Previous Quarterly Editions
Expropriation Risk: 65 65 65 63 ▼ Political Violence Risk: 51 51 51 51 ► Terrorism Risk: 50 48 45 46 ▲ Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 57 57 57 56 ▼
TREND ►
Uzbekistan, as a border nation of Afghanistan, has been preoccupied with the fallout from the fall of Kabul to the Taliban in August. In the months leading up to the US withdrawal, Uzbekistan significantly increased its security presence at the border and conducted military exercises with Russian and Tajik forces, exercises which are set to continue. As towns in the north of Afghanistan were overrun by the Taliban, Uzbekistan became a destination for Afghan government forces fleeing into its territory.
While Uzbekistan appears to have handled the immediate crisis well, Afghanistan is set to cause several security and policy challenges for the Tashkent government. Already, Uzbekistan is bracing for a refugee crisis driven by the collapse of the economy and the growing famine conditions within Afghanistan. While the government has rejected the prospect of taking on refugees, it has already set up a small refugee camp in the border town of Termez. As part of this crisis, it will also have to deal with a flow of refugees seeking access to third countries such as the United States, creating new diplomatic challenges.
The return of the Taliban has also created more long-term policy considerations. Uzbekistan is susceptible to domestic radicalisation, a concern that has caused the government to crack down heavily on displays of religious devotion. Another challenge for Tashkent is the development of trade routes to the Indian Ocean via Afghanistan, an export route critical to develop the economy of Uzbekistan, a landlocked country. On both issues Tashkent has displayed pragmatism and engaged in dialogue with the Taliban, who, in their pursuit of securing international recognition, have pledged not to export their ideology, and have committed to regional trade projects. However, it remains to be seen to what extent the Taliban can be considered a reliable regional partner.
At the time of writing, Uzbek President Shavkat Mirziyoyev was preparing for a presidential election on October 24. During this time, there had been little doubt that he would be comfortably re-elected however,his administration had taken no chances and began to crackdown on both opposition activists and independent media outlets. Despite the presence of a repressive security state, Uzbekistan is prone to frequent low level popular unrest driven by socio-economic concerns, such as the lack of adequate employment opportunities and access to utilities such electricity and gas. Indeed, the election was likely moved forward from an original December date to October in order to avoid the winter months, when protests over utility shortages traditionally occur.
The Mirziyoyev administration has won plaudits for its economic reform programme and some critical social reforms, such as ending forced labour in the cotton industry. Following key regulatory reforms, particularly around tax and the national currency, Uzbekistan has also begun engaging with international capital markets, issuing sovereign and corporate Eurobonds. At the end of 2020, the administration announced a major privatisation programme, which included some of the country’s largest state energy, mining and transport companies. The government is also dealing with the economic fallout from the COVID-19 pandemic, which has negatively affected growth and severely limited travel for the country’s approximately 2.5 million migrant workers, adding to the domestic socio-economic tensions.
TREND ▼
The Uzbek government in its 2017-21 National Development Strategy outlined a number of reforms to liberalise the economy and protect private property. In late 2020, the government outlined an extensive privatisation programme designed to divest from small and medium enterprises such as agricultural enterprises and light manufacturing, as well as bring in strategic and portfolio investors to major state-owned enterprises such as national oil and gas company Uzbekneftegaz. Despite these reforms however, there is growing concern among investors that politically connected figures have a privileged position within the economy, raising questions about the rule of law and sanctity of private property.
Uzbekistan is regularly subject to socio-economic protests, particularly over shortages of gas and electricity. While these are typically localised, the government remains concerned that such protests could spread and take on national significance. Last winter saw numerous protests, with the establishment of roadblocks emerging as a leading tactic to draw the attention of local officials.
The government is also extremely concerned about employment and living standards. With more than 600,000 people joining the workforce each year, the government is under great pressure to create employment opportunities. However, the onset of the global pandemic, which has slowed economic development and shut down migration routes, has made this task even more challenging.
Adding to this complex mix of challenges, the fall of Afghanistan to the Taliban has intensified government concerns about radicalisation, particularly among the young, poor and marginalised.
TREND ▲
There has been little evidence of a serious domestic terrorism threat in Uzbekistan in recent years. Approximately 2,500 Uzbek nationals joined Islamic State in Iraq and Syria, many of which have now been repatriated to Uzbekistan without adverse consequences.
Upon assuming the presidency in 2016, Mirziyoyev initially showed a renewed tolerance towards religious activities within Uzbekistan. However, this period did not last long, and the Uzbek government has once again become extremely sensitive to the possibility of domestic radicalisation, particularly given the difficult socio-economic conditions and the collapse of the Afghan government to the Taliban. In recent months, the government has cracked down on active displays of religious devotion, including forcing Muslims to shave their beards and arresting others for distributing ‘extremist materials’. In June, authorities in Samarkand claimed to have detained six members of Hizb ut-Tahrir, an Islamist group banned by the Uzbek Supreme Court in 2016.
Since 2017, the Uzbek national currency, the som, has been the subject of a free float. This policy has made it far easier for investors to get access to currency and repatriate profits while at the same time removing considerable pressure on government reserves. While declining slightly during the COVID-19 crisis, the som has remained relatively stable, limiting the need for government intervention in the currency rate. The government also refrained from introducing formal capital controls. While inflation remains high, at over 11%, the government has prioritised expanding economic activity and investment, and in 2020 lowered the base rate from 16% to 14%, where it has remained throughout 2021.
Uzbekistan was one of the few countries in the region to register growth in 2020, and is set to experience strong growth in 2021 of approximately 5%. This success is the result of a combination of strong fiscal and monetary responses throughout the pandemic, as well as positive engagement with international financial institutions. While government debt has grown in recent years, at 29% of gross domestic product, it remains manageable, especially considering the large capital investments Uzbekistan is making in order to increase domestic economic productivity.
Considering these conditions, international ratings agencies have given an encouraging assessment, with Standard & Poor’s and Moody’s both increasing the government of Uzbekistan’s sovereign outlook from ‘negative’ to ‘stable’ and ‘stable’ to ‘positive’ in recent months.
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