VZCZCXYZ0002
RR RUEHWEB

DE RUEHNT #0102/01 0251526
ZNR UUUUU ZZH
R 251526Z JAN 08
FM AMEMBASSY TASHKENT
TO RUEHC/SECSTATE WASHDC 9103
INFO RUEHTA/AMEMBASSY ASTANA 9858
RUEHAH/AMEMBASSY ASHGABAT 3648
RUEHEK/AMEMBASSY BISHKEK 4262
RUEHDBU/AMEMBASSY DUSHANBE 0140
RUEHNE/AMEMBASSY NEW DELHI 0803
RUEHIL/AMEMBASSY ISLAMABAD 3858
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC
RHEFDIA/DIA WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS TASHKENT 000102 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR SCA/CEN, AND EB/IFD/OIA 
DEPT PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ELAB ETRD KTDB PGOV OPIC USTR UZ
SUBJECT: Part 2 of 2, 2008 Investment Climate Statement for 
Uzbekistan 
 
REF: 07 STATE 158802 
 
Part 1 contained paragraphs 1-48. 
 
--------------------------------------------- ----- 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
¶49. Although Uzbekistan has made some progress in financial sector 
reform, it is far from having an efficient market-oriented banking 
system and well-functioning capital markets.  Financial sector 
reform has focused on creating an adequate legal and regulatory 
framework for financial intermediation and developing the sector's 
technical and institutional capacity.  The result on paper is a 
developed legal foundation, stronger regulation and banking 
supervision, an internationally accepted set of accounting 
standards, an electronic payment system, and the creation of the 
Tashkent Stock Exchange (TSE) and National Depository.  However, in 
many cases, adoption of legislation has not led to implementation. 
For instance, international accounting standards were adopted by 
banks in 1997.  Many of these standards were not implemented because 
they do not comply with the Uzbek Tax Code.  On the other hand, some 
government departments have implemented international accounting 
standards, but have not updated their systems on a timely basis. 
 
¶50. The TSE, although in operation for several years, still hosts an 
extremely low volume of equity and secondary market transactions. 
The State Property Committee (GKI) decides who can buy and sell 
shares and at what prices, as the government is involved in the 
majority of local joint-stock companies.  It is often impossible to 
locate accurate financial reports for the local companies traded on 
the TSE.  Under a World Bank project, 25 percent of the shares in 
many firms have been sold to Privatization Investment Funds (PIFs), 
but there is very little secondary trading in those shares. 
Generally, the PIFs have not been able to exercise influence over 
corporate governance. 
 
¶51. The introduction of a computerized payment system has 
substantially reduced inter-bank clearing and settlement times, 
which are now conducted almost in real time.  This has eliminated 
costly floats of money and payment uncertainties, which were 
commonplace in the early years of independence.  Consequently, banks 
are able to make timely monetary payments and better manage their 
liquidity. 
 
¶52. Nonetheless, Uzbekistan's financial sector is still dominated by 
archaic banking rules and underdeveloped capital markets.  The 
banking system is in turn dominated by large state-owned banks and 
marked by a lack of openness and competition, the presence of 
non-performing loans, and a relatively high degree of 
cross-ownership.  Furthermore, the banking system remains the 
primary conduit for the government's directed credits to state-owned 
enterprises at negative real interest rates.  The large portfolio of 
such credits poses a serious threat to the soundness of the banking 
system given the financial distress and un-profitability of most of 
these enterprises.  Unofficial figures from reliable independent 
consultants estimated that in 2001, 60 to 70 percent of bank loans 
were non-performing. However, due to stricter control by authorities 
and a drop in the rate of loans issued, the percentage of 
non-performing loans in 2007 was probably closer to 25 percent. 
 
