Tamerlane #42: July 19-26
Foreign trade turnover hit USD 29 billion in 1H 2023, Uzbek banks suspend work with sanctioned Russian Unistream, Fitch Ratings reassesses state support for banks, gas exports to China up in June
Top News
In the first six months of 2023, Uzbekistan’s foreign trade turnover reached USD 29.2 billion, a 19.4% yoy increase driven by USD 12.1 billion in exports (up 23%) and imports of USD 17 billion (up 17%). China remained Uzbekistan’s largest trade partner with USD 5.3 billion in total turnover and USD 4.2 billion in Chinese imports, followed by Russia (USD 4.4 billion), Kazakhstan (USD 2.2 billion), Turkey (USD 1.5 billion), and South Korea (USD 1 billion). CIS countries accounted for 33% of Uzbekistan’s total foreign trade turnover, down from the same period in 2022 (35.7%) and 2021 (37%). Russia was the top export destination for Uzbek goods (10.5% of total exports), followed by China (8.6%) and Kazakhstan (5.8%). Uzbekistan exported more than USD 4.4 billion worth of gold and USD 2.1 billion of industrial goods. From January-June 2023, textile exports, which accounted for 13.3% of total exports, fell 4.6% yoy to USD 1.6 billion. China was the top exporter to Uzbekistan (24.9% of total imports), followed by Russia (18.4%) and Kazakhstan (8.8%). Imports of food products topped USD 1.7 billion, driven primarily by grain imports (USD 612 million) while imports of oil and gas reached USD 925.9 million. Other major categories of imports included automobiles (USD 1.8 billion), iron and steel (USD 1.1 billion), medical and pharmaceutical products (USD 704 million), and plastics (USD 410 million).
Several Uzbek banks suspended money transfers with Russia’s Unistream Bank after it was included on the US Treasury Department’s Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals (SDN) list, which also sanctioned Ural Mining and Metallurgical Company, whose beneficial owner is Daniyor Kamilov, son of Uzbekistan’s former Minister of Foreign Affairs Abdulaziz Kamilov. After the publication of OFAC’s SDN list, Ipoteka Bank and Xalq Bank announced they had suspended operations with Unistream, while Turonbank claimed transfers were temporarily not working. Several Uzbek banks suspended transfers with Unistream before OFAC’s announcement, including Kapitalbank, Ipak Yo’li Bank, Asaka Bank, and Asia Alliance Bank, although Aloqabank reportedly claimed payment transfers were still functioning and Agrobank continues to accept but not send transfers from Unistream. OFAC’s sanctions against Ural Mining and Metallurgical Company (UMMC) came after the company’s controlling beneficiaries, Russian oligarchs Iskander Makhmudov and Andrei Bokarev, divested from the company and its subsidiaries in March 2022. According to Forbes, Daniyor Kamilov was listed as UMMC’s beneficial owner in the company’s 2022 financial report. In January, the State Assets Management Agency announced it had sold the state’s stake in Kokand Biochemical to a company owned by Kamilov.
Fitch Ratings raised the possibility of a re-assessment of Uzbek state-owned banks that are not considered by the government to be “policy banks” as the privatization of the banking sector could lead to reduced capital support for non-policy banks. Since 2018, the Uzbek government has provided state-owned banks over UZS 32 trillion (USD 3.3 billion) in Tier 1 capital injections, but since 2020 and the beginning of the privatization program, the distributions have been uneven and primarily directed toward policy banks that will remain state-owned, including Agrobank, Xalq Bank, and Microcreditbank (the National Bank of Uzbekistan is also considered a policy bank but has not needed capital injections in the past three years). According to Fitch, non-policy banks have only received injections when their capital ratios approached regulatory minimums, and state assistance has been provided more promptly to policy banks. The state’s prioritization of support for systemically important banks, which has provided them more loss-absorption capacity, as well as the rating agency’s belief that the privatization of Uzbekistan’s banking will take longer than expected, could lead to differentiation in government support-driven ratings and result in negative rating actions for non-policy banks over the next 12-24 months. At the same time, in June Uzbek banks posted record profits of UZS 1.3 trillion (USD 112 million), with profits for the banking sector for first six months of 2023 up 34.5% yoy to UZS 39.7 trillion (USD 3.4 billion). Fitch Ratings also asserted that after President Shavkat Mirziyoyev’s reelection, the government’s commitment to improving governance and implementing economic reforms will be key drivers of Uzbekistan’s sovereign credit profile.
