AUTUMN 2019
SPECIAL EDITION
INTRODUCTION D
ynamic Uzbekistan magazine is a new initiative that intends to provide objective reporting and analysis on the significant transformations taking place in Uzbekistan.
The project is the result of collaboration between several partners, including the Yuksalish Nationwide Movement, London-based media company Eurasian Investor, and leading Tashkent-based publishing house Dinara&Co, among others. There is growing recognition among the international business and investment community that Uzbekistan is entering a new phase of rapid development. Ambitious government reforms as well as the innovation and determination of the private sector will play a significant role in not only improving Uzbekistan’s attractiveness as a destination for investment, but also in improving the livelihoods of the Uzbek people. All stakeholders involved in these development processes are in need of impartial analysis and monitoring of the implementation of the economic, political, administrative, and social reforms. This magazine, like all empowered media, aims to share information and insights that can help stakeholders more effectively implement policy and seize opportunities. In these pages, we draw on the expertise of experienced politicians, business leaders, and international experts. As the old adage goes, “Who owns the information, he owns the world.� We hope Dynamic Uzbekistan will become a source of valuable information for timely and prudent decision-making by business leaders, policymakers, and members of the general public. Our editorial board is open to your ideas, suggestions, and proposals for collaboration. Thank you for your readership. Sincerely yours, The Editorial Team
DYNAMIC UZBEKISTAN
Contents
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42 uzinvest forum
Potential of Uzbekistam
Sections
64
highlight / 7 Parliament / 27 Foreign policy / 35 Finance / 41 investments / 59
Energy as an investment sector
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Contributors EDITOR Shirin Baymirzaeva DESIGNER Davron Abdullaev
Esfandyar Batmanghelidj
Founder and publisher of Eurasian Investor
Akmal Burkhanov
Chairman of Yuksalish Nationwide Movement
ADVERTISING MANAGER Nigora Jamolova PR DEPARTMENT Zarnigor Usmanova AUTHORS Zakhra Kazimova, Rushana Aliakbarova, Evgeniy Nikolaev, Esfandyar Batmanghelidj, Ben Aris, Samten Bhutia, Kate Mallinson, Robin Butler, Ben Godwin, Maximilian Hess, Akbar Ergashev
Dinara Dultaeva
Publisher of Dynamic Uzbekistan magazine and founder of Dinara&Co
Shirin Baymirzaeva
Editor of Dynamic Uzbekistan magazine
COPY EDITOR Ekaterina Savinkova PHOTOGRAPHERS Farrukh Isamukhammedov, Victoria Bots, Yuri Korsuntsev, Alohon Abdullaev, Otabek Mirsagatov, Diana Ibragimova DYNAMIC UZBEKISTAN Special Edition 2019
Kate Mallinson
Director of PRISM Political Risk Consulting and associate fellow of the Russia and Eurasia Program at Chatham House
Robin Butler
Investment analyst at Sturgeon Capital in London
Samten Bhutia
Economist focused on Central Asia and a contributor to Eurasianet
Ben Godwin
Head of Analysis at PRISM Political Risk Consulting
We express our gratitude to PR-center of Agency of Information and Mass Communications under Administration of the President of the Republic of Uzbekistan and Information channel The.Uzbek.Review for assistance in collecting materials All rights reserved. Printed by “Print.uz” 41/2, Mirabadskaya street, Tashkent, Uzbekistan.
Maximilian Hess
Head of Political Risk at AKE Group and Eurasian Fellow at FPRI
Ben Aris
Order №0123456789
Co-Founder and editor-inchief of bne IntelliNews
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DYNAMIC UZBEKISTAN
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HIGHLIGHT
10 REFORMS
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key reforms of the P r e s i d e n t o f U z b e k i s ta n
Almost 3 years have passed since Shavkat Mirziyoyev headed the post of President of Uzbekistan. New time and a new stage in the development of the state require further improvement of the public administration system. So, during the development of the Strategy Action for the five priority areas of development of Uzbekistan in 2017-2021, the main attention was paid to the fundamental reform of the goverment and public sectors. This task is the first priority direction which fully reflects the norms of the concept “From a strong state to a strong civil society�.
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Еradication of forced labor Forced labor has been one of the most important problems for Uzbekistan for many years. The country has been repeatedly criticized by international organizations for human rights and protection. For a long time, forced labor reigned in the cities concerning teachers, paramedics and students. The places of “captivity” were both cotton fields and streets that needed to be cleaned and landscaped. Uzbek cotton has been on the black list among the leading manufacturers of clothing in the world for long time. The initial stage of the reform started from the oral ban by the President, which subsequently was introduced at the legislative level. The forced labor was completely abolished and prohibited by the law. As a result, already in 2018, local cotton fell out of the black list of US produced goods using child labor.
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MEDIA FREEDOM
Ongoing reforms in Uzbekistan are closely related to changes in freedom of speech and press. Over the past year, drastic measures have been taken in the state to create an optimal environment for ensuring self-expression, open media and maximum access to information. An important role in improving this area is played by the Agency of Information and Mass Communications, through whose efforts was done a productive work to create and strengthen the press services of Uzbekistan. At the moment, there are a number of tasks that require further improvement and rising the quality of work, but the process of reforming the media that has begun is already irreversible and current results can prove effective incentives for the industry.
«FIRST OF ALL, AT THE CENTER OF OUR ATTENTION SHOULD BE SUCH URGENT QUESTIONS, AS INCREASING THE EFFECTIVENESS OF THE MEDIA ACTIVITY, THEIR TRANSFORMATION INTO A FREE TRIBUNA FOR DIALOGUE WITH THE PEOPLE, FORMATION OF THE MODERN MARKET OF INFORMATION SERVICES, HEALTHY COMPETITIVE ENVIRONMENT. MASS MEDIA SHOULD NOT EXIST ONLY IN WORDS, BUT BECOME A “FOURTH AUTHORITY”. THIS IS THE IMPORTANCE OF TIME, REQUIREMENT OF OUR REFORMS»,
– declared The President Shavkat Mirziyoyev.
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DYNAMIC UZBEKISTAN
COMMONWEALTH OF COUNTRIES For many years, relations between Uzbekistan and neighboring countries remained strained. In particular, Tajikistan and Kyrgyzstan have always been considered such as difficult neighbors. For past years there was a visa regime for entering Uzbekistan, and the borders were completely closed. However, after Mirziyoyev came to power, relations with the aforementioned neighbors improved significantly: over the past 2 years, the leaders of the three countries signed strategic partnership agreements and the implementation of several large projects, made mutual visits and, most importantly, opened the borders. An equally important reset is the formation of relations with Turkey, because the political dialogue of the countries was nullified. For the first time since independence, President of Turkey Recep Tayyip Erdogan arrived in Uzbekistan on an official visit: the parties were able to agree on preferential trade, cooperation in tourism and the military-technical sector. At the implementation stage, there is the principle “The main priority of Uzbekistan’s foreign policy is Central Asia”. As a result, a completely new political atmosphere was created in the region, and ties based on mutual trust and good neighborliness are being strengthened.
An international conference concerning Afghanistan was held on March 26-27, 2019 in Tashkent, in which representatives of more than 20 countries and international organizations took part. 63 meetings on delimitation and demarcation of the state border were held with Kazakhstan, Kyrgyzstan, Turkmenistan, Afghanistan, Tajikistan. The delimitation of the state border line has already been completed with Kazakhstan. 95% of border sections agreed with Kyrgyzstan and 99.9% of border sections agreed with Tajikistan.
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Minimizing the Black Market People of Uzbekistan have been waiting for this day for more than 20 years: the first step in liberalizing the economy was the introduction of free currency conversion in relation to foreign currency. The country was ruled by “currency chaos”, consisting of the Central Bank rate, non-cash and cash currency - the rates differed from each other by almost half. The most long-awaited day came on September 5, 2017, when all commercial banks began to buy and sell currency at the market rate.
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TAX REFORM The main topic for discussion among economists and entrepreneurs for a long time remained the concept of changes in the tax system of Uzbekistan. And finally, in 2018, another long-awaited tax reform concept was approved. The adopted reform was aimed at simplifying and transforming the tax system, reducing the tax burden and modernizing tax administration. Most of the changes came into force at the beginning of 2018.
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DEVELOPMENT AND REORGANIZATION Within the framework of the Concept of Administrative Reforms, the institutional and legal activities of a number of ministries and departments have been improved, including the tasks and functions of executive authorities, as well as mechanisms for their implementation. According to this document, 6 priority areas for reforming the public administration system are identified and the need to review the activities of more than 100 bodies of state and economic management is identified. In order to introduce new modern ideas in the public administration system, the tasks and functions of many ministries and departments were reviewed, some of them were reorganized. In order to solve the problems accumulated in the relevant areas effectively, a number of new ministries and departments have been created. The ministries of housing and communal services of the Republic of Uzbekistan, preschool education, foreign trade, innovative development, culture, sports, State committees for the development of tourism, the defense industry, as well as the National Agency for Project Management are some of them. A separate state body has been created – the Agency of Public Services under the Ministry of Justice of the Republic of Uzbekistan with territorial divisions, which is responsible for implementing state policy in this area. It will ensure the comprehensiveness and consistency of the reforms, increase the responsibility of authorized bodies and organizations for the quality
of public services. This ensures the formation of a clear organizational and institutional framework for managing the provision of public services to the population. The system of public services is being consistently improved and modernized. Today, the Public Service Centers provide 157 types of services on the basis of the ÂŤsingle windowÂť principle. Over the 9 months of 2019, 8.9 million services were provided to the population, which is 3.5 times more than the same period last year. A new Agency for the Development of Public Service under the President (ADPSP) is being created, which is responsible for the implementation of a unified state policy in the field of personnel management and human resource development in state bodies and organizations.
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DYNAMIC UZBEKISTAN
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CUSTOMS AND TARIFF REFORM Until 2017, Uzbekistan actively used the excise policy of the domestic market and prohibited the import of more than 3 000 items. More than 800 of them are goods of our neighbors - Kazakhstan. During this time, excise taxes and customs duties were reviewed more than once, and from January 1 of this year they were finally reduced: customs duties on 3,550 commodity items, and excise tax rates on 1 122 items. Out of more than 11 000 thousand imported goods, a customs duty rate of zero was set at almost 70%. As for Kazakhstan, the number of products that once fell under excise taxes decreased from 208 to 50 positions.
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Getting Closer to the People In order to ensure human interests, first of all, dialogue with people, better awareness of the concerns, life problems and needs of people and their solutions, Virtual and People’s Receptions of the President of the Republic of Uzbekistan have been created. To date, the President’s virtual reception has received 3 341 830 requests, out of which 3 291 409 are reviewed. These structures have become an indicator of increasing the efficiency of government bodies and management, as well as increasing the mechanism for in-depth analysis of problems on the ground, as well as increasing the responsibility of state bodies and officials, and evaluating their activities. Consideration within the law of each appeal and application is taken under strict control. A collective appeals portal “Mening fikrim” (“My opinion) has also been launched. Appeals are accepted through the portal, the consideration of which is the responsibility of the chambers of the Oliy Majlis and local councils of people’s deputies. Petition can be made by users who have passed authorization through the Unified Electronic Government Identification System (id.gov.uz). The appeal must be supported by at least five users who must also be authorized. The
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“Mening fikrim” web portal is designed to increase citizen participation in managing the affairs of society and the state, to ensure transparency in the activities of government bodies, as well as the viability and effectiveness of laws. The portal received 3 077 collective appeals, over which more than 24 000 comments and reviews were left. A special online platform “Jamoatchilik” (“Public”) was launched for quickly respond to suggestions, questions and problems of citizens, to solve it in a timely manner, as well as to establish effective dialogue between society and government agencies. The project was created with the assistance of the Nationwide Movement Yuksalish and the Development Strategy Center.
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EDUCATIONAL RESET In 2018-2019, five new universities and 12 branches of prestigious foreign higher education institutions were created in Uzbekistan. According to the plans for the 2019-2020 academic year, the quota for admission to undergraduate studies will be increased by 20% and higher educational institutions will be able to accept more than 110 thousand students in the ranks of students. To train and improve the qualifications of personnel in leading foreign educational centers, the “Elurt Umidi Foundation” (Hope of the Country and the People) has recently been created. The public education system was replenished with 16 thousand young cadres with higher education, and 13 thousand male teachers returned to schools. Moreover, a Program of measures was adopted for further improving the public education system of the Republic of Uzbekistan for 2018-2021.
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Fighting Against Corruption The corruption struggle has been carried out in many structures, including educational institutions. The government applied the latest technologies, as a result of which the number of quotas for 2 years increased by more than 50%. To deeply involve the parliament in the fight against corruption in the chambers, committees on judicial legal issues and the fight against corruption were formed. In order to combine the strengths and capabilities of the state apparatus and civil society institutions in the fight against corruption, the law «On Combating Corruption» was adopted. In order to increase the effectiveness of the anti-corruption system, create the most favorable business climate, and promote a positive image of the country in the international arena, the State Anti-Corruption Program for 2019-2020 has been approved. Also, from August 1, 2019, as an experiment, the implementation of the project “Sphere without
corruption” in the field of capital construction and higher education was provided. Within the framework of this project, specific measures will be taken to eliminate obstacles associated with red tape, strengthen the rule of law, and ensure a fair and transparent implementation of all processes.
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DYNAMIC UZBEKISTAN
UNLOCKING ECONOMIC
POTENTIAL *Uzbekistan is rapidly rising in world rankings and is quickly catching up with its neighbors. The country ranks 14th globally in the production of natural gas. It ranks 3rd place in cotton exports and 6th place in cotton production. The country boasts the world’s 7th largest uranium reserves, accounting for 4 percent of the total global reserves., Uzbekistan is the world’s 7th largest producer of gold. These natural resources are the foundation of Uzbekistan’s great economic potential.
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But the economy will not develop without an improved business climate. On this count, important progress has been made, as confirmed by the latest release of the World Bank’s Doing Business report, in which Uzbekistan climbed up to 7 positions and was recognized as among the 20 countries that showed the most progress in improving their business climate. The key reforms in improving the business climate in Uzbekistan, according to World Bank experts, are: Strengthening the protection of minority investors by expanding the rights and role of shareholders in key corporate decisions, clarifying ownership and control structures, as well as increasing corporate transparency Streamlining of the tax code Simplification of international trade by introducing a risk-based customs inspection mechanism, as well as easing the requirements for import documents Strengthening of contract law through the adoption of a law on voluntary mediation, as well as the creation of financial incentives to encourage parties to resort to the settlement of disputes through mediation.
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In addition, for the first time since independence, Uzbekistan successfully placed $1 billion worth of Eurobonds on the London Stock Exchange. The bonds were placed in a double tranche of $500 million maturing in 2024 and 2029. The yield on five-year securities was estimated at 4.7 percent, and ten-year bonds at 5.3 percent. The total value of applications reached $8.5 billion at its peak, which allowed the government to revise down prices for the bonds – initially they were set at 5.3 percent and 6 percent, respectively. The placement drew broad interest, with around 150 applications received from institutional investors. In terms of geography, British investors accounted for 39 percent of five-year bonds and 32 percent of 10-year bonds, American – 23 percent and 31 percent while investors from continental Europe bought 32 percent and 37 percent, and the remaining 6 percent and 10 percent were taken by Asian investors. The main investors were the management funds (75 percent and 78 percent). Insurance companies and pension funds took 20 percent and 16 percent and banks purchased 5 percent and 6 percent of the five-year and ten-year bonds, respectively.
*According to avaliable data
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DYNAMIC UZBEKISTAN
Uzbekistan's rating in "Doing Business 2020" By 2019, Uzbekistan took 69th place in the annual ranking of the World Bank's group "Doing Business 2020" among 190 countries.
