Successfully investing in Uzbekistan

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last updated on 27 May 2020 | reading time approx. 6 minutes

 

 

 

How do you assess the current economic situation in Uzbekistan?

Uzbekistan is gradually integrating into the world economy and is now on the path of transformation into a developed market economy. There is an active dialogue on the country's accession to the world trade organization. In order to create more favorable conditions for mutual trade and ease the foreign trade regime, negotiations are under way on agreement on enhanced partnership and cooperation with the European Union.

 

Almost a third of the GDP is generated in the industrial sector. More than 60 billion cubic meters of natural gas, 750 thousand tons of oil, 2 million tons of gas condensate, and 4 million tons of coal are produced annually. Non-ferrous metallurgy in Uzbekistan can rely on a developed raw material base for the main non-ferrous metals (copper, zinc, molybdenum, tungsten, platinum group metals) and precious metals (gold, silver), which allows to minimize risks for the supply of raw materials.

 

From 2017 to the present day, Uzbekistan has been undergoing full-scale reforms aimed at creating a favorable climate for business development in the country, reducing unfair competition, increasing productivity and achieving long-term sustainable growth. According to the World Bank, the progress of reforms in Uzbekistan is impressive. It is expected that by 2021 the economic growth will reach 6 per cent if market reforms are maintained. Measures to liberalize the economy have removed some significant restrictions on business, such as the lack of foreign currency, high import duties and higher tax rates.

 

The Minister of Finance of Uzbekistan stated last time that in 2017 currency liberalization lifted restrictions in currency market. In this regard, everyone has free access to foreign currency, and since 2019, foreign companies can withdraw their profits from the country without any problems. However, in practice, there are still some restrictions on the movement of capital in the foreign exchange market.

 

At the moment, Uzbekistan has a high level of inflation. According to the Ministry of economy and industry of the Republic of Uzbekistan the main reasons for maintaining the trend of high inflation in 2019 were:

  • liberalization of regulated prices (3.6 per cent);
  • devaluation of the national currency exchange rate (3.7 per cent);
  • growth of credit investment in the economy;
  • deficit of the state budget and wages (4.1 per cent);
  • other factors (1.7 per cent).
   

How would you describe the investment climate in Uzbekistan? Which sectors offer the largest potential?

With the arrival of a new President and changes in domestic policy, Uzbekistan has opened its market and offers extensive investment opportunities. Taking into account the ongoing reforms, the investment climate in the country is rapidly improving, which attracts new investors. In general, Uzbekistan has the advantage of macroeconomic stability, which, combined with current reforms, opens up opportunities in various sectors of the economy. The result is an annual increase in investment. The previous year of 2019 was a year of active investment and social development in the country. By the end of 2019, the volume of investments amounted to the equivalent of about 21 bio. US-Dollar with a growth rate of 128.6 per cent.

 

In 2019, the Law “On investments and investment activities” was adopted. The adoption of the Law was provided for by the Presidential Degree “On measures to improve the investment climate in the Republic of Uzbekistan” dated 1 August 2018.

 

The Law combines the main provisions of the laws “On foreign investment”, “On investment activities”, and “On guarantees and measures to protect the rights of foreign investors”, and classified investments into three categories: capital investment, financial investment, and social investment.

 

In accordance with the new Law, a “One window system” is prescribed, allowing investors to reduce their communication with government authorities. According to this Law and the new system, the Ministry of investment and foreign trade and its territorial bodies are responsible for the communication with investors. The Ministry of Investment and Foreign Trade should provide consulting services and assistance for investors in the preparation and submission of documents. A business ombudsman is responsible for coordinating inspections of business entities and monitoring the legality of their conduct by regulatory authorities.

 

Key factors that makes the Uzbekistan market attractive for foreign investors are:

  • wealth of natural resources (gas, gold, cotton, hydroelectric resource base); 
  • socio-political, macroeconomic and financial stability;
  • relatively low level of public debt and good foreign exchange reserves;
  • an ambitious public investment programs;
  • scope of the domestic market with a population of 33 million;
  • favorable geographical location between China and Europe.

 

The predominant inflow of investments takes place in the extractive industry (crude oil and natural gas, extraction of metal ores), as well as in consumer goods manufacturing and the construction materials industry.

 

In contrast, investments in areas such as mechanical engineering, electrical engineering, metallurgy, chemical and the pharmaceutical industry were relatively low. The investment potential of the country's traditional industries such as oil and gas, mining, agriculture and textile production is growing and can be expanded.

