Uzbek economy hit by Russian troubles

Uzbek economy hit by Russian troubles
Sales of Uzbek cars in Russia, branded as Uz-Daewoo, plunged from a peak of almost 93,000 in 2011 to some 20,000 in 2015.
By bne IntelliNews March 23, 2016

The contagion of Russia’s economic woes has spread to Uzbekistan, hampering trade, drying up remittances, and driving prices through the roof as the value of the local currency, the sum, sinks.

On the face of it Uzbekistan should be relatively immune to the economic collywobbles experienced by the other countries in Central Asia. Unlike its neighbours, Uzbekistan has little in the way of oil and gas deposits, and the much larger size of its own domestic market makes its economy more resilient. The fact that President Islam Karimov's repressive regime has not integrated with the rest of the Commonwealth of Independent States (CIS) helps too.

However, Russia remains a major trade partner and its problems have filtered through the border to affect the local economy in less direct ways.

Official figures claim that Uzbekistan’s economy grew by 8% in 2015, slightly below the 8.1% in 2014. But Karimov’s government always paints an unreliably optimistic picture of the country’s economy, rarely publishing absolute figures and making independent assessments nearly impossible. At the same time, the country’s government sets its own prices for oil and gas inside the country as part of the government’s policy of self-sufficiency in both energy and food.


Uzbekistan has little of the hydrocarbon bounty enjoyed by Kazakhstan and Turkmenistan; Uzbek energy exports amounted to 25.9% of total exports in 2014, according to figures from the Ministry of Foreign Economic Relations, Investment and Trade, compared to neighbouring Turkmenistan’s 90%, according to estimates by Uzbek analysts.

Gas exports are more substantial, amounting to 8.5bn cubic metres (bcm) in 2014 against Turkmenistan’s 41.6 bcm, according to BP’s figures from 2015.

While it is obvious that falling global oil prices would affect the country’s gas exports, the real pain the Uzbek government is feeling is caused by knock-on effects from Russia’s economic setbacks. Most of the country’s hard currency earnings come from the key exports of cotton, gold and GM Uzbekistan cars, which have in the past been big earners for the national budget.

Russian spillovers

“Trade [with Russia] accounts for 26% of Uzbekistan’s overall trade,” according to Alisher Taksanov, an exiled Uzbek economist based in Switzerland, but the turnover plummeted by 29% to $2.8bn in 2015, according to the Russian Federal Customs Service, as the collapse of the ruble led many Russian business to cut imports. In addition, Russia’s troubles inflicted woes on Uzbekistan’s neighbours, which are its main export markets in the region, after Russia and China.

Falling Russian demand has gutted the Uzbek car export business. In 2014, Uzbekistan’s car exports to Russia accounted for 26.8% of total Uzbek exports, according to the trade association GM Uzbekistan’s Russian vehicle sales had grown steadily in the last decade to become one of the country’s best exports, peaking in 2011 at 92,778 units (see chart below), according to Russia’s Association of European Businesses (AEB) that tracks car sales in Russia. But Russian car sales then plunged by 46% y/y to 20,451 units in 2015, AEB’s figures show. 

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In Soviet times Uzbekistan was a major producer of cotton (which is still part of the country’s national emblem) and the crop remains a major hard currency earner. Cotton raised roughly $1bn in export earnings for the government in 2013, Uzbek Prime Minister Shavkat Mirziyoyev told the 10th International Uzbek Cotton and Textile Fair in Tashkent in 2014. Cotton exports accounted for 23% of total Uzbek exports to Russia in 2014, figures from show.

But cotton prices have declined by approximately 25% in the 2014-2015 marketing year, which encompasses the second half of 2014 and first half of 2015. The fall in cotton prices has also led to a decision by the Uzbek authorities to cut annual cotton harvests to 3mn, down from 3.35mn, according to a statement by Uzbek President Islam Karimov in January. 

Overall, “the country’s total export earnings are projected to have fallen by 40-50% in 2015,” according to Taksanov.

But maybe the most painful channel of contagion has been the sharp contraction in remittances from Russia by Uzbek migrant labour. Remittances “make up 13-15% of the country's GDP and a large portion of the population’s foreign exchange earnings”, Taksanov says, though this is still less than in Azerbaijan and Turkemenistan.

According to figures from the Central Bank of Russia, remittances to Uzbekistan from Russia declined by 59.2% y/y to $1.9bn between January and September 2015 alone, equivalent to two thirds of the cotton exports. The World Bank forecast Uzbek remittances to fall by 59.3% to $2.5bn in 2015. The chart below shows that the Uzbek government’s economic growth figures are possibly unrelated to the reality of the country’s situation.

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Black market activity and inflation

The effects of declining oil prices on the Uzbek economy are most obvious in the country’s black market, where new opportunities have opened up for smugglers.

In September, the country had long queues at petrol stations in the capital city of Tashkent, according to a report by, a website believed to be linked to the Uzbek security services.

“The long queues demonstrate Uzbekistan’s inability to meet the country’s demand for fuel,” Taksanov said. “Uzbekistan produces 1.3mn tonnes of petrol fuel and 258,000 tonnes of liquefied gas, 260,000 tonnes of lubricating oil, but this is clearly not enough to fuel 3.6mn units of vehicles and agricultural machinery.”

The resulting deficit has given rise to smuggling, since the decline in global  oil prices “has provided a higher profit margin for the smugglers”, which led petrol fuel prices on the black market to “increase by 150% or more” above the government-set retail price, according to Taksanov.

At the same time, the prices on the black market are determined by the purchasing power of the black market sum where the unofficial rate has fallen from UZS3,200 to the dollar at the beginning of 2015 to UZS6,550 on March 11, whereas the official central bank-set exchange rate of the sum depreciated from UZS2,422.4 to the dollar at the beginning of 2015 to UZS2,861.68 on March 11.

The duel exchange rate regime that has sprung up as a result of the government’s ineffectual attempt to control exchange rates has meant that Uzbekistan has suffered a de facto devaluation of the national currency that has fed inflation. Double-digit price rises have hit even the official government-set prices. For example, in December, the Uzbek Finance Ministry and State Tax Committee issued a resolution to increase the wholesale and retail prices of alcoholic beverages by 14-28% starting from January 1, 2016, reflecting the state of inflation in the country.

Looking forward

“Up to 70% of foreign currency acquired via money transfers circulates in the black market for purchasing real estate, cars and smuggled goods,” Taksanov said. The analyst forecasts that, “as money transfers decline, prices for imported goods can be expected to keep rising, reducing the material well-being of families, and contributing to growth in social tensions”, with families spending less on “costumes, festivals, weddings, funerals, payments of tuition fees to educational institutions and tourist trips abroad”.

The situation could potentially be further exacerbated by returning migrant workers, who are leaving as the wage differential between work at home and in Russia narrows sharply. Russian average wages have already halved in dollar terms in the last year and those of migrant workers have fallen even faster.

At home, “the weakening purchasing power of the sum will also hurt the development of small and medium-sized businesses”, Moscow-based analyst from the CIS Institute, Aza Migranyan told bne IntelliNews. Small and medium-sized enterprises (SMEs) account for 56-57% of the country’s GDP and a significant chunk of its employment, according to both government sources and estimates by the Asian Development Bank.

The Uzbek authorities are likely to “take more decisive steps to boost the production of high value-added products in order to lessen the extent of [the country’s] dependence on commodities exports”, Taksanov predicts. If it happens, the economic woes might eventually become a blessing for the country in the long run.