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FOLLOWING REFORMS HAVE IMPROVED THE INDICATORS: Strengthening the protection of minority investors by empowering shareholders in making key corporate decisions
Simplification of international trade through the introduction of a customs inspection mechanism
Simplification of taxation by combining tax on development of social infrastructure with income tax
Simplification of contract enforcement through adoption of a law on voluntary mediation, as well as creation of financial incentives
UZBEKISTAN IMPROVED ITS PERFORMANCE FOR ALL RATING INDICATORS:
REGISTRATION OF ENTERPRISES
96,2 points
+0,2% (8th place in global ranking)
GETTING LOANS
65 points
without changes (67th)
OBTAINING CONSTRUCTION PERMITS
61,7 points
+0,3% (132nd)
PROTECTION OF MINORITY INVESTORS
70 points
+8% (37th)
ENSURING EXECUTION OF CONTRACTS
71,9 points
+3,7% (22th)
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CONNECTING TO POWER SUPPLY SYSTEM
86,9 points +0,9% (36th)
TAXATION
77,5 points +0,6% (69th)
PROPERTY REGISTRATION
67,9 points +0,9% (72th)
INTERNATIONAL TRADE
58,2 points
+8,4% (152th)
INSOLVENCY RESOLUTION
43,5 points
-1,7% (100th)
*Infographic is provided by Nationwide Movement Yuksalish
2017
Net taxes on products
Industry gross value added
11,5% 5,7% 22,2%
88,5%
34% 38,1%
2018
PORTRAIT OF A DIVERSE ECONOMY
Uzbekistan’s GDP amounted to 407.5 trillion sums in 2018 and grew by 5.1 percent compared to 2017, according to government statistics. GDP per capita, in turn, increased by 3.3 percent and amounted to 12.3 million sums. Positive dynamics in the main sectors of the country buoyed the rate of economic growth. Gross value added, which is created by all sectors of the economy, grew by 5.1 percent and amounted to 88.8 percent of total GDP. Tax revenue increased by 5.5 percent and amounted to 11.2 percent in the structure of GDP. In terms of overall GDP growth, industry led the way with 10.6 percent growth in the sector from 2017 to 2018.
11,2% 5,7% 26,3%
88,8%
32,4% 35,6%
For the period from January to September 2019, the gross domestic product amounted to 362 trillion sums, while investments in the economy amounted to 134 trillion sums, registering growth of 10 trillion sums over the previous year. The foreign trade turnover of the republic amounted to $31 billion and marking an increase of 37.2 percent over the previous year.
ABUNDANT ENERGY RESOURCES Uzbekistan boasts a total of 275 oil and gas fields, with a total reserve of 2.4 billion tons of oil equivalent. The maintenance of wells is a complex process, and this work is aimed at increasing oil and gas production and maintaining a stable production rate. Since the beginning of 2019, the subsidiaries of state energy giant Uzbekneftgaz have carried out repair work on more than 350 oil and gas wells. Complicated sidetracking work was carried out in 2 wells, 8 abandoned wells were revived, and 5 mothballed wells were restored. The company plans to overhaul 207 oil and gas wells by the end of 2019. In addition, the subsidiaries of Uzbekneftgaz are planning to carry out repair work under the «Hydrocarbon Increase Program: 2017-2021» at 66 wells, apply new technologies for the implementation of work together with Eriell, an oil and gas services firm, at 100 wells, while also carrying out acid hydraulic fracturing at 31 wells in cooperation with the Epsilon Development Company.
In order to ensure the stability of the hydrocarbon resource base, geological studies are carried out on an ongoing basis in the oil and gas-bearing territories of Usturt, BukharaKhiva, Gissar, Surkhandarya, and Fergana. As a result of geological explorations carried out in accordance with the Presidential Decree №3372, issued in 2017, a total of 16 oil and gas fields have been discovered. Total recoverable hydrocarbon reserves were increased to 171 million tons of standard fuel equivalent. Further intensive exploration work is currently being carried out in the central part of the Usturt region, the western part of the BukharaKhiva region, and in the southern part of the Ferghana region.
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GOLD MINING Gold and foreign exchange reserves consist of foreign currency assets and monetary gold bullion, the calculation method of which is carried out in accordance with the standards of the International Monetary Fund. In order to effectively manage the Central Bank of Uzbekistan, separate accounting of both gross and net foreign exchange reserves is maintained. As of October of 2019, Uzbekistan’s combined gold and foreign exchange reserves are valued at $27 billion. Moreover, Uzbekistan recently began to provide information about its gold reserves to the World Gold Council, created by the main gold producers, whose global share of production is about 60 percent. According to estimates from the first quarter of 2019, Uzbekistan ranked first place in the world in gold sales. The largest buyer was Russia, whose has increased goal purchases as a hedge against further U.S. sanctions.
LOGISTICS INFRASTRUCTURE Uzbekistan has a developed railway infrastructure, including high-speed rail, with a total length of 6,500 km, of which 1,200 km are recently developed. Of this network, 1,100 km are electrified. Around 90 percent of the countries total freight turnover passes through the rail network. The road network currently extends to 42,500 km of major roads, of which 3,800 km have been recently repaved and modernized. In the 28 years since independence, a road network was build to bypass reliance on links through Turkmenistan, increasing transport independence.
Passengers transportation
First half of 2018
First half of 2019
Passenger turnover, 2 127,2 mln. pass-km 2 161,3 Numbers of passengers sent, 11 514,0 thousand pers. 11 778,0 Numbers of transported 11 708,7 passengers, thousand pers. 11 967,2 Cargo transportation
Сargo dispatch, 33 274,2 thousand tons 33 726,1 Сargo turnover, 5 505,5 mln. t-km. 11 596,0
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TRADE RELATIONS The main export categories in Uzbekistan are services, energy products, gold, textile products, non-ferrous and ferrous metals, chemicals, and food products. Since independence, the country has undergone truly significant changes in the export structure: the share of services rose to 21.3 percent, the share of food increased to 7.7 percent, the share of chemical products doubled to 6.6 percent, while the share of metals exceeded 8 percent, and the share of cotton fiber, on the contrary, decreased from 59.7 percent to 1.6 percent. In the structure of imports, the main category was equipment and machinery, accounting for 42.5 percent of total value. Foreign trade turnover in 2018 amounted to $33.8 billion, of which the share of imports amounted to $19.5 billion while exports accounted for $14.2 billion. Foreign trade partner countries among the CIS are Russia, Turkmenistan, Tajikistan, Kazakhstan, Ukraine, Kyrgyzstan and Belarus (accounting for 36.8 percent of the turnover). The remaining share of trade is conducted with partner countries including India, Lithuania, Italy, Iran, France, the United States, China, Latvia, Turkey, Afghanistan, Japan, the Republic of Korea and Germany.
2018 TURNOVER RESULTS
Russia
China
Kazakhstan
Turkey
bln $
bln $
bln $
bln $
Kyrgyzstan
Tajikistan
India
mln $
mln $
mln $
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DYNAMIC UZBEKISTAN
BALANCED FOREIGN POLICY
The main objectives of Uzbek foreign policy are to protect the country’s sovereignty and expand its role in the international arena in order to maintain balanced and stable relations.
implementation of public control mechanisms, strengthening the role of civil society institutions in the media.
Today, Uzbekistan has an interest in developing relations and is open to dialogue with a wide range of global partners as it seeks the welfare of people of the world and increased prosperity. The foreign policy of Uzbekistan today reflects the implementation of the Action Strategy outlining five priority areas of development for the period of 2017-2021. While many of these areas of development focus on domestic matters, the Uzbek government is putting its own reform agenda at the heart of its new foreign policy: Improving state-society relations: aimed at strengthening the role of parliament and political parties in deepening democratic reforms and modernizing the country, reforming the public administration system, developing the organizational and legal foundations of public service, improving the e-government system, improving the quality and efficiency of public services, practical
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Ensuring the rule of law and reforming the judicial system: aimed at strengthening the true independence of the judiciary and guarantees reliable protection of the rights and freedoms of citizens, improving administrative, criminal, civil, and economic legislation, improving the effectiveness of the system of combating crime and preventing crime, the full implementation of the principle of competition in litigation, improving the system of legal aid and legal services. Development and liberalization of the economy: aimed at strengthening macroeconomic stability and maintaining high economic growth rates, increasing its competitiveness, modernizing and intensively developing agriculture, continuing institutional and structural reforms to reduce the state’s presence in the economy, strengthening protection of rights and priority development of private property, stimulating development of small business and private entrepreneurship, integrated and balanced socio-economic times a whirlwind of regions, districts and cities, the active attraction of foreign investment in economic sectors and
regions of the country by improving the investment climate. ἂ Development of the social sphere: aimed at a consistent increase in employment and real incomes of the population, improving the system of social protection and protecting the health of citizens, increasing the socio-political activity of women, implementing targeted programs for the construction of affordable housing, developing and modernizing the road transport and engineering communications infrastructure, development of the sphere of education, culture, science, literature, art and sports, improvement of state youth policy.
most importantly to maintain peace and stability for Uzbekistan and Central Asia. Currently, Uzbekistan has established diplomatic relations with more than 130 countries. Tashkent is home to 45 embassies of foreign countries, 19 representative offices of foreign organizations, 18 representative offices of international governmental and intergovernmental organizations of foreign countries, 8 consuls and 1 trade mission with diplomatic status.
ἂ Ensuring security, as well as interethnic harmony and religious tolerance, implementing a balanced, mutually beneficial and constructive foreign policy: aimed at strengthening the independence and sovereignty of the state, creating a belt of security, stability and good neighborliness around Uzbekistan, strengthening the country’s international image. To achieve these goals, it is necessary to build a system strategic partnerships with countries of the world and to engage with international organizations in order to actively increase trade and foreign investment, develop the tourism sector, and
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the PRESIDENT'S INTERNATIONAL VISITS in 2019 This year marked a clear improvement in bilateral relations between Uzbekistan and its Central Asian neighbors. These warming ties are facilitated by the strategy directed by President Shavkat Mirziyoyev to develop alliances with neighboring countries, a priority for Uzbekistan. Over the last three years, the President traveled widely both in the region and abroad, building promising relations and expressing the sincere intention of Uzbekistan to continue this improvement.
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India
17.01 18.01
Germany
20.01 22.01 UAE
24.03 26.03
China
24.04 27.04
Kyrgyzstan
13.06 14.06
Tajikistan
14.06 15.06 Belarus
31.07 02.08
Turkmenistan
10.10 11.10
Azerbaijan
14.10 15.10 President Mirziyoyev has completed forty official visits. These include:
An informal meeting of Heads of State Council of CIS in St. Petersburg
The first consultative meeting of Central Asia Heads of State in Astana
In April 2019, the President visited China to participate in the the 2nd edition of the Belt and Road Forum for International Cooperation.
The 18th meeting of Heads of State Council of the SCO Member States in Qingdao, China An event dedicated to the 20th anniversary of the city of Astana The 6th summit of Cooperation Council of Turkicspeaking States in Cholpan-Ata A meeting of Heads of Founding States of International Fund Council for Saving the Aral Sea
In July 2019, the President made an official visit to Belarus. In October 2019, the President took part in the 7th summit of the Cooperation Council of Turkic-speaking states in Azerbaijan, Baku. In the previous month, Uzbekistan had become a full member of the Council.
A meeting of Heads of State Council of CIS in Dushanbe
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DYNAMIC UZBEKISTAN
the PRESIDENT'S Regional Visits in 2019 Samarkand
11.01 12.01 syrdarya
19.02 19.02 navoi
12.03 13.03 surkhandarya
06.04 07.04 FERGANA
06.05 07.05
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jizzak
30.01 31.01 namangan
28.02 01.03 Bukhara
29.03 30.03 surkhandarya
30.04 01.05
ANDIJAN
16.05 17.05 Tashkent region
03.06 03.06 syrdarya
18.07 18.07 Karakalpakstan
20.08 21.08 Fergana
14.09 15.09
www.prezident.uz
Angren
01.06 01.06 Tashkent region
28.06 28.06 Samarkand
26.07 26.07 Samarkand
26.08 26.08 surkhandarya
17.10 18.10
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PARLIAMENT
DYNAMIC UZBEKISTAN
A RENEWED MANDATE
FOR PARLIAMENT
It has been 28 years since Uzbekistan gained independence. As they look to the future, Uzbek policymakers are in the process of assessing the current track record of development. In 1992, Uzbekistan’s GDP per capita was $600, equivalent to about $1,500 in current dollars. By comparison, in the same year, China’s GDP per capita was just $360. Today, China’s GDP per capita has risen six fold. Uzbekistan has only seen nominal growth. First Deputy Speaker of the Senate, Sodiq Safoyev, shares his views on the reasons for the country’s slow growth, including issues of corruption and limited parliamentary oversight.
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DYNAMIC UZBEKISTAN
What are the three reasons why, in your opinion, GDP growth was slow? The rate of economic growth depends on economic policy, how it mobilizes all the possibilities and how accurate it is. We must admit that the economic development of Uzbekistan during the years of independence was not what we wanted it to be. Or, Kazakhstan as an example, I remember, during a meeting with our esteemed head of state, Nazarbayev said: “When we all gained independence, we thought that Uzbekistan would become a leader in economic development in Central Asia, and we will follow Uzbekistan”. Because the vastness of Uzbekistan, its economic development, potential, scientific potential and human potential are much higher than in other countries. Unfortunately, for a number of reasons, we have not yet been able to achieve this.
If you think like a doctor, the question arises whether we make a correct diagnosis. Where have we made a mistake? It is important to make a diagnosis. In my opinion, the most important changes that have occurred in our society over the past 3 years is that we began to speak openly and critically in society. Many say: “Why didn’t they talk about this before?” We used
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to say too, but there was no such media as today, and there were no social networks to spread these words. There were people who spoke, spoke to different degrees, in different forms. In general, there are problems in the development of Uzbekistan, especially in economic development. Speaking about the diagnosis, one of the main reasons - and there are many of them, is that we did not develop the concept of economic development from the beginning. Uzbekistan is left behind. We did not support the socialist system, but did not switch to a true market economy, did not open real growth to foreign markets, and did not improve the autarky system within the country. This meant the absence of an economic program. A feature of countries that are at the stage of advanced development or modernization, in which there is such a system that is not associated with any person or government. And this system is working.
Do you think that parliament exercises its full legal authority? One of the main functions of the parliament is how it forms the budget and controls its distribution. Over the years, our parliament has circumvented this task. The functions of the parliament were to provide several aggregated figures and automatically vote for them. And more simply, parliament did its
work. And now the budget review has been going on for several months in parliament, by all the committees, since each figure must be justified by the government. And even after that, the parliament approves it with critical comments. We see that several months of delays pose a danger - the lack of a budget by the beginning of the year. Therefore, perhaps it is time to approve the budget for 2-3 years. It also requires a new parliament. Secondly, I would like to say that parliament is always a reflection of society, an indicator of the level of system and society development.
However, we must recognize that at the same time, the parliament of Uzbekistan lacks professionalism. The new parliament needs, first of all, those whom the people will elect. Along with this, professionals who are not populists, but with deep knowledge and those who are able to objectively evaluate proposals from the government, are needed. Today, budgeting, compared to previous years, is much more transparent. For example, earlier we could not get this from the parliament... I do not know to what extent it is necessary to provide
UZB EKI STAN’S E C O N O M I C D E V E LO P M E N T, ITS S CI EN TI F I C AND HU M A N P OT E N T I A L A R E M U C H GREATE R T H AN TH AT O F OT H E R C O U N T R I E S Our parliament must, of course, comply with the rapidly changing social life of Uzbekistan. If we compare modern Uzbekistan with three years ago, then we will see a completely different society. It is not easy. There is a certain degree of trust that arises from an open discussion of many issues. It is natural. But at the same time, when you ask about the relevance of the current parliament, I have to say that our parliament should change. The internal censorship that we are talking about is in other areas. Our approaches to parliament have remained the same as in the past. For example, the times when you need to get permission to perform a particular task are gone. Our parliament must change today. It should be a parliament that avoids fear and censorship, has the courage to serve the future of the nation with full responsibility to people. That is why the upcoming elections in December should be an important step towards the formation of a new parliament, a new Senate, as well as local Kengashes, not only in the center, but also in the localities
*An interview is provided by information channel The.Uzbek.Review
this information to the public, because parliament is already a body representing and protecting the interests of society. We are elected by the people, that’s why it’s called «representative body».
What do you think is the main cause of corruption in Uzbekistan? The main cause of corruption has long been known. I will not add anything new here. Corruption is a sale of authority. The level of corruption is high in society in which the level of intervention of the state in the economy is high.
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DYNAMIC UZBEKISTAN
NEW UZBEKISTAN
NEW ELECTIONS Uzbekistan is on the eve of an important political event: the election of deputies to both the Oliy Majlis, the national assembly, and the local, regional, district, and city Kengashes. Chairman of Central Election Commission (CEC) Mirzo-Ulugbek Abdusalomov explains the preparations of these historic elections in an interview with Dynamic Uzbekistan.
What is the main responsibility of the CEC? The first task is to clarify the concept of «democracy.” Translated from Greek, it means «the power of the people.” So, our task is to translate this principle into reality. The Constitution of our country outlines two important laws. Article 7 of the Constitution states: “The people are the only source of state power.” Article 30 of the Republic of Uzbekistan states that citizens of Uzbekistan have the right to participate in the management of the affairs of society and the state, both directly and through their representatives. Over 170,000 CEC employees are involved in the implementation of these laws. This is the main task of the commission.
