Clare Nuttall in Almaty -

Supporters of Uzbekistan's economic isolation seemed vindicated in 2009 when the country managed to largely escape the international crisis. Over the last year, the country has looked internally for its development, with the government's anti-crisis spending replacing foreign investment as a growth driver and domestic consumers filling the gap created as export markets dry up.

Since Uzbekistan's international borrowing was minimal, the effect of the crisis was muted. Its main impact was through lower demand for Uzbek exports such as copper and cotton, and the overall fall in consumption in two of its main trading partners, Russia and Kazakhstan. Portfolio investors also melted away from Uzbekistan along with other frontier markets.

Prices for two of Uzbekistan's main exports, gas and gold, remained high during the depths of the crisis. This contributed to the country's steady GDP growth of 7% in 2008 and a projected 7% in 2009, according to data from the European Bank for Reconstruction and Development (EBRD). The economy also received a strong boost from the government, which has made capital injections into several of the largest banks as well as launching a multi-billion dollar stimulus programme, with investments into social housing, roads, railways and other infrastructure. "The main trend in 2010 is likely to be investment in existing large companies in various sectors of the economy - such as the reconstruction of machinery and equipment, creation of new facilities, improvement of production efficiency," says Komil Ruzaev, managing partner at Essential Investments. "Financing of these projects will occur through the sale of shares in companies to both internal and external investments, mergers and acquisitions of financial institutions.

Focus on home

Even so, despite the upturn in world commodity markets, the threat of a reduction in international demand for products of Uzbek companies remains, according to Ruzaev. "The government is trying to solve this situation by refocusing the economy on the domestic market," he says.

Manufacturing companies have turned to the domestic market as exports to Russia and other countries have declined. GM-Uzbekistan, a joint venture between US carmaker General Motors and state-owned Uzavtosanat, increased sales to local customers, taking advantage of pent-up demand.

Tight control of imports has meant that consumer goods have often been hard to come by. Potentially, Uzbekistan is a huge consumer market, given the country's 27m strong population, and low ownership rates for many common consumer items. "Retail services are still very prospective and have a lot of potential. Consumption didn't decrease a lot and is expected to grow further with other sectors," says Karen Srapionov, senior analyst at Avesta Investment Group.

A handful of international investors are targeting the consumer market. In February, TeliaSonera increased its stake in Uzbekistan's second-largest mobile operator Ucell from 74% to 94% in a $220m deal. "Eurasia as a whole is a growth engine for our company," TeliaSonera spokeswoman Cecilia Edstrom tells bne. "Uzbekistan has a large population and relatively low mobile population - there is significant potential."

This interest remains despite the still-difficult business environment. For companies in the natural resources sector, the tax burden for foreign PSA (production sharing agreement) participants increased in 2009, while all investors were affected by the government's anti-crisis measures, which supported the economy but introduced additional distortions, according to the EBRD's latest Transition Report on Uzbekistan. "The new government programme has been accompanied by a tightening of foreign exchange convertibility for importers," says the report, pointing out that in 2009 convertibility delays for imports lasted up to six months. The difference between official and black markets exchange rates grew from around 5% in 2008 to 20-25% in 2009.

However, this did not stop some major deals being signed recently. In November, Uzbekneftegas signed a $2.5bn agreement with Malaysian oil and gas company Petronas and South Africa's Sasol to build a synthetic liquid fuel production plant. A $4bn agreement to develop a gasfield and build a chemicals plant in the Surgil region was signed during President Islam Karimov's visit to South Korea in February 2010. "In 2010, a lot of projects are getting started in the oil and gas sector - geological surveys and construction of exploration and refinery complexes - also automobile and railroad construction, water and energy supply facilities and infrastructure," says Srapionov.

However, he notes that privatisation plans drawn up back in 2008 are not currently on the agenda. "The main privatisation projects are large industrial complexes. Prices of these plants are at a low now, unlike two or three years ago. We expect that the government will hold onto these packages and will try to sell them when prices increase sufficiently."

Meanwhile, international investment into Uzbek securities has slumped, with turnover on the Tashkent stock exchange dropping by one-quarter. Foreign portfolio investors, who started turning to Uzbekistan and other new frontier markets in the years leading up to the crisis, have stayed away. There are hopes that the pick-up in the Russian, Ukrainian and Kazakh markets will be followed by a revival in Uzbekistan. But, realistically, the return of investors to this and other frontier markets in significant numbers is still some way off.