Despite being Central Asia’s most populous nation by far, Uzbekistan has failed to develop into a major investment hub over the past few decades. This has been due to the tightly controlled economy and high levels of government interference in private business activity. However, the potential for it to become a competitive player in the region has increased markedly since President Shavkat Mirziyoyev came to office late 2016. The president has led a broad reform agenda aimed at attracting new investment to drive economic growth.
Diversifying domestic production
The automotive sector is a centrepiece of this agenda. Until a year ago, automotive production lay in the hands of a single joint venture between the US’s General Motors and the state-owned automotive holding, Uzavtosanoat. Mirziyoyev in 2017 implemented his programme “On Measures to Further Improve the Management and to Accelerate Development of the Automotive Industry in 2017-21”.This saw an announcement that the sector would become more competitive and more diverse, along with a pledge to increase car production threefold.
Already, there have been a number of new investors, from a number of global regions. These include: France’s Peugeot Citroen, which is due to start producing minivans in the Jizzah free economic zone from December 2018; South Korea’s DK Group, which in December 2017 signed an agreement for the production of motorcycles; and a number of Chinese entities that are due to start production of various automotive products in the next five years. Further growth in the sector is highly likely to take the form of joint ventures with the government.
Mirziyoyev has made clear that he wants Uzbekistan to become a source of automotive exports in Central Asia and the wider Eurasian region. Currently, production does not meet domestic demand, let alone export potential, so there is considerable room for growth.
Simplifying regulation
The automotive sector push is part of a wider de-monopolisation and market expansion agenda being led by the government. The authorities have already taken a number of concrete measures to this end. These include liberalising the foreign exchange market in 2017, which was previously defined by strict limits on currency conversion and repatriation of profits, and reforming the tax system to reduce privileges for certain favoured companies at the expense of others.
Perhaps the most actively pursued reform has been the dismantling of trade barriers. This has included simplifying export procedures and abolishing export duties on almost all goods. Mirziyoyev has also prioritised improving transport links and facilitating trade movement with Uzbekistan’s Central Asian neighbours. This is likely to significantly facilitate exports across the region in the next five years.
Persistent unknowns
Despite these unprecedented developments towards a more vibrant and competitive business environment, threats to the reform agenda – and to investors in all sectors – remain.
Not least among these threats is the highly opaque political structure. Mirziyoyev has already distinguished himself from his predecessor, president Islam Karimov (1991-2016), by showing openness to new investment, seeking to removing bureaucratic hurdles, and engaging with regional partners to further cooperation and business. However, Mirziyoyev served as prime minister under Karimov for many years, and has shown few reformist tendencies in his approach to politics. Strategic decision-making remains concentrated in the president’s hands, parliament acts as a rubber stamp and vocal critics are kept in check through state harassment. Mirziyoyev until early this year was locked in a behind-the-scenes battle for influence with the once powerful security services. He appears to have won that fight, and has an open road to push ahead with his economic reform agenda – for now.
These backroom tensions and top-down decision-making structures contribute to a persistent threat of opaque political allegiances and presidential whims undermining stability in the business environment. Due diligence of partners in the automotive sector remains key to mitigating the threat of politically exposed business partners suddenly falling out of favour and losing their status in the business sphere.
Furthermore, Uzbekistan is unlikely to fully shed its deeply engrained protectionist habits. While keen to drive greater regional integration and trade, it is likely to continue to protect domestic markets through high import tariffs, including on cars. Mirziyoyev will remain concerned about protecting domestic jobs, as well as business interests.
Looking ahead
Nonetheless, compared with just two years ago, Uzbekistan looks like a markedly different business destination. Persistent uncertainty in the business and political environments means it is far too soon to talk about it is an emerging regional leader. Expansion of the automotive sector – measured by the arrival and retention of new players, but probably more importantly by an increase in domestic supply, followed by new export markets – will be an important measure of the extent and pace of change.
Author
- Eimear O’Casey, Analyst