As Uzbekistan re-enters the world community, it hopes to revive its historical role as a crossroads for East-West trade. Foreign merchants, financiers and investors have throughout the ages made significant contributions to Uzbekistan`s history and economy.

Since independence, the Government of the Republic of Uzbekistan has taken numerous measures to encourage foreign economic involvement in the economy. In these four years, laws have been passed on property rights, denationalisation and privatisation, foreign investment, entrepreneurship, banking and foreign trade. Housing has been privatised, internal trade deregulated, and the control of shops and services transferred into private hands.

These are just first steps. The Government and people of Uzbekistan are committed to reform and are moving ahead towards an open economy.

A NEW ROLE FOR UZBEKISTAN

Central Asiaþs best-kept secretþ is how a multinational executive recently described Uzbekistan. In medieval times, it was the cultural and economic nerve-centre of a vast empire that stretched across Central Asia into India and Iran, and a key post in the overland trade route between China and the West. Today, it is the most industrialised of the former Soviet Central Asian republics.

But since there is little publicity about Uzbekistan, most outsiders are unfamiliar with its long history and present industrial strength. Those who do know are struck by the commercial possibilities, in particular, by the countryþs potential to once again become an economic hub connecting Europe with Western China, Central and South Asia.

The foundations for this revival are laid. Uzbekistan has an extensive transportation network, and large urban population. Its capital, Tashkent, is the largest city in Central Asia with a population of 2.4 million, and the only Central Asian city with a subway system. The national carrier, Uzbekistan Airways, connects Tashkent with the major capitals of Europe and Asia.

Following Uzbekistanþs independence on 1 September 1991, Uzbekistan has moved rapidly to take its place on the world stage. It is a member of the United Nations, the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank, and has concluded bilateral agreements with the leading world economies. Some thirty countries have already set up embassies in Tashkent.

Uzbekistan has embarked on a concerted programme of political liberalisation and economic reform. With the goal of moving step-by-step to a market economy, the programme is guided by some overriding concerns. Key among these is maintenance of social stability and the minimisation of economic shocks in the transition to a market system.

GEOGRAPHY AND MINERAL WEALTH

Uzbekistan lies at the heart of the Central Asian steppe that was home to Genghis Khan and Tamerlane. It is bordered by Kazakhstan, Afghanistan, Turkmenistan, Tadjikistan and Kyrgyzstan. While it does not share borders with China, Pakistan or India, these large markets lie less than five hundred miles, or an hourþs flight away.

Uzbekistan has a land area of 447,400 square kilometres, about the size of Sweden. The Syr Darya and the Amu Darya - Central Asiaþs two largest rivers - form its borders in the north and south. In their fertile valleys, cotton, fruit and vegetables flourish. About 3/5 of the country is desert. The Tien Shan Mountains and the lush Fergana Valley, which separate Central Asia from China, lie in the east. The Aral Sea forms part of the western border.

Uzbekistan is endowed with a wealth of mineral resources, including some precious metals. There are large gold deposits in the Kizyl-Kum desert. Copper, zinc, lead, tungsten, aluminum and molybdenum are found in the Kuramin range. There are also large deposits of feldspar, fluorite, bentonite clays, phosphate, asbestos, and kaolin.

Uzbekistan is the world's tenth largest producer and a net exporter of natural gas. Two pipelines are planned, one with Turkish assistance to the Mediterranean and another to Western China. In 1992 Uzbekistan produced more than 4 million tons of petroleum. Sizable new reserves have been discovered at Kokmulak near the Turkmenistan border, and Mingbulak and Chinaz in the Fergana Valley. Estimates show that these might be among the ten largest in the world. With current investment projects, Uzbekistan will increase its production to 8 million tons per year and be self-sufficient by the end of 1996.

Other national energy sources are available to support industrial development, notably, hydro-electric power. Modernisation of existing oil, gas and coal powered stations is a priority, as they are not fuel-efficient. Research is also underway to harness alternate sources of energy, such as wind and solar power. Solar power is already used for metal smelting and purification in Zarkent, rural electrification and powering of high-altitude research stations.

CULTURE AND HERITAGE

The population is young and dynamic. Seventy per cent of Uzbekistanþs 23 million people are less than 30 years old. There is universal literacy due to an effective system of public education and 52 universities across the nation. Some of these, together with the Uzbek Academy of Sciences, are internationally renowned for their innovative scientific research. At this moment, some seven million people, or one third of Uzbekistanþs population, are enrolled in educational institutions. Over 70% of the population is Uzbek, but a hundred nationalities live in the republic, the most important being Russians at 8%, followed by Tadjiks, Tatars, Koreans and Kazakhs. There are also significant Uzbek minorities in Tadjikistan, Kyrgyzstan, Turkmenistan, and Afghanistan.

A brief history

Throughout history Uzbekistan has been a gateway between East and West. For millennia it has been the home of a mixture of Persian and later Turkic peoples, including the 6th century B.C. Scythians, the world's first mounted archers, and later the Sogdians, the legendary Silk Route traders who were conquered by Alexander the Great in the 4th century B.C. on his way to India. The cities of Samarkand and Bukhara, which are 2,500 years old, became key trading posts along the Great Silk Route that took silk from China and brought back gold, silver and wool from the West. Bukhara became renowned as a holy Islamic city. Science and the arts flourished as early as the 9th century - still in print are the medical writings of Avicenna, and the poetry of the 10th century Sufi Omar Khayam.

