Uzbekistan's New Opportunities for Business by Alisher Bekkulbekov The Republic of Uzbekistan was established on August 1, 1991. Its territory is 447,800 square kilometers. Uzbekistan is situated in the center of the Central Asian region in between the Amu-Darya and Syr-Darya rivers. The Republic stretches 1425 km from west to east and 930 km from north to south. The climate is sharply continental; a year has around 300 summer days. Uzbekistan is rich in natural resources; more than 100 types of raw minerals in 700 deposits have been discovered here. All of the elements in the Mendeleev's table (e.i. most mineral resources) are found in Uzbekistan. According to foreign experts, the value of all these resources is more than $3 trillion. The population of the Uzbekistan Republic is about 23 million, and it is growing at an annual rate of 2.4%. There are more than 100 nationalities living in Uzbekistan. The average age of the population is 24 years old. Its capital, Tashkent, is the largest city in Central Asia with a population of 2.4 million and is the only Central Asian city with a subway system. Uzbekistan's independence has been recognized by 160 states. On March 2, 1992 Uzbekistan became a full-fledged member of the United Nations. Also, the Republic is a member of the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, and several other prestigious international organizations. The Republic of Uzbekistan was one of the first Soviet Republics to declare independence, adopt its own Constitution, and introduce a presidency and democratic parliament. Five years ago no one could have predicted that Uzbekistan would become one of the most dynamic and progressive among all the former Soviet Republics. It has the best investment opportunities today. Table I indicates that Uzbekistan has made relative achievements during the last five years. In addition, there are a few more facts. Uzbekistan is the only state, among, the post-Soviet countries that has increased its oil and gas production in recent years (indeed it has doubled oil production) to ensure its own energy self-sufficiency. In 1995, growth in the extraction of oil and gas condensate increased to 37.5%, and natural gas production grew by 2.9%. Another impressive result is that Uzbekistan has increased its self-sufficiency in grains; its output rose to over 3 million tons, and according to some estimates in 1996, the Republic may achieve 4.5 million tons of harvested grain. Real privatization in Uzbekistan has been dramatic, but has not been accompanied by economic disorder and social discontent as elsewhere. The private sector in the economy now produces 44 % of the industrial production and 97% of agricultural production. The non-state sector consumes 44% of total capital investments and employs 64% of the labor force. More than 250 representative offices of foreign companies and banks are in Uzbekistan. The United Nations, the World Bank, IMF, and many other international organizations have opened their headquarters in Tashkent. Over 2000 joint ventures are registered in the Republic. Foreign investments of over $3 billion have been made in Uzbekistan. Moreover, the Republic fulfills all of its obligations on foreign credit repayments without default and is generally regarded as an excellent credit risk-taker. What are the main reasons for Uzbekistan's success? The central reason is that, unlike leaders of the many other Commonwealth of Independent States (CIS) countries, the President of Uzbekistan, Islam Karimov, has shown exceptional intuition and has created an extraordinary degree of domestic and foreign confidence in Uzbekistan. Consequently the realization of his strategy for transition to a free market economy, in which he has taken into account the peculiarities of the Republic and the experiences of other countries, showed that it was the right choice. He and his advisors have found a unique middle ground between painful shock therapy and backsliding into an economic decline. The five basic principles which have minimized the pain of transition and have already initiated dynamic growth, are: · supremacy of economics over politics · the state as the major reformer and guarantor of economic transformation · supremacy of law in all spheres of activities for both state and society · powerful social policy · consistent and stage-by-stage accomplishments economic reforms Thus, Uzbekistan has transformed from a society driven by ideology to a pragmatic country aimed at attracting businesses and incurring high levels of domestic and foreign investment. During the transition, the Uzbek Government has actually accelerated infrastructure development, in contrast to many other CIS countries. In addition, by the Uzbek Government's implementing of the five principles outlined above, social catastrophes such as greatly falling life expectancies and declining birth and marriage rates, have been avoided. A second factor is that since the first steps of independence, an array of necessary laws and regulations have been