¶53. In discussions with the IMF, the authorities argue that in the 
absence of a developed inter-bank market, it is too early to switch 
to a market-based system of money and credit management.  Instead, 
the Central Bank of Uzbekistan intends to allocate credit through a 
system of competitive credit auctions as an interim measure. 
Foreign investors, therefore, have access to local credit, although 
the terms and interest rates do not make it a competitive or 
realistic source of additional funds.  The underdeveloped financial 
system, coupled with the rent-seeking found in the government 
sector, makes finding reliable credit terms very challenging. 
 
¶54. The micro-credit sector has been the focus of attention by the 
 
government, NGOs, and international banks.  In 2006 the Uzbek 
government created its own bank, the Microcredit Bank; however, a 
few international banks speculate that the funds will not reach the 
intended recipients, but instead will be appropriated by the 
well-connected elite.  A number of U.S.-based NGOs have been active 
in the past in supplying micro-credit; however these organizations 
have suspended their activities because the government has not 
issued implementing regulations to the new micro-credit law.  The 
government forced several of these organizations to leave Uzbekistan 
in 2006 and effectively closed the operations of others through 
¶2007.  The EBRD, the IFC, and other international donors continue to 
explore possibilities for opening a micro-credit lending bank to 
help meet untapped credit needs. 
 
¶55. The largest bank in the country is the state-owned National Bank 
for Foreign Economic Activity of Uzbekistan (NBU).  NBU controls 
most of the commercial bank loan portfolio and 66 percent of 
Uzbekistan's foreign-exchange business.  The government has reduced 
the number of state-owned banks in recent years (in part due to bank 
insolvency), although instead of releasing these assets for 
private-sector use, it transferred assets to a smaller number of 
state-owned banks, mainly Asaka Bank and NBU.  According to NBU's 
last publicly-available report, the bank's capital totaled USD 485 
million in 2005. 
 
¶56. Uzbekistan's banking system continues to play an anomalous role 
in the collection and enforcement of taxes.  Specifically, banks not 
only make tax payments at the request of their clients, but also 
help tax authorities enforce tax legislation.  If a tax inspector 
perceives that a particular firm is not paying taxes in a timely 
manner, it orders the firm's bank to block its client's account. 
This arrangement applies to all businesses, including joint 
ventures.  In a number of cases, tax inspectorates froze bank 
accounts of joint ventures, accusing them of tax evasion.  A new 
anti-money laundering law came into force in 2006, obliging banks to 
report all financial transactions exceeding a certain threshold. 
This law was rescinded in 2007 due to an overburdening of the 
system, according to the government.  Additionally, concerns existed 
that the law had been misused to gather financial information on 
banks' clients. 
 
¶57. Another major source of irritation for firms operating in 
Uzbekistan is restricted access to cash.  All inter-firm 
transactions must be conducted by bank transfer.  Cash withdrawals 
by legal entities are only permitted for payment of wages and travel 
expenses.  Cash receipts must be deposited on the same day they are 
received.  A March 24, 2000 decree improved this situation somewhat 
by allowing individual entrepreneurs, some small enterprises, and 
joint ventures with foreign capital of $150,000 or more to withdraw 
cash from their bank accounts up to the amount deposited within the 
previous ninety days.  However, in June 2001, the government issued 
a new decree instructing local administrations, commercial banks, 
and tax authorities to tighten control of cash circulation.  The 
decree stiffened penalties for firms that fail to deposit their cash 
receipts in banks.  Pervasive restrictions on cash withdrawals have 
resulted in many small enterprises conducting the bulk of their 
operations in cash, illegally.  Any liberalization of restrictions 
on access to cash is likely to be gradual.  The situation is 
aggravated by the fact that the largest denomination bill is 1,000 
soum (less than 77 U.S. cents), turning transactions of any 
significant value into logistical undertakings. 
 
------------------ 
Political Violence 
------------------ 
 
¶58. In May 2005, armed militants stormed a prison in Andijon, 
released its prisoners, and then took control of the regional 
administration and other government buildings in Andijon Province. 
Fighting broke out between government forces and the militants, and 
reports indicated that several hundred civilians died in the ensuing 
violence. While there were no reports of U.S. citizens affected by 
these events, U.S. citizens and other foreigners in Uzbekistan 
 
frequently have experienced harassment from authorities and local 
residents since the 2005 violence. 
 