What makes the forthcoming elections historic? To date, five presidential and five parliamentary elections have been held in our country. However, the upcoming elections will be very different from the previous ones. First of all, it is worth noting that as a result of the reforms taking place in the country, the global community will pay special attention to our elections. Many experts have expressed their interest in participating as election observes. Second, in our country, the sociopolitical situation is changing every day. The Uzbek people have a growing sense of empowerment with regards to social change. Almost every day, through social networks and the media, we are witnessing how people are becoming more demanding in relation to state institutions. This is an 32
example of the fact that people no longer serve the state, but the state serves the people.
Thirdly, the expected elections will be held in a completely different way in accordance with the new Electoral Code adopted on June 25, 2019. The new code meets all international norms and standards and consists of 18 chapters and 103 articles. The adoption of the new code was an important event in the sociopolitical, legal, spiritual, and educational life of the country.
How does the new Electoral Code protect the rights of voters? Around thirty new regulations have been introduced to the Electoral Code, which established guidelines for the organization of the election process and people’s
participation in elections. For example, all necessary measures are being taken to increase the participation of persons with disabilities in the voting process. The code also takes into account the special needs of persons with disabilities in the conduct and preelection campaign of political parties and candidates for deputies by producing and distributing printed and audiovisual campaign materials. In addition, in accordance with the Electoral Code, the prohibition on voting by persons incarcerated for crimes that do not constitute a great public has been eliminated. They too can now exercise their constitutional right.
The legislative framework regulates the functioning of single electronic voter list of Uzbekistan, which will ensure that each voter is included in only one voter list and guarantees the implementation of the principle of «One Voter, One Vote.” In addition, voters are allowed to mark their ballots not with one sign (+), as it was before, but one of three: “+”, “√”, “X.” In addition, only representatives of political parties could previously observe the election process, today representatives of self-government bodies can also take part in the election process, including chairmen, deputy mahallas, etc.
Japan. The opinions of foreign experts were also taken into account. However, there were recommendations with which we did not quite agree and therefore left their own option. For example, in our code the right to run for election to the legislative chamber is reserved for citizens who have been resident in Uzbekistan for at least five years. Foreign experts disagreed with this rule, believing that it deprives the candidate of the right to be elected. But the question arose: “After the election, how can a candidate solve the problems existing in the country if he has not been in the country for several years?” So while we carefully listened to the opinions of all experts, we adopted those rule that we felt can really contribute the improving of electoral process.
How are you making these reforms clear to the public? In October of this year, the Saylov 2019 mobile application was launched. Now citizens can learn more about the electoral law and activists of the election commissions and get answers to their questions. Elections are essential in implementing the country’s democratic reforms. I am sure that everyone who believes in the bright future of their country will use their constitutional right and vote for a worthy candidate!
What lessons have you learned from other countries? During the development of the new Electoral Code, the experience of more than twenty foreign countries was studied, including Canada, Sweden, France, Holland and
Author: Rushana Aliakbarova
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DYNAMIC UZBEKISTAN
34
FOREIGN POLICY
DYNAMIC UZBEKISTAN
THE BELT AND ROAD INITIATIVE The Belt and Road Initiative is a major infrastructure initiative that will link the countries of Central Asia with the People’s Republic of China. The initiative centers on the countries that are part of the historic Silk Road, and seeks to increase trade flow between Europe and Asia through better transport links via land and sea.
Economic Union, seeks to support the national development strategies of various countries and to play an important role in economic progress worldwide.
A
At the end of April 2019, Beijing hosted the second Belt and Road Forum for International Cooperation, among the largest international meetings to shape the future agenda of global trade relations. Official statements suggest that 283 agreements were signed during the forum with a total value of $64 billion. The global scope of the Belt and Road Initiative extends to the participation of 65 countries in Asia, Europe, and Africa and the initiative has been an integral part of Chinese foreign policy over the last five years. During the second addition of the international forum, Chinese President Xi Jinping noted that this project, implemented in conjunction with international and regional structures such as the United Nations, Shanghai Cooperation Organization, the European Union, and the Eurasian
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Uzbekistan was among the first countries which expressed support for the Belt and Road Initiative, becoming a founding member of the project. The country’s participation in the work of this initiative is crucial in terms of ensuring sustainable economic development and in supporting the implementaton of transport and infrastructure projects that can have a positive impact on Central Asia. Uzbekistan’s participation in the project is also consistent with the country’s priorities for further deepening bilateral cooperation with Beijing. China is one of the leading trade, economic, and investment partners of Uzbekistan. As a result of the summit in Qingdao, agreements were reached on 46 projects totaling $6.8 billion of which $3 billion reflects direct investment. In 2018, trade between two countries reached $6.5 billion, an increase of 35 percent year-on-year. About 350 enterprises have established in Uzbekistan with Chinese capital. Today, the total amount of Chinese capital invested in the Uzbek economy exceeds $8 billion. A number of investment projects are ongoing. For Uzbekistan, access to the sea is extremely important. Therefore, country is actively involved in projects to create international transport corridors that provide access to the markets of South Asia, the Middle East, and Africa.
In 2016, the construction of the Angren-Pap electrified railway connecting the Fergana Valley with the main part of Uzbekistan was completed. In addition, the construction of the China-Kyrgyzstan-Uzbekistan railway corridor will create enormous economic opportunities for the participating countries. This project will give, Uzbekistan direct access to China and the Middle East. Moreover, freight transportation times will be reduced by up to six days. In 2018, volume of transportation of foreign trade goods by rail between China and Uzbekistan increased 18.2 percent compared with the year before. The construction of new roads, including the creation of the Andijan-Osh-IrkeshtamKashgar corridor, will not only expand mutually beneficial ties between the countries of Central Asia, but will also give an additional impetus to their economic development.
Second, Uzbekistan seeks to develop the socalled “smart” agriculture and create a joint center for agricultural innovation. Ensuring food security in a changing climate is one of the main challenges facing society today. Third, it is necessary to use the scientific and technologic innovation for the development of human capital. The rapid introduction of the latest achievements of science and technology in all spheres of life is a key prerequisite for sustainable economic growth, improving living standards, and ensuring the economic competitiveness in global markets. In this regard, the President of Uzbekistan proposed creating a framework for cooperation in priority areas of scientific and innovative activity. Establishing this framework within the structures of the Belt and Road Initiative may help accelerate the scientific and technical process, combining the means and capabilities of various countries to create joint ventures and innovation clusters.
THE BELT AND ROAD INITIATIVE PL AYS AN IMPORTANT ROLE IN ECONOMIC PROGRESS W ORLD WIDE China’s transit and logistics projects are helping Central Asian countries gain access to world markets and strengthen industrial cooperation. In the speech at the international forum, the President of Uzbekistan, Shavkat Mirziyoyev, proposed a number of important initiatives aimed at strengthening relations in Central Asia, addressing food security issues, meeting the social needs of the population, and developing cultural, humanitarian, and tourist ties. First, Uzbekistan is interested in maximizing the transit potential of Central Asia and creating the China-Central Asia-West Asia economic corridor. In this regard, the construction of the Uzbekistan-KyrgyzstanChina railway will benefit all participants, through the expansion of trade, the creation of new jobs, the attraction of tourists, and the receipt of income from transit.
Fourth, the president called for the expansion of tourism exchanges. To achieve practical results in the field of tourism, President Mirziyoyev proposed to establish the International Tourism Association of the Silk Road in Samarkand as an annual tourism forum within the Belt and Road Initiative. Uzbekistan has significant potential for tourism development. The country has more than 7,400 cultural heritage sites, of which 209 are included in the UNESCO World Heritage List. In addition, there are 11 national parks and state reserves, 12 nature reserves, 106 museums, and a wide range of other notable attractions.
Author: Akmal Burkhanov, chairman of Yuksalish Nationwide Movement
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DYNAMIC UZBEKISTAN
UZBEKISTAN’S TRADE WITH NEIGHBORS
Shavkat Mirziyoyev’s ascent in 2016 ripped Uzbekistan out of economic isolation. The new administration has floated the sum, set in motion reforms to the tax system, improved the quality of official statistics and liberalized trade restrictions while aggressively courting neighbors. Under Mirziyoyev, Uzbekistan has emerged as one of the main drivers of reintegration in a region that has generally decentralized since the Soviet collapse.
jumped from $242 million to $462 million the same year; with Turkmenistan from $159 million to $274 million. Trade with Tajikistan saw a particularly sharp jump (131 percent) from $124 million to $287 million. This trend is continuing. According to the latest available data from the IMF, in the first five months of 2019 Uzbekistan’s trade turnover with the other Central Asian countries totaled $1.7 billion – 27.6 percent higher than during the same period last year. If earlier industrialization of import substitutions (replacing foreign imports with domestically produced goods) was a priority, now there is a course towards opening the borders.
U
zbekistan is the only Central Asian republic bordering all the others. As the most diversified economy in the region, moreover – and with the most developed manufacturing base – Uzbekistan has much to offer its neighbors. Development of the Uzbek manufacturing sector and the subsequent demand for labor could lead to an increase in migration from neighboring Kyrgyzstan and Tajikistan, further reinforcing the integration process. Available data, such as they are, underscore the changes. Between 2017 and 2018, Uzbekistan’s imports from Kazakhstan increased by $569 million, or just over 53 percent. Total trade turnover with Kyrgyzstan
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Mirziyoyev’s first notable economic reforms – the devaluation of the sum and the liberalization of currency controls – were a step in this direction. By easing access to foreign exchange for importers, Mirziyoyev reduced a major barrier to trade between Uzbekistan and its neighbors.
Author: Samten Bhutia, economist focused on Central Asia and a contributor to Eurasianet
SUCCESS IS BREWING IN UZBEKISTAN
The economy of Uzbekistan is at the stage of rapid development. Improving business and private entrepreneurship is an important factor in achieving significant economic results. Today, the number of investors wishing to invest in various sectors of the economy is also growing. They are confident that Uzbekistan presents an environment conducive to establishing a robust and competitive business. In this interview, general director of the UzCarlsberg Nadav Geller shares his opinion on the new investment potential.
What is the secret of brand success? We continue to grow and develop. This is due to the fact that we strictly adhere to our strategy: focus on quality without compromise. Our headquarters has more than 50 years of experience, and we understand that the consumer will always distinguish when he is offered a real product, and appreciate it.
How do reforms contribute to the development of your company?
As a subsidiary of Danish brewer Carlsberg, UzCarlsberg is fully foreign owned company established in Tashkent in 2007. The company has brought European management standards to Uzbekistan and has won numerous awards. For example, in 2019, UzCarlsberg received the “Quality Mark” from the Technical University of Munich. In addition, the company has been certified according to ISO 9001 and ISO 22000. In the same year, the company’s products won the Monde Selection medal, a European food contest with entrants around the world.
For 3 years, while UzCarlsberg has been operating in the market of Uzbekistan, we have witnessed dramatic changes in the country. Currency reform, conversion, changes in tax legislation - all these changes have a positive impact on our company. Thanks to customs reform, over two years we began to export our products and are working to expand the horizons of cooperation. We have great expectations from Uzbekistan and are excited about new prospects here.
Author: Rushana Aliakbarova
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DYNAMIC UZBEKISTAN
40
FINANCE
DYNAMIC UZBEKISTAN
AN “UZBEK DAVOS” IN LONDON
Uzbekistan will be the focus of a major investment forum to be held on November 27 in London, the global capital of emerging markets investment.
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Presented by London-based Adam Smith Conferences and Eurasian Investor, the UzInvest Forum has been developed in consultation with Uzbekistan’s Ministry for Investments and Foreign Trade, but is Uzbekistan’s first major international investment forum launched as a private sector initiative. The UzInvest Forum will welcome delegates from across Europe for an intensive day of plenary sessions and working meetings focused on opportunities for European trade and investment in Central Asia’s most populous country. A senior government delegation will be participating in the forum and includes First Deputy Minister of Investments Laziz Kudratov, Deputy Minister of Finance Odilbek Isakov, Director of the Capital Markets Development Agency Atabek Nazirov, and Director of the State Assets Management Agency Sunnatilla Bekenov. The delegation comprises of the “architects” of Uzbekistan’s market-oriented reforms. As well as offering European executives investors an opportunity to learn more about recent reforms in the areas of legal
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protections, privatization, and capital markets modernization with direct updates from the responsible officials, the UzInvest Forum will also highlight the important role of Uzbekistan’s private sector in driving economic development and opening the door to foreign investors. Zafar Khashimov, CEO of Korzinka.uz, the father of modern food retail in Uzbekistan, will give a keynote speech on the increasingly dynamic private sector in Uzbekistan and the growing interest in entrepreneurship. Senior bankers who will be addressing the audience in London include Bobur Parpiev, the Chairman of Orient Finans Bank, who are lead partners for the forum, as well as Anvar Irchaev, Chairman of Universalbank, Christophe Charlier, Chairman of Renaissance Capital, and Giorgi Shagzide, CFO of Georgia’s TBC Bank, which recently entered the Uzbek market. Esfandyar Batmanghelidj, founder of Eurasian Investor, explained that the timing of the UzInvest Forum marks the completion of the first phase of Uzbekistan’s economic reforms – the critical next phase is set to begin.
“During my research trips to Uzbekistan over this past year, I was able to meet a wide range of business leaders and learn more about how the Uzbek economy has changed over the last three years,” he said. “The opportunity for European multinational companies and financial investors is clear – Uzbekistan will offer early-movers robust growth in revenues and returns for years to come. But to move into the second phase of economic reform, a wider pool of foreign companies and investors need to be introduced to the Uzbek market. We want to help launch this second phase,” Batmanghelidj explained. Foreign investors have been impressed with the pace of economic reforms in Uzbekistan and the robust economic growth being delivered by the government of President Shavkat Mirziyoyev. The popularity of the February Eurobond offering was a major vote of confidence. Kiyan Zandiyeh, CEO of London-based investment company Sturgeon Capital, one of the sponsors of the UzInvest Forum, sees growing interest among investors in Uzbekistan. “Investors see strong economic growth coming from a low base, an ambitious economic reform program and attractive macro dynamics. There has been a surge of interest in the past year, which we believe
will only increase, as awareness grows about the unique opportunity set the country presents,” he said. But many companies and investment firms with experience in emerging markets in Eastern Europe, the Middle East, and South East Asia, still have yet to fully appreciate the scale of the opportunity in Uzbekistan, which extends not just to its market of 33 million people, but to Central Asia more broadly — a region with a population of over 100 million. Describing the forum’s effort to bring policymakers and business leaders from Uzbekistan and Europe into closer conversation, Ayça Apak, Director of Research and New Business Development at Adam Smith Conferences described the forum as “the Uzbek equivalent of the World Economic Forum in Davos”. The UzInvest Forum will take place at Glaziers Hall, a historic venue near London Bridge, just a short distance from the city’s financial center. It is the first of a series of investment promotion activities planned by Adam Smith Conferences and Eurasian Investor aimed to support economic development in Uzbekistan. Adam Smith Conferences, a market leading business media company, has over 25 years experience in organizing investment summits in CIS countries.
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DYNAMIC UZBEKISTAN
TRIPLING OF
STOCK EXCHANGE MARKET CAP BY 2025 Uzbekistan is planning an overhaul of its dormant capital markets and a new agency is leading the charge. Established in January of 2019, the Capital Markets Development Agency (CMDA) has quickly become a key actor in the country’s economic reforms.
Kazakhstan and 54.2 percent in Vietnam, a recent darling of emerging markets investors. CMDA intends to boost the total market capitalization of the stock exchange from the current level of just under $5 billion to $15 billion by 2025. To achieve this target, the agency’s development strategy calls for both an increase in the minimum percentage of free float for listed companies, and envisions a new wave of initial and secondary public offerings related to the government’s broader privatization drive.
