VZCZCXYZ0004
RR RUEHWEB

DE RUEHNT #0173/01 0381318
ZNR UUUUU ZZH
R 071318Z FEB 08
FM AMEMBASSY TASHKENT
TO RUEHC/SECSTATE WASHDC 9197
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHTA/AMEMBASSY ASTANA 9936
RUEHAH/AMEMBASSY ASHGABAT 3726
RUEHEK/AMEMBASSY BISHKEK 4340
RUEHDBU/AMEMBASSY DUSHANBE 0218
RUEHBUL/AMEMBASSY KABUL 2195
RUEHLM/AMEMBASSY COLOMBO 0198
RUEHNE/AMEMBASSY NEW DELHI 0872
RUEHKT/AMEMBASSY KATHMANDU 0282
RUEHIL/AMEMBASSY ISLAMABAD 3927
RUEHKA/AMEMBASSY DHAKA 0192
RUEHMO/AMEMBASSY MOSCOW 7297
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RUEHVEN/USMISSION USOSCE 2319
RUEHBS/USEU BRUSSELS

UNCLAS TASHKENT 000173 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN BEXP ECON EAID EIND EINV ETRD PHUM
PREL, SMIG, SOCI, KZ, RS, UZ 
SUBJECT: CONTROLS ON TRANSFERS AND WITHDRAWALS OF CASH 
 
Ref: A) 07 Tashkent 1922, B) 07 Tashkent 2180 
 
¶1. (SBU) Summary: A December 2007 Central Bank order has resulted in 
delays for those trying to access foreign currency transfers. 
Simultaneously, local currency withdrawals have become more 
difficult as the Central Bank has further limited cash supplies. 
The two developments appear to be unrelated, but both illustrate the 
perverse economic consequences of Uzbek attempts to enforce taxation 
collection, stem inflation and regulate the activities of foreign 
governmental and non-governmental organizations.  Pre-election 
jitters in December 2007 probably reinforced the Government of 
Uzbekistan's penchant for strict monitoring of foreign activities. 
However, in our quest for a silver lining, we note this could also 
facilitate the Uzbeks' apparent willingness to allow greater 
non-governmental organization activity, by ensuring that such 
activity is "under control."  End summary. 
 
¶2. (SBU) This cable is SBU and therefore omits names of embassy 
contacts. 
 
Expansion of foreign currency transfer controls 
--------------------------------------------- -- 
 
¶3. (SBU) In the run-up to the December 23, 2007 Uzbek presidential 
elections, the Central Bank of Uzbekistan issued an order broadening 
the range of foreign currency transfers subject to special screening 
procedures.  First, the background: In February 2004, the Uzbek 
Cabinet of Ministers had issued its Resolution Number 56, ordering 
screening of foreign currency transfers into Uzbekistan by foreign 
governmental and non-governmental organizations.  The decree was on 
its face aimed at monitoring aid, grants and technical assistance. 
Under the order, all foreign currency transfers subject to the order 
were to be screened by either the National Bank of Uzbekistan or 
Asaka Bank.  Any other bank receiving a transfer of foreign currency 
from a foreign governmental or non-governmental organization had to 
inform the intended recipient that the money must either be 
transferred to one of these banks or returned to the sender.  Asaka 
Bank and National Bank of Uzbekistan then conducted a screening 
process, to ensure that the intended use of the funds was acceptable 
to the Government of Uzbekistan.  The decree has been applied since 
2004 to local non-governmental organizations, but many foreign 
non-governmental organizations were allowed to continue executing 
transfers through their established banks. 
 
¶4. (SBU) An Embassy contact in the banking sector confirmed recent 
reports that the Central Bank of Uzbekistan in December 2007 issued 
an order expanding the scope of Resolution Number 56 to all 
transfers of foreign currency from non-residents to residents of 
Uzbekistan.  Residence is defined as 183 days' or more physical 
presence in Uzbekistan.  The Embassy contact said he believed the 
order was part of the general pre-election jitters noticed without 
exception by all observers here.  Foreign businessmen and other 
Embassy contacts began to notice the effects of this order in 
mid-January, after returning from the holidays.  The Central Bank's 
announcement had not been publicized, and few understood the reasons 
behind the new difficulties. 
 
¶5. (SBU) Foreign non-governmental organizations are among those 
affected.  In December 2007, a USAID implementing partner that is a 
foreign (i.e., non-Uzbek) non-governmental organization informed us 
that it was unable to process foreign transfer currencies through 
its usual bank.  The organization had been told that it must begin 
processing such payments through either Asaka Bank or National Bank 
of Uzbekistan.  In January 2008, several other foreign 
non-governmental organizations reported they were being subjected to 
the order.  Although the non-governmental organizations in question 
were concerned about maintaining adequate cash flow, they did not 
know whether the Government of Uzbekistan would subject their 
foreign currency transfers to additional scrutiny. 
 
¶6. (SBU) Comment: The Uzbek government recently agreed to release 
funds seized in 2006 from two USAID implementing partners (ref B), 
and political signs point to increased GOU willingness to allow a 
return of civil society and human rights NGO activity.  We do not 
believe that the new Central Bank order indicates a reversal in this 
trend.  End comment. 
 
