Tamerlane #37: June 7-14
OTP Bank completes purchase of 73% of Ipoteka Bank, Mirziyoyev visits Italy and agrees to strategic partnership, Uzum merges with payments processor Click, Rosatom ready to build Uzbek nuclear plant
Top News
OTP Bank completed its acquisition of a 73.41% stake in Ipoteka Bank, Uzbekistan’s fifth largest bank, for a reported USD 324 million in a historic privatization deal. On June 13, the Hungarian bank finalized the purchase of 75% of the state’s shares in Ipoteka Bank after agreeing to terms in December 2022, and will purchase the remaining 25% from the Ministry of Economy and Finance in three years. The International Finance Corporation (IFC) supported the transaction and will continue providing ongoing financing and acting as a consultant for the Uzbek bank. OTP Bank is the first foreign bank to be involved in the privatization of Uzbekistan’s banking sector, and the long-awaited deal is a major victory for the government’s privatization program and its ambitious plans to decrease the state’s dominant role in the economy. In its first investment in Central Asia, OTP Bank acquired an Uzbek bank with over 1.5 million clients, a 7.6% market share by assets, and a leading position in the country’s mortgage lending market.
From June 7-9, President Shavkat Mirziyoyev paid an official visit to Italy, meeting with President Sergio Mattarella, Prime Minister Giorgia Meloni, and Italian business leaders and signing a declaration of strategic partnership for the two countries. The Uzbek president’s meeting with Sergio Mattarella focused on strengthening cultural, educational, and tourism ties as well as pressing international issues such as the humanitarian and economic crisis in Afghanistan. On June 8, Mirziyoyev met with Prime Minister Giorgia Meloni and signed a joint declaration establishing a strategic partnership between Uzbekistan and Italy in addition to several intergovernmental agreements and memorandums of agreement on cultural and diplomatic affairs. President Mirziyoyev then attended a meeting in Milan with representatives from Italy’s major businesses including Eni, Enel, Pirelli, Danieli, Saipem, and others, where the parties discussed the Uzbek government’s reform program and opportunities for Italian businesses and investors in Uzbekistan and Central Asia. The Uzbek president instructed the government to set out a roadmap for engagement with Italian businesses and facilitate their involvement in major investment projects in Uzbekistan, including a proposal to increase the production capacity of Uzbek Steel (Uzmetkombinat). Before Mirziyoyev’s arrival, the Uzbek-Italian business forum on June 6 brought together more than 200 business leaders and government officials and produced agreements and contracts totaling more than EUR 9 billion in the energy, oil and gas, metallurgy, chemicals, textiles, and agricultural sectors. Economic ties between Uzbekistan and Italy have been growing in recent years, with bilateral trade turnover reaching nearly USD 380 million.
Uzum, a digital services ecosystem that includes Uzbekistan’s largest private bank Kapitalbank, announced a merger with payments company Click as consolidation in the fintech space continues shows no signs of slowing. While the full details of the deal were not disclosed, Click’s shareholders will acquire a minority stake in Uzum, which plans to transform the payments processor into a “superapp” and entry point into the Uzum digital services ecosystem. According to Uzum, Click processed 37 million transactions in May and its app has 9 million downloads, and the new combined userbase will total more than 13 million. Click will continue rolling out its current projects, which include lending offerings, integration with government services, tourism applications, and others, while providing Uzum users new payment options in its digital marketplaces. The merger of Uzum and Click, along with TBC Group’s completed acquisition of Payme, has established two clear frontrunners in Uzbekistan’s burgeoning fintech and digital services space, and more consolidation is likely on the horizon.
Russia’s Rosatom is reportedly preparing to sign a contract “in the near future” to build Uzbekistan’s first nuclear power plant, according to Director for Capital Investments Gennady Sakharov. Rosatom plans to build two units with a total capacity of 1,200 MW in Uzbekistan. Sakharov noted that the company is just waiting for Uzbek officials to sign the contract and is ready to begin the project as soon as possible. The controversial nuclear power plant project comes amid efforts by Western countries to sanction Russia’s civil nuclear energy sector, and recently Rasul Kusherbaev, a government energy adviser and former lawmaker, called the plans “disastrous” and labeled Russia “a bully, an aggressor, [and] a blackmailer.”
Local Markets
On June 12, the Republican Stock Exchange Toshkent listed shares of state-owned Xalq Bank under the ticker XKBK in preparation for the bank’s partial privatization under the “people’s IPO” framework. Xalq Bank is among 40 state-owned enterprises set to offer shares through the “people’s IPO” program, which will be conducted through the “E-Auction” platform before trading on the RSE Toshkent. State-owned Xalq Bank will offer up to 2% of shares through its IPO.