CMDA is led by Atabek Nazirov, a former banker with Goldman Sachs and the European Bank for Reconstruction and Development (EBRD) who is among the cadre of successful Uzbek professionals encouraged by the administration of President Shavkat Mirziyoyev to return to Tashkent from abroad to help implement economic reforms. Addressing an audience of bankers and investors at the Uzbek embassy in London in September, Nazirov laid out the ambitious targets he has set for his agency, previewing a strategy that has been developed with input from organizations such as EBRD, the International Finance Corporation, and the Securities and Exchange Commission of the United States. The Tashkent Stock Exchange was established in 1994, but its market capitalization is a mere 5.3 percent of GDP, compared to 21.7 percent in neighboring
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The Tashkent Stock Exchange is currently dominated by state-owned banks, which are legally mandated to list shares. These shares account for 86 percent of the trading stocks on the exchange, limiting liquidity and the appeal of the exchange for foreign investors, who hold just two percent of the shares. According to a synopsis of the agency’s strategy, CMDA estimates that the forthcoming IPOs of ten major state enterprises, drawn from the energy, agriculture, mining, and manufacturing sectors, with a combined value of $13 billion, could “increase the free float by additional $1.3 billion.” These ten enterprises are drawn from a larger pool of nearly thirty stateowned enterprises earmarked for partial or full privatization. In parallel to its efforts to diversify the pool of companies issuing securities on the exchange, CMDA is also seeking to broaden
the pool of both domestic and foreign investors. An oversubscribed debut Eurobond offering in February served to demonstrate interest in the Uzbek market among international institutional investors.
involved in the development of the country’s capital markets. A consolidation of relevant laws, acts, and decrees will result in the establishment of a single consolidated capital markets code by the end of next year.
But the agency is also seeking to encourage the development of local retail investing and pension funds in order to ensure that Uzbekistan’s working and middle classes can participate in the expansion of the stock market and benefit from the privatization of once exclusively state-owned firms.
As is the case for so many facets of Uzbekistan’s reform agenda, the fundamental barrier of CMDA’s development strategy is no longer the absence of a clear roadmap or institutional authority, but rather a more basic issue of human capital. The agency has been empowered with a staff of 50, but beyond its offices, the talent pool of the financial sector remains small.
When asked whether the major Uzbek companies would be deterred by the burdens of corporate governance and investor relations entailed in any public offering,
According to a statement provided by CMDA, there are “only around 300 qualified
THE AGENCY INTENDS TO COLLABORATE WITH LOCAL SCHOOLS AND UNIVERSITIES TO INCREASE OVERALL FINANCIAL LITERACY Nazirov pointed to the forthcoming public offerings of Sanoat Qurilish Bank, Asia Alliance Bank and Jizzax Plastmass, a plastics manufacturer. CMDA, which is the markets regulator, is working with these companies in tandem with their external consultants in order to help navigate recent and forthcoming regulatory changes. Presently, Uzbek companies are entirely dependent on bank loans to finance new investment, making it difficult for major enterprises to raise the significant funds necessary for much-needed upgrades to fixed capital. Nazirov believes that the country’s largest enterprises will have no choice but to issue securities in order to meet the financing requirements of their own transformation plans, making CMDA’s mission pivotal for the broader campaign of economic reform. In a sign of this mission’s importance, President Mirziyoyev convened a meeting in October of relevant ministries and agencies
securities markets participants have relevant certificates, which is considerably less compared to developed countries.” The agency intends to collaborate with local schools and universities to increase overall financial literacy while also providing clearer pathways for career development “to stimulate growth in domestic brokerdealer industry.” CMDA recently signed a memorandum with Columbia University to organize a series of finance seminars in Tashkent.
Author: Esfandyar Batmanghelidj, founder and publisher of Eurasian Investor
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DYNAMIC UZBEKISTAN
Orient finans bank:
TRANSFORMATION AND DEVELOPMENT The reforms carried out by the President and the Government of the Republic of Uzbekistan have yielded tangible positive results for the country’s economy, and large-scale socio-economic and structural reforms have given a powerful impetus to the development of the banking sector, noted Bobur Parpiev, Chairman of the Board of Orient Finans Bank, a leading private sector bank.
Orient Finans Bank attaches great importance to lending to priority sectors of the economy. This year, Orient Finans Bank took an active part in specialized targeted financing programs, such as supporting women entrepreneurs, the “Every Family is an Entrepreneur” program, and preschool education support programs.
The ongoing business transformation and new strategic decisions helped us achieve high results in 2018-2019. Understanding and accepting the rapid changes that are taking place in the Republic, Orient Finans Bank is in ongoing process of restructuring not only external solutions and offers for its customers, but also internal processes, technologies used and, most importantly, its corporate culture. While developing transformation models, we rely on world best practices.
T
oday, digitalization processes are seriously affecting and changing the existing business models of banks. In the world of rapidly developing technologies and customer needs, the key task is to ensure the reliability and adaptability of banking systems and develop competitive advantages through the introduction of innovative financial products and service technologies. The long-term viability of the Orient Finans Bank is based on today’s investments in new technological solutions creating value for our customers.
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According to the results of the first half of 2019, the Bank made a profit of $15 million. The Bank’s capital grew by more than 28 percent compared to the same period in 2018. We ensured a return on equity for the first half of 2019 above 16 percent. The Bank’s loan portfolio has grown in all areas and amounted to $275 million while maintaining its quality.
The number of legal entities served increased by 54 percent compared to the same period in 2018 and reached more than 7,000 customers, mainly due to the segment of medium and small enterprises. Today, Orient Finans Bank has over 700 highly qualified specialists who work daily for the benefit of customers and society.
First half of 2019 year Assets
Equity
475mln $
91mln $
Loan portfolio
Deposite base
275mln $
288mln $
7 000
270 000 Retail clients
Corporate clients
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14
Retail service points
Currency exchange points
7
11
public service centers
Branches
Bank’s position on the market
3 ROA
3 ROE
Bank’s rating:
4 11 14 14
Net profit
Equity
Assets size
Loan portfolio
B/Positive/B November 2019
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DYNAMIC UZBEKISTAN
UZBEKISTAN RETHINKS
FISCAL POLICY
Where is economic and fiscal policy headed? Why is it important to reform state-owned companies? Is it possible to slow down inflation? Uzbekistan’s First Deputy Minister of Finance, Timur Ishmetov, provides the answers to these questions and discusses other important issues in this interview.
in sums, because there are certain risks associated with inflation.
Don’t you think that dollarization is a consequence of inflation, not a cause? In part, dollarization is the result of national currency distrust. In the case of Uzbekistan, this is the result of the previous economic policy, when a lot of currency restrictions and generally restrictions on money circulation led all economic agents to accumulate money in dollars, attract loans in dollars, and conduct transactions in dollars because it was more reliable and convenient.
Why do we have high inflation for a quarter century? In your opinion, what function does sum fail to fulfill as the national currency? I do not think that sum does not fulfill any function. It performs all functions, just to some extent, perhaps not well enough. If it does not perform at least one of the functions, then this is no longer money. In our case, at the current moment of economic development, when we have rather high inflation, plus a high degree of dollarization of the economy – all this is in the compartment, perhaps, makes it difficult to fulfill the saving function. Of course, not everyone wants to accumulate
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Generally, inflation is the result of macroeconomic policies. But there may be many reasons. A quarter century is a long period. I suppose, in the 1990s, perhaps the main reason was printing money. On one hand for the last ten years, perhaps more, Central Bank of Uzbekistan did not finance the government and did not provide credit resources to banks either. There was no such classic printing of money. But, on the other hand, in the last three years, Uzbekistan has been adjusting the economy for new realities. The previous economic policy was largely based on the government maintaining various prices artificially: on commodity markets for goods, on the money market - interest
rates and the exchange rate on the foreign exchange market were maintained artificially. Prices were regulated by the state everywhere. On the one hand, this is the key factor. And on the other, it is risk management in any sectors of the economy through the introduction of restrictions. If there is a risk of some kind of operation, instead of working with risks and consequences, these operations were simply prohibited. For example, export-import operations or, in general, the country’s trade balance. One wrong pricing intervention policy creates a lot of restrictions, which then go to other sectors and ultimately affect the entire economy. Therefore, three years ago, the restructuring of economic policy began. If you remember, in 2017, the first step was the liberalization of the exchange rate, meaning a switch to the market
liberally used the policy of indirect benefits and subsidies in order to supposedly help the population, but they were selling some goods below the price. In this case, it is clear that it is unrealistic to constantly sell yourself at a loss – its is not sustainable. In such cases, when the price rises, inflation will form. Of course, high inflation is not good.
What makes high inflation so dangerous? Because it eats up the real incomes of the population and it is difficult for the business with high inflation to plan the future. You are doing some kind of business, you have to plan something, what expenses you will have. If you have constantly high inflation, then you will be laying high inflation on your future products, although it is not a fact that it will be. That is, expecting high inflation,
EVERYONE UNDERSTANDS THAT WE NEED TO ADOPT FREE MARKET PRICING. AND THE MAJOR INFLATION FACTOR FOR THE LAST THREE YEARS WAS TRANSITION TO MARKET PRICES rate. The currency was devalued. Then government began to liberalize prices in various commodity markets. The economy in previous years lived at artificial prices, and now, in order to fix everything and switch to market prices, it is necessary to transfer the entire economy to a new price level. If you want, if you don’t, it’s inflation. We adjust prices from artificially lowered prices and raise them to market prices (foreign currencies, interest rates, commodity prices). So, it spurs inflation. Therefore, this inflation over the past three years is inevitable and necessary. We still need to make these corrections. There was a parallel course - the whole economy, the whole business, and people were adjusted to it, everyone was calculated according to a parallel course, and not according to the official one. Products were sold, focusing on the market rate. But there are goods for which there is no parallel market. One example can be seen in electricity. Here the single supplier is the state. The state
you are already laying in the cost of higher inflation. As a result, you are forced to sell the goods at higher prices today, so that you do not end up with loss. Eventually, if you expect inflation for the future period and if all economic actors expect inflation in a year, then it will become manifest today. Therefore, keeping inflation low is crucial. This is the number one task of economic policy.
You are now working on fiscal policy having previously worked on monetary policy. What do you consider the salient differences? The main difference, I think, is that the Central Bank has certain tasks, but the main task is to ensure price stability. This is in our case, in Uzbekistan. In other countries, there may be other main tasks, such as ensuring the stability of the banking and payment system. But here, the main objective is price stability.
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DYNAMIC UZBEKISTAN
The task of the Central Bank is to ensure that inflation of the future period will not be high. Accordingly, the Central Bank should take actions today based on forecasts of inflation for the future. With a long-term outlooks, the Central Bank should be able to predict inflation of the future period and now take measures to reduce it. The task of other state bodies is far more focused on short-term requirements. Do you need to build roads? Necessary. Do you need to build schools? Necessary. Do you need to issue salaries? Necessary. Do you need to adjust salaries for inflation? Necessary. Therefore, this difference in short and long-term goals between the government and the Central Bank around the world gives rise to possible misunderstandings and frictions between policymakers.
It is clear that in previous years we have underinvested. Probably, there is no a single industry where we had optimal levels of investment. There is a huge investment hunger, there is a desire to make reforms, build roads, schools, and help other industries. But most importantly, the state has reserves. And at such moment it is very difficult to restrain and not try to use this money quickly. Whereas for macroeconomic stability, with the current level of inflation and a negative balance, we need tight financial discipline. The budget should be spent within income. That’s how much you have earned, for example this year, that much you have to spend. Do not spend reserves, and do not fill the economy with money. There is a great demand, there is a lot of pressure, in the good sense, for us to live up to these standards.
I CONSIDER IT A MAJOR ERROR THAT THE EMPHASIS WAS ON ENSURING ECONOMIC GROWTH THROUGH STATE INTERVENTIONS RATHER THAN THROUGH PRIVATE SECTOR EFFORTS Sometimes, when the Central Bank takes actions today, it seems to the government that there is no need to raise the rates. Whereas the Central Bank, even if inflation is high now, interest rates are high and credit is expensive, but next year inflation will be even higher and the consequences will be worse. The price of lowering inflation next year is a tough measure of this year. Therefore, all over the world, both theory and practice have shown that there is a need to grant the Central Bank more autonomy in decision-making. Why? Because the goals are different than those of the government and parliament. When your goals are different, you need to freedom to make the sensible decision.
What do you consider do be the priorities for fiscal policy at this time? The main task of the Ministry of Finance at the present time is fiscal expansion.
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In fact, we spent our days in disputes with other ministries, which want to receive money from the state budget. And every day everyone asks for new money. They ask, initiate, make draft decisions, heated discussions that something needs to be done. If you listen to each individually, then, in principle, they are right. Yes, it needs to be done. But if, on the whole, we do all this and violate our own budget, which we approved, then the consequences are negative – they devalue all your good plans. The government is putting any project to debate. This is an incredible achievement for Uzbekistan, in my view. It is one thing when I, whether in the Ministry of Finance, whether in the Central Bank, argue and say “no, this is wrong,” and it is another thing when the people say it. But the government is seriously committed to expand this debate. This means that it
consciously wants to make fewer policy mistakes. This is an achievement. I think this is undeniable. The fact that there are many state-owned companies in Uzbekistan and the fact they occupy a dominant position in each industry is not in dispute. Now the government has a task – to try to get itself out of economic activity. A clear example of this is electricity generation. Currently, energy generation is not enough to cover demand. Everyone knows that. Therefore, somewhere sometimes the lights will be turned off because of power shortages. Now, if we take the forecast of demand for the next 10 years, the energy burden will increase. Firstly, the population is growing, and secondly, the economy. The only way out of this dilemma is to attract private investment. So private investors can open private generating industries. For this, energy reform has begun. What did we do? First, this colossus of Uzbekenergo was divided into three parts, as in the whole world. The whole process is aimed at ensuring that the state phased out. In order for private, local, and foreign investors to come and build power plants, reforms must first be carried out. The same process has started in the oil and gas industry and in the transportation sector, where the national airline is now separated from the airports operator. The beginning of reforms in all these sectors suggests how the state will gradually leave these sectors. If this could be done
*An interview is provided by information channel The.Uzbek.Review
in three days, the government would have done it last year.
In your opinion, what are the three main reasons of low growth? You can point to one issue – we had the wrong economic policy. A single agency alone cannot do absolutely everything. The same Central Bank, no matter how they talk about its autonomy, if they and the Ministry of Finance do not coordinate their policies, then the value and result of their autonomy is worthless. I consider it a major error that the emphasis was on ensuring economic growth through state interventions rather than through private sector efforts. I think the only way we can improve the situation is to rely on the private sector. The most important thing is not to try to pit foreign and local investors against one another. If a local businessman does not invest, a foreign one will not come.
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DYNAMIC UZBEKISTAN
BANKS RUSH TO MATCH PACE OF ECONOMIC REFORMS
Since coming to power in September 2016, Uzbek President Shavkat Mirziyoyev has had one overriding goal – boosting foreign investment. Uzbekistan has recently implemented currency reform, trade liberalization, new legislation on free trade zones, and a slew of other measures, but these achievements still need support and growth.
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Mirziyoyev’s efforts have been remarkably successful. Foreign direct investment rose an astounding 444 percent in 2018. Another ringing triumph came via Uzbekistan’s Valentine’s Day debut on US dollardenominated sovereign bond markets, which should help facilitate other Uzbek firm’s efforts to raise funds abroad. However, for Uzbeks to truly reap the benefits of these developments, the country must develop an effective banking sector. The government faces significant difficulties in implementing the necessary reforms: reconstituting its existing state banks, decreasing the dominance of the main players, allowing competition across industries, and, most importantly, taking measures to dramatically increase the availability of retail banking services to most Uzbeks. Three main state players dominate the existing banking environment: The National Bank of Uzbekistan (NBU), UzPromStroyBank (PSB), and Asaka Bank. A prime function for these banks is to back the state, for example, Asaka Bank finances much of state-controlled GM car manufacturing Uzbekistan. In fact, it is relatively common for other state entities to be closely tied to and even shareholders of their respective backers. There are a handful of private banks as well, but none are significant for the domestic economy. Penetration by foreign banks is near nonexistent, only the Korean Development Bank has a local subsidiary. Previous administration of President did not encourage the arrival of foreign banks. Although there have been some microfinance initiatives, they are mainly used
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to finance the state’s plans in the agriculture sector at subsidized rates. Mirziyoyev’s effort to open up the country has seen international financial institutions re-enter Uzbekistan. One of their key aims is to support the development of the banking sector. The Asian Development Bank is working with two state-owned banks, PSB and Aloqabank, to develop trade finance. It has also loaned sizable sums to the privately-held Davr Bank and owns a small stake in Ipak Yo’li Bank. The European Bank for Reconstruction and Development is undertaking similar efforts to support and stimulate trade. The World Bank’s International Finance Corporation underwrote the first foreign Uzbek sum-denominated bond issued by Hamkorbank, in which it also owns a stake. Such efforts will mainly serve to finance existing trade, but Uzbek banks’ increased access to international markets can only go so far while their domestic penetration remains limited. The legacy of the severe currency controls, which meant the black market exchange rate was often near double the official rate until the currency was allowed to float in 2017 – also means trust in banks is low. As a result, any penetration of the domestic retail market is minimal. The Central Bank has acknowledged that the share of cash in the economy is an issue, and is moving to combine it. The state announced that will stop handing out pensions in cash and
will also attempt to increase the number of retail banks in districts outside of Tashkent by five-fold. Data from the Asian Development Bank shows that in most regions of the country, there are more than 10,000 people per ATM. Several efforts are now underway to try and modernize Uzbekistan’s banking sector through mobile and e-banking. The state recently launched the Humo payment system, which it aims to integrate with its Click software to enable banks and vendors to facilitate card purchases more easily. Georgia’s second largest bank, TBC, has moved to develop online banking in Uzbekistan in a fashion similar to its domestic banking platform, Space. TBC recently completed the purchase of an Uzbek payment platform, Payme, and seeks to develop the e-banking platform further in competition with Click. Such efforts have seen notable success in other underbanked emerging markets, most notably Kenya. Yet, while such competition is welcomed,
announced plans to sell a 10 percent share in three banks: PSB, Asia Alliance Bank (AAB), and Aloqabank. However, it is unlikely that this will be a route in for foreign competition. A former EBRD official and Goldman Sachs banker was tapped in January to lead a restructuring of Uzbekistan’s capital markets. But the Tashkent stock exchange has a free float of only some $300 million, and with foreign investors required to seek government approval to invest in banks, interest is unlikely to be significant in the short term. While Trade and Foreign Investment Minister Sardor Umurzakov recently announced the intent to lift the requirement for foreigners to receive government approval to buy stakes in Uzbek banks, he gave no timeline. Any sales of AAB, PSB and Aloqabank – which already trades on the exchange – in advance of such reform will therefore give an advantage to existing elites who benefit from the status quo.
