Uzbekistan’s IT sector on fire and targeting the vast US market

Uzbekistan’s IT sector on fire and targeting the vast US market
Since launching an aggressive drive to develop its IT sector, Uzbekistan's IT export revenues have ballooned from a few million in 2017 to $100mn last year, but the government is targeting $1bn in only a few more years time. / wiki
By Ben Aris in Berlin June 18, 2022

One country’s brain drain is another country’s gain. In the competitive business of IT outsourcing, Uzbekistan wants to wind up on the right side of that equation.

Russia’s invasion of Ukraine sent shockwaves through the world of outsourced IT services, as sanctions and the exit of Western companies prompted highly trained technology professionals to flee Russia and Belarus in droves. Uzbekistan, just a few years into its own tech revolution, launched an aggressive drive to attract as many as possible to the capital, Tashkent. More than 5,000 have arrived since the start of the conflict, according to the government, and 2,000 alone came from the Belarusian capital Minsk after the Uzbek government sent several charter flight to rescue those that wanted to leave shortly after the Ukraine war started. Belarus’ participation in Russia’s war in Ukraine killed what was left of its domestic IT sector.

Mission: USA

Flush with new IT talent, Uzbekistan’s Minister for the Development of Information Technologies and Communications (ICT), Sherzod Shermatov, is leading a delegation of business leaders on a US trade tour to promote his country’s credentials as a new low-cost destination for outsourcing IT and services from software development to business processes. With stops in New York, Washington DC, San Jose and Irvine in California, the group will meet with executives from companies including Apple, Google, Meta, PayPal and Coursera, as well as US and international officials.

Their case? Labour in Uzbekistan is half the cost and Shermatov told bne IntelliNews in an exclusive interview: “The quality is every bit as good as in India and the Philippines, two countries that have dominated the IT outsourcing market for decades.” Add to that a friendly tax and regulation regime, new infrastructure and a young and growing population taking crash courses in coding and English.

“Currently Uzbekistan has the best proposition for IT companies in terms of tax benefits,” Shermatov said in an interview from Tashkent. “If you become a resident of our IT Park, you are completely free from taxes.” Wages for business process outsourcing jobs such as logistics are about a quarter of those in the US and significantly lower than those in India and the Philippines, he said.

Unprecedented transformation

Uzbekistan is aware that it has come late to the outsourcing party. Besides Russia and Belarus, countries including Romania, the Baltic states and even Jamaica have been pursuing aggressive growth in the market for years, while existing powerhouses continue to benefit from long-established connections. Uzbekistan’s technology and English-language initiatives only began in 2017, a year after Shavkat Mirziyoyev took over as president.

Mirziyoyev has thrown the one-time pariah state open and his comprehensive reform programme that was detailed in the bne IntelliNews report Uzbekistan Rising is “adding value.” The government has taken existing sectors like cotton production and forced local firms to make textiles instead. IT is same and hopes to capitalise on Uzbekistan's young and growing population; the Central Asian republic is one of the very few Former Soviet Union countries to have seen its population grow in the last decade.

“IT is one of the few industries which is a pure net positive to the balance payments,” says Shermatov. “If you set up a car plant you have to import machines, but with IT you import nothing and everything can go for export. Our competitive advantage is the lower cost of labour, but for the average Uzbek the wages they can earn in IT are much better than they can get in the traditional economy.”

Since the start of the IT reforms, the country has gone into overdrive, engaging in what the World Bank calls an “unprecedented economic and social transformation.” About 1.2mn Uzbeks have completed the “One Million Uzbek Coders” training programme and over a million more are signed up.

Tashkent’s IT Park – created just three years ago – now hosts more than 650 companies – all of which are exempt from paying taxes and customs duties until 2028, better terms than existed in Russia or Belarus even before sanctions were introduced. Customers already there include Amazon, UPS, DHL and Volvo.

With US help, Uzbekistan launched the English Speaking Nation programme, spending tens of millions of dollars on raising proficiency in the language. The country’s more than 30,000 English language teachers receive US-funded training, and government officials are paid a premium if they speak English. The state also opened up the country to a number of foreign universities – creating competition in the educational market and raising standards. There are 6mn children in Uzbekistan, and 680,000 will graduate this year to join the workforce. The president has put a high premium on not only adding value to industry, but also the country’s human capital, one of its most valuable resources.

