Clare Nuttall in Almaty -

The resurgence of investment into emerging markets has seen a small upturn in interest in Uzbekistan, but the country's troubled business environment means that international investors are unlikely to come back in force.

After a series of arrests of top business people at the beginning of this year, some investors say that confidence among the business community is at a "record low." And while the violence in Kyrgyzstan has not, as some feared, spilled over into neighbouring Uzbekistan, concerns about the country's future stability remain.

Two years ago, interest in Uzbekistan was starting to build. In addition to the country's hydrocarbon and mineral reserves, there were signs the isolated economy was starting to open up to foreign investors. A new securities market law had just been passed and several of the country's largest assets were scheduled for privatisation. Uzbekistan has Central Asia's largest population, and its 27m people were believed to be on the cusp of replicating the consumer booms seen elsewhere in the region, particularly Russia and Kazakhstan. This resulted in the country being touted as a hot new frontier market.

Then came the crisis, and investors melted away from Uzbekistan and other emerging economies. Several local brokerage houses had to lay off staff as their business disappeared. Privatisation was also off the agenda, with no international strategic buyers looking to Uzbekistan when there were assets going cheap across the developed world. Even before the crisis struck, some of the gloss had come off the reforms, with many complaints that even the reformed securities market still lacked transparency.

Fundamentally sound

Today, some portfolio investors are starting to return following a regaining of confidence in the region's more developed economies, Russia and Kazakhstan. Uzbekistan's fundamentals remain sound and the economy stayed relatively resilient to the crisis thanks to its isolation and the continuing high prices for its main exports, gas and gold. In 2010, the International Monetary Fund forecasts 8% real GDP growth. "We see that foreign clients are increasing their activity, asking about previous investments, looking for new cheap offers," says Karen Srapionov, senior analyst at Tashkent-based Avesta Investment Group.

While the number of foreign investors is low, international oil and gas majors are expected to invest $1.9bn in exploration and production in Uzbekistan between 2010 and 2015, according to Uzbekneftegaz officials. In addition to Russia's Lukoil and Gazprom, major investors in the hydrocarbons sector include China's CNPC, Korea National Oil Corporation and Malaysia's Petronas Cargill Overseas. Another development this year has been the formation of the $500m Oman-Uzbekistan investment fund announced in 2009.

However, smaller-scale operators still run up against significant problems with bureaucracy and corruption. Local business people were also unnerved by the authorities' crackdown on a number of successful businesses in the first half of this year, even though the government has attempted to put a positive spin on these events, painting them as an attempt to clean up the economy. Alp Jamol Bank lost its licence in March, and was subsequently put into liquidation with all its assets going to state-owned Khalq Bank. Its majority owner Mukhiddin Asomiddinov is believed to have fled Uzbekistan to avoid arrest. The owner of Kapital Bank, Batyr Rahimov, was later also arrested.

This was followed in May with the announcement that Zeromax's assets had been seized and the company shut down. Zeromax, Uzbekistan's largest foreign investor, is also understood to have close ties with the president's daughter, Gulnara Karimova, leading to a flurry of speculation over the motive for the shutdown. "The confidence of the business community is at a record low," one investor who preferred not to be named tells bne. "The recent crackdown against local businesses and banks only makes the situation worse by keeping foreign investors away and forcing entrepreneurs to move their asset and businesses outside the country."

"We thought it was very hard to work in the Uzbek market," says a former investor who has since left, citing the "not-so-good" investment climate, including the May 2010 closure of all private notary offices.

While investors are returning to some frontier markets, the situation in Uzbekistan today is very different from two years ago. In place of the tentative opening of the economy is now a move in the opposite direction.