ONE OF KEY AIMS IS TO SUPPORT THE DEVELOPMENT OF THE BANKING SECTOR all the players face formidable challenges. Perhaps the most significant barrier in Uzbekistan for establishing a coherent e-banking infrastructure, is that the country still has no 4G network. Plans are in place for 4G coverage nationwide, but only by 2023. Developing internet infrastructure and vastly expanding the ATM network are only two of the necessary steps needed to bring Uzbekistan’s banking sector into the 21st century. Best practices from other countries where banks have had similar success in expanding credit action is necessary. The current bankruptcy code last saw a significant overhaul in 2003 and should be revisited in its entirety, and in conjunction with wider judicial reforms that will level the playing field in long-corrupt domestic courts. Credit growth is necessary for the government to achieve its goal of becoming a middle-income country by 2030. TBC has said it plans to offer credit through its Space e-bank in Uzbekistan. However, it is unclear if others will seek to enter the online sector, though some Russian banks have reportedly expressed interest. The government also recently
The sale of shares in AAB is eyebrow-raising as it was only in January that Tashkent announced it had bought-out the previously-private bank. The purchase occurred nearly-concurrently with Mirziyoyev announcing his intention to decrease the state’s share in the sector. Interestingly, there has not been an explanation or public pricing of the deal. However, this lack of communication may not be the only factor that drives down any potential interest. Mirziyoyev’s reform agenda deserves the praise it has received. But it will only be through further reforms to the banking sector, the courts and bankruptcy process as well as the development of backbone infrastructure that the economic benefits can reach the wider population – who have borne the brunt of the cost of inflation that resulted from the currency liberalization – rather than just the elites.
Author: Maximilian Hess, head of Political Risk at AKE Group and Eurasian fellow at FPRI
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DYNAMIC UZBEKISTAN
UZBEKISTAN’S CREDIT BOOM Uzbekistan is rapidly opening up, having embarked on a path of structural reforms and economic growth that is making headlines around the world. Growth is expected to pick up with the government working itself to exhaustion to create a modern market-driven economy, fuelled by large public investments. But there is a string of challenges to overcome, including high unemployment. The rapid credit expansion, price liberalization and a sharp devaluation of the local currency, which is raising inflationary pressures, are among other problems, the Institute of International Finance (IIF) noted in a report entitled “Uzbekistan – opening towards the world”.
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The government has been working hell for leather to remodel the economy since President Shavkat Mirziyoyev started to the new stage of reforms in Uzbekistan. So far, the new administration has been prudent and it enjoys large currency reserves and a low external debt. But inflation is the main macroeconomic problem that the government needs to contain. Tight monetary policy must be maintained to lower the pace of the ongoing new-era credit expansion as well as to address inflation, according to the IIF. The government has also targeted sectors with large export potential, especially in the more valuable parts of the production chain. For example, the government plans to ban the export of raw cotton next year to force producers to invest in spinning and textile mills to add processing value to their exports. As such programs gather momentum, the large current account deficit will narrow gradually. For now, the large government reserves represent a buffer. The positive impact of reforms is clearly visible. GDP growth is not yet matching expansion that ran at an average of 8 percent a year between 2005-2015 driven by heavy
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investment in manufacturing, and exports of metals, gas, cotton, and gold. “Growing inefficiencies and weaker demand for Uzbekistan’s exports – due to moderation in growth in China, and sanctions on Russia – led to slower growth in recent years,” the IIF observed. Growth picked up to 5.1 percent in 2018, as underperformance in the agriculture sector (30 percent of GDP) was more than offset by strong performances in mining, manufacturing and construction. With the completion of the first wave of reforms, including exchange rate liberalization, the easing of trade barriers and price controls, the IIF anticipates that growth will pick up to 5.5 percent this year and 5.7 percent in 2020. “Uzbekistan has ample potential to raise its growth beyond the short-term by improving infrastructure, positioning itself as a regional transit hub, and integrating into regional supply chains,” the IIF said.
MORE JOBS PLEASE But the biggest obstacle to success for Mirziyoyev is high unemployment. Unlike most countries in Europe and the Former
Soviet Union (FSU), Uzbekistan enjoys a young and rapidly growing population, but the economy cannot create enough jobs. “Despite the steady growth, unemployment remains very high, as half of the population are less than 30, leading to rapid growth in the working-age population – an increase of about half a million annually,” the IIF points out.
HIGH INFLATION HEADACHE High inflation is another headache for the government. It is currently running at 14 percent as the inflationary effects of the sharp currency devaluation that followed the liberalization of the Uzbekistani sum (UZS) in September 2017 are still working their way through the system.
THE GOVERNMENT HAS ALSO TARGETED SECTORS WITH LARGE EXPORT POTENTIAL The upshot is that many young Uzbeks have left the country to look for work abroad, with the majority going to Russia. It received 900,000 new migrant workers from Uzbekistan alone in 2018, according to the Federal Security Service (FSB). While the money these migrant workers send home is a useful source of cash and contributes to keeping the current account deficit in check, Uzbekistan needs to create more domestic jobs to allow these workers to return home.
The after-effects of the currency liberalization are gradually being fed into the system as more controls over the currency are removed. It was only in August that banks were for the first time allowed to offer dollars in ATM machines to the general public. Though, in a step back, Uzbekistan in late September removed the option allowing VISA, MasterCard, UnionPay and other international cardholders to withdraw funds in foreign currency from ATMs.
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DYNAMIC UZBEKISTAN
MAIN MACROECONOMIC & FINANCIAL INDICATORS
2016
2017
2018
2019
2020
Nominal GDP, $ billion
81.8
59
50.5
61.8
72
Real GDP, % change
6.1
4.5
5.1
5.5
5.7
Agriculture, % change
6.2
1.2
0.3
2.5
3
Non-agriculture % change
6.1
6
7.2
6.7
6.7
Unemployment %
5.2
5.8
9.3
10.4
11.3
CPI Inflation, Avg., %
8
13.8
17.7
13.6
12.4
Fiscal Balance, % GDP
1.9
-2
-1.2
-1.8
-1.7
Current acc., % GDP
0.4
2.5
-7.1
-6.6
-6.1
Reserves ex. gold, $ bn
14.2
14
12.4
12.8
13.5
In months of imports
7.5
6.6
4.1
4
4
Gold Reserves, $bn
12.3
14
14.6
16.3
17.7
Government debt, % GDP
8.6
20.2
19.2
21.2
22.5
Policy rate, eop, %
9
14
16
16
15.5
Source: National authorities; IIF forecast for 2019-2020
“With continuous price adjustments and buoyant economic growth, we expect inflation to remain elevated in the near term. Private credit soared in the past two years despite monetary policy tightening. Given the limited effectiveness of the rate hikes, further credit tightening will have to come from restraints in government-directed lending,” the IIF also noted.
7.1 percent of GDP in 2018. The IIF foresees the deficit falling slowly as the steps of liberalization gradually take effect, but it is worried by the ongoing credit boom. “A sustained credit boom and buoyant domestic demand present challenges, the IIF said. Unless restrained, high credit growth can lead to wider current account deficit and the deterioration of the external position over the medium term. Nonetheless, total public
THE STATE IS SUFFERING FROM AN ACUTE SHORTAGE OF QUALIFIED SPECIALISTS CURRENT ACCOUNT DEFICIT TOO HIGH A domestic credit boom and easing of trade restrictions has spurred a surge in imports of capital goods. Such a situation is what caused the government to clamp down on the convertibility of the sum in the first place back in 1995. With imports sucked in following the liberalization, the current account has shifted from a small surplus under the previous government to a swelling deficit that reached
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foreign assets, half of which are in the form of gold, are at a comfortable level.” Going forward, it is possible that authorities may use some of their reserve deposits to clean up the balance sheets of local banks, but in the meantime the recent rise in gold prices and a Eurobond issue in February mean that the government is well funded and can also keep the overall level of reserves stable. “The low government debt allows Uzbekistan to proceed with reforms from a strong
position. However, announced restructuring of SOEs may create a dent in revenues as a large share of taxes is collected from such enterprises,� said the IIF. With the move to a more market-based economy, comprehensive tax reform will be needed to avoid the risk of a drastic decrease in tax revenue, the IIF advised. On the expenditure side, the government will have to strike a balance between meeting large social and investment needs through directional lending and fuelling pro-cyclical fiscal policies, which may destabilize the economy. Despite low fiscal financing needs, Uzbekistan issued its first international bond in February this year. A string of corporate issues is expected to follow. Thanks to the solid state of the public finances, the Uzbek sovereign bond has performed very well with yields falling from 5.4% at issuance to 4.3% as of July. The bond currently trades with only a 100 bp spread over Georgian sovereigns, and Georgia is much more advanced in terms of pro-market reforms.
The banking system appears to be sound, according to an IIF assessment. Tier I capital exceeds 14 percent of risk weighted assets, non-performing loans (NLPs) are low at 1.3 percent of total loans, and the profitability of the banks is high with ROA at 2 percent and ROE at 16.2 percent in 2018. The authorities have been working steadily to address vulnerabilities in Uzbekistan’s financial sector associated with inadequate governance and oversight. The Central Bank of Uzbekistan, for instance, adopted a new regulation that requires commercial banks to form their required reserves in national currency with the aim of reducing the dollarization rate in the economy. This rule is also expected to improve the efficiency of market mechanisms for liquidity regulation in the banking system, the IIF said.
BANKS ARE STRONG The state is suffering from an acute shortage of qualified specialists to carry out reforms and so has turned to the banks as the most competent stateaffiliated specialists in the country to implement business plans: of the $1 bn raised from the sovereign Eurobond in February, three-quarters of the money was distributed to the state-owned banks to onlend to specific projects.
Author: Ben Aris, co-founder and editor-in-chief of bne IntelliNews
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DYNAMIC UZBEKISTAN
58
INVESTMENTS
DYNAMIC UZBEKISTAN
“GREEN” MORTGAGE FOR UZBEKISTAN The population of Uzbekistan is constantly growing and likewise the economy is showing steady growth. This entails increased energy consumption, and hydrocarbon reserves are exhaustible, therefore, Uzbekistan needs alternative, renewable energy sources. A joint project of the Government of the Republic of Uzbekistan, the UNDP, and the Global Environment Facility entitled «Assistance In the Development of the Construction of Energy-Efficient Rural Housing in Uzbekistan» aims to develop energy-efficient housing. In this interview, Mark Chao of the Market Transformation Institute, which is based in New York, discusses his role as chief technical advisor of the project.
Why low-carbon houses?
Tell about the benefits of energy efficient homes? The most important advantage is saving the family budget, saving money every month by saving energy. There are additional advantages - these are heat-shielding houses with an energy-efficient shell, they live comfortably all year round. This shell protects against cold in winter, does not give heat leaks, and in summer protects against heat penetration. There is also a unique advantage, especially for residents of the countryside. We have some projects, called low-carbon houses, they have solar panels on the roof. I heard that there are power outages in some areas, and these houses have their own power supply. 60
This is a technical term. There are energyefficient buildings - this means that the building requires less energy, and there are low-carbon houses. In addition to energysaving materials, they have solar panels, which provide the house with its own electricity, sufficient for lighting and heating water. The advantage of such a house is the opportunity to save on electricity and heating, this is beneficial to the owner and the environment, because due to the fact that the energy received from burning hydrocarbon fuel is not wasted in lighting and heating the house, greenhouse gas emissions are reduced.
How is energy efficiency at home achieved? Is it built of some special materials? Mineral wool based on basalt fiber is used as an insulating material. The insulation blocks are fixed with dowels to the brick wall outside, then there is a grid on which the plaster is already laid. Thus, the house is insulated from all sides, including the floor and the roof, turning into a semblance of a thermos that retains heat. It should be noted that the thickness of the insulation varies between 5-10 centimeters. It depends on the climatic region, because in the north of Uzbekistan cold is stronger than in the southern regions.
Tell about the financial component of the project? Due to Presidential Decree №5577, “On Additional Measures to Improve State Regulation in the Construction Sector”, issued in November 2018, it was determined that housing projects must be equipped with energy-efficient and energy-saving equipment. Therefore, the state finances the mass construction of energy-efficient houses, as provided for in the State program for the construction of affordable rural housing. A «green» mortgage refers to low-carbon buildings with solar panels. If a rural family wants to buy such a house, they can turn to Qishloq Qurilish Bank or Ipoteka Bank for a “green” mortgage, and the Global Environment Facility will cover the costs of solar panels and related equipment.
For 2019, the project allocated $1 million and now it is in 5 pilot regions - Samarkand, Bukhara, Surkhandarya, Fergana and Khorezm regions, 800 rural households have access to a “green” mortgage, in which our project
pays for the cost of photovoltaic equipment. It is very pleasing that the share of women as borrowers in the «green» mortgage was 53 percent. Next year we plan to extend funding to other regions of Uzbekistan.
Why does the population not accept solar panels? If this is beneficial, why do people not seek to receive them? This is the classic number one question that has been around energy efficiency and solar panels for many years. This is the socalled market failure, we call it theoretically, because if it is theoretically profitable, then it pays for itself, then why don’t people do it? One reason is that there is a simple lack of knowledge in this topic. From the point of view of energy efficiency, it is impossible to see through the eyes, because building looks the same as a nonenergy-efficient building, so people look at such a house and think: it’s just a house.
A study has been conducted in the United States on what is the
number one factor that forces people to choose solar panels for their homes. Various factors were identified, such as income, political views, education, etc. It turned out that the number one factor that determines whether a person will install solar panels in his house is that a neighbor has a solar panel in his house. If they see a solar panel in their area, then suddenly the desire to purchase the same house for themselves is very much increasing.
For me, the most impressive thing about this project is the role of the state and the President. Shavkat Mirziyoyev could not issue a decree that says about the mandatory energy efficiency of houses, but the President did it. Energy efficiency is a smart thing. It is good for the population, it is good for the country, it is good for the planet. And this is great, so I want to pay tribute to the participation of the state in this matter, it really impresses me.
Author: Evgeniy Nikolaev
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DYNAMIC UZBEKISTAN
RIGHT OF
PRIORITY MOVE
Nicolas Page – leading expert in the banking sector, head of corporate finance and operations in the financial sector in professional services network PricewaterhouseCoopers is sharing information about many years of experience, banking market and Uzbekistan in an exclusive interview for our magazine.
Tell about yourself and experience? What crucial moments in your life could leave a mark in your career? Within PwC my role is Global and Europe, Middle East and Africa (EMEA) leader for Financial Services Deals. Through this role I am in a frequent contact and dialogue with colleagues and clients around the world to discuss, explore and create Mergers and Acquisitions (M&A) situations in financial services. Within PwC I think one of the main contributions I have been able to make is to create and maintain a global network of colleagues similarly focused on Mergers and Acquisitions (M&A) in financial services. This has contributed in establishing of PwC as a market leading of Financial Services Deals business that is able to serve all clients involved in domestic and cross border
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Mergers and Acquisitions (M&A) projects in this region.