Enforcing tax collection by limiting cash transactions 
--------------------------------------------- --------- 
 
¶7. (SBU) By late January, Embassy contacts and independent websites 
also began to report difficulties withdrawing local currency from 
bank accounts.  Businessmen - foreign and Uzbek alike - and those 
private individuals who actually keep their money in the bank 
reported significant difficulty withdrawing local currency.  Our 
banking contact said he was unaware of any change in the Central 
Bank's longstanding practices and suggested that some banks might 
simply be experiencing shortages of cash.  Uzbek banks in 
particular, he said, have more trouble than foreign joint venture 
banks in generating cash revenues.  However, another well-connected 
banking contact later told us that the Central Bank indeed was 
limiting cash supplies to local banks (vice foreign joint venture 
banks) and that this was an attempt to limit inflation.  The Central 
Bank was limiting cash, he said, throughout the country, but more so 
in the provinces than in Tashkent. 
 
¶8. (SBU) The Central Bank of Uzbekistan actually limits banks' 
access to cash for two reasons - to facilitate taxation collection 
and to stem inflation.  First, tax collection: Limiting cash 
supplies theoretically forces businesses to comply with rules that 
require all institutions (i.e., businesses, institutions and other 
entities that are not individual persons) to conduct all 
transactions via bank transfers.  Only payments for salary and 
"salary-equivalents" are exempt.  Even minor purchases of supplies 
must be made via bank transfer, with some allowance for urgent 
needs.  The Central Bank has the right to collect the cash deposits 
of all banks at the end of every banking day but has normally 
refrained from doing so. 
 
¶9. (SBU) Banks in Uzbekistan cannot, as banks in most countries do, 
turn to the Central Bank for cash whenever they wish.  Requests for 
cash must be for accepted purposes, such as salary payment. 
Moreover, cash is in short supply within the banking system, and a 
clear pecking order is said to exist in filling requests.  Requests 
to pay salaries to employees of governmental bodies and state 
ventures, for example, hold precedence over requests to pay salaries 
to employees of an ordinary private company.  Connections matter, as 
well. 
 
¶10. (SBU) Another aspect of Uzbek banking regulation is the 
requirement that businesses deposit all cash with their banks at the 
end of every day.  The taxation authorities bear primary enforcement 
responsibility, and many businesses in this cash-based society evade 
the requirement. 
 
Limiting inflation by blocking access to local currency? 
--------------------------------------------- --------- 
 
¶11. (SBU) A well-connected banking contact confirmed that the 
Central Bank is currently limiting cash supplies to local (i.e., 
Uzbek) banks, particularly in the provinces, and that this is an 
effort to combat inflation.  This comports with the prevalent theory 
among many of our foreign and local business contacts.  The practice 
is known within the local banking community as "cash collection." 
The Central Bank has few anti-inflationary options at its disposal. 
Interest rates are adjusted only about once per year, with other 
banks following along, and other orthodox policy options are 
limited. 
 
¶12. (SBU) The Government is understandably concerned about 
inflation.  Authorities have raised pensions, government salaries 
and the minimum wage by over 40 percent in the past year.  This, as 
well as restrictive import substitution policies and a worldwide 
increase in food prices, has led to price increases that are 
severely impacting the standard of living for most Uzbeks.  Staple 
foods are up 30 percent in the past year (and over 100 percent for 
bread in the past eighteen months), and housing prices in Tashkent 
have become an increasing burden for most residents.  The 
government's official 2007 inflation figure of 6.8 percent is 
clearly inaccurate.  Young and middle-aged men and women continue to 
leave for jobs in Russia and Kazakhstan, while Tashkent continues to 
experience an inflow from the provinces. 
 
Perverse consequences of cash policies 
-------------------------------------- 
 
¶13. (SBU) The Government's cash policies will probably drive an 
increasing number of businesses into the illegal cash economy. 
Anecdotal information suggests that this is already far more 
widespread than most of our contacts care to admit.  This will tend 
to benefit those who have ready access to cash and/or who have 
inside connections.  In fact, the requirement that businesses 
conduct all transactions, even minor supplies purchases, via bank 
transfer has reportedly already produced a cottage industry of 
fly-by-night entities that camouflage cash transactions with 
"official" bank documentation.  This documentation is then submitted 
to the tax inspectors.  Many of these fly-by-night entities are 
rumored to be run by government insiders.  In a country ranked 175 
out of 180 in Transparency International's 2007 Corruption 
Perceptions index, this is as easy to believe as it is difficult to 
confirm. 
 
Uzbeks take it in stride: it's better than Tajikistan 
--------------------------------------------- -------- 
 
¶14. (SBU) Uzbek citizens throughout the country seem to be taking 
their economic difficulties in stride.  The government is flush with 
excess cash from a booming commodities market.  Remittances from the 
one to three million Uzbeks working abroad (in a country of 27 
million) account for up to 20 percent of GDP and keep many families 
fed and clothed.  A fair number of Uzbeks prosper in legitimate as 
well as not-so-legitimate business.  As some Uzbeks have pointed 
out, this is a country that has survived much worse, and, relative 
to some of its neighbors, it remains a decent place to live. 
 
¶15. (SBU) Moreover, decent (though in some sectors aging) Uzbek 
infrastructure and general living conditions on the ground remain at 
odds with abysmal economic indicators and seemingly 
counterproductive economic policies.  One visiting World Bank 
official recently remarked that the numbers point to a foundering 
state, but few who have visited would call it that. 
 
Comment: How long will the paradox last? 
---------------------------------------- 
 
¶16. (SBU) How long this paradox can last is anyone's guess. 
However, with the possibility that a global economic downturn could 
impact both the commodities markets and the Russian economy (and 
hence Uzbek remittances), it bears some thought.  The bank policies 
described above are among the many Uzbek policies that hinder a 
broad-based economic growth and jeopardize Uzbekistan's chances of 
weathering an eventual rough patch. 
NORLAND