In June, Uzbekistan increased natural gas exports to China despite falling domestic production and an ongoing energy crisis, according to Chinese customs data. The value of Uzbekistan’s natural gas exports to China in June reached USD 85 million, compared with USD 76 million in May and USD 40 million in April, according to Chinese figures. For the first six months of 2023, gas exports to China totaled USD 204 million, half the amount reported for the same period in 2022. However, Uzbek and Chinese statistics on natural gas trade differ, at times significantly, and the State Statistics Agency reported total natural gas exports of USD 76.9 million in June and USD 278 million for the first half of 2023.
Local Markets
The State Assets Management Agency (UzSAMA) signed a memorandum of understanding with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), a member of the Islamic Development Bank Group, to facilitate cooperation including outreach to ICIEC’s members about the privatization of state assets in Uzbekistan. The MOU also envisions the ICIEC providing expertise and support to UzSAMA for the privatization process, corporate governance reforms for state-owned enterprises, and trade and investment facilitation.
On July 25, UzSAMA announced the start of privatization process for Angren Logistics Center JSC. UzSAMA is seeking to sell the state’s 100% stake in Angren Logistics Center, a cargo, customs, and logistics facility in the Tashkent region. Mosaic Financial was selected as consultant for the privatization, and submissions of expressions of interest for the asset are due by August 31.
The Foreign Investors Council under the President of the Republic of Uzbekistan published another Brief Investor Handbook on Privatizations, which provides an overview of the government’s privatization program, government ministries involved in the process, the regulatory framework, and policy development.
Macroeconomics
By presidential decree, a new fund to support industrial development through loans and equity investments will be established under the auspices of the Fund for Reconstruction and Development and will seek to raise USD 1 billion. The Industrial Development Fund (IDF) will seek to raise USD 1 billion, including USD 200 million from the Fund for Reconstruction and Development, to support lending for large-scale industrial projects, capital expenditures, market research projects, and hiring foreign specialists, as well as equity investments and foreign currency loans. In January 2019, the Fund for Reconstruction and Development founded the Uzbekistan Direct Investment Fund (UzDIF) with an initial authorized capital of USD 100 million that could increase to USD 1 billion over time.
In June, bank deposits fell by nearly UZS 2 trillion (USD 171 million), and since January businesses have withdrawn more than UZS 25 trillion (USD 2.1 billion) from Uzbek commercial banks, according to data published by the Central Bank of Uzbekistan. Deposits in Uzbek banks totaled UZS 202.9 trillion (USD 17.4 billion) as of July 1, down by UZS 13.8 trillion (USD 1.2 billion) since the beginning of the year, a dynamic driven primarily by outflows from legal entities, while deposits from individuals have actually increased by UZS 11.3 trillion (USD 970 million) in 2023.
The United Arab Emirates’ AMEA Power will build renewable energy plants in the Karakalpakstan, Bukhara, and Navoi regions, according to an announcement by the Ministry of Investment, Industry and Trade. Minister of Investment, Industry and Trade Laziz Kudratov met with AMEA Power’s chairman Hussein Al-Nowais and agreed on the joint implementation of three green energy projects, although specifics on the power plants have yet to be released. Al-Nowais, who is also a board member of Rotana Hotel Management Corporation, told the Minister of Culture and Tourism Ozodbek Nazarbekov that the hospitality company plans to open hotels in Tashkent, Samarkand, Bukhara, and Khiva.
Uzbekistan’s first high-tech landfill, a USD 16 million project that will be built with geomaterials and have no negative impact on groundwater, is under construction in the Tashkent region with support from the Asian Development Bank. The 25-hectare landfill, part of a project to improve waste management for Tashkent and its surrounding region, will also include pipe infrastructure that in the future will be able generate methane and produce electricity.
According to the Ministry of Digital Technologies, the total value of services exports from Uzbekistan’s IT Park reached USD 140 million in 2022, up from USD 17 million in 2020, while the number of residents in the facilities increased from 147 in 2019 to over 1,400. IT Park, which was founded in 2019 as a free economic zone for information technology companies and as a startup accelerator, has expanded rapidly in recent years, opening 12 branches across Uzbekistan and in Germany and the United States, and has benefitted from the relocation of foreign IT companies, particularly from Russia. In 2017, residents of IT Park produced UZS 179.9 billion (USD 15.4 million) worth of services; by the end of 2022, that number reached UZS 5.1 trillion (USD 437.7 million).
From January-June, the value of financial services in Uzbekistan totaled UZS 50 trillion (USD 4.3 billion), an increase of 22.7% yoy, with Tashkent accounting for more than UZS 27 trillion (USD 2.4 billion). The Statistics Agency reported financial services accounted for 23.5% of the total value of services for the period. In the Bukhara region, the value of financial services increased 38.5%.
