Tamerlane #28: April 5-12
US sanctions Akhangarancement and Usmanov entities, new regulations for banks' authorized capital, IFIs forecasting 5%+ GDP growth through 2024, Masdar secures USD 396 mln financing for solar plants
Top News
The US Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned leading Uzbek cement producer Akhangarancement (Ohangaronsement) and its parent company Akkerman Cement CA LLC as part of a crackdown on entities controlled by Russian-Uzbek oligarch Alisher Usmanov. Akkerman Cement, which is owned by Usmanov’s USM Holdings, acquired a 98.6% in Akhangarancement in January 2022 for UZS 1.88 trillion (USD 164.4 million) from two offshore companies that purchased the asset in May 2021 after it was transferred to Sberbank by its former parent Eurocement to cover its debts to the Russian bank. Akhangarancemt is a top five cement producer in Uzbekistan. OFAC targeted Usmanov’s sprawling business empire, including 29 entities and 25 individuals (including five Uzbek citizens and relatives of Usmanov) such as Russian telecommunications company MegaFon and mining holding giant Metalloinvest, in an effort to combat Russian sanctions evasion. American persons are prohibited from dealing with entities and individuals added to OFAC’s Specially Designated Nationals (SDN) List, and Usmanov and his linked businesses are also subject to sanctions imposed by the United Kingdom.
On April 7, the Senate of the Oliy Majlis (parliament) approved amendments raising requirements for banks’ authorized capital from UZS 100 billion (USD 8.7 million) to UZS 500 billion (USD 43.7 million) by 2025. The authorized capital requirements included in the law “On Banks and Banking Activities” was set at UZS 100 billion in November 2019, with mandatory levels previously determined by the Central Bank of Uzbekistan (CBU). The Senate’s amendments to banking legislation will also partially lift restrictions on the purchase of shares in Uzbek banks by foreigners (since 2019 foreign investors have been allowed to purchase up to a 5% stake in banks without needing prior permission from the CBU) and simplify the acquisition of bank shares placed on international markets. Local broker Avesta identified at least seven banks that potentially would not meet the UZS 500 billion authorized capital threshold by the end of 2024.
The World Bank forecasts Uzbekistan’s GDP will grow 5.1% in 2023, 5.4% in 2024, and 5.8% in 2025, which would make it the fastest-growing economy in Europe and Central Asia, while the International Monetary Fund (IMF) predicts GDP to rise 5.3% in 2023 and 5.5% in 2024. The Asian Development Bank (ADB) expects 5% growth for Uzbekistan in 2023 and 2024. Despite the state’s “overwhelming control” of key input markets and constrained private sector development in Uzbekistan, the World Bank’s forecasts include the positive effects of the government’s reform programs and fiscal consolidation, nominal private sector credit growth (which bucks regional trends), revenues from gold and copper, and demand recovery for Uzbek exports to China. Meanwhile, the ADB points to moderating inflation and solid industrial growth (driven in part by demand from Russia) as well as sanctions risks for Uzbek exports, increased budget deficits, and anticipated growth in social spending as key drivers of its forecasts. Both the World Bank and IMF forecast Uzbekistan’s inflation will settle at 10% by 2024, nearly double the CBU’s estimates and levels established in the state budget. Bekhzod Jalilov, Senior Economist at the ADB Permanent Mission in Uzbekistan, told local publication Kurziv.uz that the 5% inflation target for 2024 was “unattainable” and he expected the CBU to shift its targeting period to 2026-2027.
UAE’s Masdar has secured USD 396.4 million in financing from the European Bank for Reconstruction and Development (USD 205), Asian Infrastructure and Investment Bank (USD 83.6 million), Asian Development Bank (USD 64.5 million), and the European Investment Bank (USD 43.3 million) for the construction of three solar power plants with a total capacity of almost 900 MW in the Surkhandaryo, Samarkand, and Jizzakh regions. The financing package, which includes loans and revolving facilities, will help support Uzbekistan’s National Strategy for the Transition to a Green Economy project to develop 7 GW of solar power capacity by 2030. When completed, the new solar power plants will provide electricity for over one million households. While the EBRD, ADB, and EIB have already supported multiple renewable energy projects across Uzbekistan, the financing package is the AIIB’s first renewable energy venture and second private sector commitment in Uzbekistan.