adopted. In a remarkably short period of time, standard and legal frameworks have been created. During the past five years, laws and regulations in virtually all main areas of the formation of the market economy have been passed. These include laws "On Foreign Economic Activity" and "On Foreign Investments and Guarantees of Foreign Investors' Activity." These and other laws and standard regulations provide many privileges, benefits, and guarantees for foreign investors. For example: · There are particular taxation privileges for profits reinvested in the broadening and modernization of production. · The enterprises with 50% participation of foreign capital, and which produce consumer goods, are free from the obligatory sale of foreign currency to the Central Bank for up to 5 years from the date of their registration. · The enterprises with 30% participation of foreign capital, and which specialize in the production of various agricultural, consumer, and industrial products (except the mining industry) are granted a two year grace period for profit taxation. The given grace period can be prolonged for up to 5 years for projects, which included into investment program of the Republic of Uzbekistan. · For enterprises with 30% participation of foreign capital, the rate of the tax on income is reduced from 18% to 10%. A third reason for Uzbekistan's achievements is the realization of an open door policy, which has been a top priority of general economic policy. Structural reorganization, overcoming the economy's one-sided orientation toward raw-material production, and producing export-oriented and import-substituting products are the priorities in the external economic and investment policy. Priority areas for investment include the following: · mining and metallurgical production and expansion of extraction and processing of non-ferrous and ferrous metals · drilling, processing, and transportation of oil and gas · advanced processing of cotton, agricultural raw materials and products, including fruit, vegetables and grain production · development of transportation and telecommunications · engine production, including automobile, aircraft and agricultural machinery manufacturing · production of building materials · development of the tourism industry · environmental protection industries A fourth factor is that the priority in the economic reform has been given to the creation of the market infrastructure and the development of small businesses. In recent years, Uzbekistan has witnessed the creation of the Republican Stock-Exchange Center, regional stock market, and private stock and securities trading offer. Private business growth has also accelerated. In 1995, more than 4,000 joint stock companies were registered in Uzbekistan. Also, in 1995 and in the first quarter of 1996 more than 75,000 small enterprises were registered. The State Property Management and Support of Entrepreneurship Committee hasbeen largely responsible for this success. The Committee can distribute share capital, carry out the sales of shares (including participation of foreign partners) through stock exchange, and sign sub-contracts with the enterprises which are to be privatized. In some cases, the State Property Committee can sell up to 100% of the share capital of enterprises to foreign investors. A dynamic organization, headed by Deputy Prime Minister Victor Chgen of the State Property Committee, is the key economics ministry responsible for transforming Uzbekistan's state industrial base into a thriving private industrial sector. Finally, and also very important, is that Uzbekistan has engaged in bilateral, economic cooperation and double taxation with many countries, including the United States, China, Korea, Great Britain, Russia, and others. In order to reduce the cost of attracting foreign investments to Uzbekistan and diminish the risks of foreign investors, Uzbekistan joined the Washington Convention of 1964 and the Seoul Convention of 1964. In addition, the national insurance company, Uzbekinvest, was established to cover political and commercial risks. Uzbekinvest and the National Bank of External Economic Activity joined with the American Financial Group, AIG, Inc. to establish joint insurance companies to: (a) cover political risks (its headquarters is in London) and (b) cover commercial risks (its head office is in Tashkent). As a result, the UzDaewoo-Auto Project (with the South Korean conglomerate Daewoo), which amounts to $700 million, is one of the largest projects with direct foreign investment participation on a 50:50 basis. The assembly plant in the Andijan region came on-line in April 1996 and has a production capacity of 200,000 cars annually. Another large single investment of the CIS is the Zarafshan Newmont Gold Mining Project (over $229 million) with Denver-based Newmont Mining Corporation. Also Lonro company recently created a joint venture in Uzbekistan and has invested in a gold-mining branch worth $250 million. In addition, British American Tobacco has a tobacco