Doing business or working for the development of business in Uzbekistan is tricky business! The current environment is not conducive to foreign trade, development work or joint venture activities. The US government's Department of Commerce has provided this frank assessment of the business operating envrionment
THE ECONOMY AND TRADE RELATIONS
(Note: Statistical data is difficult to obtain for Uzbekistan. Data from organizations such as the IMF, EBRD and the Economist Intelligence Unit's differ significantly from Government of Uzbekistan sources.)
Agriculture accounts for 26.4% of Uzbekistan's GDP and its primary export is cotton. Uzbekistan is the third largest exporter of cotton worldwide. Due to Uzbekistan's historically low harvest in 1998 and falling world prices, cotton did not bring in the quantity of hard currency expected. Uzbekistan also grows a variety of other crops, including a wide range of fruits and vegetables. However, much of what is grown cannot be sold fast enough and there is a limited domestic capacity to preserve the remainder of the crop. According to a talk given by Ambassador Safaev, over half of Uzbekistan's fruit and vegetable harvest goes to spoilage due to a lack of development in the food- processing sector. Despite the Government of Uzbekistan's efforts to develop the food- processing sector, much more needs to be done to modernize agribusiness overall. Natural Resources Uzbekistan is rich in natural resources that Western companies have been eager to exploit. Uzbekistan is the world's seventh largest producer of gold (with only 25 percent of the proven fields in production) and contains the fourth largest reserves. Currently the world's fourth largest uranium producer and also has a highly developed copper industry. Uzbekistan also possesses substantial hydrocarbon resources, particularly in natural gas, where it is among the world's 10 top producers. More than 160 oil and gas fields have been discovered. In the oil industry, Uzbekistan has obtained the distinction of being the only former Soviet state to enhance production since independence.
Uzbekistan has lagged behind other former Soviet states in the pace of its reforms. Both politically and economically, Uzbekistan continues to resemble its former Soviet self. In 1993-94, the Government of Uzbekistan's fiscal policy was quite impressive and it received considerable support from the World Bank and the IMF. It was during this period that Uzbekistan began to show signs of being a potential economic powerhouse in Central Asia. However, a series of blows to the economy, including a poor cotton harvest and a lack of hard currency reserves led President Karimov to reverse his reform program and to impose more government control over the fledgling soum. Although these steps certainly served a purpose (i.e., to stabilize the Uzbekistani economy), they also alienated Western donor organizations. In October 1996, the IMF announced a suspension of the Stand-By Arrangement pending the establishment of corrective measures "consistent with the growth and inflation targets of the Uzbek government."
Currently the Central Bank sharply limits the amount of cash soums in circulation and stipulates that virtually all transactions by enterprises, with the exception of wages and travel, must be paid by interbank transfer rather than cash soums. The effect of this policy has been to make even day-to-day bank operations difficult and time consuming. Interbank transfers can take anywhere from several days to several months to clear. As a result, a parallel pricing system has formed in Uzbekistan with the price for goods in interbank transfers running as high as three times the cash soum price.
Historically, these policies, coupled with a prohibition against hard currency transactions outside of the banking system, have served as a bulwark against inflation, helping the Government of Uzbekistan to maintain strict control over the money supply and subsidizing state purchases of priority imports. At the same time, they have nurtured a sizeable black market, which the government has occasionally tried to combat by instituting even stricter controls.
The overall effect of these measures on U.S. trade and investment in Uzbekistan has proven to be negative. Evidence already suggests that small firms have either withdrawn from the market until conditions improve or focused their trade and investment activities within priority sectors. Larger firms are also adversely affected by these regulations, but may possess the resources to wait out the crisis. According to a 1999 paper produced by the American Chamber of Commerce in Uzbekistan, 19 companies effectively ceased operations in Uzbekistan during 1998, including a number of major multinationals. Banking As the Soviet Union collapsed, the banking system in Uzbekistan crumbled as well. A new law on banking was drafted and a Central Bank of Uzbekistan established in 1992. The other major bank in Uzbekistan, the government-owned National Bank of Uzbekistan still controls about 60 percent of all banking assets. In recent history, the Central Bank has varied the amount of control it exerts over currency and bank deposits.
As of June 1998, 33 banks were licensed for operations in Uzbekistan, all of which had licenses to conduct foreign exchange operations. According to existing banking laws, all commercial banks have the right to operate in any sector. In practice, however, most of these banks follow the Soviet practice of devoting themselves exclusively to one industry or sector, with the majority of their loans going to state-owned enterprises. For instance, Uzkhlopkoprom, the government's cotton procurement and ginning agency, holds 33 percent of the shares in Uzagroprombank even though the latter is officially designated as a private entity. Currently Uzbekistan's National Bank for Foreign Economic Activity (NBU) accounts for more than 90 percent of all foreign banking transactions. Although a number of foreign banks maintain offices in Uzbekistan, none of them have opened branch operations, most likely due to Uzbekistan's currency controls.
Privatization in Uzbekistan, like many other economic reforms, has been lagging. President Karimov announced a major privatization plan in October 1995, which is being implemented late in 1998 – 2000. Major Uzbekistani companies, unavailable to Western companies until this point, are due to be privatized, but initial reaction to these efforts has been lukewarm. While this plan is ambitious and represents a unique opportunity for investors interested in Uzbekistan, it is yet to be determined how successful this program will be. The first tender of this program, for the Almalyk Copper Plant, has been widely considered a failure due to lack of interest.
Further Links on Business in Uzbekistan:
The Center for Economic Research in Uzbekistan (SLOWWWWWWWWWWW!)