“I was actually minister of public education when we started pursuing projects with the idea that most of our graduates would be able to speak English.’’ Shermatov said. “Then there’s IT Nation, where we have a comprehensive approach on changing the curriculum from the idea that school graduates would be able to not just be users of ICT, but also the developers who can earn money in IT…. We even encourage our workers to speak with an American accent, as that is already our biggest export market.”

High stakes

The stakes are high for the double-landlocked Central Asian republic of 35mn, whose main exports are gold, copper, textiles and agricultural goods. Uzbekistan is dependent on nearby Russia's demand for its exports, and it relies on the Russian railway network for access to markets further afield. That’s a matter of growing concern for the country’s leadership and business community, analysts say, after seeing the Russian military cut off Ukraine’s access to the sea and close its most vital export routes.

IT exports offer a unique solution to the country’s geographic challenges. All you need is English-speaking, digital natives and a good and inexpensive internet connection. The cost of a quality connection in Uzbekistan has plummeted over the last couple years thanks to tens of millions of dollars in government investment, according to Nodir Ruzmatov, the CEO of New York-based business process outsourcing company RevoTech and Uzbekistan’s largest entrepreneur in Business Process Outsourcing (BPO) and IT outsourcing.

“When we started the park in 2017, it was almost nothing. It was only the tax benefits,’’ said Farhod Ibragimov, CEO of IT Park Uzbekistan. “There have been huge changes over the last three or four years in Uzbekistan's IT sphere. 58 universities now have IT specialised courses, 20 of them are wholly focused on IT. We already have over 20,000 high qualified specialists right now, and that is going to increase by at least 10,000 annually.’’

The conflict in Ukraine has provided an unexpected windfall for Uzbekistan in more ways than one. Besides prompting an influx of IT talent, it has also severely restricted the outsourcing businesses of Russia and Belarus, two of the biggest competitors in the region. Ukraine is another big player in the IT outsourcing business and has also suffered extreme disruptions.

Open arms

Uzbekistan continues to woo IT specialists, introducing special three-year multiple entry IT visas, simplifying the process of obtaining residency permits, taking IT specialists looking at moving to Uzbekistan on tours to the ancient city of Samarkand, the heart of the ancient Silk Road, and plying them with plov, the country’s signature dish of rice pilaf.

Uzbekistan IT park’s website provides testimonials from IT professionals who have made the swap, and has just commissioned a mini-documentary introducing would-be IT immigrants to Uzbekistan. And this may just be the beginning. The Russian Association of Electronic Communications, a lobby group, said in March that 50,000 to 70,000 specialists had left Russia and as many as 100,000 more might follow them in the coming month.

Cue operation “Tash Rush.” On February 25, the day after Russia’s invasion of Ukraine, Uzbekistan’s IT Park launched its relocation programme backed by local businesses. Within weeks, Uzbekistan had sent 12 chartered flights to the Belarusian capital, Minsk, to ferry some of the world’s most talented software developers to Tashkent. When Belarus held one of the planes on the tarmac and refused to let it leave, Uzbekistan’s President Mirziyoyev jumped on the phone to intervene. The flight took off.

The relocation programme provides perks to tech immigrants including credit cards and sim cards, housing assistance, help finding jobs for spouses and registration of children at schools and a “One Stop Shop” to deal with red tape, recruit personnel and find offices. Working with contacts developed during Uzbekistan’s study of the IT industry in Belarus, they got the word out that Uzbekistan was ready to provide a warm welcome.

“The first days of this event were, you know, a big rush,” Ibragimov said in a joint interview with the minister. “Everybody was worried. And even the plane tickets were extremely expensive at the time. We tried to organise and help in everything. Now those companies are happy with us since we were friendly with them when they were in need.”

Growth ambitions

Uzbekistan’s goal is to grow the volume of the country’s IT exports to $1bn by 2028, a 25-fold increase from last year. The target for 2022 is $100mn, more than double the total from 2021 and 50-times what IT exports earned in the first year in 2017. At $1bn, Uzbekistan’s IT exports would surpass the value of agricultural goods and textiles. In short, Uzbekistan is aiming to turn knowledge-based IT exports into the biggest economic driver in the country after gold.

