Uzbekistan has started transitioning to a policy of accelerated investments. The three-year investment program from 2020 to 2022 is designed to raise over $35 billion from outside the country. The country with one of the fastest growing economies in the Commonwealth of Independent States is offering investors to invest not just in its industry, but in power generation, pharmaceuticals, communications and retail as well. Kursiv Research found out what business opportunities and risks Uzbekistan might pose for foreign investors.
The 2019 spike
Based on results of the last year, Uzbekistan entered the top five of countries with a transition economy that received the largest amount of foreign direct investment (FDI). This data was published in UNCTAD’s World Investment Report 2020.
The document says that in 2019, the republic received $2.3 billion of direct investments from foreign investors, not counting loans. In the list of five countries with the same level of economic development that received outside capital, Uzbekistan is in fifth place by volume of foreign assets and in first by performance. For the past year, Russia turned up FDI growth by 139%, Ukraine by 30%, Serbia by 3% and Uzbekistan by 266%. Oil and gas projects accounted for the biggest share of this investment spike.
The State Committee of the Republic of Uzbekistan on Statistics, citing total numbers on all kinds of foreign funding, says the sum of assimilated funds was $4.2 billion last year. That’s how much foreign investors invested in fixed capital of Uzbekistani enterprises. The finances were used on oil and gas projects, production of food, textile goods, clothes, etc. For the duration of Uzbekistan’s investment-welcoming policy, more than 10,000 foreign companies invested in the country’s economy. Among them is the LUKOIL oil giant, a subsidiary for exploration and mining of China National Petroleum Corporation (CNPC) and the German automotive MAN Group.
At the beginning of 2020, the COVID-19 crisis did not affect this positive dynamic significantly. According to the Ministry of Investments and Foreign Trade of Uzbekistan, in January through April, foreign investors funneled nearly $2.5 billion of FDI. This is nearly double the amount from the same period of 2019. The agency plans that by the end of 2020, direct investment volume will reach $9 billion.
Opening the country
Increased interest in the country from foreign business is a result of the new foreign economic policy, brought after the change of president. The statistical data shows that those figures only began to grow in 2017–2019, after Shavkat Mirziyoyev won office. Uzbekistan did not become attractive for investors until it carried out a number of reforms aimed at protection of the outside capital.
Here are the principal theses of those reforms. The state does not have the right to interfere in the affairs of the investment activity subject and the investor is guaranteed free transfer of funds from Uzbekistan and a grace period without income and property taxes. Investments are not to be nationalized or requisitioned. If the government passes laws that disadvantage the owner of outside capital, then in disputed matters those legal acts that were in effect at the time of investment are applied.
According to Fabrizio Vielmini, a senior research fellow of the Center for Policy Research and Outreach (CPRO) at Westminster International University in Tashkent, a country with a population of 34 million needs to have about 500,000 jobs created annually. However, accomplishing this without attracting outside capital is extremely difficult.
“Previously, the country lived in a closed system, but after the shift of power, Uzbekistan took the course for a new, open investment policy. One can see the desire to radically change the current situation. Attracting foreign investments for Uzbekistan is a matter of survival. If there are no immediate structural changes in politics and economics, the state will be unable to take a hit under conditions of a global recession. The stakes are incredibly high. The existing political system is oriented at making the country more investment-worthy for foreign partners. Despite the crisis, the situation in Uzbekistan remains positive and in the future, dynamic parameters will be different from neighboring countries,” said Vielmini who is a political scientist and an expert on international relations of Central Asian countries.
According to the speaker, among the main reasons for increasing investor interest is the announced large-scale privatization program. About 3,000 state participation enterprises will be put up for sale. Plans for Uzbekistan’s entry into the Eurasian Economic Union may also be of significance here. After all, the Customs Union will open new markets for Uzbek producers, including those with foreign capital participation.
What can official Tashkent offer to future investors? The Investment Promotion Agency of Uzbekistan markets the country for investors as one of the most rapidly developing states in the CIS. According to the World Bank, in recent years Uzbekistan has considerably advanced in the Doing Business ranking: from 166th to 69th place. Its advantages include the geographic location as the center of Asia, the so-called crossroads between China and Europe, cheap labor (average wage is at $240) and decreasing tax and regulatory burden.
Sven Lorenz, an expert on international investment research from Germany, calls border markets such as Uzbekistan undervalued. In his article on the republic in the Financial Times, the German investor noted that in Uzbekistan, which was a politically isolated state for a long time, there is currently low competition and great potential for untapped opportunities. That’s something that developed countries cannot boast of. This is the place where the “blue ocean” business strategy can be applied. Although, in his words, the most populated Central Asian country is not without its risks and issues.
A measure of caution can’t hurt
System risks in developing countries and investment protection are the main issues that investors face when entering new markets. Igor Matveev, executive director of the UNESCO International Sustainable Energy Development Center (ISEDC), citing the development of investments in Uzbekistan’s energy sector, noted that out of negative internal factors, the most significant one for investors is the discord of ministries and departments in official Tashkent. This is due to, firstly, lack of a state doctrine or strategy linked to development plans of industries and regions. Secondly, according to the speaker, there is a low quality of state control over investment activities.
“In the near future, the national investment and economic policy of Uzbekistan will be reflexive and will adjust depending on the situation in the country and the geopolitical environment. Capital is a ‘shy doe,’ wary of uncertainty, the risks of which have intensified over the past few years. A subjective assessment of the geopolitical environment makes it possible to predict the deterioration of the situation in the medium term,” Igor Matveev emphasized in an interview for Kursiv.
Fabrizio Vielmini believes that some caution among investors regarding Uzbekistan could be linked to the existing contradictions within its administrative-political system. Investors want to be certain that all announced investment reforms will be implemented.
“The main thing is for the system to work the way it is said to. It is necessary that investors do not encounter internal barriers that prevent capital from developing as expected,” the CPRO senior researcher summed up.
UN analysts are pessimistic about further positive trends of investment inflows to countries with transition economies. According to conclusions from the authors of the report, by the end of 2020, FDI inflows to such countries will drop by 38% overall. Their performance will not recover until 2022. This is due to a falling demand for commodities and, consequently, a decrease in the income of multinational enterprises.
According to the interviewed experts, foreign investments are what can help Uzbekistan overcome the crisis with positive numbers by increasing production.