The Asian Wall Street Journal
November 7
ith Uzbekistan now playing host to U.S. troops, its capital, Tashkent, is humming with U.S. companies drawn to a country that has emerged as Washington's staunchest ally in Central Asia.
But with most interest geared to a U.S. military presence of uncertain duration, there are doubts about what kind of long-term impact the foreign interest will have on the country. Analysts say real investment will flow into Uzbekistan only once it overhauls its economy -- largely unreformed since the breakup of the Soviet Union.
Military cooperation with Washington has certainly refocused attention on Uzbekistan. A clutch of U.S. companies have bid for contracts to supply the 1,000 U.S. troops now deployed at an Uzbek air base or provide humanitarian assistance to neighboring Afghanistan, according to Western officials in Tashkent.
Two U.S. firms, Harris Corp. and Motorola Inc., which had been negotiating communications-equipment deals for many months with the Uzbek Ministry of Defense, have seen the contracts expedited since the Sept. 11 attacks, the officials say. The companies declined to comment.
And companies such as Lucent Technologies Inc. and Datron World Communications Inc. have expressed interest in the Uzbek market since the Sept. 11 terrorist attacks on the U.S., according to Western officials in Tashkent.
"The alliance with the U.S. is going to help, but it has to go hand in hand with policy changes," says Robert Horton, head of the Tashkent office of Chevron Texaco Corp., which has a $9.2 million oil-refining joint venture in the country. Uzbekistan is still far less appealing than other ex-Soviet republics, such as Kazakstan, which have pushed ahead with market reforms, he says.
Despite having the largest population in Central Asia, at 24 million, and a reputation for relative political stability under hard-line president Islam Karimov, Uzbekistan has been something of an economic pariah. After independence in 1991, the nation, strategically located on the ancient Silk Road, was expected to be the powerhouse of Central Asia. With rich gold and other mineral resources, it was spared the economic dislocation suffered by its ex-Soviet neighbors. It earned valuable hard currency from exports of cotton and gold and reached levels close to self-sufficiency in energy and grain.
But its overall economic performance since independence has been disappointing. Under Mr. Karimov, industry and agriculture, trade and banking are still largely state-controlled. Soviet-era factories are propped up by subsidies; bureaucracy and corruption stifle free enterprise.
"Meetings with investors were like visits to a cancer clinic," recalls one Western diplomat who served in Tashkent in the late 1990s.
Some foreign companies like energy group Baker Hughes Inc. voted with their feet, closing their offices in Tashkent, while others scaled back, cutting staff and replacing expatriates with local hires. Even a company like Coca-Cola Inc., whose investment was supposed to be a rare success story, has suffered. Three senior managers of the local bottling franchise left the country in August after investigations were launched into their Tashkent plant. Customers now say deliveries are so badly disrupted that local prices for the beverage have doubled. A company spokesman said the hold-up in production is due to a bureaucratic snag.
Another problem confronting business is the draconian currency controls imposed in 1996 as a temporary measure after a poor cotton harvest, but which are still in force. And, barring a little tinkering, the government has resisted strong pressure from the International Monetary Fund and other agencies to liberalize exchange-rate policy. Despairing of improvement, the IMF, which suspended its aid program in 1996, effectively closed its office in April.
There are some pockets of good news. The Uzbek government, eager to sell more gold abroad to help pay off its foreign debt, has encouraged investment in the mining sector, where foreign companies often enjoy tax holidays and are less affected by the currency controls.
Newmont Mining Corp., based in Denver, has been operating at the Muruntau gold deposit, one of the biggest open-pit gold mines in the world, since 1995. Newmont's joint venture, which recovers gold from Muruntau waste, won a $30 million loan from the European Bank for Reconstruction and Development in January to extend its life until 2013; last month, Newmont said it had reached agreement with the government to increase its stake in another joint venture to develop two gold deposits 80 kilometers southeast of Tashkent.
International lenders also are showing more interest. The EBRD aims to invest up to $300 million in all five central Asian republics next year, compared with $220 million this year. The IMF is sending a delegation next month for its most wide-ranging discussions with the Uzbek authorities since halting its aid program.
Many in Tashkent speculate that Uzbekistan's military cooperation with the U.S. may be rewarded with a new IMF loan with eased conditions. Foreign businessmen say this would send the wrong signal. "Visible rewards for good behavior don't get down to the core problem," says Charles Rudd, a U.S. businessmen who has worked in Uzbekistan for 13 years. "Unless there's major reform here, you're always going to be throwing good money into a bad hole."