

Multinational U.S. companies that don’t want to lose market share to China in Central Asia will stay in Uzbekistan, and Washington’s ongoing commitment to keep China in check will increase engagement with the country.

This year, the country adopted a New Uzbekistan Development Strategy covering the period from 2022 to 2026. Says Deputy Prime Minister Sardor Umurzakov, “One of the main priorities of our new Strategy is accession of Uzbekistan to WTO.”