Previous Quarterly Editions
Expropriation Risk: 65 62 62 61 Political Violence Risk: 38 38 38 38 Terrorism Risk: 58 56 54 52 Exchange Transfer and Trade Sanction Risk: 62 58 58 58 Sovereign Default Risk: 60 58 58 54
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The extent of the change that Shavqat Mirzioyev has brought to the Central Asian region since becoming Uzbekistan’s president in 2016 was made clear in November when the president of neighbouring Tajikistan switched on the first turbine unit at the Roghun hydroelectric power station. The critical impetus for its final completion came when Mirzioyev reversed his predecessor's hostility to the project, which had included blocking construction supplies. The recent degree of Uzbek-Tajik cooperation on water and energy issues that enabled its completion represents a complete shift in regional relations. President Mirzioyev has also been facilitating Afghan peace talks involving the Kabul government and the Taliban, capitalising on the fact that both sides regard Uzbekistan as both neutral and influential. Relations with Moscow are also improving. A high point of President Putin’s visit to Tashkent in October was a ceremony to mark the symbolic start of work on Uzbekistan’s first nuclear power station, which is being financed by Russian soft loans. Although the location has yet to be chosen and significant construction will not begin before 2020, the economic logic of using nuclear power so that the country’s gas output can be diverted for use in its developing petrochemicals sector means that it is very likely to be completed. The two countries are also developing military ties under Mirzioyev. Moscow is concerned that insurgents from Afghanistan may slip across the border into Central Asia and eventually into Russia, so a well trained and equipped Uzbek military will ease Moscow's worries about needing to commit large numbers of its own troops in the event of a major crisis. Russia has offered counter-insurgency training, and joint military exercises resumed soon after Mirzioyev came to power. However, he is expected to maintain the Uzbek reluctance to join regional economic or security bodies. With new trade routes opening up through Central Asia, largely as a result of China's Belt and Road Initiative, Uzbekistan stands to gain simply from being a cooperative trading hub. The president’s decision to devalue the som in 2017 and subsequently allow it to float freely was widely welcomed abroad. In an explicit reward for the country’s liberalising policies, in 2018 the World Bank announced almost a billion dollars in new financing for projects that range from energy efficiency to horticulture. However, the immediate impact of liberalising the currency was a wave of price rises that pushed inflation close to 20%. Unemployment remains high, making remittances from Russia and neighbouring countries crucial to the economy. The taxation system, which is excessively complex, has been discouraging job creation by imposing a greater burden on larger firms. The tax overhaul that came into effect in January 2019 should reduce the disincentives for hiring while widening the base for collecting VAT. President Mirzioyev is aware of the need to make the benefits of moving towards a market-based economy more evident as soon as possible.
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The re-engagement with Moscow under Mirzioyev, which now carries the full endorsement of President Putin, should lead to greater Russian investment. Gazprom and Lukoil are already well established in the Uzbek energy sector and both have recently indicated plans for substantial new investment. Gazprom extended its contract for the Shahpakhty gas field on the western Ustyurt plateau in May 2018 as it is using Uzbek gas as a substitute for Turkmen gas. Even if its purchases from Turkmenistan resume at some point during 2019, as seems probable, the commitment to Uzbekistan will continue. By contrast, other international companies still appear to be waiting for further evidence of the government’s long-term intentions. With about 1,800 SOEs employing some 800,000 workers, Tashkent would like to push forward with its privatisation programme. However, the high rates of corruption and bureaucratic inefficiency that still worry potential investors will take time to tackle.
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There have been changes in the leadership of the National Security Service (SNB), but it is not clear how far President Mirzioyev is prepared to loosen the authority of the state as the country goes through a period of higher prices and job losses due to economic restructuring. Any sizeable public gathering is still liable to trigger a strong response and the government is likely to retain official definitions of Islamic radicalism that also encompass non-violent government opponents, giving the security forces wide scope for action. The overall drift towards a more liberal society is likely to generate demands for democratic freedoms and create space for more protests over economic hardships. The reforms undertaken so far have been popular, but the social costs and heightened expectations of change will need to be carefully managed.
In its first major arms purchase under President Mirzioyev, Uzbekistan bought twelve Mi-35M attack helicopters from Russia that can be used in a counter-insurgency role. Given Uzbekistan's proximity to Afghanistan, more updates to Soviet-era equipment suitable for combating insurgents are likely to follow. While the government has legitimate concerns about the return of Islamist militants from conflicts abroad, there is also evidence of home-grown radicalism.
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Economic growth was around 5% in 2018 and the IMF expects a similar result in 2019. However, inflation has returned to the double-digit levels not seen since 2013 and ended the year at 15%. The som fell back in the second half of 2018 but began 2019 relatively stable. There are plans to expand the country’s Islamic banking capacity and encourage greater foreign investment in the financial sector.
External debt is still below 20% of GDP, but new loans from China associated with its Belt and Road initiative, as well as from Russia for the nuclear power plant, could push this up quickly. The issuance of a som-denominated ‘Samakand’ bond in London in June 2018 was another step in the government’s effort to secure a positive sovereign credit rating from the major international agencies. Having been given an investment grade by Fitch in December, it appointed four banks, two in the US, one in Europe and one in Russia, to lead a Eurobond issue of 500 million dollars during the first quarter of 2019.
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