¶59. The State Department has issued several public notices 
specifically about the security situation in Uzbekistan, and all 
American citizens intending to invest in Uzbekistan should review 
the most current security information available via the State 
Department web site.  Terrorists do not distinguish between official 
and civilian targets.  Because of increased security at official 
U.S. facilities, terrorists may prefer softer civilian targets such 
as residential areas, clubs, restaurants, places of worship, hotels, 
schools, outdoor recreation events, and aircraft.  The al-Qa'ida 
linked "Islamic Jihad Group" claimed credit for the suicide bomb 
attack against the U.S. Embassy in July 2004.  This group also 
claimed credit for terrorist attacks in late March and early April 
2004 that killed 47 people in Tashkent and Bukhara.  In light of 
domestic and international threats, the government has implemented 
intense security measures such as establishing security checkpoints, 
sharply restricting access to certain streets and buildings, and 
deporting nationals of suspect countries. 
 
¶60. Supporters of extremist groups such as the Islamic Movement of 
Uzbekistan (IMU), al-Qa'ida, and the Eastern Turkistan Islamic 
Movement remain active in Central Asia.  These groups have expressed 
anti-U.S. sentiments.  On December 1, 2001, the Uzbek government 
imposed travel restrictions on large parts of the Surkhandarya 
province bordering Afghanistan, including the border city of Termez. 
 Though the border between Uzbekistan and Afghanistan is officially 
open to traffic, in reality Uzbeks need permission from the National 
Security Service (NSS) to cross the border, and only select Afghans 
are allowed into Uzbekistan. 
 
---------- 
Corruption 
---------- 
 
¶61. Uzbek law prohibits corruption, and officials accused of 
corruption are subject to prosecution.  A number of officials have 
been prosecuted under these laws.  Despite these measures, there is 
considerable anecdotal evidence that officials, who have 
considerable latitude in interpreting regulations, supplement their 
salaries through bribes.  Several major incidents of bribe 
solicitation have been reported to U.S. officials.  Foreign 
investors who refuse to pay bribes have experienced difficulties. 
 
¶62. U.S. businesses have cited corruption as one of the main 
obstacles to foreign direct investment in Uzbekistan.  Lack of 
transparency in bureaucratic processes, including tenders, and 
limited access to currency convertibility, encourage corruption. 
Uzbek law does not forbid government officials from acting as 
"consultants," a common method of extracting payment. 
 
¶63. Three main sections of the government are tasked with fighting 
corruption: the NSS, the Ministry of Internal Affairs (MVD), and the 
General Prosecutor's Office.  Uzbekistan is not a signatory of the 
OECD Convention on Combating Bribery or the UN Anticorruption 
Convention.  In its 2007 Corruption Perceptions Index, Transparency 
International ranked Uzbekistan near the bottom (175th place, ahead 
of only Myanmar, Somalia, Iraq and Haiti). 
 
------------------------------- 
Bilateral Investment Agreements 
------------------------------- 
 
¶64. Uzbekistan has signed bilateral investment or free trade 
agreements with a total of 47 countries, including China, the Czech 
Republic, Egypt, Finland, France, Georgia, Germany, India, 
Indonesia, Israel, Italy, Japan, the Republic of Korea, Kuwait, 
Malaysia, the Netherlands, Pakistan, Poland, Russia, Saudi Arabia, 
Slovakia, Switzerland, Turkey, the United Kingdom, and the United 
States.  Among these, several agreements, including those with 
India, Italy and the United States, have not yet entered into force. 
 In 2004, Uzbekistan and Russia signed a Strategic Framework 
 
Agreement, that also includes free trade and investment concessions. 
 In November 2005, the government signed an alliance agreement with 
Russia, with provisions for economic cooperation.  Uzbekistan and 
Ukraine also agreed, in 2004, to remove all bilateral trade 
barriers.  In 2006, Uzbekistan began the accession process to the 
Eurasian Economic Community (EURASEC).  At the end of 2007, it had 
ratified less than half of the necessary documents. 
 