joint venture with the State and plans to invest a total of $232 million. All of these companies came to Uzbekistan because they were convinced of the desirable business climate in Uzbekistan. During his recent visit to the United States and meeting in Denver with American businessmen, the President of Uzbekistan, Islam Karimov, said that Uzbekistan has an excellent system of privileges and guarantees for foreign investors. With his decree "on additional measures to encourage the creation of enterprises with foreign investments and their activity" from June 1, 1996, foreign investment enterprises that produce export-oriented and import-substituted products received additional benefits, such as: · They shall be granted the right to receive a tax credit for the development of production; that is, they shall be granted a deferment for a period of up to two years for their profit tax, value added tax and land tax payments into the budget. · Enterprises with a share of foreign capital in the authorized capital of not less than 500,000 US dollars, shall be exempt from the payment of property tax. As additional proof the European Bank for Reconstruction and Development (EBRD) has eighteen projects operating in Uzbekistan with a total value of $520 million. This is the second largest amount in the investment portfolio of the CIS, after Russia. Also, the World Bank chose Uzbekistan as its first investment in an agro-industry project in the CIS. In short, Uzbekistan stands clearly, as one of the most exciting emerging markets. It enjoys a popular, stable government, a highly skilled labor force, and virtually no violent crime. President Karimov's government is efficient, pragmatic, and "pro-business." Thus, the question, why should foreign investors become interested in Uzbekistan, seems obvious. This is because: · Historically its territory was a cultural and economic center of a vast empire that stretched across Central Asia into India and Iran, and had a key post in the overland trade route between China and the West. As such, Uzbeks have an historical trading culture; · Large markets such as China, Pakistan and India lie less than five hundred miles away from Uzbekistan. The Central Asian and Russian market is a large one. Uzbekistan has signed special agreements with the Russian Federation, Kazakhstan Republic, Kyrgyzstan Republic, Turkmenistan, Ukraine, Belarus Republic and others promoting policies of free trade; · There is a high level of labor resource supply. Moreover, Uzbekistan has a well-educated society and is comparatively cheap this very important resource. · It has the fifth largest gold deposit in the world and ranks seventh in gold production. · Its deposits of oil and gas are among the top ten countries in the world. · It is the fourth largest cotton producer in the world and the second largest exporter after the U.S. · It has a stable political and investment climate. · Foreign companies are protected by the Constitution, for any changes in law or retroactive laws, for up to ten years from the time of investment. · It is the only country in Central Asia to produce metals, aircraft, cars, motors, cotton-picking machines (and other agricultural technology, cable products, excavators, cranes and lifts, equipment for the textile and cotton-cleaning industries and weaving machines. · It houses one of the largest airline companies in Central and Southeast Asia "Uzbekistan Airways." It operates regular flights to more than 20 international destinations and offers weekly flights from Tashkent to New York and back. · There is great potential to develop the tourism industry. Cities with historical museums, such as Samarkand, Bukhara and Khiva are known all over the world. There are over 4,000 architectural monuments. The combination of these factors has created an air of excitement and dynamic optimism in Tashkent. Dr. Charles Becker, President of the University of Colorado's Economics Institute, summarized the situation in this way: "Uzbekistan is a dazzling country, and the Uzbeks are a 'can-do' people with great business instincts. But, the best indication that this is a country 'on the move' comes when you call senior government officials at 9:00 at night, and they are all still working in their offices." The information presented here is but a brief glimpse at the next "Asian tiger" Uzbekistan. To get a deeper understanding of the myriad of possibilities for new business opportunities, and to discuss investment options in detail, please contact the Representative of the State Property Committee Republic of Uzbekistan in the U.S., Mr. Alisher Bekkulbekov; 1005 12th Street; Boulder, Colorado 80302; tel. : (303) 786-0936; e-mail: alisher@ucsub.Colorado. edu. The Russian-American Chamber of Commerce® is a nonprofit, nonpartisan organization acting to promote American business interests in the Russian marketplace. The Russian-American Chamber of Commerce® Last Updated: November 27, 2001. Copyright the Russian-American Chamber of Commerce® 1995-2003. All rights reserved.