Uzbekhydroenergo announced the first ever tender for a private-public partnership (PPP) to design and build five hydroelectric power plants with a total capacity of 46.6 MW. The state-owned hydro company selected several consultants to assist on the PPP tender process, which is scheduled for August.
Uzbekistan’s trade volume through the Georgian ports of Batumi and Poti increased 72% yoy to 864,000 tons in 2022, as the Ministry of Transportation signed a memorandum of understanding with the Georgian Ministry of Economy and Sustainable Development to increase transportation and logistics connections. Additionally, state-owned Uztekstilprom reportedly plans to build a logistics center in a free industrial zone in Poti.
Turkish Proyapı Mühendislik ve Müşavirlik A.Ş. will begin work on a feasibility study for the construction of a long-awaited toll highway between Tashkent and Samarkand supported by a USD 1.5 million grant from the European Bank for Reconstruction and Development (EBRD). The government developed plans to build a toll highway between Tashkent and Samarkand in 2018, but President Shavkat Mirziyoyev removed the head of the Committee for Roads Abdurakhmon Abduvaliev earlier in July after a lack of progress on the project and other plans for new roads connecting Tashkent to regional capitals.
Saudi ACWA Power installed the first wind turbine in the Bukhara region as part of a project that includes the construction of 158 turbines with a total capacity of 1 GW. The 100-meter-high wind turbine, built by the Chinese company Envision, was completed on July 25, and will be connected to Uzbekistan’s energy system through 260 kilometers of newly built high-voltage transmission lines that will bring power to the Bukhara, Karakalpakstan, Khorezm, and Navoi regions.
Business
S&P Global Ratings upgraded Kapitalbank’s long-term issuer credit rating to “B” from “B-” with Stable Outlook after the bank “materially strengthened” its business position and emerged as the top retail lender in Uzbekistan. The ratings agency pointed to Kapitalbank’s capture of a 14% market share of retail lending and 15% share of retail deposits, rapid growth of the bank’s loan portfolio, strong brand recognition, investments in digital innovation, and support from shareholders as drivers of the ratings upgrade. However, S&P Global Ratings noted that competition in the Uzbek banking sector is likely to increase significantly in the coming years, led by OTP Bank’s acquisition of Ipoteka Bank, and along with geopolitical risks stemming from sanctions against Russia, could limit opportunities for future growth. Kapitalbank is the seventh largest bank by total assets in Uzbekistan.
Turkish company Medex Textile is reportedly considering investing up to USD 25 million in the production of clothing under the Zara and Columbia brands in the Tashkent region. Representatives from the Tashkent region met with the head of Medex Textile Yavuz Orhan to discuss the development of a two-stage project, consisting of a knitted fabric production facility followed by a ready-made clothing factory in the city of Yangiyul with a total annual export potential of USD 20-30 million.
South Korean payment service BCard signed a memorandum of understanding with Uzbekistan’s state-owned payment processor HUMO to establish a payment transfer network between the two countries. Part of the government’s Digital Uzbekistan 2023 Strategy, the agreement, which was signed at the Central Bank of Uzbekistan in Tashkent, will help facilitate remittance and payment transfers using QR codes.
Bakhodir Alimov, former Deputy Chairman of the National Bank of Uzbekistan (NBU), was appointed Chairman of Asia Invest Bank, a Moscow-based subsidiary of the NBU established in 1996 to facilitate trade between Russia and Uzbekistan. Alimov was a well-known figure at the NBU who frequently met with foreign investors and officials.
Government & Politics
The head of the Hamburg Chamber of Commerce’s Committee on Eastern Europe Stefan Mirko proposed the creation of an Uzbek-German economic chamber in a meeting with the Uzbek Chamber of Commerce and Industry’s chairman Davron Vakhabov. The proposed organization would serve as a platform to develop trade and economic relation between Uzbekistan and Germany, and the two sides also agreed to send Uzbek specialists to Germany for advanced training. In the first six months of 2023, trade turnover between Uzbekistan and Germany increased 67% to USD 929 million, driven by USD 892 million in German exports.
Timothy Smart was appointed the United Kingdom’s Ambassador to Uzbekistan after the retirement of Tim Torlot and will arrive in Uzbekistan in early August. Smart previously served as the Head of the Foreign, Commonwealth & Development Office’s Eastern Mediterranean Department and was ambassador to Madagascar from 2012 to 2017.
The general plan for the “New Tashkent” urban development project will be prepared by leading global architecture firms Meinhardt, Foster + Partners, and OMA. The prominent architecture bureaus from Singapore, the United Kingdom and the Netherlands, respectively, will help developing planning for the “New Tashkent” project that will be built on 20,000 hectares of land and will accommodate up to 500,000 people.