Uzbekistan’s electoral stability creates investment opportunities

Uzbekistan’s electoral stability creates investment opportunities

The re-election of President Karimov for a 4th term spells continuation of rampant corruption, while Karimov is forced to reduce dependency on a Russia in crisis. However, the entailed political stability also creates new opportunities for investment in Uzbekistan’s abundant resource sectors.

It comes as no surprise that 77-year-old Islam Karimov, Uzbekistan’s president for the past 25 years, won presidential elections on March 29th by a landslide. Garnering over 90% of the votes, Karimov secured a fourth term in office despite the constitutional limit of two terms.

Mired in controversy, these elections have seen no shortage of criticism by Western observers, such as the Organization for Security and Cooperation in Europe (OSCE), which lambasted the elections as unconstitutional and unfair, citing the obvious lack of “genuine political alternatives.”

The state in the hands of the bureaucracy has remained a dominant influence in the economy, resulting in customary fraudulent elections and human rights abuses during Karimov’s reign.

Uzbekistan consistently does poorly on a host of international economic indexes, from Transparency International’s Corruption Index to the World Bank’s Doing Business Report as nepotism pervades society and has grown more rampant over time.

However, despite its corrupt business environment, Uzbekistan has enjoyed robust annual growth rates of over 8 percent under Karimov, who has helped foster its gas, cotton and gold industries, while successfully maintaining healthy relations with Russia, China, Europe and even the United States.

Uzbekistan’s vast energy reserves are among the three largest in the former Soviet Union, following Russia and Turkmenistan. As one of the top ten natural gas-producing countries in the world, the Oil and Gas Journal estimates that Uzbekistan has 594 million barrels of proven crude oil reserves as of January 2014.

About 60% of all known oil and natural gas fields can be found in the Bukhara-Khiva region. This region is the source of about 70% of Uzbekistan’s oil production.

In light of decreasing oil production, the Uzbek government has been forced to shy away from subsidized domestic prices and an inherent autocratic energy policy towards reforms friendlier to foreign capital through a series of production-sharing agreements and joint ventures with its state-owned oil and natural gas company, Uzbekneftegaz.

Scanty pipelines and decrepit infrastructure are challenging production and distribution, a limiting factor to development when compared with gas-rich Caspian neighbors, who have enjoyed the support of a European government anxious to break the Russian grip on the energy sector.

Uzbekistan has significant untapped deposits of oil and gas. There are 194 deposits of hydrocarbons in Uzbekistan, including 98 condensate and natural gas deposits and 96 gas condensate deposits.

According to IHS Energy, limited export options and access to hard-currency markets have hampered foreign investment in upstream activities. The net inflow of foreign direct and portfolio investment has seen a steady decline in recent years, plunging from 3.6 percent of GDP in 2011 to 1.2 percent of GDP in 2012 and 2013.

The Uzbekistan government now hopes to attract as much as $850 million in foreign and domestic investments as it seeks to tap into approximately 47 billion tons of its own oil shale deposits. Plans to ramp up shale oil exploration are in full development, as shown by joint ventures with Asian companies like Japan Oil, Gas & Metals National Corp.

Focusing predominately on natural gas, Lukoil, Russia’s second-largest oil company, has pledged to increase its investments in Uzbekistan from $1.5 billion in 2010 to $5 billion by 2017.

Aside from its abundant energy reserves, Uzbekistan is also appealing for its gold deposits, an industry that accounts for nearly 9% of the country’s GDP. It is the ninth largest gold producing country and boasts the fourth largest known gold reserves in the world.

Its gold and uranium production, which is ranked seventh in the world, comprise 25% of the Uzbekistan’s total exports.

Another central component to the Uzbek economy is its cotton industry, which constitutes around 25% of its GDP. As the fifth cotton producer in the world, it generated circa 3.3m tons last year.

This industry, controlled completely by the government, has been marked with scandal over its use of mandatory manual labour in the cotton industry. It is estimated that each year around 1 million people are taken from their jobs and schools and thrown into Uzbekistan’s cotton fields to pick “white gold” and meet government quotas.

Uzbekistan has yet to shed its nefarious ways and regularly ranks in the State Department’s annual worldwide assessment of human trafficking and forced labour Tier 3 category next to countries like Yemen, Saudi Arabia, and the Central Democratic Republic of Congo.

The Ukraine crisis has spelled serious disruptions for Russia, whose economic slowdown last year resulted in a substantial paring in demand for Uzbekistan’s exports. While close to $6.6 million in remittances were sent by the estimated 4 million Uzbek migrant workers living in Russia in 2013, this number began to drop significantly last year and is expected to continue falling this year.

President Karimov has had to learn quickly that shielding Uzbekistan from Russia’s economic crisis is pivotal. A country rich in energy-producing resources and mineral reserves, Uzbekistan boasts great economic potential.

About Author

Itziar Aguirre

Itziar currently works as a Research Consultant at JLL, a commercial real estate capital intermediary. She holds an MBA in Accounting and Finance from the University of St. Thomas and an MSc in Comparative Politics from the London School of Economics.