Wednesday, 01 April 2015 00:00

Privatization in Uzbekistan: The Next Double

By Umida Hashimova (04/01/2015 issue of the CACI Analyst)

Privatization is a sore subject in Uzbekistan. Cases of expropriation of foreign and local companies in the past have painted a discouraging picture for private business in the country. Uzbekistan is also criticized for a government-controlled slow privatization process that has been continuing at a snail’s pace since the early days of independence. Uzbekistan’s import-substitution and export-oriented industrialization policy is also not popular among backers of a liberal economy.

Yet, privatization gained renewed attention when, on January 16, 2015, Uzbekistan’s President Islam Karimov requested the Cabinet of Ministries to develop a program on restructuring, modernization and diversification of production for 2015-2019 with a focus on privatization. This was the first presidential-level request for privatization and thus very important for elevating the topic’s importance. In a government like Uzbekistan, what the head of the country says today becomes law tomorrow with ensured follow-through.

The Program on Privatization is under development and is envisioned to encompass full-scale and pivotal analysis of the government’s presence in the economy, aiming to decrease the state presence and increase the share of the private sector. The program prescribes a three-fold reduction of state-owned enterprises: 534 companies that have state shares in nominal capital will be reduced to 147, and 660 non-working enterprises will later be sold to private individuals. The World Bank and the International Finance Corporation were for the first time actively included in the program development process to solicit their expert opinion on the privatization process, with the first round of meetings organized in March 2015.

In the most recent World Bank and State Department reports, however, privatization and foreign investment did not receive high marks. In the Uzbekistan Country Program Snapshot for 2014, the World Bank mentions that the net inflow of foreign direct investments (FDI) has been decreasing in recent years. Cumulative per capita FDI inflows are low due to the government’s reluctance to fully open the economy and improve the foreign investment climate in some areas. The State Department’s Investment Climate report for 2014 pointed out that “access to currency conversion, debilitating red tape, an onerous system of taxation, overregulated banking, and punitive customs laws and procedures” are the most important issues mentioned by foreign and domestic investors, followed by expropriation cases and politically-motivated inspections of companies. The same report says that Uzbekistan’s investment legislation provides a range of guarantees for foreign investors, but the legislation is ambiguous and self-contradicting.

When this author raised these issues from the State Department report with Uzbek officials familiar with developments in the privatization area, they said (on condition of anonymity) that in most expropriation cases, companies seek to abuse domestic laws that allow tax-free import of machinery to Uzbekistan. They then fail to produce a final product through localized production as stipulated in the agreement signed by investors. The officials added that in some expropriation cases, the final product fails to materialize by the deadline of an agreement. Overall, they claimed Uzbekistan currently has around 31,000 private companies and the majority of them are working successfully.

When the author asked the same officials why the Privatization Program is being developed now, 24 years after the privatization process started in the early 1991s, they responded that the government is now more confident to give up state assets because it is certain that privatization can be implemented without disruptions. Unsuccessful early privatization processes in Russia and other former Soviet countries made Uzbekistan hesitant to rush into the privatization process. Furthermore, they added, the government focused on developing a legislative basis for privatization that among others things would protect socially vulnerable groups who could have been disadvantaged by privatization. In preparation for the privatization process, the government was also busy establishing colleges with foreign partners that would provide the younger generation with business-oriented education.

The State Department’s Investment Climate report recognized improvements, such as  amendments to the Law on Foreign Investments (effective January 20, 2014), which introduced a single-window process for the registration of businesses, requiring no more than seven days to finish registration from the submission of an application.

The recent developments in privatization at the presidential level might indicate that Uzbekistan’s government has depleted its measures to control the economy and is ready for the next step. However, the question remains if the economy’s modernization and market-oriented reforms will continue while the government is implementing strong import-substitution strategies. The development of the privatization program at the president’s request in partnership with international organizations is a signal that Uzbekistan’s government is increasingly interested in seriously improving the country’s investment and business climate as state assets are being prepared for divesture. 

Published in Field Reports

By Arslan Sabyrbekov (07/02/2014 issue of the CACI Analyst)

In response to Uzbekistan’s decision to stop supplying gas to southern Kyrgyzstan, Bishkek considers blocking the water coming to the Grand Namangan Canal under the guise of making long awaited reparations. This, according to many experts, is not a constructive decision and will simply further worsen bilateral relations. But Bishkek’s efforts to establish contacts with Uzbek colleagues did not bring any results. Silence from Tashkent is generating speculations and a spread of rumors from both sides about the deterioration of relations between the two neighbors.

