Uzbek currency turns 20 amid thriving black market

By bne IntelliNews July 23, 2014

Olim Abdullayev in Tashkent -


At Tashkent's landmark Chorsu market, black market currency dealers greet shoppers with stacks of Uzbekistani som packed in plastic bags. "We buy dollars, euros, Russia[n rubles] and gold," they shout at passers-by indiscriminately – right under the noses of police officers loitering nearby, who pretend not to notice the illegal activity.

This is a scene in the Uzbek capital almost 18 months after authorities adopted measures in a bid to smash the black foreign exchange market in the country, which has thrived ever since the national currency, the som, was adopted exactly two decades ago in July. At its adoption, the national currency changed hands at UZS6 to the dollar, but double-digit inflation has taken its toll: the value of the som against the dollar has fallen by more than 500 times on the black market over the past 20 years.

Since its adoption the som has never been a fully convertible currency, as the government has imposed restrictive control on access to foreign currency. Foreign firms say currency convertibility is one of the greatest obstacles to proper investment operations in Uzbekistan. In 2003, Tashkent signed up to Article VIII of the International Monetary Fund’s Article of Agreement, which bans "restrictions on the making of payments and transfers for current international transactions."

Despite committing itself to currency convertibility for current account transactions, the Uzbek government maintains informal restrictions on the forex market and the repatriation of foreign companies' profits. All legal entities must obtain permission from the central bank to access forex, but bureaucracy, corruption and limited forex reserves mean not all applicants are granted such permission.

Shermamat Abdullazade, a former finance ministry official who is now living in exile in the US, told the website in an interview in late May that Uzbekistan doesn't have enough reserves to issue such permission to all applicants. He explains that enterprises that are protected from on high have easy access to forex, but authorities cut exchange quotas for other enterprises with foreign involvement in order to "extort cash from them."

Even when joint ventures access forex, the country doesn't have a legal private market for investors to transfer their funds and private money transfer systems offer services only to individuals with strict limits on forex transactions. "The goal of the government's tight fiscal and monetary policies is to minimise capital outflow, regulate imports, stimulate local manufacturing and reduce the country's dependency on external factors," the US State Department said in its 2013 Investment Climate Statement on Uzbekistan. "The [Uzbek government] believes that this course minimises Uzbekistan’s exposure to risk stemming from global financial woes, but in practice, deters potential foreign investments."

Four rates for forex

Tight government controls over forex have created a situation where there are now four different exchange rates in the country: two of them – the official rate set by the central bank and the exchange booth rate – are legal exchange rates; the third rate – the Uzbekistan Commodity Exchange rate for import operations – is semi-official; while the fourth rate – the black market rate – is unofficial and technically illegal.

Black-market currency dealers sell dollars at a rate of UZS3,100 to the dollar, while commercial banks are supposed to sell them to the population for about UZS2,362. The official exchange rate set by the central bank (without any liability to sell dollars) was UZS2,320.16 on July 8. The fourth rate is around UZS3,700 at which importers buy dollars on the commodity exchange to pay for their imports, according to the website, believed to be linked to the Uzbek security services.

Uzbekistan has imposed further restrictions on access to forex by individuals. Regulations adopted by the Central Bank of the Republic of Uzbekistan banned commercial banks from selling cash dollars to the population from February 2013. Instead, authorised banks were ordered to sell non-cash dollars into potential buyers' international payment cards such as Visa or MasterCard. Eligible Uzbek citizens could then use the funds while they were abroad, with restrictions placed on how much they could withdraw each day (usually no more than $100). The central bank sold the new scheme as "more perfect" and "widespread international practice." It also claimed that holders of international cards could use them for online payments, but Visa or MasterCard issued by Uzbek banks do not have CVV numbers. At the same time, commercial banks are not restricted in purchasing cash dollars from the population.

Yes, we have no dollars

The new regulations didn't result in Uzbek citizens being able to access forex more freely despite the burdensome procedures. According to central bank regulations, every Uzbek passport holder is entitled to purchase $2,000 a quarter, but commercial banks cite various reasons or create additional obstacles to discourage citizens from pursuing their entitlements. For example, they tell clients that they have reached their limits to sell foreign currency, or say that because of many applications to buy foreign currency they can sell only part of the entitlement, forcing people to come back several times until they exhaust their limits or patience. In response to inquiries about the purchase of dollars in early July, one branch of Kapital Bank in Tashkent said that it hadn't sold dollars to individuals since December 2013 because "we don't have dollars."

From time to time, law-enforcement agencies carry out raids against black-market currency dealers, which stops the trade for a few days. The latest such raid was organised in Tashkent on June 26. This is done to give the appearance of a fight against black marketeers and usually targets either ordinary citizens or those at the lowest layer of the currency trade hierarchy, locals believe. After such raids, the exchange rate usually fluctuates, providing people involved in the activity with additional profits.

Uzbekistan sends millions of migrant workers to foreign countries every year, mostly Russia and Kazakhstan, who send home cash worth billions of dollars. According to the Central Bank of Russia, in 2013 remittances from Russia alone totalled $6.63bn, which accounted for nearly 12% of Uzbekistan's GDP in 2013 (denominated in dollars at the official exchange rate).

Due to the over 30% difference in the official and black market rates, almost all cash dollars end up on the black market and circulate outside the banking system in Uzbekistan. Despite the fact that selling dollars to the population at the deliberately low rate damages state interests, few in Uzbekistan believe the authorities are serious about destroying the black market in forex. Moreover, locals believe that the tentacles of the "mafia," which controls the black market and makes enormous profits, lead directly to people high up in the government. "The state is the mafia in Uzbekistan," sighs one resident of Tashkent.


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