Uzbek President Shavkat Mirziyoyev is widening the circles of Uzbekistan’s engagement with potential trade partners. After recent visits to the United Arab Emirates, India, and Germany, Mirziyoyev has trips planned to Belgium, Switzerland, Canada, Japan, Bulgaria, and Belarus in 2019.
The reader will note that these visits take Mirziyoyev well outside Uzbekistan’s region. Seeking investment from countries without territorial aspirations in Central Asia bolsters both Uzbekistan and Central Asia. It allows Tashkent to pursue foreign direct investment and political support from influential partners who can counter the region’s powerful neighbors, Russia and China.
Since Mirziyoyev’s election in 2016, Tashkent has made a number of smart moves to improve the business climate. It eliminated currency controls; relaxed border controls to encourage petty traders and family reunification; approved more air travel to neighboring countries; simplified the tax code; created special economic zones; strengthened the independence of the Central Bank of Uzbekistan; and started to reform state-owned enterprises. The most eye-catching reform is a moratorium on financial inspections of business -- inspections that had served as opportunities for shakedowns from bureaucrats.
In March, President Mirziyoyev signed a law that makes it easier to start a business, eases real estate transactions, and implements a dispute resolution mechanism that avoids a court hearing.
Why the push? Fifty-six percent of Uzbeks are aged below 30; more than 600,000 a year are enteringthe jobs market. Uzbekistan witnessed Russia’s 1998 economic collapse and managed to avoid the worst of the global financial crash in 2008. The country’s leaders now wish to advance at a measured pace. As such, they may not be enthusiastic recipients of Western advice, especially about changing the country’s social organization.
Uzbekistan has secured investment agreements with China, the United Arab Emirates, India, South Korea, Germany, and the United States. Taking a cue from Kazakhstan’s multi-vectored foreign policy, Uzbekistan is casting a wide net that will to allow it to reform at its own speed. When one partner gets too prescriptive, as Germany for instance has done, Tashkent tends to pivot to a “business first” approach. Campaigners have called on Tashkent to put human-rights reforms at the top of the agenda. Tashkent has a different approach. It believes that by creating a place where contracts are enforceable, courts and regulatory agencies are transparent, and property rights are respected, Uzbekistan will improve human rights, and ensure Uzbeks will make more money.
Along with increasing economic freedom, the government can encourage, or at least not frustrate, the desires for personal freedom that are especially prevalent among the nation’s young. The country’s leaders, who grew up in the Soviet Union, should understand how important this is. The recent unblocking of some websites of news and human-rights organizations does indicate that the government knows its role is not to curate news and information for its citizens.
Tashkent knows it sits in a troubled region where investors will be wary of risking their money. But because it doesn’t want to be in the grip of Russia and China, it has to demonstrate to investors that extremism won’t easily find a home there.
Mirziyoyev addressed the threat of extremism in a 2017 address. He recalled that Uzbekistan was an ancient cradle of Islamic culture, and he declared that “protection of youth from the influence of various religious extremist groups stands as a major task for all of us.”
Mirziyoyev is betting that economic opportunity, citizen participation in governance, and proper Islamic education can help “delusioned persons” avoid extremism’s “crooked path.” But progress here has been slow, with the security services defaulting to punitive measures against those they believe guilty of extremism.
Stuck in the middle
Beyond sociopolitical challenges, Uzbekistan faces geostrategic constraints that may color the kind of investment it attracts.
In 2018 the Caspian Sea states signed an agreement that left many issues unresolved, such as the ownership of energy resources beneath the seabed. Russia could stymie projects such as the Trans-Caspian Gas Pipeline that threaten to cut into its market share in Europe. That would limit Uzbekistan’s options to sell its natural gas.
Uzbekistan has healthy oil and natural gas reserves, but they were developed with old technology. Mature fields may be revived with new techniques. Most of the outside investment has come from Russia and China, and newcomers may be welcomed as a counterweight and as sources of better technology.
Uzbekistan’s labor costs are low, but the country is landlocked, so its transport costs are high. Air connections are important and the government is streamlining operations by unbundling functions -- airline, airport management, and air traffic control -- and instituting an independent regulator.
Transiting bulk commodities across neighboring countries other than Russia will be tough, as much of Iran’s economy is controlled by the sanctioned Islamic Revolutionary Guard Corps; Afghanistan and Pakistan suffer from corruption and violence; and Moscow may stall the mooted Trans-Caspian Gas Pipeline.
One solution to the labor cost-transport conundrum is to climb the value chain and export finished goods. Uzbekistan’s silk-making tradition is well-known to Western fashion houses, so the country may easily move to exporting textiles and finished garments instead of raw materials.
If the promise of pipelines recedes, Uzbekistan can turn natural gas into feedstock for industrial applications. The government recognizes the need for additional investment in the aging petrochemical infrastructure and has so targeted $12 billion for improvements. The country’s “substantial natural resources” will be a source of inputs for a gas-driven petrochemicals industry.
But for Uzbekistan’s petrochemical plans to work, it will need other energy sources than the natural gas that supplies over 90% of the country’s electricity, so a 2.4 gigawatt Russian nuclear plant project is happening at the right time. The plant will use locally-mined uranium and help Uzbekistan stay ahead of power supply shortages caused by economic growth.
The development of the telecommunications infrastructure in Central Asia has been matched by an increase in cybercrime -- the region has one of the world’s highest rates of the latter. Fortunately, Uzbekistan has registered strong gains in ICT access, use, and skills so its organic efforts that include a national ICT roadmap and university training in IT security, and a collaboration with leading Indian IT companies, will help ensure investors’ data stays put.
The state has an outsized role in the economy and crowds out private sector access to land, infrastructure, credit, state support, and contracts. The government says it wants to reduce the state role in the economy, but it will be tested when job losses accompany rationalization. The investor’s top challenges may be people issues: being blamed for job losses that may accompany the reorganization and modernization of old facilities, and the self-interest of the management of SOEs who may see investors as sources of cash for “their” operations.
Uzbekistan’s leadership will likely pursue the “Singapore model” with a strong, non-ideological government focused on economic development. To do so, Uzbekistan must reform the efficiency and integrity of how it delivers services to the citizens. President Mirziyoyev’s declaration that government must serve the people was a warning of his expectations. But the important expectations aren’t just the president’s Uzbekistan in 2019 isn’t Singapore in 1965, and the question is whether the government will be able to satisfy the rising expectations of a young population while it rationalizes its economy and pursues greater independence.
James Durso (@james_durso) is the Managing Director of Corsair LLC. He was a professional staff member at the 2005 Defense Base Closure and Realignment Commission and the Commission on Wartime Contracting in Iraq and Afghanistan. Mr. Durso served as a U.S. Navy officer for 20 years and specialized in logistics and security assistance. His overseas military postings were in Kuwait and Saudi Arabia, and he served in Iraq as a civilian. The views expressed are the author's own.
