Tamerlane #43: July 26-August 2
CBU holds policy rate at 14%, July inflation falls to 8.9%, government delays privatization/IPOs of major banks including SQB, US Senator proposes Jackson-Vanik exemption for Uzbekistan
** Editor’s note: the Tamerlane newsletter will be off for the remainder of August and will return in September. Additionally, given the time and effort that goes in to creating the weekly updates, as well as the positive reception the newsletter has received from subscribers, Tamerlane will be transitioning to a subscription model that will feature new content including economic, trade, and financial data. Sections of the newsletter will remain free for subscribers. We invite subscribers to share feedback, comments, or suggestions on how to make Tamerlane more valuable or useful as we transition to a paid model. Please get in touch via Substack or at tamerlane.newsletter@gmail.com. Thank you for your continued support.
Top News
On July 27, the Central Bank of Uzbekistan (CBU) held the policy rate at 14% despite falling inflation and declining inflationary expectations as the central bank aims to bring inflation down to forecasted levels of 8.5%-9.5% by the end of 2023. Despite a downward trend for inflation in the first half of 2023, the CBU noted in its announcement that core inflation, which hit 11.3% yoy in June, was falling slower than expected and demand pressures remain as evidenced by a high proportion of good and services with price increases of more than 10%. Uzbekistan’s economy, which grew at 5.6% yoy in 1H 2023, is benefitting from lending growth, raised government spending, and increased demand for services, but still suffers from a supply and demand imbalance, which is fueling higher core inflation. The soum has also depreciated against the dollar at an increased rate in the first half of 2023, which the CBU sees as being driven by an increase in imports. As global inflation eases, supply chains recover, and economic growth continues to surprise, the CBU pointed to sticky core inflation and the “prevalence of fundamental demand factors putting upward pressure on prices in the economy” as justification for leaving interest rates higher. The CBU concluded that a sustained downward trend for both core and headline inflation over the coming months could allow the central bank to lower the policy rate, with the next rate setting meeting scheduled for September 14.
The Presidential Administration has delayed the privatization and initial public offerings of several state-owned banks, including Sanoat Qurilish Bank (Uzpromstroybank), until 2024-2025. The state now plans to reduce its stake in Sanoat Qurilish Bank (SQB) to less than 50% by the end of 2024, and is also in negotiations to secure a USD 50 million convertible loan from the Asian Development Bank and an additional USD 40 million loan from the International Finance Corporation (IFC) by the end of 2023. SQB will also reportedly issue USD 100 million in green bonds with the support of the IFC. The IFC and the European Bank for Reconstruction and Development previously invested USD 125 million in SQB through a convertible loan. Additionally, the Presidential Administration delayed the privatization of IPOs and privatizations of several other banks, including Qishloq Qurilish Bank (delayed until March 2024), Asaka Bank (end of 2025), and Xalq Bank, Microcreditbank, Aloqa Bank, Agrobank, and the National Bank of Uzbekistan (January 2025). CBU Chairman Mamarizo Nurmuratov noted at a July 27 press conference that geopolitical turmoil and weak investor confidence was slowing the privatization of Uzbekistan’s banking sector.
Inflation slowed to 8.9% yoy in July, marking the first time since August 2016 that inflation in Uzbekistan has fallen below 9%. Inflation fell 0.2% from June to July, the second consecutive monthly deflationary print, despite a 2% mom increase in gasoline prices. The prices for many food staples continued to decrease significantly over the past month, including tomatoes (30.5% down mom), onions (20.2%), potatoes (14.5%), flour (2.1%), eggs (4%), and sunflower oil (3%), while other categories such as cucumbers (8.1%), melons (6.3%) and carrots (5.9%) recorded modest monthly increases. Inflation for manufactured goods fell to 7.3% yoy, while prices for goods such as household appliances (7.6% yoy), and furniture (6.6%) remained elevated but below 2022 highs. Services inflation rose from 8% yoy in June to 8.2% in July, despite slowing rates of prices increases for restaurants (0.6% mom), hospitality (0.3%), and rents (0.3%). Transportation costs, including air travel (4.3% mom), train travel (1.2%), and repair and maintenance services (2.5%) recorded monthly price increases.
Senator Chris Murphy called for the United States to exclude Uzbekistan, Kazakhstan, and Tajikistan from the Jackson-Vanik amendment – Cold War era legislation that imposed trade restrictions on the Soviet Union – and grant the three Central Asian countries permanent normal trade relations (PNTR) status. In an opinion piece for The Diplomat, Senator Murphy (D-Connecticut) encouraged the United States to offer Central Asia a “strategic alternative to China and Russia” by granting an exemption to trade restrictions imposed in 1974 in response to the Soviet Union’s restriction of emigration rights for Jews and other minorities. Since the fall of the Soviet Union, the US Congress has exempted several post-Soviet countries, including Russia, from the Jackson-Vanik amendment, but restrictions have remained for Uzbekistan, Kazakhstan, and Tajikistan, despite their compliance with the law’s emigration rights provisions. Murphy highlighted the importance of giving the US access to Central Asia’s markets, especially in the wake of strains on global supply chains due to Russia’s invasion of Ukraine, while also making the case that it was in the United State’s best interests to curb the influence of Russia and China in the region. Repealing the Jackson-Vanik amendment has been a major priority of the Uzbek government and its diplomats in Washington, DC, and current legislation proposed by the US House of Representative’s “Uzbekistan Caucus” links the exemption to Uzbekistan’s accession to the World Trade Organization.