¶65. The "Treaty between the government of the Republic of Uzbekistan 
and the government of the United States of America concerning the 
Encouragement and Reciprocal Protection of Investment" was signed in 
Washington, D.C., on December 16, 1994, and ratified soon after by 
the Uzbek Parliament.  The U.S. government, however, has not acted 
to bring this agreement into force, and is unlikely to do so until 
the investment climate in Uzbekistan significantly improves.  In 
2004, Uzbekistan signed the regional Trade Investment Framework 
Agreement (TIFA) with the U.S. Trade Representative's Office and its 
four Central Asian neighbors. 
 
-------------------------------------------- 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
¶66. The Overseas Private Investment Corporation (OPIC) has been 
working in Uzbekistan since the signature of the bilateral 
investment incentive agreement in October 1992.  Over the course of 
its operations in Uzbekistan, OPIC exposure has totaled 229 million 
USD for six projects.  As of January 2007, at least two loans - to a 
hotel and a school - were active.  OPIC supports U.S. investment in 
developing countries and emerging markets by managing risk with 
political risk insurance, providing financing through direct loans 
and loan guaranties, and working with private capital through 
OPIC-supported private-equity investment funds.  (www.opic.gov) 
 
¶67. The estimated annual exchange rate used in Uzbekistan varies 
from institution to institution.  The exchange booth rate was USD 
1/1,302 soum, as of December 31, 2007.  While overall the soum has 
greatly deflated against the dollar since the 2003 availability of 
currency conversion, currently it is moderately depreciating; the 
Economist Unit forecasts the soum to reach 1,400 to the dollar by 
¶2008. 
 
----- 
Labor 
----- 
 
¶68. Literacy in Uzbekistan is officially almost universal at 98 
percent, and workers are generally well-educated and trained, 
although with skills transferred from the Soviet era.  Most local 
technical and managerial training does not meet international 
business standards, but foreign companies engaged in production 
report that Uzbek workers learn quickly and work effectively. 
Foreign firms report that younger Uzbeks are more flexible in 
adapting to changing international business practices but are also 
less educated than their Soviet-trained elders.  The Common Country 
Assessment, published by the UNDP in 2003, noted that declining 
access to education among rural youth, especially girls, was causing 
a decline in the education level across the country.  In addition, 
widespread corruption in the education sector has also lowered 
educational standards due to the widespread practice of purchasing 
grades and even entrance to prestigious universities and lyceums. 
 
¶69. Some American companies offer special training programs in the 
U.S. to their local employees.  With the closure or downsizing of 
many foreign firms, it is easy to find qualified, well-trained 
employees, and salaries are low by western standards.  In the last 
few years there has been a dramatic increase in the number of 
workers migrating to Russia and Kazakhstan, among other countries, 
leaving less qualified workers at home to fill in the gaps. 
Corporate income taxes were reduced in 2006 and in 2007 to 10 
percent. The mandatory insurance payroll deduction dropped from 25 
percent in 2006 to 24 percent in 2007. The government plans to 
further cut tax rates and lessen the tax burden in 2008. It adopted 
 
a new version of the tax code in January 2008 (see paragraph 15). 
Salary caps, which the government implements in an apparent attempt 
to prevent firms from circumventing cash withdrawal restrictions, 
prevent many foreign firms from paying their workers as much as they 
would like. 
 
¶70. Labor market regulation in Uzbekistan is similar to that of the 
rest of the former Soviet Union, with all rights guaranteed but some 
rights unobserved.  Cases of workers striking include the following 
in 2003: Turkish construction workers striking against their Turkish 
employer over working conditions; textile workers who picketed in 
front of the Ministry of Light Industry due to nonpayment of wages; 
and large-scale bazaar strikes in light of stark increases in stall 
fees and an increase in taxes on imported products.  In 2004, more 
unrest and dissatisfaction from enforcement of overzealous trade 
regulations caused unrest in bazaars in March, and again in 
November.  However, after the May 2005 events in Andijon, there have 
been few large public displays of dissatisfaction. 
 
