Moscow writes off Uzbek debt, Tashkent agrees to talk about free trade zone

By bne IntelliNews December 11, 2014

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Russia has agreed to write off Uzbekistan's debts in return for Tashkent's consent to consultations on the establishment of a free-trade zone between Central Asia's most populous nation and the Moscow-led Eurasian Economic Union. Regional security and the ongoing geopolitical tensions caused by the conflict between Russia and Ukraine were also top of the agenda on Russian President Vladimir Putin's flying visit to the Uzbek capital, Tashkent, on December 10.

"Today we agreed that we would start consultation regarding a possible signing of a treaty between Uzbekistan and the Eurasian Economic Union on a free trade zone," Putin said. "I want to stress this is only consultations."

Ahead of the visit Russian observers speculated that Uzbek President Islam Karimov wanted to get closer to Russia in order to shield his country from challenges posed by the withdrawal of US-led troops from Afghanistan. 

Another reason, observers suggest, for the thaw in Uzbek-Russian relations may well be Moscow's outrage at the new Ukrainian government's drift away from its orbit towards the West. 

Moscow agreed to write off $865mn of Uzbekistan's $890mn debt to Russia - $500mn in principal debt and $388mn in interest, with Tashkent having to pay a token $25mn. The deal will solve the problem of mutual financial claims between the two countries and will pave the way for expanding bilateral trade and economic ties and new Russian loans for buying weapons. Despitetalk of Uzbek purchases of Russian armament and an "increase in Russian military-technical presence" in Uzbekistan it is not clear whether Tashkent will rejoin the Moscow-led Collective Security Treaty Organisation it left twice - in 1999 and 2012. Observers suggest that the withdrawal of Nato troops from Afghanistan and a boost in activity by Isis in Syria and Iraq and the Taliban in Afghanistan are forcing Tashkent to seek closer cooperation with Russia to "preserve peace, stability and tranquillity in our countries and the region as a whole".

Nor it is clear whether Putin's announcement that the countries agreed to start consultations on the establishment of a free trade zone between Uzbekistan and the Eurasian Economic Union will eventually lead to Central Asia's most populous nation's membership of the free-trade bloc. Uzbekistan has shied away of multilateral economic and political blocs within the CIS, preferring to do business on a bilateral basis.

A year ago the speaker of the Uzbek parliament's Senate, Ilgizar Sobirov, hinted at Uzbekistan's possible membership of the Customs Union of Russia, Kazakhstan and Belarus (it will be transformed into the EEU in January 2015) after his meeting with Valentina Matviyenko, the chairwoman of the Russian parliament's upper chamber, the Council of Federation. Since Putin sees the EEU more as a political union and a counterweight to the West, Uzbekistan's membership will be a coup for Russia despite the low level of the country's economic development compared to the existing members of the bloc. The fast-track membership Russia offered to Armenia and Kyrgyzstan sets a precedent for Uzbekistan should Karimov decide to take his country into the EEU.

Russia is one of Uzbekistan's largest trading partner and largest investor: according to Uzbek President Islam Karimov's figures, Russia accounts for a fifth of his country's foreign trade, but according to Putin, trade with Russia accounts for almost a third of Uzbek foreign trade. Uzbek official statistics are notoriously unreliable: Tashkent claimed bilateral trade exceeded $7bn in 2013, whereas Putin put the figure at $4bn. It grew by 8% year-on-year to over $3bn in January-September 2014, according to Putin.

Russia has invested $8bn in the Uzbek economy in the past 15 years, with oil giant Lukoilinvesting $3.5bn in gas projects in the country and Russian mobile operators Vimpelcom andMTS active in the Uzbek market.

Karimov, 76, has not announced yet whether he will stand for another term in the forthcoming presidential election in March 2015, and Putin underlined that he was following the situation: "An electoral cycle is starting in your country in the near future and there will be election to parliament and then of head of state," Putin said. "And at the beginning of our conversation I would like to wish success in holding these paramount events."

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