A shift from $6.2mn in IT exports in 2019 to the targeted $1bn in less than a decade would be nothing short of a revolution reducing the country’s dependence on physical trade routes and lifting more of the population in this low-income country out of poverty. The trip to California throws the opportunity of technology into sharp focus. California, roughly the same physical size as Uzbekistan, has a GDP of more than $3 trillion. In 2020, Uzbekistan’s was $57.7bn, according to World Bank Data. California’s GDP per capita is $85,546 (2021), compared with $1,900 in Uzbekistan.

In California, the trade delegation has fixed meetings with executives from several companies including Apple, Google, Meta, PayPal and Coursera in Silicon Valley, according to the minister. The initial meetings in New York and Washington will deal with more general political questions as Uzbekistan’s geopolitical importance has been boosted by Russia’s war in Ukraine and the Taliban take over in Afghanistan.

While the growth targets may seem ambitious from Uzbekistan’s point of view, reaching the goal of $1bn would require securing only a tiny fraction of the US market. The US accounts for the lion’s share of the global IT outsourcing market, expected to be worth as much as $682.3bn by 2027 – up from just over $526bn last year, according to Mordor Intelligence. About 80% of Uzbekistan’s IT exports currently go to the US

“One billion within a few years? Yeah, it's pretty doable and we are very confident about it,’’ Ruzmatov, who has landed dozens of clients in the US in just the last few years, said in the interview. “And if business is confident and the government is supportive, I think we have everything, everything on hand to do it and to make it happen.”

The US appears to like what it’s seeing in Uzbekistan. Daniel Rosenblum, the US ambassador to the country, visited Tashkent’s IT Park this month to extend his support and Minister Shermatov’s trade delegation has meetings in Washington with the State Department, USAID and on Capitol Hill. The US is keen to counter Russian influence in the former Soviet space. Uzbekistan is – arguably – the only country in the region whose foreign policy is not dictated by Moscow.

And Uzbekistan has an in to the US market via the Nasdaq listed EPAM software company. Originally founded in Belarus, EPAM was instrumental in setting up the Minsk High Tech Park that catalysed a boom in that country’s IT outsourcing business. EPAM has long since moved its head office to New York, but the largest part of its engineers were still based in Minsk. However, since the mass protests against President Alexander Lukashenko broke out last year, now followed by war, EPAM has increased the number of its employees working in Tashkent from 300 to 3,000.

Raising the profile

Shermatov, a Yale graduate, says his job is to raise awareness – noting that when he got his Master’s Degree in 2000, he was always taken aback at how few people had even heard of his country. Awareness of the new Uzbekistan is still a hurdle 22 years on. Despite being named “Country of the Year” by The Economist in 2019, with an aggressive reform agenda, Central Asia’s most populous nation needs to do more to raise its profile.

In the 'Doing Business 2020' study by the World Bank, Uzbekistan was ranked among the world’s most improved economies for ease of doing business – rising from 141st in 2015 to 69th. The macroeconomic backdrop is also improving. In 2021, the economy grew at a record 7.4%, despite COVID-19 and global economic turbulence. Even during the height of the pandemic in 2020, Uzbekistan’s economy grew 1.6%, one of the few countries to show any increase.

Uzbekistan’s economic reforms, including price and currency liberalisation, are also helping the country make friends. The European Bank for Reconstruction and Development recently resumed lending there after a decade-long hiatus. And it’s not just the EBRD. The World Bank, the IMF and the Asian Development Bank (ADB) are all providing financing to support Uzbekistan’s reforms.

Economically speaking, it’s hard to overstate the importance of IT for the country. The average monthly wage in Uzbekistan is still less than $200 a month. To achieve the country’s aim of halving poverty and reaching upper-middle-income status by 2030, Uzbekistan needs more and better jobs, according to the World Bank.

Are a few short years of reforms and rebuilding enough to convince US executives to make deals with a country that few of them can pick out on a map?

“We have qualified specialists, we have experience and we are ready with the infrastructure as well,” said Minister Shermatov. “Before, it was always through the other countries, Poland, Belarus, Russia, others; now it is time to go and work directly with US companies because we are ready.”