Tamerlane #41: July 12-19
Uzbekistan's GDP grew 5.6% in 1H 2023, Uzbekistan "actively cooperating" with US to avoid Russian sanctions fallout, soum hits historic low against US dollar, Mirziyoyev attends summit in Saudi Arabia
Top News
Uzbekistan’s GDP grew 5.6% yoy in the first half of 2023, according to preliminary data from the State Statistics Agency. Despite earlier warnings from the government that growth could slow to 3.5% as a result of harsh cold temperatures in January that caused energy shortages and temporarily ground the economy to a halt, Uzbekistan’s GDP has continued to record above 5% growth in 2023. The physical volume of industrial production increased 5.6% yoy in 1H 2023, which surpassed 1H 2022’s level of 5.4%, while agricultural production hit 3.8% in the first half of 2023, compared with 2.7% in 2022. However, several other sectors measured by the Statistics Agency lagged 2022’s growth rates, including foreign trade turnover (19.4%), construction (4.8% in 1H 2023), commercial services (12.3%), retail turnover (6.9%), and freight turnover (0.1%). Additionally, as of July 1, Uzbekistan’s population reached 36.4 million, up 2.2% yoy.
The United States is “actively cooperating” with Uzbekistan and Kazakhstan to avoid the impact of Russian sanctions on their economies, while The Washington Post reports the Biden administration is “preparing new economic measures” against Kyrgyzstan for helping Russia evade sanctions. Russian state-owned news agency reported that Assistant to the Secretary of State for South and Central Asian Affairs Elizabeth Horst, speaking at a US congressional hearing, stated that Central Asian countries, particularly Uzbekistan and Kazakhstan, are engaging with the United States to navigate the Western sanctions regime against Russia and seeking an “alternative” to pressures on the region exerted by Russia and China. These outreach efforts stand in contrast to Kyrgyzstan, which The Post reports could face secondary sanctions for facilitating the re-export of banned goods and technologies to Russia. The decision to impose economic penalties on Kyrgyzstan came after “months of fruitless visits” by US officials to Bishkek, although senior Kyrgyz officials claimed they had not received warnings from the American side about possible sanctions.
The Uzbek soum hit historic lows against the US dollar, with the Central Bank of Uzbekistan’s (CBU) official exchange rate crossing the 11,600 mark on July 19, despite its intervention of USD 2.4 billion in the foreign exchange market in Q2 2023. Since the start of 2023, the soum has lost more than 3% against the dollar, after depreciating by 3.9% in 2022, and has experienced increased volatility. On July 12, Uzbek commercial banks began selling dollars at UZS 11,650, an all-time high. The CBU’s intervention to support the soum was the largest since Q1 2022, when the US dollar rose sharply due to increased foreign currency demand in Uzbekistan after Russia’s invasion of Ukraine. In June, the CBU purchased eight tons of gold, its first acquisition since February after months of selling. Forbes Advisor ranked the Uzbek soum the seventh weakest global currency in 2023, behind the Iranian rial, Vietnamese dong, Laotian kip, Sierra Leonean leone, Indonesian rupiah, and Lebanese pound.
From July 18-19, President Shavkat Mirziyoyev visited Saudi Arabia for the “Central Asia-Cooperation Council for the Arab States of the Gulf,” where Saudi Crown Prince Mohammed bin Salman praised the opportunities for “new horizons” and increased cooperation between Central Asian and Gulf states. The summit in Jeddah, attended by leaders from Uzbekistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Saudi Arabia, Qatar, the United Arab Emirates, Kuwait, Oman, and Bahrain, focused on strengthening and developing political, trade, and economic ties between Central Asia and the Gulf, a process that has been underway for several years as Gulf companies and state-owned investment vehicles pour capital into projects across the region. In his speech at the summit, President Mirziyoyev emphasized the strong ties between Gulf countries and Central Asia, and made several proposals including creating a free trade zone with the Gulf, establishing a visa-free regime, enhancing trade and transport connectivity and logistics, encouraging Gulf investments in Central Asia through a Joint Investors Council, deepening cooperation in high-tech investments including AI and green energy, supporting the Trans-Afghan Railway project, and addressing climate change. Mirziyoyev also proposed hosting the next Central Asia-Gulf summit in Samarkand. On the sidelines of the summit, Mirziyoyev met with Crown Prince Mohammed bin Salman and traveled to Mecca, where he performed the Umrah.
