Uzbeks Look for Eastern Promise

Uzbekistan's reputation in the West may have been tarnished by reports that its security forces gunned down hundreds of civilians in Andijan in May this year. But just as two western banks announced they were scaling down their lending operations because of human rights concerns, Tashkent found itself other economic partners who were less fussy about such matters.

China has joined Russia as one of the top two investors in the Uzbek economy and in May, China Exim Bank signed four credit agreements to underwrite forthcoming investments in Uzbekistan worth 300 million US dollars.

The lack of confidence shown by most international financial institutions has been a deterrent to potential investors. The International Monetary Fund suspended its loan arrangement nine years ago because of stalled macroeconomic reforms, and in July 2005, the European Bank for Reconstruction and Development said it would stop funding all projects directly linked with the Uzbek government because of the “indiscriminate use of force against civilians” in Andijan.

A month earlier, the Bank of New York closed off a credit line it granted to the National Bank of Uzbekistan. The latter move was ostensibly because the loan period had simply ended, but local analysts believe it also had a lot to do with the US government falling out with the Uzbeks.

While the country has seen some western investment in key sectors in past years, the bulk of the new money is now coming from Beijing and Moscow, rather than from the wider international business community. And there is a new focus on natural gas, of which Uzbekistan has significant reserves, and also on its more modest oil wealth.

The trend is likely to continue given the ongoing row over the Uzbek government's refusal to accede to international calls for an independent investigation into the May 13 violence in Andijan. On October 3, the European Union placed sanctions on Uzbekistan, which will have an impact inter alia on economic relations.

In contrast, the Russians and Chinese offered public support for the Uzbek leadership's position, using a July summit of the Shanghai Cooperation Organisation of which all three countries are members to press for an end to the United States military presence in Central Asia. Uzbekistan has asked the US military to vacate the Karshi-Khanabad airbase which it was using for flights to Afghanistan.

The decision by Moscow and Beijing to support the Uzbeks at a time when their reputation elsewhere is troubled was in part because neither country is as concerned as the West is about the human rights records of its partners. However, there may also be an element of self-interest – Tashkent's weakness strengthens their respective hands in negotiating on both regional security and economic deals.

Although it has considerable mineral wealth and agricultural capacity, Uzbekistan has failed to attract significant amounts of foreign direct investment, FDI. Measured per capita, the total amount of FDI received since independence is the lowest of any former Soviet state.

Local businesses and foreign investors face numerous problems that result from the overall lack of economic reform since Uzbekistan became independent from the Soviet Union in 1991. These include restrictions on banking transactions and trade, price controls on the domestic market, the retention of a large state-owned industrial sector with monopolies in many areas, obstructive bureaucracy and pervasive corruption.

Economic analysts in Uzbekistan say there needs to be a fundamental shift in government policies to create a friendlier environment for foreign investors.

An economics lecturer said investors will only come if the government cuts taxes and other levies imposed on them and ends the restrictions it places on exchanging currency and moving capital in and out of the country.

“If a businessman invests his money in the country and makes a profit, then if he's got any sense he will re-invest the capital in local businesses. So then he will not only be investing, but expanding production," said the lecturer. "Just like people, capital likes freedom.”

He added that if the government created a level playing field and reasonable incentives for local businessmen, foreign money would inevitably start coming in. "If we need foreign investors, we must create good conditions for domestic investors, and the foreigners will come by themselves,” he said.

According to the US State Department, there have been no large investments from the United States for the last five years. Before that, western investors focused on areas such as mineral extraction, agriculture and food processing. The Newmont mining company is working in Uzbekistan's important gold industry, Coca-Cola has three bottling plants and Case corporation makes farm machinery. Other major non-US investors in past years have included the South Korean car manufacturor Daewoo, the Swiss food products giant Nestle and the UK-based British American Tobacco.

Russian and Chinese firms appear less nervous about the difficulties of operating in this business environment – and they are not constrained by governments worried about the human rights dimension.

As western investors hold off, Russia and China are building up their presence.

More surprising than the Russian commercial interest in Uzbekistan is the arrival of Chinese oil companies. Until now Beijing’s principal interest appeared to be Kazakstan, where a common border offers both strategic and practical motives for investing in oil.