On April 14, 2014, Uzbekistan stopped supplying gas to southern Kyrgyzstan. In Osh city, over 60,000 people remain without gas. The reason for the plight of Osh residents is the fact that in early April 2014, the Kyrgyz government reached an agreement with Russia’s state company Gazprom to sell its 100 percent share of Kyrgyzgaz Company, in exchange for investments and an uninterrupted supply of gas. Formally, Tashkent did not violate the terms of its contract with the Kyrgyz side, according to which the Uzbek gas monopoly has the right to terminate the supply of natural gas to Kyrgyzstan in case of a Company ownership change. This, according to Kyrgyz economist Dzhumakadyr Akeneyev, “should have been foreseen by the Kyrgyz authorities during the long negotiation process with the Russian side over the transfer of Kyrgyzgaz ownership to them.”

According to Kyrgyzstan’s Prime Minister Djoomart Otorbaev, Bishkek’s efforts to establish contact with Uzbek authorities did not bring any results. His letter to his Uzbek counterpart to resume gas supply to Kyrgyzstan’s southern residents did not bring any reaction. “Gazprom took upon itself obligations to uninterruptedly supply gas to Kyrgyzstan, and is currently holding talks with Tashkent,” stated Otorbaev. Gazprom, which is often considered as an instrument of Russia’s foreign policy, is also active in Uzbekistan, but mainly in its western part, close to the Aral Sea. Theoretically, Gazprom’s operation in Uzbekistan could sell Uzbek gas to a Gazprom subsidiary in Kyrgyzstan, and according to experts, the price would be cheaper. For Uzbekistan, this seems to be a bad deal since its gas will be sold to its former customer at a relatively lower price. But to deliver Uzbek gas to Kyrgyzstan, Gazprom still needs to use the pipelines of Uztransgas, the company in charge of transporting gas and liquid hydrocarbons produced in Uzbekistan to domestic consumers and for export. Building a pipeline across southern Kazakhstan is not an option since it will take many years and is too costly. Thus, negotiations will be intense and their outcome remains unclear.

From the very first days when Uzbekistan stopped supplying natural gas to southern Kyrgyzstan, heavy discussions have taken place in Bishkek over conducting reparation works in the Grand Namangan Canal, located in the country’s southern Jalal-Abad region. Kyrgyzstan’s Deputy Prime Minister Abdrakhman Mamataliev stated, “Since the Canal’s construction in 1957, reparation works took place only twice, and we might have to close it temporarily and carry out all the needed works.” Indeed, no one questions that the Grand Namangan Canal must be repaired, but taking into account the fact that it is summer and the water is crucial for Uzbekistan’s harvest, the decision is not constructive and will massively damage ordinary Uzbek citizens working in agricultural sector. Fortunately, not all key figures in the Kyrgyz government support this idea.

Kyrgyzstan’s First Vice-Prime Minister Tayirbek Sarpashev said that Kyrgyzstan should not take such a step and revert to provocations. In his words, “Uzbekistan and Kyrgyzstan are brotherly nations, with cultural, economic and political ties. Ups and downs are common between neighbors and it is simply wrong to intimidate someone.”

­In the meantime, Kyrgyzstan’s opposition leaders were quick to use the situation to criticize the authorities. According to them, this demonstrates the government’s inability to carry out its functions, despite its assurances to the population of uninterrupted gas supply. The government is also being criticized for its inability to conduct an independent foreign policy, i.e. to establish direct contact with the authorities of the neighboring state and involving Gazprom in the negotiations is only further complicating the state of bilateral relations.   

The author writes in his personal capacity. The views expressed are his own and do not represent the views of the organization for which he works.

Published in Field Reports


By Slavomír Horák (05/21/2014 issue of the CACI Analyst)

Karakalpakstan is a remote autonomous republic on the Western edge of Uzbekistan in the lowlands of the Amudarya River. It suffers from high unemployment and substantial emigration to neighboring Kazakhstan and Russia, not least due to the hydrocarbons boom in Kazakhstan’s Mangyshlak. However, the crisis in Ukraine is having ramification also in this region of Uzbekistan. Leaflets have been distributed around the region in recent weeks, appealing for the organization of a referendum on the region’s independence and secession from Uzbekistan and/or to request annexation to Kazakhstan or even Russia. Can we expect a new round of instability and state partition in Central Asia in line with the continuing dissolution of Ukraine?


Published in Analytical Articles

By Oleg Salimov (the 27/11/2013 issue of the CACI Analyst)

The challenges of economic development and regional integration in Central Asia have given rise to a number of projects in various spheres. Among these, the “Turkmenistan-Afghanistan-Tajikistan” railroad is directly aimed at stimulating the participating countries' economies through the creation of a better transportation system for easy access to new markets. The project's goal is to expand regional infrastructure, connect the landlocked countries with seaways, and eventually link Eurasian and Southeast Asian markets. The ability of the participants to successfully finalize construction of the railroad, provide security, and incite an interest from other countries will determine whether this project can mark the beginning of a new Silk Road. 


Published in Analytical Articles

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The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.


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