¶71. Some European firms have initiated boycotts of Uzbek cotton 
products on the grounds that child labor has been used in the cotton 
harvest.  The government states that it has long been accepted 
practice to use high school and university students in the annual 
harvest.  Sometimes children under fourteen, especially from rural 
areas, participate in harvests, and this has led to charges of child 
labor.  The extent of this problem is disputed, but some independent 
observers, including the International Labor Organization, report 
that it is improving. 
 
------------------------------ 
Foreign Trade Zones/Free Ports 
------------------------------ 
 
¶72. Uzbekistan has no maritime borders.  The law on free economic 
zones passed on April 25, 1996, envisaged the establishment of free 
trade zones including consigned warehouses, free customs zones, and 
zones for the processing, packing, sorting and storage of goods. 
However, these zones have yet to be established.  The Ministry for 
Foreign Economic Relations, Investment and Trade (MFERIT) indicated 
that it is waiting for major investors to develop projects before 
establishing these. 
 
------------------------------------ 
Foreign Direct Investment Statistics 
------------------------------------ 
 
¶73. Uzbekistan projects foreign direct investment (FDI) in 2008 will 
be $1.435 billion.  Of this, the government anticipates $628.63 
million will go to the energy sector, including $562.8 million to 
the oil and gas sector; $85.2 million, to the textile sector; $160.8 
million, to communications; and $62.37 million, to the transport 
sector.  According to government statistics,  FDI in the first half 
of the year grew 120 percent to $416.7 million, and total FDI 
reached $308.9 million, up 140 percent year-on-year.  The government 
attributes the rise in FDI to the entrance of new foreign telecom 
providers and investments by Russian energy firms.  The government 
includes international loans and grants in its FDI accounting, and 
its statistics are therefore not reliable.  The European Bank for 
Reconstruction and Development (EBRD), in contrast to the 
government, estimates 2005 FDI of USD 211 million and 2006 FDI of 
USD 250 million.  EBRD figures for 2007 were not available. 
According to government figures, Uzbekistan's largest trading 
partners are Russia, Turkey, South Korea, Kazakhstan and China. 
 
¶74. From Uzbekistan's independence in 1991, U.S. firms have invested 
roughly USD 500 million in Uzbekistan.  2007 was a difficult year 
for many foreign investors, especially U.S. companies.  Due to 
declining investor confidence and changes to Uzbek legislation, 
numerous international investors have left the country or are 
considering leaving.  Newmont Mining, the largest U.S. investor, and 
Coscom, a large cellular provider, both had extended difficulty with 
the government and left the country.  Caterpillar Tractors pulled 
out in late 2006.  Chevron-Texaco set up operations in 1992 and is 
 
focusing on producing lubricants for the Uzbek market.  It remains 
in business in Uzbekistan.  Many non-U.S. foreign firms have had 
problems, including UK-based Oxus Gold and two Israeli companies. 
Shares or assets of these companies or their residual operations are 
routinely acquired by well-placed Uzbek insiders.  The remaining 
large foreign investors include Swiss-owned Nestle, UK-owned British 
American Tobacco, Russian-owned Gazprom, and Russian-owned Lukoil. 
 
------------- 
WEB RESOURCES 
------------- 
 
¶75.  WWW.MFER.UZ 
 WWW.SOLIQ.UZ 
 WWW.EBRD.ORG 
 WWW.WORDLBANK.ORG 
 WWW.GOV.UZ 
 //BISNIS.DOC.GOV 
 WWW.UZREPORT.COM 
 WWW.UZ 
 WWW.USEMBASSY.UZ 
 WWW.EXPORT.GOV 
 
NORLAND