Local Markets
The Uzbek government placed UZS 38.5 trillion (USD 3.3 billion) worth of government bonds on the Republican Currency Exchange in the first half of 2023, a 12.7% yoy decrease as trading volumes on the primary market fell 10.3% yoy. Two-thirds of government securities placed on the exchange were issued with maturities up to six months, while the remaining third had maturities up to five years. While trading volumes were down 10% on the primary market, the second market fell by nearly 25% to UZS 5.6 trillion (USD 479 million) in 1H2023. For short-dated treasuries, the average weighted yield ranged from 15.91% to 17.87%, with a significant rise since June that corresponded with an overall decrease in trading volumes.
The State Assets Management Agency (UzSAMA) has put up a former Uztelecom office building for auction on the “E-Auction” platform with bids starting at UZS 97 billion (USD 8.3 million). The four-story, 7,000 square foot office building in Tashkent’s Mirabad district is partially unfinished, and Uztelecom has been looking for a buyer since September 2022 and has already lowered its asking price from UZS 112 billion (USD 9.6 million).
Macroeconomics
The Uzbek government published a draft of its “Uzbekistan-2030” Strategy for discussion, which outlines plans to create a “New Uzbekistan” that will cost USD 252 billion. The extensive policy document is structured along five “directions,” including education, healthcare, and social welfare; sustainable economic growth; environmental sustainability; developing the rule of law; and foreign policy and security. Within the five directions there are 100 goals that reflect the government’s tangible priorities for the next seven years and keeps in place the objectives of the previous 2026 development strategy. The draft is currently open for discussion until August 15.
In the first half of 2023, remittances to Uzbekistan fell by 21.2% from 2022’s elevated volumes, which were driven largely by Russia’s invasion of Ukraine. Remittances to Uzbekistan in 1H 2023 totaled USD 5.2 billion, a little more than half the volume of money transfers in Q2 2022 alone (USD 5.1 billion), which was partially raised due to residents of Kyrgyzstan and Tajikistan using Uzbek banks due to local cash shortages and withdrawal restrictions. CBU Chairman Mamarizo Nurmuratov expects total remittances to Uzbekistan to reach USD 11-USD 11.5 billion by the end of 2023, compared with USD 16.9 billion in 2022. Money transfers from Russia accounted for 80% of total remittances in 1H 2023. The depreciation of the Russian ruble, which has lost 26% against the US dollar since the beginning of the year, also had a negative impact on the flow of remittances to Uzbekistan and Uzbek exports to Russia.
Hungary plans to establish a special industrial zone near Tashkent, while Uzbekistan is considering building a logistics hub near Budapest’s airport. Hungary’s Minister of Foreign Affairs and Trade Péter Szijjártó announced the creation of the special industrial zone in a joint press conference with Uzbek Minister of Investment, Industry, and Trade Laziz Kudratov, and also highlighted opportunities for cooperation in nuclear energy. Hungarian companies in the pharmaceutical, agricultural, and food sectors are planning to enter the Uzbek market, and they will be supported by Ipoteka Bank, which was acquired by Hungary’s OTP Bank earlier this year. Uzbekistan also is considering using a logistics hub at the Airport City facility as a base for Uzbek exports to European countries, while the Uzbek Chamber of Commerce and Industry plans to open a representative office in Budapest.
South Korea’s Export-Import Bank will provide Uzbekistan a 40-year, USD 74 million loan on preferential terms for the purchase of medical equipment. The funds will be used for the purchase of X-ray machines, ultrasound machines, electrocardiographs, ophthalmoscopes, and other medical equipment, and the National Bank of Uzbekistan will act as the agent for the settlement of funds.
The CBU is studying China and Russia’s experience with introducing digital currencies, according to Chairman Mamarizo Nurmuratov, although the use cases for Uzbekistan are not obvious. Nurmuratov noted during his July 27 press conference that CBU representatives traveled to China to discuss the development of digital currencies and also attended a forum hosted by the Central Bank of Russia on a trial project to introduce a digital ruble among 13 Russian banks. According to Nurmuratov, Russia’s adoption of the digital ruble is driven by the Central Bank of Russia’s desire to reduce transaction and payment processing fees, which in some cases can reach as high as 3%-4%. Nurmuratov noted this was not a problem for Uzbekistan, where transaction fees are paid by the recipient rather than the sender. The CBU chairman also warned that a digital currency posed a liquidity risk for Uzbek commercial banks, who could lose deposits to the central bank, where digital currencies are stored.