Local Markets
On July 13, the State Assets Management Agency (UzSAMA) announced the start of privatization process for two ethyl alcohol producers - Andijon Biokimyo Zavodi and Biokimyo JSC. UzSAMA is seeking to sell the state’s 76% stake in Andijon Biokimyo, with share capital of UZS 24 billion (USD 2.1 million), and its 51% stake in Biokimyo JSC, with share capital of UZS 9.6 billion (USD 825,309). Abrau Capital was selected as consultant for both privatizations, and submissions of expressions of interest for the two assets are due by August 15.
The Committee for Competition Development and Protection of Consumer Rights has yet to give its approval for the merger of the Uzum Group and payment processor Click, as the regulator is waiting for the companies to submit required information and to hear from competitors. The head of the Competition Committee Shahrukh Sharakhmetov emphasized that the regulator’s approval was required to complete the merger and punishments would be issued if Uzum and Click failed to adhere to requirements. Sharakhmetov noted concerns about potential monopolization in the payment services sector given Uzum’s rapid growth and Click’s large userbase of over 11 million. Uzum and Click announced the merger on June 12.
The Central Securities Depository (CSD) published its 2022 Annual Report, which highlights the state-owned depository’s efforts to reform its own corporate governance and efforts to establish connections with Euroclear and Clearstream. The CSD’s report also noted that the state’s stake in the total amount of shares held fell by 1.2% to 80.7% in 2022, while the number of joint-stock companies with state participation fell 4.7% to 223. The CSD provided depository services to seven investment funds and two “privatization investment funds” in 2022.
Macroeconomics
Inflation expectations declined for the fifth consecutive month, according to the Central Bank of Uzbekistan’s June survey, although fears of a weakening soum emerged as the primary concern of Uzbeks. Inflation expectations for individuals and businesses both fell to 13.3%, although Tashkent residents recorded a higher outlook for price rises at 16.8%. Half of individual respondents and 55% of businesses mentioned concern about currency fluctuations in the CBU’s June survey, with fears about the soum’s devaluation among firms rising 11%. The CBU’s survey also marked the first inclusion of crop failure due to climate change as a potential driver of inflation, which was mentioned by 26% of respondents.
The Central Bank of Uzbekistan (CBU) published a statement in response to social media speculation about the country’s international reserves, asserting the central bank’s holdings were in line with international best practices and that the accumulation of gold and foreign currency reserves “is not the main goal.” The CBU’s gold and foreign currency reserves decreased by USD 650 million from June to July, although physical gold holdings increased from 11.9 to 12.1 million troy ounces.
The State Statistics Agency raised the levels of minimum consumer spending, which it uses to determine the poverty line Uzbekistan, to UZS 568,000 (USD 48) per month, or UZS 18,900 (USD 1.62) per day, an increase of 14% yoy. The new poverty line, which the Statistics Agency had been required to update in January, adjusts for inflation and rising food prices and includes the cost of daily food consumption, goods, and services.
Uzbekistan was the fourth largest producer of grapes in 2022, behind only China, Italy, and the US, according to a study by Uzbek Geostatistika. According to Geostatistika, Uzbek farmers grew 1.6 million tons of grapes in 2022 (the State Statistics Agency put the total at 1.7 million tons), significantly behind China’s 14.8 million tons but ahead of Russia’s production of 551,000 tons.
The Asian Development Bank (ADB) appointed Kanokpan Lao-Araya as the Country Director for Uzbekistan. Lao-Araya, who previously served as Country Director for Kyrgyzstan, joined the ADB in 2001 after working at the Thai Ministry of Finance and replaces Cindy Malvicini, who was appointed Deputy Director-General of the ADB’s South Asia Department.
Business
UzAuto Motors plans to launch complete knock-down assembly (CKD) of its Chevrolet Onix cars in Kazakhstan in Q1 2024 after starting semi-knocked down (SKD) assembly at the SaryarkaAvtoProm plant in Kostanay in May. The announcement came at a July 17 intergovernmental working group meeting chaired by Uzbek Deputy Prime Minister Jamshid Khodjaev and Kazakh Deputy Prime Minister Serik Zhumangarin and focused on joint projects, investments, and bilateral trade. Other joint projects discussed at the intergovernmental working group meeting included plans to manufacturer white goods under the Artel brand in Karaganda starting in 2025, new agricultural and textile production ventures, and measures to improve transportation infrastructure and lower tariff regimes to encourage increased bilateral trade turnover. The two parties also discussed the possibility of raising tariffs on the export of coal from Kazakhstan to Uzbekistan and lowering duties on Uzbekistan’s import of Kazakh flour.