Local Markets
The main office of state-owned Aloqa Bank and a building owned by the Ministry of Digital Technology were privatized for a total of UZS 387 billion (USD 33.8 million) on the “E-Auction” platform and purchased by a company possibly linked to Samarkand entrepreneur Khurshid Turaev. The two buildings, located in central Tashkent, had been previously put up for auction but failed to find a buyer until Black Gold Industry News LLC offered 5% over asking price and ended the bidding after 10 minutes. Turaev, a prominent businessman and member of Uzbekistan’s ruling political party with a portfolio of factories and shopping centers in Samarkand, suggested in a deleted Instagram post he was behind the purchase of the buildings.
On April 7, the Republican Stock Exchange Toshkent announced the placement of a three-year, UZS 6 billion (USD 523,628) corporate bond issue with a 28% coupon by Imkon Finans. The bond issue, registered with the Ministry of Economy and Finance in February, is the third from microcredit organization Imkon Finans, although the RSE Toshkent delisted its first UZS 4 billion (USD 349,077) bond placement in January 2022.
The Presidential Administration announced plans to establish the USD 100 million Fund for Youth Initiatives of New Uzbekistan to support the development of “creative parks” in regions across the country on the model of Tashkent’s successful IT Park. The fund will reportedly offer preferential financing for youth business ideas and startups and will support training for young people to find jobs in the IT, advertising, marketing, design, and architecture sectors.
Macroeconomics
The Presidential Administration indicated that key construction materials, including wood, plywood, and windows, will be exempt from customs duties until 2025 to spur housing development and reduce construction costs. Additional measures include the ability for developers to use buildings under construction as collateral and receive loans for individual floors, fixed lending rates for individuals undertaking energy efficiency repairs, instructions for regional leaders to improve roads and infrastructure around new constructions, and mandatory engineering and geological surveys as a result of increased seismic activity in the region.
The Central Bank of Uzbekistan (CBU) added eight tonnes of gold in February, according to the World Gold Council, the third most among global central banks and behind only the People’s Bank of China (25 tonnes) and the Central Bank of Turkey (22 tonnes). The value of the CBU’s gold holdings increased USD 1.4 billion from March to April 2023, despite physical reserves falling from 12.6 to 12.3 million troy ounces over the same period.
According to Russian publication Kommersant, the vacancy rate of warehouses in Uzbekistan is only 4.5%, which along with other regional storage space shortages is complicating Russian efforts to increase the flow of parallel imports. Warehouse vacancy rates are nearly zero in Kazakhstan, Georgia, Armenia, Kyrgyzstan, and Tajikistan, and analysts believe Russian companies will need to purchase and develop built-to-suit warehouses in Central Asia and the Caucasus region.
Uzbekistan’s population is growing by nearly 2,000 people every day, according to the Statistics Agency. On April 1, Uzbekistan’s population reached 36.2 million, up more than 170,000 since the beginning of the year, with monthly population growth recorded at an average of 57,600 people.
President Shavkat Mirziyoyev approved a series of amendments on April 10 relaxing laws on consumer borrowing, including the abolition of restrictions on using loans to purchase imported goods. In 2018, President Mirziyoyev signed a decree ending requirements for consumers loans to be used only for locally produced goods and for the buyer to inform the seller they had received a loan to purchase the goods, but a series of amendments proposed by the Cabinet of Ministers and the Antimonopoly Committee delayed passage through the Oliy Majlis (parliament) until March 2023.