What projects are you currently working on and how productively and successfully are they being implemented? It is of course hard to talk about current projects as they are generally protected by confidentiality agreements but some of the M&A themes, I have recently worked on including online retail banking, emerging market fund management, and disruption in financial services through digital technologies. My current experience is digital agenda that is now in front of mind for big institutions and also attracting significant capital from investors who support entrepreneurial businesses. When
taken together with regulatory scrutiny I think digital developments will lead to an active M&A market in financial services.
Share your opinion on the banking sector of Uzbekistan? What are the advantages and disadvantages of the banking sector of our country? Any banking market should seek to provide a safe and stable environment for intermediation between savers and borrowers and be configured to encourage profitable lending to relevant businesses. Commercial banks play a fundamentally important role in economic development and in any economic transition towards a market economy, and therefore will play an important role in Uzbekistan going forward. In Uzbekistan there is a chance to observe what has worked well (or less well) in other markets and could be applicable to develop policy and practice in this sphere.
How can you evaluate the ongoing reforms in the economy of Uzbekistan? Having grown up and worked in market economies I am all in favor of adoption of policies that encourage private enterprise and entrepreneurship. These changes are not so easy as we have seen over the last 20 years or more across Eastern Europe and other markets. To attract inbound investment, one needs to have some key planks in place such as transparent company law, a clear tax system that supports inbound investment, government programs that incentivise global organisations to want to come and do business in Uzbekistan and many others. I am encouraged by the developments in Uzbekistan and hope this path of reform continues long into the future.
Can you estimate the investment potential of Uzbekistan at this time? What forecasts can you give for the coming years?
TO ATTRACT INBOUND INVESTMENT, ONE NEEDS TO HAVE SOME KEY PLANKS IN PLACE SUCH AS TRANSPARENT COMPANY LAW, A CLEAR TAX SYSTEM THAT SUPPORTS INBOUND INVESTMENT AND GOVERNMENT PROGRAMS What, in your opinion, is the main problem/ disadvantage of a large structure or organization? Often in business inertia can inhibit development and stifle innovation, and larger organizations can be more prone to this challenge. Inspirational leaders that provide the possibilities for organizations to become innovative can make a big difference. As you know around the world in business there is a strong focus on ‘agile’ to create a more flexible and efficient way of working process. In financial services productivity is a key agenda item for many organizations which brings together several features to empower an organization to improve performance - better understanding the workforce, rethinking change functions, embracing the platform economy, improving the workforce digital IQ, bringing an agile mindset and mastering digital labor.
With its population of 33 million, historical and cultural development and geographic positioning, Uzbekistan possesses some interesting and attractive strengths to explore in the future. However, whilst there is considerable capital in the world to be invested every dollar of investment needs to be fought for. Finding the right partners sometimes can take some time and a careful deliberate process at all levels will likely be well rewarded in the longer run.
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DYNAMIC UZBEKISTAN
UZBEKISTAN TO OVERHAUL
THE ENERGY SECTOR
In July 2019, President Shavkat Mirziyoyev announced an ambitious five-year strategic plan for Uzbekistan’s energy sector. Measures outlined in the plan include new legislation on production sharing agreements and subsoil use, and extensive reform of the state energy producer Uzbekneftegaz (UNG), Uzbekistan’s largest state-owned enterprise (SOE) with 120,000 employees.
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The plan envisages unbundling the commercial and regulatory functions of UNG and an IPO of up to 49% of both UNG and Uzbektransgaz (UTG). Reorganization of UNG would be a significant step towards a more market-driven economy in Uzbekistan. The restructuring will see UNG split into separate production, transmission (UTG) and distribution (Hududgastaminot, a new corporate entity) units. UNG will be responsible for upstream exploration and downstream processing while UTG’s gas supply branches will be replaced by a single entity that will operate distribution networks in cooperation with competing Private Public Partnerships. UNG accounts for not less than 86 percent of the country’s energy and electricity production, 20 percent of tax contributions to the budget and 15 percent of GDP. Following the president’s orders, UNG CEO Bakhodir Sidikov disclosed UNG’s production statistics, information formerly classified as state secret. Sidikov stated that in 2018 oil production had declined by 8.2 percent to 746,400 tons, while gas production had increased by 6.1 percent to 59.8bcm, with domestic demand around 39bcm. The reforms aim to increase gas production by 17 percent by 2025.
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A critical objective of the restructuring is to increase the role of international capital in the sector. As a result, state holding company UNG will be subject to far greater transparency requirements, giving observers an unprecedented view into the sector. UNG and Uzbekenergo, the state-owned electricity company also undergoing deep restructuring, are planning to use a comprehensive list of corporate reporting standards for 2020, including the international accounting standards IFRS. UNG will seek an international corporate credit rating in order to effectively to raise capital for projects in geological exploration and energy production. To this end, it plans a USD 1 billion Eurobond issuance in 2020. The presidential decree also requires far greater transparency in procurement and subcontracting processes. Unbundling the hitherto black box of UNG into separate generation, transmission and distribution entities will be a long process. First, UNG has a range of outstanding debts, with the terms of some loan agreements preventing it from reorganizing. Before it can be restructured it will require consent from creditors. If effective, the restructuring would entail thousands of job losses at the nation’s biggest employer and significant
tariff increases, the social impacts of which the Uzbek leadership is looking to mitigate. In July, President Mirziyoyev also ordered the reform of geological exploration and tasked the Ministry of Investments and Foreign Trade and the State Geology and Mineral Resource Committee to work on investment portfolios. The decree mandates the introduction of international standards according to the Australian JORC code. Although the top-down character and general course of reforms in Uzbekistan bears some risk of distortion and delay, the reform is a positive step in laying the ground-work for foreign investment beyond Russian and Chinese in the country’s resources sector. The reform will have ramifications for the oil and gas industry too, as Uzbekistan does not separate mining and petroleum legislation, instead having a unified regime. The government has a strong commitment to addressing its energy balance and boosting its renewable provision. While the country could potentially meet 100 percent of its electricity needs using solar, the priority is the remaining gas in the ground. By the end of 2019, the Uzbek government is planning to conclude financing arrangements,
potentially a soft loan, and an engineering, procurement and construction contract with Russia’s Rosatom for two power reactors in Uzbekistan, making Uzbekistan the first Central Asian country with conventional nuclear power. There are openings for international oil companies (IOCs) at both underperforming brownfield sites and at new sites where a lack of funds has limited exploration other than by Russian and Chinese operators. Distribution channels also remain limited, with little spare capacity or outlets beyond domestic industry currently available. So far only Gazprom and Lukoil, which know the political-bureaucratic environment well, have been awarded PSAs. Other projects, many Chinese, have been implemented under a simple JV partnership structure. This arrangement may work for state-backed Chinese operators, as their interests are not always strictly commercial, but may not work for IOCs. IOCs are generally holding out on making firm commitments, preferring to wait for better terms. One major challenge is ensuring the rights of producers to sell gas on the open market. Currently, the Uzbek government plans to limit producers’ rights
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DYNAMIC UZBEKISTAN
A CRITICAL OBJECTIVE OF THE RESTRUCTURING IS TO INCREASE THE ROLE OF INTERNATIONAL CAPITAL IN THE SECTOR to export and requires them to sell directly to UNG which then sells the gas onto the open market. Another challenge is the underdeveloped nature of Uzbekistan’s oil and gas ecosystem. Geological data is not digitalized, is in the Russian language, and is collected by outdated surveying equipment. This is all under development. Uzbekistan’s gas resources also present the prospect of developing a petrochemicals industry. A gas-to-liquids (GTL) plant is under development in the southern Kashkadarya province, and expansion at the nearby Shurtan gas chemical complex is planned. These prospects are dented by the country’s rare double-landlocked status, which increases export costs and logistical challenges. With a population of 32 million, Uzbekistan has a large domestic market but only at prices – for now, at least – that may not justify investments. The same is true of neighboring markets in Central Asia.
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By actively courting international partners, Uzbekistan is more likely to witness its stagnating oil and gas industry fulfill its potential. But expectations of opportunities for foreign investors need to be tempered, given the country’s relatively small resource base, the entrenched position of Chinese and Russian operators, and the logistical challenges at play.
Author: Kate Mallinson, director of PRISM Political Risk Consulting and associate fellow of the Russia and Eurasia Program at Chatham House
RETAIL
REVOLUTION Tashkent’s gleaming Compass Mall sits across the ring road from the hulking and heaving Qo’yliq Dehqon Bozori, one of the city’s largest traditional markets. When Uzbek developer and large group of companies Orient was selecting the location for the mall, they were no doubt thinking about convenience. The location, right next to a major thoroughfare and adjacent to a market that already attracts thousands of shoppers each day, no doubt made it easier to lure shoppers into the new mall’s sky lit corridors. But the choice of location can also be seen as a statement, putting in stark contrast Uzbekistan’s retail ways of old and the new formats that are rapidly changing the consumer landscape.
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As Uzbekistan continues is economic reforms under President Shavkat Mirziyoyev, the country’s large consumer sector has been among the first to see an influx of new investment and the arrival of new goods and services. With a population of around 33 million, Uzbekistan’s market is slightly smaller than the Polish market back in 1990, at the outset of economic transitions in Eastern Europe. But Uzbekistan’s GDP per capita is actually slightly higher than Poland’s level at the time.
The mall includes well-known Western brands, such as French cosmetics boutique Yves Rocher and Danish jewelry boutique Pandora. But the retail offerings also point to Uzbekistan’s unique position at the heart of Europe and Asia – Turkish fashion retailer LC Waikiki, Chinese lifestyle retailer MINISO, and Russian youth fashion chain Oodji all have large stores in the mall. A food court includes Western staples such as Wendy’s and KFC as well as local favorites like Chopar, a pizza chain.
Considering rising incomes and growing household purchasing power, the market potential is clear. According to data compiled by the World Bank, household final consumption reaches a new local currency peak of 221 trillion Uzbek sum last year, equivalent to approximately $27 billion at the time.
Orient Group is also the mall’s anchor tenant through Makro supermarket chain. In terms of store size and merchandising Makro stores are comparable with the hypermarkets of French retail giant Carrefour, whose own market entry has been the subject of persistent rumors, eventually confirmed in October by an official statement — an indication of the growth potential in food retail.
Orient Group, a major conglomerate active in real estate development, were early movers in Uzbekistan’s retail revolution, opening the country’s first modern shopping mall, Samarqand Darvoza, in 2014. Spanning 35,000 square meters across two floors, Compass Mall, which opened last year, is the group’s flagship development and is managed by group subsidiary The Tower Mall Management Group.
For now, Makro’s sole competitor is Korzinka.uz supermarket chain, led by ebullient Uzbek entrepreneur Zafar Khashimov. Korzinka.uz operates nearly 50 supermarkets, discount stores, and convenience stores. The typical Korzinka. uz store is smaller than the typical Makro outlet but has a comparable, if slightly less
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DYNAMIC UZBEKISTAN
REGIONAL POINTS MAP OF SUPERMARKET CHAINS KORZINKA.UZ AND MAKRO
1
Nukus
35 5
Urgench 1
2
Toshkent Toshkent vil.
Namangan 1 Andijon
3
1
Navoiy
Jizzax
Samarqand Buxoro Qashqadaryo
1
Termiz
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Guliston
Farg’ona
premium product selection. Korzinka.uz also operates two fashion retailers, Red Tag and Flo, which often share space with Korzinka.uz stores. Given the fast expansion of Orient Group’s malls and Korzinka’s supermarkets, including more recent growth beyond Tashkent to Uzbekistan’s other major cities, it is clear that Uzbek consumers have taken to the new retail formats and the wide selection of products –
the IPO put forward clearer guidelines for the recognition of trademarks, an important if belated reform for the likes of FMCG giants Néstle and Carlsberg, which manufacture products locally in Uzbekistan. Improvements in intellectual property protections will however introduce new headaches as more companies seek to import foreign products to Uzbekistan. Fearing increased competition, local manufacturers
IT IS CLEAR THAT UZBEK CONSUMERS HAVE TAKEN TO THE NEW RETAIL FORMATS particularly packaged foods and personal care products — on sale. But further growth, particularly beyond Tashkent, will require improvements in both the infrastructure and legal frameworks which underpin the consumer sector. Uzbekistan sorely needs upgraded warehousing and distribution solutions, particularly in the “cold chain” required to move perishable goods. The government will also need to improve its regulation of the consumer sector. A recent move to reassign the Uzbek Intellectual Property Office (IPO) to the Ministry of Justice has given commercial actors new confidence that copyright and trademark infringement can be challenged in court. In early August,
have taken to lobbying the government to introduce tariffs and other protectionist measures in order to stave competition from popular foreign brands. In some cases, the government has obliged. A recent and sudden increase in the import duty applied to shoes hit a number of foreign brands and their local agents. Shopping in the traditional bozors, or markets, will continue to be the dominant retail experience in Uzbekistan for years to come. But for an emerging middle class, shopping malls like Compass show the way to a newly affluent lifestyle. Author: Esfandyar Batmanghelidj, founder and publisher of Eurasian Investor
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DYNAMIC UZBEKISTAN
LUKOIL
15 YEARS IN UZBEKISTAN 2019 marks the 15th anniversary of cooperation between LUKOIL oil company and the Republic of Uzbekistan. A company is the largest foreign investor in Uzbekistan: its total investment is about $8 billion.
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For such a short historical period, LUKOIL oil company managed to achieve a lot company successfully implements high-tech projects in the field of natural gas production and processing, completes the construction of Gissar group of fields and Khauzak, unique in its design and technological equipment, the Kandym gas processing complex was commissioned, creation of new production enterprises and facilities, as well as an efficiency of production and use of hydrocarbon resources in Uzbekistan was increased. Drilling at first launch area of the project - the Khauzak-Shady gas field in Bukhara region - began in the summer 2006. In
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November 2011, first launch complex was commissioned and gas production began on the Western Shady area. A commissioning in 2014 of a booster compressor station in Khauzak, which has no analogues in Uzbekistan, allowed to increase the level of gas production up to 20%. In May 2015, gas pre-treatment installation of Kuvachi-Alat and Northern Shady with infrastructure and collection systems were commissioned. The development of contract territory in Bukhara desert was not the only task of LUKOIL oil company in Uzbekistan. Simultaneously, a company’s work processes were progressing in Kashkadarya region. In September 2017, the production facilities
of Gissar group of fields were put into operation, followed by reaching the project level of gas production. One of the largest LUKOIL oil company projects in Uzbekistan is a high-tech Kandym gas processing complex, which received the highest rating from the President of the Republic of Uzbekistan Shavkat Mirziyoyev as a “miracle in desert” and was erected in record time - exactly 2 years after the start of construction. The capacity of complex is more than 8 billion cubic meters with modern engineering and transport infrastructure, due to which, the company’s cumulative gas production reached 76 billion cubic meters. Performing production tasks, LUKOIL oil company also contributes to the solution of social issues in regions of its presence: the infrastructure of regions of presence is being
developed, social facilities are being built, jobs are being created. Thus, due to LUKOIL oil company projects, more than 3,000 people have been employed. LUKOIL oil company pays great attention to the development of education, culture, sports, healthcare in Uzbekistan as part of its charitable activities, a total amount of which exceeded $13 million. During 2019, a number of charity events were held – a repair and equipping of two boarding schools for children with special needs in Karshi and Tashkent, a supply of drinking water to boarding schools for 2,000 children, a purchase of Braille stationery for 800 children, which will contribute to the integration of children in society gaining a profession and a fulfilling life. Due to the support of LUKOIL oil company in Tashkent first time in 2019, the Navruz international
TOTAL AMOUNT OF CHARITABLE ACTIVITIES EXCEEDED $13 MILLION 71
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sports half marathon was held time, in which about 2,000 participants took part, the Soglom Avlod Uchun (For a Healthy Generation) Foundation was presented with a new auto-ammunition equipped with diagnostic equipment for medical patronage in remote areas of Bukhara region. The largest social project implemented jointly with the Ministry of Preschool Education of Uzbekistan will be a construction of three innovative kindergartens in Bukhara, Karshi and Tashkent region, for which LUKOIL oil company will allocate $12 million. A kindergarten in Bukhara will be built according to a project specially developed by LUKOIL oil company. Two other pre-school institutions will also include rehabilitation centers for children in need of special treatment. Work on the implementation of this unprecedented project has already begun. The merits of LUKOIL oil company in the development of the oil and gas sector of Uzbekistan are marked by the high state award of the Republic of Uzbekistan. On August 31, 2018, the President of the Republic of Uzbekistan Shavkat Mirziyoyev presented the President of PJSC LUKOIL oil company Vagit Alekperov a state award - an order “Dustlik” for his great contribution to the development of oil and gas complex and increase an efficiency of use of hydrocarbon resources of Uzbekistan.