UzVC, Uzbekistan’s national venture capital fund, invested in Pastoral, an agro-technology company offering precision regenerative livestock farming services developed in partnership with the United Nations Development Programme. Pastoral, which is owned by Karakoram Innovation, an innovation consultancy and venture incubator, sells affordable solar-powered animal tracking sensors and delivers real-time livestock feeding and location information via the Telegram app. The company also helps farmers earn carbon credits from sustainable farming that can be sold to Western buyers.
Gazeta.uz published an interesting column by local broker Avesta’s Karen Srapionov summarizing why he believes Uzbek companies do not go public, and why local IPOs have not produced successful results. Reflecting on TBC Group’s recent full acquisition of Payme, Srapionov identified several key reasons why private companies do not go to public markets, including lack of guarantees of private property; insufficient protections for minority shareholders; lack of government enforcement of regulations; unwillingness of the state and companies to accept frontier market discounts on assets; an illogical, complex, and constantly shifting regulatory landscape; underdeveloped market infrastructure (including a ban on nominal owners); strict account opening requirements for foreigners; and many others.
Macroeconomics
At a meeting of prime ministers from the Commonwealth of Independent States (CIS), Uzbekistan signed an agreement on free trade and services that eliminates restrictions and opens market access to the finance, transportation, construction, consulting, education, healthcare, and tourism sectors. The agreement, which has been under development for 10 years, creates the conditions for investors from other CIS countries to receive the same treatment as local and foreign businesspeople, although Uzbekistan carved out an exemption allowing it to enact legislative restrictions on investments in nuclear energy, electricity production, and mechanical engineering. CIS officials claim the agreement in the short term will increase trade turnover among CIS countries by 1.1% and services by 8%.
SACE, Italy’s export financing agency, and Thermal Power Plants JSC, announced an agreement to launch four major projects worth EUR 2.2 billion to modernize Uzbekistan’s electricity infrastructure. The agreements, signed at the Uzbek-Italian business forum, include plans to revamp and increase the capacity of the Tashkent thermal power plant to 990 MW and build gas piston units and hot water boilers in six districts in the capital. SACE’s financing conditions include the requirement to employ Italian businesses as general contractors in the projects.
The US Congressional Research Service published a report, “Central Asia: Implications of Russia’s War in Ukraine,” which highlighted opportunities for US engagement in the region and encouraged congressional leaders to expand economic and trade ties with Central Asian countries. The report, prepared for Members and Committees of Congress, focused on several key issues for Central Asia, including trade, energy, minerals, regional connectivity, security cooperation, and media freedom while detailing the implications of Russia and China’s influence in the region.
From May to June, Uzbekistan’s gold and foreign reserves fell nearly 2.5% to USD 34.4 billion, with physical gold reserves decreasing from 12.2 to 11.9 million ounces, totaling USD 23.3 billion, and foreign currencies recording a slight increase to USD 10.1 billion. From March to April, the Central Bank of Uzbekistan reported an increase in reserve holdings of almost USD 1.5 billion as gold prices topped USD 2,000 per ounce, although the CBU’s physical gold reserves have steadily fallen from 12.7 million ounces in January 2023.
The Central Bank of Uzbekistan issued warnings to 17 commercial banks and two credit institutions for violations including sanctions risk compliance, charging excessive fees, and transparency.
The United Kingdom issued more than 6,000 visas to seasonal workers from Uzbekistan and Kyrgyzstan in 2022, accounting for nearly a quarter of the total, with Uzbekistan emerging as the UK’s second largest source of seasonal labor behind Ukraine. The UK’s Gangmasters and Labour Abuse Authority (GLAA), a UK government agency that provides oversight and investigates labor exploitation in the agricultural sector, included the visa statistics in announcement that it had signed agreements with the governments of Kyrgyzstan and Uzbekistan to strengthen workers’ protections and extend oversight over recruitment agencies. GLAA’s director of strategy noted that he expected the number of seasonal workers arriving in the UK from Central Asia to continue increasing in the coming years.
Business
China Energy Engineering Corp., one of China’s leading energy and mining companies, reportedly plans to build the largest cement plant in Uzbekistan as well as two solar power plants in the Kashkadaryo and Bukhara regions. The chairman of China Energy, Song Hailang, met with Minister of Investment, Industry, and Trade Laziz Kudratov to discuss proposals for the two solar power plants, with a combined capacity of 1,000 MW, and a new cement plant in the Samarkand region with an annual production capacity of three million tons. The two parties hope to commission the projects by the end of 2023.