CBU Chairman Mamarizo Nurmuratov warned about the risks of a housing bubble emerging in Tashkent, as demand has far exceeded supply and residents expect housing prices to continue to rise despite the introduction of measures to cool housing sector price growth. The CBU mentioned the possibility of a price bubble in the capital’s housing market for the first time in a May 2023 publication on financial stability, which noted the increasing divergence between market prices and fundamental housing values that had reached UZS 210 million (USD 17,982) in 2023. The CBU pointed to the effects of the COVID-19 pandemic, the state’s subsidized mortgage program, the elimination of internal migration and housing purchase restrictions, increased mortgage lending, and the relocation foreigners (particularly from Russia) to Tashkent as key drivers of the housing bubble. Nurmuratov noted that the CBU set a maximum mortgage lending amount of UZS 440 million (USD 37,677) to reduce risks associated with a housing bubble, although the government’s announced plans to impose a moratorium on new construction in Tashkent until the approval of a new general plan threatens to exacerbate existing trends.
Business
Uzavtosanoat, the holding company that owns UzAuto Motors and other automobile production enterprises, announced it had exported cars and equipment worth USD 307 million in the first half of 2023, a 40% yoy increase. Enterprises owned by Uzavtosanoat increased production by a total of 13% yoy to UZS 25.2 trillion (USD 2.2 billion) while reducing imports by USD 71.7 million. The company produced 160,000 passenger vehicles, 1,300 agricultural vehicles, 1,245 commercial vehicles, and 105,000 engines in 1H 2023.
Turkish company Esan Eczacibasi will develop the Uchkulach deposit in Uzbekistan’s Jizzakh region. The head of Esan Eczacibasi Savash Shahin signed an agreement with Minister of Investment, Industry, and Trade Laziz Kudratov to develop mining and production facilities at the Uchkulach deposit, which contains non-ferrous metals including zinc, lead, cadmium, silver, and bismuth).
Demand for products from Uzbekistan on Russian online marketplace Wildberries increased nearly 60% yoy in the first half of 2023, driven by growth in sales for clothing, health products, furniture, household appliances, and others. Wildberries launched programs in Uzbekistan to sign up local vendors for its marketplace, including trainings and new pick-up points, with the total value of sales of Uzbek products reaching RUB 12.7 billion (USD 136 million). Clothing from Uzbekistan accounted for two-thirds of total sales.
Russian department store Slava reportedly plans to open stores in Uzbekistan as part of broader expansion plans outside of the Russian market. Slava, which first opened in 2015, is currently undergoing rapid expansion as the company plans to occupy retail space vacated by Western brands that left Russia, and Uzbekistan and Belarus are reportedly at the top of its list for international store openings.
Government & Politics
The Uzbek government is proposing to increase the maximum size of the budget deficit from 3% to 5% of GDP for 2023 in connection with the “Uzbekistan-2030” Strategy as well as raised government spending. A 5% budget deficit, or UZS 53.4 trillion (USD 4.6 billion), reflects increased government spending in the first half of 2023, although the Ministry of Economy and Finance has reportedly stopped publishing information on budget revenues and expenditures since January. CBU Chairman Mamarizo Nurmuratov claimed the raised spending levels were in part driven by an increase in natural gas imports, although as Gazeta.uz points out, Uzbekistan has only imported USD 200 million worth of natural gas in 1H 2023.
Uzbekistan, Turkmenistan, and Iran are planning to build a joint transportation corridor, with Iran proposing to reduce fees for the transit of Uzbek goods, according to the Ministry of Transportation. A meeting of representatives from Uzbekistan Ministry of Transportation and Iran’s Ministry of Roads and Urban Development agreed to develop an international transportation corridor with Turkmenistan as well as the use of Iranian ports of Bandar Abbas and Chabahor for imports and exports and the future development of another transportation corridor linking Uzbekistan, Afghanistan, and Iran.
Uzbek Minister of Defense Bakhodir Kurbanov hosted South Korean Minister of Defense Lee Jong Sup in Tashkent on August 1, where they discussed potential cooperation between the two countries’ defense sectors and signed an agreement to launch joint production of military-grade optics. South Korea’s military delegation met with Uzbek officials to discuss continuing cooperation and new potential opportunities for partnership in cybersecurity, personnel exchange, and joint training, and also visited the Academy of the Armed Forces of Uzbekistan.
On July 31, Egypt and Uzbekistan signed an agreement to establish the Uzbek-Egyptian Business Council to facilitate bilateral business and economic opportunities. The agreement was signed by the Uzbek Chamber of Commerce and Industry and the Egyptian Businessmen's Association with a plan to increase connections between businesses and hold regular forums to discuss opportunities for mutual trade and investments.
Great work. A really interesting read.