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A chronicle of events in company’s history on fertile Uzbek land is rapidly replenishing with new pages. Without stopping at successes achieved, LUKOIL oil company strives for new horizons, possessing necessary experience, technology and financial means to implement innovative projects in oil and gas industry in Uzbekistan.
DYNAMIC UZBEKISTAN
THE VIEW FROM A
FRONTIER MARKETS ASSET MANAGER The liberalization of the currency in September 2017 was a turning point in Uzbekistan, opening up the economy for investors to deploy meaningful capital. Alongside this the government’s tax reforms, anti-corruption efforts, improved foreign relations and introduction of visa free travel are encouraging increased foreign investment. These wide ranging and fundamental reforms enacted by Shavkat Mirziyoyev are comparable in scope and ambition to those in Poland in the 1990s and Georgia in the early 2000s. As a result, Uzbekistan was named as one of the top 20 reforming countries in the 2020 in the Ease of Doing Business rankings, having risen 18 positions in the past 3 years to 69 out of 190.
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It was these reforms that drove Sturgeon Capital to launch a fund dedicated to Uzbekistan. As a specialist frontier markets asset manager investing in Central Asia for over 13 years, Uzbekistan had been the elephant in the room. The country boasts the largest population in the region, 50 percent of whom are below 25. Education levels are high. Yet the country is starting from a low economic base compared to its peers, yet to capitalize on low debt, plentiful natural resources, and a strategic location at the heart of Central Asia. For these reasons, Sturgeon has long seen opportunity in the country. Sturgeon began investing in the country in 2011 and with the change of administration made a concerted effort to increase its presence there. In August 2018 we hired the former CEO of the UzOman Fund, Alijon Ravshanov, to join our team. The UzOman Fund is a joint sovereign fund between
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Uzbekistan and Oman, and has deployed $200 million in private equity in Uzbekistan. As the founding CEO, Alijon is one of the most experienced private equity investors in the country. Based on our experience investing in the region, and extensive time spent on the ground, Sturgeon believes that private equity is the best way to access the highest quality investments and capitalize on the growth and reforms in Uzbekistan. This is for three reasons: first, it enables us to partner with talented management whose incentives are closely aligned with ours; second, these private companies can dynamically respond to the opportunities created by the reforms; and third, by taking large minority stakes Sturgeon can better control the direction of the business, in particular with regards to capital allocation decisions, so as to maximize value creation over the investment period.
At a time when the structure of the Uzbek economy is changing rapidly as the reforms take effect, there are two sectors, which Sturgeon thinks will benefit in particular. The first is financials, especially the banking sector. Currently this sector in Uzbekistan is dominated by state banks, which have over 85 percent of assets. These banks effectively act as an extension of fiscal policy, lending to state companies at preferential rates while becoming saddled with non-performing loans.
rapidly from a low base, the financial sector has the potential to deliver high returns for investors. Second is the digitalization of the Uzbek economy. Having been shut from international investment, forcing the development of its own idiosyncratic business ecosystem, many sectors in Uzbekistan are inefficient and ripe for disruption. For instance, more than 50 percent of retailers in Tashkent rely on paper or Excel for their store management, and 60
WITH UZBEKISTAN’S GDP GROWTH FORECAST TO BE 6 PERCENT AND ABOVE FOR THE NEXT 5 YEARS At the same time retail and SME lending is effectively non-existent, and the state banks’ focus remains on corporate lending. This presents an opportunity for smaller, private banks to take market share in the higher margin consumer-lending sector. With Uzbekistan’s GDP growth forecast to be 6 percent and above for the next 5 years, and as the share of the black economy shrinks and financial inclusion and penetration increases
percent of parcels are delivered by informal taxi drivers. This presents an opportunity for early movers to implement proven business models from elsewhere in frontier and developing markets. Currently Uzbekistan is a difficult market for international companies, requiring a high degree of localization and often not having the
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capacity to charge the prices that would make it worthwhile. While major regional and international players are looking at the market, many remain reticent to commit the time and capital necessary to be successful. However, for local players customer acquisition costs are exceptionally low, and the opportunity to establish a leading brand with large market share and loyal customer base is somewhat unique when compared to the competition that early stage tech businesses face in other markets.
UZBEKISTAN IS SOMEWHAT UNIQUE AS AN INVESTMENT OPPORTUNITY The main challenge lies in execution, and so it is important to carry out extensive due diligence and market research. Here Sturgeon prefers to partner with entrepreneurs with a history of executing similar business models, and with an experienced team in place who understand the challenges and opportunities of the local market. At a time when the global economy is defined by low growth, high debt levels, and an aging population, Uzbekistan is somewhat unique as an investment opportunity. Sturgeon Capital intends to capitalize on this opportunity, by delivering an international standard investment vehicle for investors to achieve high returns.
Author: Robin Butler, investment analyst at Sturgeon Capital in London
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Signatory of:
www.sturgeoncapital.com
Principles for Responsible Investment
DYNAMIC UZBEKISTAN
TRANSPARENT OPPORTUNITIES
Tax and audit experts play a central role in a modern and transparent economy. In this interview, Sanjarbek Saidov, who leads KPMG in Uzbekistan, talks about the return to the country and the outlook for corporations across sectors.
What spurred KPMG’s return to the Uzbek market? KPMG returned to the Uzbek market in early 2017, thereby resuming the composition of the Big Four players along with Deloitte, EY, and PwC. For more than two and a half years, our team has been able to gain a solid portfolio of customers in various sectors of economy. We advise international financial institutions, government bodies of the Republic of Uzbekistan, audit financial statements of local and international companies, and provide tax advice to international companies who plan to enter the Uzbek market. As you know, KPMG ceased operations in 2009 and concentrated on other markets, however, for a long time we did not stop observing the events taking place in the country. After the election of Shavkat Mirziyoyev, the board of directors in the CIS made an official decision to return to Uzbekistan and open an office in early 2017.
What are your goals for KPMG’s operations in Uzbekistan? As already mentioned, we managed to collect a client base, but our priority is to work for the future. The market shows great interest both from foreign investors and from local companies. Weekly we meet with interested foreign
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investors. They are interested in changes in the business climate, in tax, and currency laws. We provide consulting services on various issues, for example, in what form to open a legal entity, in what form should be the capital. Next, we provide assistance in acquiring the necessary enterprise, shares or other assets. After an investor has entered the market, we provide them with audit services.
legislation will lead to an improvement in the image of Uzbekistan, will give more confidence to current and potential investors.
In what ways to you help give potential investors piece of mind? Today we devote a lot of time and energy to communicating with potential investors. Since we have previously advised many global companies, our task is to familiarize them
A MORE TRANSPARENT TAX CODE WILL IMPROVE THE IMAGE OF UZBEKISTAN AMONG INVESTORS Our clients, to whom we provide various types of services, are mainly multinational firms and their subsidiaries: Lukoil, Beeline, GM, Eurocement Group, Indorama, European Bank for Reconstruction and Development, UNDP, Asian Development Bank, Huawei, as well as the Fund for Reconstruction and Development of Uzbekistan, among others.
How is a more transparent economy increasing demand for your services? Thanks to currency liberalization, investors can freely convert profits. Since this has led to even greater investment and investment interest in the economy of Uzbekistan, our company expects further growth in exports and investments. As for reforms in tax legislation, very big changes are expected from January 1, 2020. More clear and transparent tax
with the market of Uzbekistan and show all the opportunities. In conversations, we notice how interest is growing. It increased due to large-scale changes in the legislation, including changes in the tax sphere, currency liberalization, customs regulation, and an increase in the number of services provided by the state through electronic services. We also see interest from state-owned companies – we try to participate more often in official tenders held under the auspices of stateowned enterprises. But it is important for us to note that we are interested not only in foreign companies, but also supporting the development of successful local players.
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MOVING AWAY FROM
STATE-LED GROWTH In the World Bank’s recently published Doing Business 2020 ratings, Uzbekistan was listed as a top 20 reformer globally, having jumped from 76th to 69th place in one year. The study noted improvements in corporate governance regulations, taxation, customs, and dispute resolution. The result reflects much of the progress made by Uzbekistan since President Shavkat Mirziyoyev assumed office in 2016. Under Mirziyoyev’s tenure the government has delivered extensive economic reforms, most notably with the introduction of a new tax code and liberalization of the foreign exchange system.
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These reforms have helped Uzbekistan achieve excellent growth, well in excess of its Central Asian neighbors. Following a low of 4.5 percent in 2017, the IMF predicts growth to hit 5.5 percent this year and then remain at 6 percent into the 2020s. The Asian Development Bank (ADB) predicts similar growth, suggesting it could peak at 6.2 percent in 2021. In the low yield global environment, Uzbekistan’s growth story has attracted significant attention from investors. Currency liberalization has already radically improved the business environment on the ground in Uzbekistan. However, the reform has also had significant implications for both national and corporate debt, a large proportion of which is pegged to – or denominated in – dollars. In 2017, currency liberalization saw the Uzbek som halve in value in the space of one week. As a result, public debt rose from 8.6 percent to 20.2 percent of GDP. Total external debt grew from 18.6 percent to 34.5 percent. One area of concern is the corporate sector, which is dominated by state-
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owned enterprises (SOEs). Not only have their external obligations increased, but the government has begun actively issuing SOEs with credit at below-market rates to stimulate economic growth. As a result, credit growth rose 50 percent in 2018, and by a similar proportion in H1 2019. This credit is largely channeled through state-owned banks, which make nearly half of all banks in Uzbekistan. Each state-owned bank fulfils a particular role as a policy lender, serving specific markets. For example, Uzbekistan’s largest bank, National Bank of Uzbekistan focuses on transport, energy and communications, while Uzpromstroybank services the energy and chemical industry. The increased lending is also a recognition of the socio-economic challenges that Uzbekistan faces – most critically, employment. Currently, of a working age population of 33 million, only 13 million are in official employment. The remainder either work in the informal sector, abroad, or are simply not economically active. A recent study showed that 10 percent of people aged 20-24 were not even seeking work.
Uzbekistan is experiencing a demographic boom, which could see as many as 600,000 people join the workforce each year over the next five years. The government is so concerned about this demographic challenge that it has sought to formalize arrangements for labor migration, for example, with the United Arab Emirates. The international community, in recognition of Uzbekistan’s latent economic potential and socio-economic concerns, has largely welcomed the drive to increase investment in the economy. However, the rate at which debt is growing in the country is becoming a concern for international financial institutions. Public debt is expected to hit 25 percent of GDP in 2020. Uzbekistan has also experienced inflationary pressures, having risen from 8 percent to more than 14 percent in the last three years. While the macrofundamentals remain relatively strong, the impact of rising debt within SOEs is a concern. In response, the government has pledged to decrease policy lending and adhere to market rates. It is also planning to introduce further oversight of the finances of SOEs. The government also needs to replace state credits with private investment. Continued active engagement with international financial institutions will be critical to delivering the improved regulatory
environment required for this shift. This year the government issued its first ever Eurobond, worth USD 1 billion, paving the way for SOEs to raise funds on global markets through their own issuances. In the long term, the government also intends for key SOEs to be privatized. This would require extensive structural reform of SOEs, plans for which the government has laid out but is yet to make significant progress on. Uzbek state oil and gas company Uzbekneftegas has already announced plans to secure a credit rating ahead of a bond issue in 2020 before privatization in 2024. This would be a remarkable achievement for a company that is in desperate need of reform. Uzbekneftegas, like many Uzbek SOEs, is a large conglomerate containing both disparate commercial units and regulatory functions, all of which will need to be untangled in order to put the company on a sound commercial footing.
Author: Ben Godwin, head of analysis at PRISM Political Risk Consulting
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UZBEK CITIZENS EMBRACE
CONSERVATION If the citizens of Ethiopia can plant 350 million trees in a single day, then surely Uzbeks can aspire to do the same. Yuksalish, a Nationwide Movement, announced the “Bir Million Darakht” (One Million Trees) campaign, launching a major social media campaign to organize a mass treeplanting event in Uzbekistan. The purpose of the campaign is to combat the consequences of deforestation and climate change and raise public awareness of the importance of environ meal conservation. The campaign is intended to be held twice a year, in the autumn and spring. An important feature of the campaign is that events are determined only on the basis of volunteering, allowing member of the public to demonstrate their citizen leadership.
DRAWING ON FOREIGN EXPERIENCE Yuksalish experts studied the success of similar events in countries worldwide and also sought to build on the success of the Green Initiative campaign held by the municipality of Tashkent in the spring of 2019. Similar campaigns are organized in many countries of the world. For example, in July 2019, Ethiopian authorities reported that more than 350 million trees were planted during the 12-hour Green Heritage (#GreenLegacy) campaign. The campaign was supported by millions of citizens. Prior to this, citizens in the Indian state of Uttar Pradesh set a then world record by planting 50 million trees in a single day. Another example of dedication in conservation comes from the individual effort of Ken Chaplin from the Canadian province of Saskatchewan. Over several weeks in the summer of 2001, he was able to plant more than 15,000 seedlings of red pine per day.
A FORREST WHERE THE SEA ONCE WAS The One Million Trees campaign was launched in Karakalpakstan. The first batch of trees – 200 junipers – were planted on October 24, 2019 on the land of the International Innovation Center for Aral Sea Basin. The initiative of the Yuksalish activists was supported by the United Nations in Uzbekistan. October 24 is recognized as United Nations Day, and the campaign’s launched helped connect local initiatives to global efforts to combat environmental degradation.
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JUNIPER
PRELIMINARY RESULTS OF THE ACTION “ONE MILLION TREES”
ASH
Total
402 839
CATALPA FRUIT TREES QUINCE: QUINCE, APRICOT, APPLE, PLUM
61 451
176 568
Gulistan, Gulistan State University
In all areas of the Namangan region
SYRDARYA REGION
2-5.11.2019
JUNIPER
Gulistan State University, the organizations themselves
CHESTNUT CYPRESS
NAMANGAN REGION
4-5.11.2019
District departments of improvement, forestry, gatherings of mahalla citizens
JAPANESE SAPHORA CRIMEAN PINE PAULOWNIA
City and place of planting Date of event Responsible for subsequent care of seedlings Tree planting is completed
100
REPUBLIC OF KARAKALPAKSTAN
Nukus, Innovation Center under the President of RUz
520
Innovation Center under the President of RUz
Karshi, improvement administration and related organizations
24.10.2019
164 200 ANDIJAN REGION
Andijan, Asaka, Izbaskan districts
KASHKADARYA REGION
6-7.11.2019
Improvement administration of Asaka, Izbaskan, Khanabad districts and Andijan city
13-14.11.2019
Improvement administration and related organizations
The International Innovation Center for Aral Sea Basin was established by the President of the Republic of Uzbekistan with the aim of conducting research developing practical solutions to improve the local ecosystem in the lands left behind by the recession of the Aral Sea. It is symbolic that Karakalpakstan was chosen as the starting point. In just one generation, the Aral Sea, once the fourth largest lake in the world, disappeared. The Aral Sea catastrophe aggravated climatic conditions in the region. The unprecedented environmental situation in the Aral Sea zone has breached the borders of Central Asia to become a global problem. Today, encouraging work is taking place – work that is turning the sandy flats into a green forest. Through initiatives like those launched by Yuksalish, citizens from across the country can contribute to this good cause.
A CAMPAIGN THAT GREW Nukus passed the baton to provinces across Uzbekistan. In November, tree-planting involving young volunteers, government employees, mahalla activists, and public organizations took place in Syrdarya, Namangan, Andijan, Kashkadarya, and Surkhandarya regions. In these regions, in less than one month, more than 400,000 trees were planted, including thousands of fruit trees.
CAREFUL PLANNING From the very beginning of the campaign, Yuksalish operated in accordance to several goals. Among them – a reliance on a volunteer spirit, careful choice of trees, taking into account proposals of the local population, and planning to account for the conditions of each region, such as irrigation, temperature, and soil characteristics. Specialists from the Research Institute of Forestry and environmental experts helped us devise the campaign. For example, in Syrdarya, Kashkadarya, and Surkhandarya regions, care was taken to select tree species that are resistant to difficult climatic conditions. In addition, water-saving technologies, including hydrogel, were used during their planting. The campaign was held in the format of an eco-marathon that included open lessons for teachers and youth as well as master classes for employees of beautification departments. It was supported by a branch of the Regional Environmental Center for Central Asia in Uzbekistan within the framework of the UzWaterAware project funded by the European Union in partnership with local Khokimiyats. Another important principle is sustainability – the trees planted should not be forgotten. When choosing the location for planting, campaign activists determined in advance who would take responsibility for the care of the trees. The designated caretakers included beautification departments, forestry
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officials, the administration of educational institutions, mahalla assets, public organizations, and residents themselves.