Uzbekistan oil and gas industry is somewhat in the shade compared with its Kazak and Turkmen neighbours. In fact it has quite respectable reserves, especially of gas, and it hardly lags behind Turkmenistan even though that country makes much of its potential.

It is hard to assess oil and gas reserve in Central Asia, as some governments cite figures for possible reserves that are excessively optimistic. The authoritative Oil and Gas Journal, quoted by the US Department of Energy's website, suggests the Uzbeks have just under 600 million barrels of proven oil reserves – slightly more than its estimate for Turkmenistan, which claims to be a major oil as well as gas state. While their current oil production is slightly lower than in Turkmenistan, the Uzbeks produce roughly the same amount of gas, again countering Turkmenistan's reputation which is based as much on its reserve calculations that no one else has seen, as on reality.

Most Uzbek gas is exported to neighbouring states, but Russia and by extension European markets are becoming increasingly important. China adds an altogether new dimension.

One employee of Uzbekneftegaz, the state's oil and gas agency, sees the arrival of Chinese investors not so much in regional strategic terms as simply part of Beijing’s natural desire to expand its interests abroad in order to satisfy the spiralling demand for fuel at home.

“In a global environment where there is more competition for access to dwindling energy resources, the rapid growth of the Chinese economy is forcing Beijing to engage in "oil diplomacy" more actively, said an employee of Uzbekneftegaz, the state's oil and gas agency. “China is looking to expand its presence on the world market in any way possible."

In July, Chinese deputy premier, Wu Yi signed a memorandum under which Sinopec, a major oil and gas firm, agreed to invest 106 million dollars over five years in oil prospecting and extraction. The firm is currently conducting geological surveys in the Andijan and Namangan regions, at a cost of 56 million dollars, and in the first phase of operations will invest another 50 million.

This comes in the wake of another major project in which the giant China National Petroleum Corporation, CNPC, will help develop oil and gas in the Aral Sea, the inland water which is slowly drying up. The other consortium members are Uzbekneftegaz, LUKOIL, Korea National Oil and Petronas from Malaysia. CNPC will start geological surveys early next year. No one is saying how much the deal is worth, although some local observers believe the investment will be in the region of 200-250 million dollars.

The CNPC deal was tied up with a partnership deal President Islam Karimov signed with the Chinese government when he visited Beijing in May, shortly after Andijan.

Two other Chinese oil firms are involved in lesser projects. PetroChina has announced plans to invest 47 million dollars next year to develop four fields in northwest Uzbekistan, while Dong Shan will spend 12 million dollars, also next year, on surveys in Andijan region.

Russia has retained its role as a traditional economic partner, and over the last year or so it has started capitalising on its position with a strong focus on oil and gas.

The oil firm LUKOIL has been in Uzbekistan, working on a production-sharing deal signed in June 2004 which will see gas coming on stream next year from three fields in the southwest. LUKOIL calculates that it will invest close to one billion dollars in the project.

Meanwhile, gas producer Gazprom is involved in plans to revitalise the Central Asian-Centre Pipeline which runs northwards from Turkmenistan via Uzbekistan and Kazakstan to Russia. Uzbekneftegaz is currently preparing a review of the state of the gas network so that the technical and economic planning can go ahead.

“Gazprom is currently in urgent need of Uzbek and Turkmen gas,” said the Uzbekneftegaz staffer. “The relative cheapness of local raw materials and the pipeline infrastructure put in place in the Soviet period make the local market very attractive for the Russians - especially bearing in mind Gazprom’s plans to increase gas exports to Europe.”

A December 2002 agreement with Gazprom provides for exports of eight billion cubic metres of natural gas in 2005, rising to 10 billion cubic metres a year from 2007.

Investing in pipeline reconstruction will give Gazprom considerable leverage “to dictate its own rules of the game to Tashkent in the local fuel and energy industry”, said the Uzbekneftegaz employee.

The same may well apply to other major Russian and Chinese investments. But for the moment, Uzbek leaders seem happy to place their hopes in its two powerful political and economic backers.

Names of Uzbekistan nationals quoted in this article have been withheld out of concern for their security.