Uzbekistan rising

Uzbekistan rising
Since he took over in 2016 President Shavkat Mirziyoyev has been attempting to put in place a raft of radical reforms. Five years on and those changes are starting to make a difference. Uzbekistan's economy is taking off. / bne IntelliNews
By Ben Aris in Tashkent November 5, 2021

Uzbekistan’s economy is taking off. President Shavkat Mirziyoyev, who was just re-elected for another five years, took over five years ago and launched a radical reform programme. He re-opened the country to the rest of the world. The government started frenetically working to modernise and put the country on a market footing. At the same time, the president launched a diplomatic effort to better integrate Uzbekistan in the region and further afield, as well as try to create something like a common market with his neighbours in the region. Now all that work is starting to bear fruit.

A tour of the country in October revealed extraordinary progress. In an unsung success the entire cotton sector – long the backbone of the country’s economy to the extent that cotton plants are part of the nation’s symbol – has been completely privatised and the entire sector put into privately owned commercial hands. The wheat sector, also strategically important and also part of the national emblem, is currently undergoing the same transformation, which will be completed next year.

A string of banks are being prepared for privatisation and the first big bank, the mortgage specialist Ipoteka Bank, has already been sold to Hungarian investors, with another nine banks from the total of 12 to be put under the gavel soon.

But more impressive is that every factory and kombinat visited on the tour is in the midst of, or has already completed, investment projects to expand and modernise their production to meet burgeoning demand and rapidly growing exports.

The lifting of currency controls in 2017 that transformed the foreign trade regime means Uzbekistan’s biggest and best enterprises have seized the opportunity to start exports, which have ballooned. Initially only involving the country’s immediate neighbours in the first round, foreign trade has since expanded and exports are now going to the whole of the Commonwealth of Independent States (CIS), China, Turkey and even the African market, which has recently been opened to made-in-Uzbekistan goods. The country was awarded the sought-after general preferential trade status for textile exports to the EU in April; this allows it to sell cotton fabric and fibre without duties or quota restrictions. Textile exports have already more than doubled this year, and privately owned white goods manufacture Artel has become the biggest maker of consumer gizmos in the whole CIS. Its factory, located in the wastes of the Kyzyl-Kum desert, is becoming a truly international business.

The sense of optimism is palpable. The lives of the ordinary people have improved materially. Mirziyoyev’s re-election on October 24 was criticised for the total lack of any real opposition candidates, but according to voters polled by this publication he would have won a landslide victory even if there had been competition. The population are extremely happy with the way things are going and are happy to let Mirziyoyev keep going.

The Central Bank of Uzbekistan told bne IntelliNews in an interview: “We face no major risks or difficulties at the moment. Our task now is to manage the growth and put the republic on a solid footing and modernise the economy.”

Long road

When I first arrived in the country as a young correspondent in 1995, tasked with reporting on its first attempt to open up to the rest of the world, the country was in almost total collapse. Industry was not functioning. The currency had been deeply devalued to the point where it was almost worthless. Inflation was in triple digits. The power was out and the shops were empty. If it hadn’t been for the open-air markets and Uzbekistan’s legendary agricultural output the situation for its citizens would have been impossible.

The lifeline that kept the country afloat was cotton. A major producer in Soviet times, cotton exports remained the newly independent Uzbekistan’s main source of hard currency earnings, of about $3bn a year.

Nevertheless, investors were flooding in because it is the largest and most populous of the five so-called Stans (Tajikistan, Turkmenistan, Kyrgyzstan, Kazakhstan and Uzbekistan) and had so much to offer. A large and largely young population of 35mn makes it by far the biggest retail market in Central Asia. As the only country to share a border with all the other Stans – Uzbekistan is also one of only two double-landlocked countries in the world – makes it the natural production and distribution centre for the rest of the region. And its lack of massive hydrocarbon resources means that it already had a relatively diversified economy based on textiles, manufacturing, gold mining, food processing and other industries.

It should have taken off. But when the country’s former president Islam Karimov got the bill for the opening of trade in the form of a $1bn trade deficit he lost his cool. “We are not going to spend our hard-earned foreign currency on importing chewing gum,” he said in a famous speech. He clamped down and introduced strict exchange controls that killed business off dead.