The International Islamic Trade and Finance Corporation (ITFC) signed agreements with Hamkorbank and Qishloq Qurilish Bank to allocate USD 25 million for the development of small and medium-sized businesses in Uzbekistan. The ITFC will provide Hamkorbank USD 15 million through the Murabaha framework to support the bank’s private sector lending to small and medium-sized enterprises, while Qishloq Qurilish Bank will receive USD 10 million for trade financing, supporting women entrepreneurs, and lending to the agricultural sector.
Slovak metallurgical company OFZ plans to move nearly half of its production to Uzbekistan due to cheaper energy prices and lack of state support from the Slovak government and European Union. OFZ’s general director Branislav Klocok claimed electricity prices in Uzbekistan would be approximately five times cheaper than in Slovakia, with the company forced to lay off more than 200 workers due to high energy prices and lack of subsidies from the Slovak government, which did not take steps to reverse OFZ’s relocation to Uzbekistan. OFZ ultimately chose Uzbekistan as a destination for its blast furnaces after considering India, Egypt, Bosnia and Herzegovina, Brazil, and Azerbaijan, and could begin production as soon as October.
Fitch Ratings affirmed Qishloq Qurilish Bank’s “BB-” rating but downgraded the bank’s viability rating (VR) to “b-” due to the “material deterioration of the bank's asset quality.” The ratings agency pointed to an increase in impaired loans, weak capitalization, the risk of a slowdown in small and medium-sized business lending, and non-deposit funding and limited liquidity as key drivers for the VR downgrade for Qishloq Qurilish Bank (QQB). Fitch also noted that while QQB is scheduled for privatization by 2025, the sale could take longer than expected as the bank continues to transform its business model.
Chinese car company Great Wall Motor reportedly signed a strategic cooperation agreement with Uzbek ADM Jizzakh that will launch production of Haval brand cars in Uzbekistan as early as the end of 2023. The production capacity of the joint venture is expected to reach more than 10,000 cars annually by 2024, and Great Wall Motor expressed interest in further production localization in Uzbekistan.
Polish company Orion plans to invest up to EUR 6 million in production facilities for tobacco, coffee, and food products in Uzbekistan. Orion’s Boguslav Chernek met with Uzbekistan’s Ambassador to Poland Bakhrom Babaev in Warsaw to discuss the development of EUR 3 million tobacco production facility in the Surkhandaryo region, as well as a EUR 2 million coffee packaging center and EUR 1 million chocolate factory in Samarkand that could create up to 500 jobs.
Government & Politics
At his inauguration before the Oliy Majlis (parliament) on July 14, President Shavkat Mirziyoyev pledged to increase Uzbekistan’s GDP to USD 160 billion by 2030 and placed climate change and the transition to the “green” economy at the center of Uzbekistan’s transformation over the next decade. Mirziyoyev claimed the “mobilization” society would not end with the snap presidential elections and emphasized the need for the country to improve efficiency and attract investments in the face of growing disruptions to the global economy. The President noted his next term in office would be marked by significant transformations and emphasized his commitment to pursuing a market-based economy, while demanding leaders at all levels be judged by actions and results, not “beautiful speeches.” Mirziyoyev earlier instructed the Ministry of Investment, Industry, and Trade to develop a plan for USD 30 billion in new investments by the end of 2023, including the creation of “investment managers” for new investors that will report directly to the Minister.
Negotiations between Uzbekistan, Pakistan, and Afghanistan over the Trans-Afghan Railway project have reportedly reached the final stage as representatives from the three countries meet in Islamabad to hammer out the final details. The project, which is estimated to cost between USD 4.6 and 8.2 billion and is expected to be completed by 2027, would connect the cities of Termez, Mazar-i-Sharif, Kabul, and Peshawar by rail and reduce shipping time and costs between Uzbekistan and Pakistan by five days and 40%, respectively. The railway project, which has been discussed for several years and was interrupted by the Taliban’s seizure of power in Afghanistan in August 2021, would effectively create a new transportation corridor between Europe and Asia and would support both freight and passenger
The Uzbek government plans to introduce a registry of companies with exclusive rights from October 1 in an attempt to introduce transparency and anti-competitive measures compliance among Uzbekistan’s dominant state-owned enterprises and natural monopolies. The registry, which will be managed and monitored by the Committee for Competition Development and Consumer Rights Protection, will require companies with dominant market positions to publish information on contracts, tenders, and potential anti-competitive practices. However, despite laying out monitoring and compliance efforts, the decree does not include specific penalties for companies who abuse their dominant market position. The government will also start implementing its “We Are Listening to You” program, which will facilitate meetings between officials and entrepreneurs and foreign investors to develop proposals obstacles to competition in certain sectors.