According to the Ministry of Energy, electricity generation increased 2.1% yoy to 20.1 billion kWh in Q1 2023. Electricity supplied to consumers increased 8.5% yoy to 16.7 billion kWh. In the previous four years, Uzbekistan has signed agreements to build 25 power plants with a total capacity of 11.9 GW that are expected to come online by 2026 as the country struggles to combat blackouts and modernize its aging electrical grid and energy infrastructure.
Business
On April 6, the Central Bank of Uzbekistan issued two licenses for payments services to Uzinfocom and Smart Marketplace, bringing the total number of payments operators in Uzbekistan to 51. Other payments organizations currently operating in Uzbekistan include popular services Click and Payme, state payments processor UZCARD, and the Uzbek Commodity Exchange (UzEx).
Fitch Ratings assigned SQB Insurance, a wholly owned subsidiary of Sanoat Qurilish Bank (Uzpromstroybank), an Insurer Financial Strength (IFS) rating of “BB-” with Stable Outlook. The ratings agency pointed to the insurance company’s moderate business profile (a top 13 non-life insurer in Uzbekistan), weak capital position after increased regulatory requirements, improving return-on-equity, and a high-risk investment portfolio dominated by local bank deposits as key drivers of the rating. SQB insurance was established by Sanoat Qurilish Bank in 2018 to add to its portfolio of financial services offerings.
Nike plans to open its flagship store in the Tashkent City Mall, which is still under construction, and join other American companies including Subway and Cinnabon in establishing a presence in Uzbekistan.
Government & Politics
On April 11, President Shavkat Mirziyoyev signed a law criminalizing domestic violence and introducing tougher punishments for sexual violence and harassment, according to Saida Mirziyoyeva, the president’s daughter and head of the Presidential Administration’s communications department. Activist groups, including the Nemolchi.uz project aimed at ending gender violence in Uzbekistan, have long called for the criminalization of domestic violence, and in 2022 joined a working group with government officials to draft amendments to Uzbek legislation. After drawing public attention to the issue and the Ministry of Justice’s attempts to stonewall progress, last month the Oliy Majlis adopted a bill that included many (but not all) of the activists’ recommendations.
In a visit to the regional capital Guliston, President Mirziyoyev announced the establishment of an “Advanced Innovations Zone” and several major initiatives and projects to develop the economy of the Syrdaryo region. The innovation zone, designed to foster projects in the biopharmaceuticals, construction materials, agriculture and food production, and electrical engineering sectors, will offer companies exemptions on land, property, income, and turnover taxes as well as customs duties for three years. Additionally, the government plans to invest in a USD 500 million joint Uzbek-Chinese biotechnology cluster and create a new university focused on oncology research and vaccine development. To finance new projects in the Sydaryo region, the creation of the Uzbek-Chinese Investment Fund is envisioned in partnership with the Chinese Silk Road Fund with an investment target of USD 1 billion.
Uzbekistan and Kyrgyzstan are reportedly beginning work to restore a Soviet era underground natural gas storage facility in the Uzbek enclave of Sokh, which is located within the territory of Kyrgyzstan. The Northern Sokh facility, which was built in 1976 and has a total storage capacity of 3 billion cubic meters of gas, has not been operational since the fall of the Soviet Union due to territorial disputes between Uzbekistan and Kyrgyzstan.
New Uzbek Ambassador to the United States Furqat Sidiqov met with the co-founder of the Cotton Campaign Bennett Freeman to discuss fair labor practices and the elimination of forced labor in Uzbekistan. In March of last year, the advocacy group Cotton Campaign ended its call for a global boycott of Uzbekistan’s cotton products over the government’s forced labor practices in the annual cotton harvest.
The Tashkent International Investment Forum, organized by the Ministry of Investment, Industry, and Trade, will be held in the capital from April 27-28. The event, which seeks to promote investment and business opportunities in Uzbekistan, will include speakers such as President Shavkat Mirziyoyev, the presidents of the EBRD and ADB, ministers from the United Arab Emirates, Kazakhstan, Pakistan, Kyrgyzstan, Tajikistan, and Latvia, as well as global business executives and leaders.