The next 20 years are a story of stagnation and autarky, where Karimov tried to make the hobbled republic work by reaching for the tools most familiar to him: a state-dominated centrally planned command economy. To give him credit, the economy did make progress. Industry was rescued and a sophisticated automotive sector built up that exported its UzDaewoo cars all over the CIS, now rebranded UzAvto after Daewoo collapsed several years ago. Rising gold prices added another source of revenue and Karimov introduced some market reforms such as special economic zones, but they were not enough. Uzbekistan fell far behind its local rival Kazakhstan, even if it didn't turn into a complete basket case like Tajikistan and Turkmenistan.

Many people interviewed for this article were appreciative of the stability and improved living conditions they enjoyed under Karimov and he is not widely seen as the dictator that he is viewed as in the West. Certainly the new administration has in no way demonised or heavily criticised Karimov, but then Mirziyoyev served as his prime minister for several years, so the current administration prefers to emphasis the continuity.

Change of guard

The first stop of the tour was the far western town of Nukus, a lost settlement in the midst of the Qizilqum (aka Kyzyl-Kum) desert and the capital of Karakalpakstan, the birthplace of the Turkic people.

When I first visited Nukus over 20 years ago I went with a Turkish friend who was running a UN programme that gave chickens to women so they could support themselves by selling eggs and at the same time add some protein to their diet. The city was an ecological disaster, as over-irrigation had seen the water table rise to the surface and the fields were caked with salt that lay like snow on the ground. The local firms had no money and were paying their workers with sacks of pasta so that at least they had something to eat.

The white goods manufacturer Artel set up a hoover assembly plant in Nukus in 2011 during Karimov’s time under licence from Korean consumer electronics giant Samsung, but since then has expanded production to include several of its own branded items that are now best sellers not only in Uzbekistan but throughout Central Asia and in the CIS.

After a stop-off in the ancient Silk Road way station of Khiva where the legendary 1,001 Nights stories are set, we travelled on to the industrial mining town of Navoi that is home to Muruntau, the largest open-cast gold mine in the world, as well as NavoiAzot , a large petrochemicals plant, and Qizilqumsement, the biggest cement plant in the country.

When I visited the gold mine 20 years ago the city was a grimy run-down place with few shops and little life on the streets, populated by mainly Russians and Ukrainians that knew the mining business well from their homelands. The US company Newmont had opened a gold processing plant that was working the thousands of tonnes of tailings from decades of Soviet gold mining that were still rich with the yellow ore in a simple process to turn the rocks into gold. A fortified shed next to the plant was stacked from floor to ceiling with bars of gold.

Today the mine is flourishing. Newmont is long gone following a dispute with Karimov over tax payments, but the mine is still working the tailings, but is expanding its open-cast operations and is on track to increase output by 30% in the next five years. However, the main event will be its 100% privatisation, where shares will be sold on the open market. The gold mine will be ready to be privatised from January 1, its ebullient director told bne IntelliNews.

“We are 90% ready!” chief engineer Nikolai Snitka told bne IntelliNews in an interview. “It could happen from January 1. The company has been restructured and transformed into a joint stock company [JSC]. International consultants like McKinsey are currently auditing the assets. We want to be transparent and have everything to international standard!”

Currently international consultants McKinsey are auditing the assets and valuing the works, but the corporate restructuring has already been completed and the sale of the company is awaiting a government decision.

NavoiAzot has been investing in several new product lines and has just launched the production of PVC plastics that have never been produced in Uzbekistan before. The demand has been so great that the company has already launched a second project to more than double the production together with some Chinese investors. Previously the company borrowed money for its expansion, but business has been growing so fast that now the company is investing its own funds, borrowing using commercial credits or inviting investors to participate.

The plant is of Soviet vintage, set up in 1977, and is the biggest cement maker in Central Asia. If construction is one of the main drivers of economy growth, then the frenetic activity at the cement plant is perhaps a good indicator of the changes in the Uzbek economy. The beaten huge silos of the original production stand at the back of the territory and continue to churn out some 3mn tonnes of cement a year entirely for the domestic market, as domestic demand is currently outstripping domestic supply by 6mn tonnes, forcing Uzbekistan to import cement.

Qizilqumsement is investing $112mn to add a fourth production line, the first significant investment made since 1986. The grounds of the plant are littered with material and equipment as a new silo soars overhead and is already more than half completed. The company is funding 81% of the investment from its retained earnings and the rest has been taken as commercial loans from Uzbek banks.

“In 1994 we had to close down one of the three lines, as there was no demand,” says Abduqahhor Salomov, the general director of Kyzylkum Cement. “Today we can’t produce enough and even after the new line goes into action we will be working at full capacity. You can feel the difference in the country.”



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