 

At the same time, global trends such as the need for digital transformation, rising incomes and the current demographic trajectory create significant development potential in relatively new sectors for Uzbekistan: the financial and banking sector, the construction industry and telecommunications. Demand for financial instruments such as mortgage, consumer and other types of loans cannot be fully satisfied yet. The growth of the banking sector is likely to exceed the pace of general economic growth.

 

For successful cooperation and attracting investors, it is envisaged to create further favorable framework conditions. A State Fund for supporting the development of entrepreneurship has been established to provide financial support to Uzbek companies. Thanks to the measures taken in recent years, Uzbekistan has risen from 146th to 76th place in the World Bank’s “Doing Business” ranking among 190 countries.


What challenges do German companies face during their business ventures into Uzbekistan?

Uzbekistan is a country, in which since 2017 reforms have been implemented at the fastest pace. The speed of changes in the regulatory sphere is remarkable. In average, for example, in 2017, the President signed a significant number of presidential decrees every two days. On the one hand, this dynamic created new business opportunities and provided rapid positive changes, but on the other hand, it created problems for entrepreneurs in the form of legal uncertainty and possible cancellation of initially visible advantages. In addition, the rapid pace of changes may lead to the risk that some new laws are not sufficiently detailed and will not pass the necessary cross-checking and approval, which may lead to contradictions and misinterpretation.

 

It should be noted that although the country has improved its position in international ratings, the economy still remains under state control. There is still uncertainty in tax and customs regulation in part. In early 2019, by merging the State investment Committee and the Ministry of foreign trade, a (new) Ministry of investment and foreign trade was created, which will be responsible for implementing the unified state investment policy.

 

A large number of gaps and lack of legal development in the area of protecting intellectual property characterises legislation in the country. Thus, companies are experiencing difficulties in protecting their intellectual property rights in Uzbekistan.

 

President Mirziyoyev announced in front of the elected parliament extensive reforms to modernize and open up the country. What impact will this have on the economy?

In contrast to the outdated practice of an unofficial centralized approval of large investment projects, the principle of a free market economy requires the possibility of free investment activity. The fact that such a necessary decentralization of the coordination of investments has already taken place shows, among other things. the extended powers of local authorities and municipalities to grant investment grants or other subsidies.

 

Foreign investors now have various options to invest in areas that have been government-controlled in the past. Those are the mining industry, air and rail transport as well as energy production and energy transport. The banking and financial areas is gradually opening up to foreign banks. More flexible conditions have been created for attracting highly qualified foreign specialists, not only for the private sector, but also for government sector.

 

High potential, favorable conditions for foreign investment and dynamic development of economic sectors, in general, increase the attractiveness of Uzbekistan not only as a good market for sales of modern mechanical engineering products, but also as a new emergency market for investors. Therefore, we believe that reforms will have a positive impact on the economy of Uzbekistan, whose growth is projected by international financial organizations, despite the economic situation in the world.


In your opinion, how will Uzbekistan develop?

The investment climate in Uzbekistan is likely to continue to improve. The country continues to open its borders and seeks economic cooperation with many countries in the world. If the willingness and readiness to change retains, the country will be able to offer investors interesting opportunities for long-term investments. The ADB forecasts growth of Uzbekistan's gross domestic product this year at 4.7 per cent (due to the spread of coronavirus), and in 2021 – up to 5.8 per cent, as the reforms will stimulate growth in agricultural, industrial and service sectors. The government is expected to continue to encourage investors’ participation in the transport, education and health sectors.

 

On 22 August 2018, the Uzbek President Shavkat Mirziyoyev signed a decree on measures to ensure the openness of budget data and active participation of citizens in the budget process. According to this decree, starting from 2020, the state budget and trust funds must be prepared in accordance with international accounting standards. The Ministry of Finance of the Republic of Uzbekistan has been instructed to submit an action plan to harmonize budgeting with international public financial reporting standards in public sector (IPSAS) for 2019-20.

 

In addition, almost all commercial banks have already fully aligned their accounting with IFRS. Other legal entities can also voluntarily apply IFRS, although it is expected that an obligation will follow soon. Accordingly, it is expected that resulting transparency of governmental activities and compliance with international accounting standards will open new opportunities for foreign investors.

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Michael Quiring

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Dr. Andreas Knaul, LL.M., d.i.a.p. (E.N.A.)

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+7 495 9335 121

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