SUSTAINIBLE FUNDRAISING As part of the One Million Trees campaign, an ongoing fundraising effort for tree planting has been announced. Everyone can contribute to the implementation of the initiative to replenish the forest fund in the regions of Uzbekistan. A similar method is practiced in many countries. For example, American blogger Jimmy Donaldson, together with the nonprofit organization Arbor Day Foundation, launched the #TeamTrees campaign. Its goal is to raise funds to plant 20 million trees by the end of 2020. At the end of October 2019, more than six million dollars had already been raised, enough to plant 6 million trees. The billionaire founder of Tesla and SpaceX, Elon Musk, supported the fundraising effort and donated $1 million to the campaign. A special bank account was opened for the One Million Trees campaign, where interested organizations, groups, citizens, compatriots abroad, and anyone who wants to contribute to the preservation of the environment can make a donation.. The funds raised will be used to purchase seedlings, planting equipment, fertilizer, and water-saving technologies. The Yuksalish Nationwide Movement is committed to ensuring the transparency of fundraising and spending. Detailed reports will be provided regularly to the public. In particular, a special Telegram channel (@birmilliondaraxt) was created for this purpose, through which citizens can monitor the progress of the campaign.
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AN ONGOING EFFORT The One Million Trees campaign was not a one-off event or a public relations effort. It was focused on specific results: improving the environment, mitigating the effects of climate change, the ecological education of the population, uniting volunteers around a common goal, and providing a better life for future generations. Every year, people cut down or burn 130,000 square kilometers of forest, an area equivalent to more than 17,000 football fields. Actions like this contribute to the 20 percent annual increase global carbon emissions. Trees are a clean air factory. In a single hour, one hectare of urban green space can absorb eight kilograms of carbon dioxide and forms more than six kilograms of oxygen. In a year, adult trees covering half a hectare of land can absorb the same volume of carbon dioxide that a car emits in 42,000 kilometers of driving. Forest reduction leads to irreparable consequences of global significance. This is especially true for Uzbekistan and the wider Central Asian region. Planting trees and shrubs across the country is an ongoing process. Within the framework of the One Million Trees campaign, the Yuksalish Nationwide Movement has expanded its calls for cooperation to all interested parties, including engaged citizens, public and international organizations, and representatives of the business community.
*An article is provided by Yuksalish Nationwide Movement
C H A N G E S
I N
LEGISLATION On 2 September 2019, the Draft Tax Code of the Republic of Uzbekistan (New Tax Code) was released for public discussions. New Tax Code was developed by the Ministry of Finance and State Tax Committee of the Republic of Uzbekistan in collaboration with International Monetary Fund, World Bank, as well as international and national experts.
G
enerally, it is aimed at harmonization of tax system by reducing the number of taxes and obligatory payments, introduction of internationally common tax concepts (such as controlled foreign corporations, thin capitalisation, transfer pricing) and provision of more detailed guidance on taxation, as described further. New Tax Code is expected to become effective as of 1 January 2020. Besides, a Presidential Decree №5837 “On measures on further improvement of the tax policy of the Republic of Uzbekistan” was issued on 26 September 2019 (Decree 5837). Certain provisions of the Decree 5837 have become effective from 1 October 2019 while others to be included in New Tax Code and enforced accordingly.
Effective 1 January 2020, CIT rate is increased from 12 to 15%. USP (i.e. employer’s social contribution) is reduced from 25 to 12% for entities with state participation thereby aligning the rate with the one applicable to other taxpayers. Simplified VAT regime for certain taxpayers introduced in 2019 for 2 years is to be abolished as of 1 January 2020 due to its inefficiency and lack of interest from taxpayers. Existing procedure on suspension of banking operations is to be abolished. The revised procedure should be based on “risk-analysis” method with suspension period not exceeding 30 days. Previously, suspension could be carried out for indefinite period.
Effective 1 October 2019, VAT rate is decreased from 20% to 15 %. The excise tax rates for goods produced and services rendered in Uzbekistan are generally increased.
Type of goods / services
Old rate
New rate
Cigarettes
UZS 117 900 per 1 000 pcs and 4% of the customs value
UZS 141 500 per 1 000 pcs and 9% of the customs value
Mobiles services
15%
20%
Petrochemicals, e.g. gasoline AI-91/ AI-92/ AI-93
UZS 35 343 per ton
UZS 250 000 per ton
Natural gas (incl. for export)
15%
20%
Polyethylene granules
25%
30%
*An article is provided by professional services network PricewaterhouseCoopers
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A VISION FOR AN
“INTELLIGENT” UZBEKISTAN Researchers predict that the widespread adoption of information and communication technology (ICT) in various industries in the next two to three decades will create an “intelligent” environment. Technology will enable “feelings, connection, and intelligence”. In this historical process, the physical and digital worlds will undergo a deep integration; ICT will comprehensively rebuild traditional industries and stimulate the development of the digital economy. In the future, effectively all enterprises seeking to increase the efficiency and competitiveness of production will adopt cloud services, big data, the Internet of things, as well as artificial intelligence into their main technological processes and management systems.
As a global leader in the supply of basic ICT infrastructure and smart terminals, Huawei is committed to ensuring that the digital world becomes accessible to every person, every family, and every organization. Huawei operates “in Uzbekistan and for Uzbekistan.” For many years, the company has been establishing basic ICT infrastructure, helping operators to create a high-quality network, providing enterprises with advanced digitalization methods, and pursuing mutually beneficial cooperation with local partners to contribute to the development of the digital economy of Uzbekistan.
The onset of the 5G era will gradually accelerate the development of science and technology around the world. It will have a profound impact on the work and life of people, by providing new pathways for economic growth and by providing the foundation of the transition of humanity to a more intelligent society.
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In April 2019, President of the Republic of Uzbekistan Shavkat Mirziyoyev visited the Huawei Research Center in Beijing and was accompanied by Huawei founder and CEO Ren Zhengfei. The President received an exhaustive report on Huawei’s advanced technical achievements in ICT fields such as 5G technologies, “safe city” and “smart city” solutions, cloud technologies, terminal operations, and their fields of application. President Mirziyoyev has repeatedly noted
UZBEKISTAN MAY BECOME A LEADER IN THE APPLICATION OF 5G INNOVATIVE SOLUTIONS IN REGION that the development of the ICT industry is an important factor in improving the investment climate and public safety of Uzbekistan and he is a champion of digital economic development. The interest of the Uzbek government in innovative technologies and the possibilities of their application was further demonstrated when the Prime Minister of Uzbekistan, Abdulla Aripov, visited Huawei’s headquarters in Shenzhen in August 2019. The agreements reached as a result of the visit will make it possible to modernize an existing network in the country and begin a phased implementation of commercialization of 5G networks.
Currently, Huawei is actively involved in planning and development of the basic infrastructure of the 5G network of Uzbekistan in cooperation with local telecom operators. As part of the country’s recent “ICT Week,” the first full-fledged testing of 5G network technologies was successfully conducted together with mobile operators Ucell and Uzmobile, confirming the fact that Uzbekistan can become a leader in the application of innovative solutions in region.
Author: Davron Azizov, PR and GR Director of Huawei in Uzbekistan
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INVESTMENT: THE CATALYST OF ECONOMIC GROWTH A country’s investment attractiveness depends on many factors that determine where a country is located in the global investment map. Doniyor Islamov, Managing Director of RB Asia, an international investment and consulting firm, explains what steps are necessary to enter the Uzbek market.
ROLE OF SMALL BUSINESS As of June 1, 2019, 385,000 legal entities were registered in Uzbekistan, of which more than 304,000 (79 percent) are small businesses. At the same time, small business generates 54 percent of GDP and 76 percent of employment. For comparison, the employment rate in small and medium-sized entities in Germany is 62 percent, in Japan it is 56 percent, in United Kingdom it is 53 percent, in the United States it is 42 percent, and in Russia it is 34 percent. What conclusion we may make based on this data? On the one hand, countries with a significant share of SMEs have a more stable economy. However, on the other hand, it suggests that there are few organizations have reached significant scale in the country.
BENEFITS OF BIG BUSINESS Large companies have several advantages, compared to small businesses. First of all, this is the cost of financial resources. Large organizations can raise local and international financial resources easier and at a cheaper cost. Secondly, large organizations are often more competitive in terms of the cost of production due to economies of scale in procurement and production. Thirdly, they can attract modern technologies and highly qualified personnel to train their employees. Due to these factors, large business has higher productivity and competitiveness not only in the local market, but also in the international markets.
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SIGNIFICANT SHARE OF STATE To date, there are about 600 joint-stock companies in Uzbekistan, which are the foundation of the national economy, most of which are state-owned (more than 230 entities). At the same time, many of these companies are not efficient and profitable. The government is taking a number of measures aimed at transforming the jointstock companies in order to increase efficiency and transparency by: 1. Transforming the companies with the participation of International Financial Institutions 2. Transferring the management to independent companies 3. Privatization of non-core assets 4. Development of the mechanism of publicprivate partnership. These measures have already led to positive results; however, the volume of foreign investment is still not high. What additional measures can contribute to the growth of foreign investment in Uzbekistan? In our opinion, there are a number of measures
RB ASIA is a part of an international group that was created 15 years ago and during this period we have completed over 90 investment transactions worth $2.5 billion in CIS countries. We advise mainly private companies in the field of raising investments and financing, help to find international partners with technologies and competencies. Our investment advisory services are divided into 4 stages.
I. ANALYSIS OF PROJECT ATTRACTIVENESS At this stage, we analyze the client’s company for investment attractiveness. Based on our experience, we know how international investors evaluate the project - which criteria are in important and which are not. Key characteristics are the size and proposed share of the project, competitive advantages, factors of investment attractiveness, etc. Based on the initial analysis, if we see good potential for attracting an investor, only then we conclude an agreement with the client and begin the further steps. For us it is absolutely critical to successfully close
BASED ON OUR CONSIDERABLE EXPERIENCE, WE KNOW HOW INTERNATIONAL INVESTORS EVALUATE PROJECTS that can contribute to further growth of investments:
transactions; therefore, we undertake only those projects in which we believe in.
� Creating favorable conditions for the growth of not only SMEs, but also the development of large private businesses
II. PREPARATION OF INVESTMENT MATERIALS
� Hiring independent investment consulting firms for the process of privatization of state assets � Bring expertise of international highly qualified specialists, including experienced fellow citizens abroad and appoint to the top management of JSC and to the boards of directors, as independent directors � Development of an export financing mechanism, especially for high value-added products.
Each project must be properly presented. In accordance with international standards, there is a certain data set that should be prepared for presentation to investors. At this stage, there may be a wider scope of services, if there is also a need to prepare the company for investment, in order to attract investment under more favorable conditions.
III. PROJECT MARKETING We have a database of investors with whom we are negotiating various projects. However, for each project, we develop a separate list 89
DYNAMIC UZBEKISTAN
of investors relevant specifically for the project. Next, we begin negotiations with investors either directly, if we have direct contacts with decision makers, or with the help of our global partners - the Globalscope association, of which we are a member of. Globalscope is an international association of investment advisors from 48 countries that allows us to reach almost any major strategic or financial investor.
IV. NEGOTIATION AND CONCLUSION OF TRANSACTION This is perhaps the most difficult and important stage. Here, together with our clients, we develop a strategy for negotiations with investors, with the aim of concluding an agreement on the
in various regions of Uzbekistan and is a leader in the market of drywalls and dry mixes. RB ASIA also actively advises foreign companies that enter Uzbekistan market. Using our local market expertise and legal requirements, we conduct market research, find local partners and provide effective market entry. Moreover, we consult projects of the World Bank and other IFIs in Uzbekistan in the various areas.
PILLARS OF SUCCESSFUL MARKET ENTRY Based on our experience, we identified a number of factors for the successful entry of foreign investors into the Uzbek market:
INTEREST IN UZBEKISTAN AMONG GLOBAL INVESTMENT COMMUNITY IS CERTAINLY GROWING most favorable conditions, but at the same time, we are helping not to break the deal
SUCCESSFUL EXAMPLES OF FOREIGN ENTERPRISES To date, about 9,000 companies registered in Uzbekistan are controlled by foreign companies or are joint ventures. Despite the small number, the growth rate is very high, since only a year ago this number was around 6,000 companies. The largest number of foreign companies from countries such as Russia, China, Turkey, Kazakhstan and Korea. There are quite a few cases of successful foreign investment in Uzbekistan. For example, Nestle, which entered the market of Uzbekistan in 1999, and the total investment in the country amounted to more than 60 million US dollars. Since then, the company has become a leader in the local market for such food products as bottled drinking water and sterilized milk. Another European company in the food industry - Lactalis, saw the potential in further development of the Uzbek market, is in the process of acquiring Nestle assets in Uzbekistan. Another example is KNAUF. In 2005, KNAUF entered the market of Uzbekistan through the acquisition of JSC “Bukharagips�. To date, having invested more than $75 million, the company has quarries and production facilities 90
Cooperation with a local partner. Entering the Uzbekistan market together with a local partner or acquiring a stake in a partner company will speed up the process of entering the market. It is important to involve a local consultant who will help reduce the risks associated with partners. Studying the market and its landscape. Due to the fact that widespread reforms aimed at liberalizing the economy, improving the business and tax climate are underway in Uzbekistan, market conditions are also changing rapidly. In this regard, it is recommended to study the market conditions and evaluate its potential properly. Regional approach. When developing the business plan of the project, it is worth evaluating not only the market of Uzbekistan, but also the markets of neighboring countries, as there are favorable customs conditions with neighboring countries. You should enter as early as possible. Interest in Uzbekistan among the global investment community is certainly growing. Many companies are actively considering, but not all of them decide to take the next step. Under such conditions, those investors who enter among the first in will undoubtedly have a competitive advantage.
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PROTECTION AND GUARANTEE OF INVESTOR’S RIGHTS
The government guarantees and protects the rights of foreign investors carrying out investment activities in the territory of the Republic of Uzbekistan. The country has established a system providing for the provision of foreign investors with conditions not less favorable than the corresponding conditions for investments made by legal entities and individuals of Uzbekistan.
for its investment. The legislation provides a notification procedure of the usage of a tenyear guarantee. Thus, in case of deterioration of investment conditions, a foreign investor notifies the relevant authorized body on the application of the guarantee. The authorized bodies that are notified of the application of the guarantee by the foreign investor are the state organizations carrying out the state registration of legal entities - the Ministry of Foreign Affairs, the Ministry of Internal Affairs, the Ministry of Foreign Economic Relations, Investments and Trade, the State Tax Committee of the Republic of Uzbekistan and servicing banks.
THE GUARANTEES OF LEGISLATION STABILITY If future legislation worsens investment conditions, then the laws which were valid at the date of investment will be applied to foreign investors for a period of ten years from the date of investment. A foreign investor has the right to apply at its own discretion the provisions of the new legislation that improve the conditions
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THE GUARANTEES AGAINST NATIONALIZATION Foreign investments and other assets of foreign investors are not subject to requisition, except for cases of natural disasters, accidents, epidemics, epizootics. The decision on requisition is made by the Cabinet of Ministers of the Republic of Uzbekistan. The compensation which is paid to the foreign investor in these mentioned cases must be adequate to the damage caused.
THE GUARANTEES FOR THE USE OF FUNDS
prescribed by the legislation of the Republic of Uzbekistan.
Income of a foreign investor received in the Republic of Uzbekistan may be reinvested in the territory of the Republic of Uzbekistan or used in any other way at the discretion of the foreign investor. Enterprises with foreign investments, in accordance with the legislation have the right:
The guarantees of investments return due to the termination of investment activity
- To open, use and dispose of accounts in any currency, in any bank in the territory of the Republic of Uzbekistan, as well as abroad - Receive and repay loans in foreign currency.
THE GUARANTEES OF FUNDS TRANSFER
After the termination of investment activity, the foreign investor has the right to free repatriation in the monetary or natural form of the assets received as a result of the termination of investment activity, without prejudice to performance of obligations of the foreign investor concerning the Republic of Uzbekistan or other creditors. In addition, a Presidential Decree established the institution of an authorized representative under the President of the Republic of Uzbekistan to protect the rights and legitimate interests of business entities.
Foreign investors are guaranteed free transfer of funds in foreign currency to and from the Republic of Uzbekistan, without any restrictions, provided that they pay taxes and other mandatory payments in the manner
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