According to the Financial Times, after its takeover by UBS, Swiss bank Credit Suisse is barred from taking on new clients in “high-risk countries” including Uzbekistan. UBS is reportedly seeking to limit money laundering, bribery, and corruption risks at the scandal plagued Credit Suisse, and Uzbekistan is included in a list of “high-risk countries” that also includes other Central Asian countries Tajikistan, Turkmenistan, and Kyrgyzstan, as well as Afghanistan, Belarus, Myanmar, South Sudan, Venezuela, Yemen, Zimbabwe, and others. Credit Suisse was previously active in Uzbek projects, including supporting financing for UzAuto Motors and Uzbekneftegaz’s USD 2.3 billion gas-to-liquids facility, and was linked to a major scandal involving Uzbek government officials and the Orient Group.
From June 5-7, The National Bank of Uzbekistan (NBU) held a non-deal roadshow with institutional investors from Asia and Europe to gauge interest in a bond issue in Chinese yuan. NBU representatives met with a wide range of potential investors, including BNP Paribas Asset Management, Aberdeen Holdings Asset Management, Invesco, GaoTeng Global Asset Management, China Investment Corporation, HPS Investment Partners, Haitong Asset Management, and many others to discuss the bank’s transformations, Uzbekistan’s banking sector, the government reform program, and the country’s macroeconomic outlook. A potential yuan bond issue by the NBU would set a benchmark for future Uzbek issuers and potentially open up new financing opportunities for companies unwilling or unable to borrow in dollars.
Over the past week, Tashkent has suffered from rolling blackouts as state-owned Regional Electrical Power Networks carried out repairs on the capital’s electrical grid. The power outages affected six of Tashkent’s districts and were compounded by overheating and power line failures as the capital experienced a heat wave and increased demand for electricity.
Egypt’s Orascom is reportedly planning on building a USD 50 million industrial zone for the production of paint and construction chemicals in the Navoi region. The plans were announced by the khokim (governor) of the Navoi region Normat Tursunov and come after Orascom representatives met with President Shavkat Mirziyoyev in Cairo in February and held talks with Minister of Investment, Industry, and Trade Laziz Kudratov.
Ski resorts in Uzbekistan, Kazakhstan, and Russia signed an agreement to establish the Eurasian Alliance of Mountain Resorts and a common interstate route for tourists. At an event in Sochi, representatives from Uzbekistan’s Amirsoy, Kazakhstan’s Shymbulak, and Russia’s Rosa Khutor agreed to program to jointly develop the countries’ mountain resorts, promote domestic tourism, and share best practices. The Eurasian Alliance of Mountain Resorts will be headquartered in Almaty and led by Kazakh journalist Andrei Kukushkin.
Government & Politics
At a meeting of prime ministers of CIS countries in Sochi on June 8, Uzbek Prime Minister Abdulla Aripov called for the creation of a transportation corridor from Belarus to Pakistan. Prime Minister Aripov proposed the development project at a meeting with Russian Prime Minister Mikhail Mishustin, which would link Belarus, Russia, Kazakhstan, Uzbekistan, Afghanistan, and Pakistan through a multimodal transportation corridor and open up new opportunities for trade and cargo shipping. While in Sochi, Aripov also attended a meeting of the Eurasian Economic Union’s (EAEU) Intergovernmental Council, where he repeated calls for the EAEU to support the construction of the China-Kyrgyzstan-Uzbekistan and Uzbekistan-Afghanistan-Pakistan railway projects.
President Shavkat Mirziyoyev kicked off his reelection campaign for president in Nukus on June 12, where he declared, “I strive to be a worthy son of both Uzbekistan and Karakalpakstan.” Amid the backdrop of controversial ongoing trials and appeals of those convicted of inciting violence in the protests in Nukus in July 2022, which were violently put down by Uzbek authorities, Mirziyoyev pledged to increase funding for mahallas (communities) through additional land and property taxes and introduce school bus transportation for children in the region’s remote villages.
Uzbekistan has joined the Organization for Economic Cooperation and Development’s (OECD) base erosion and profit shifting inclusive framework, an international effort to crack down on tax evasion and improve transparency of tax rules. The OECD’s two pillar plan calls for a fairer distribution of tax revenues from multinational enterprises and the introduction of a 15% global minimum tax rate. Uzbekistan joins 142 other countries, including the only other Central Asian country, Kazakhstan, as members of the OECD’s inclusive framework on base erosion and profit shifting.
During his official visit to Italy, President Shakvat Mirziyoyev met with the head of the United Nation’s Food and Agriculture Organization (FAO) Qu Dongyu to expand cooperation, discuss food security, and develop a new 20230 Cooperation Program. The FAO’s portfolio of projects in Uzbekistan has tripled over the past few years and includes priority areas such as water use, animal husbandry, agro-industrial enterprises, forestry, ecology, and others.
The Uzbek government will allocate USD 100 million in financing as part of an overhaul of environmental regulations that will require industrial enterprises to modernize air, water, and gas treatment systems to reduce emissions. The legislation also requires companies to install emissions monitoring substations, which will be backed by subsidized government loans, and pay pollution compensation fees for three years.