In the 13th century the Mongols under Genghis Khan overran this region, and it became the heart of an empire that extended from the Urals to India. The terrible Pax Mongolica was followed by the equally ruthless rule of Timur, called Timur-the-Lame or Tamerlane, in the 15th century, who made Samarkand his capital and conquered Persia and India. His grandson Ulugbek, a brilliant astronomer, ruled Samarkand until he was assassinated by his own son. The last Timurid, Babir, founded the Mogul dynasty in India in the 16th century.

By the 19th century, the region had fallen into economic and cultural stagnation, prey to the whims of petty tyrants and the intrigues of Russia and England. At that time, it was divided into 2 hostile khanates - Khiva, and Kokand, and the Emirate of Bukhara. Russia eventually incorporated Central Asia into its empire in 1865, at about the same time as it took over the Caucasus. This at least brought improvements in transportation and education and an end to the slave trade.

The Soviet period saw continued improvements in education and society, but proved to be more brutal and intrusive than the Tsarist occupation, effectively banning religion and eventually introducing the Cyrillic script in place of the Arabic and Latin scripts, and making Russian the lingua franca. Furthermore, the Stalinist repression did not bypass Uzbekistan. Not only were leading figures shot, but whole peoples were forcibly resettled here, including the Chechens, Volga Germans, Metskhetian Turks and Crimean Tatars. However, Uzbekistan also proved a haven for thousands of refugees from collectivisation and political terror. 200,000 orphans were resettled here during WWII.

The economy was integrated into the Soviet planning system, and Uzbekistan experienced remarkable industrial development, but at a great cost to the environment. Massive irrigation canals were constructed in the 1930s and 1950s, and whole factories were transported from European Russia during WWII. The standard of living rose significantly, which allowed the traditional family-centred lifestyle to flourish. Population growth was very high, with families of 10 or more children common. Following the earthquake in 1966, all Soviet republics and Warsaw Pact countries contributed to a massive rebuilding programme of Tashkent.

By the 1970s, economic and environmental problems were evident, especially the tragedy of the Aral Sea, once the world's fourth largest inland sea, which has lost 40% of its water through excessive irrigation. The rigid political and economic system of the Soviet Union became less and less viable, and it was dissolved in 1991. Overall, despite the legacy of crisis which the Soviet system left behind, it is fair to say that great strides were made during this period to bring Uzbekistan into the 20th century.

BUSINESS OPPORTUNITIES

A Diversifying Economy

Agriculture accounts for almost half of Net Material Product in Uzbekistan. It is the worldþs fourth largest producer of cotton, but only 16% of the cotton crop is processed locally. The aim is to increase this to 40% in the nearest future. At the same time, improvements in the efficiency of cotton growing will allow a wider range of foodstuffs to be grown. The foreign investor is seen as essential to this transformation. Furthermore, it is recognised that the processing of agricultural and dairy products requires major restructuring and investment. Presently, there are no canning facilities, and as much as 35% of the bountiful harvest of subtropical fruit and vegetables is lost. There are considerable opportunities for investment in canning, juicing, preserving, bottling and packaging.

Uzbekistan has considerable industrial potential; it is the world's seventh largest producer of gold and has substantial known deposits of many other valuable minerals. It is also a major producer of textiles, fertilisers, machinery, aircraft and aviation equipment. Petrochemicals, energy, metallurgy and construction materials are among the most recently developed industries. A large chemical industry centres on the production and processing of cotton. In all these areas commercial opportunities are plentiful.

Economic and trade treaties with Russia, Ukraine, Azerbaijan, Kyrgyzstan and Kazakhstan, among others have recently been concluded, and the Central Asian countries are moving rapidly towards a Central Asian Common Market.

Priority for Domestic Value-Added

After decades of having limited control over its economy, the Government is encouraging increased local value-added through more domestic processing. Whether in cotton, minerals or fruits, the aim is to boost the international competitiveness of Uzbekistanþs products. Building the industrial base to expand downstream activities and diversify exports is therefore a central theme of the current programme of economic modernisation and a principal goal of the Uzbek Government.

Transport and Telecommunications

Despite being a landlocked country, Uzbekistan has a highly developed transportation system. Its railways link it not only with all the CIS countries, but via Kazakhstan to China. A new railway is under construction which will link Uzbekistan, via Turkmenistan to Iran and Pakistan, providing new routes to Indian Ocean ports. Existing roads are also being upgraded. Already, transport trucks from Europe, Turkey and Iran carry a growing proportion of Uzbekistan's imports, and rapid development of this means of transport is a Government priority, as exemplified by the Mercedes-Benz joint venture producing trucks with Uzautoprom in Khorezm.

Tashkent is quickly emerging as a major communication centre, and a number of international airlines offer direct flights to Frankfurt, London, Istanbul, Islamabad, Delhi, Singapore and Tel Aviv. Uzbekistan Airlines Airbuses provide direct flights to New York, London, Tel Aviv, Kuala Lumpur, and many other world capitals. Uzbekistan has nine airports, and daily flights connect all parts of the country.

Efforts are underway to upgrade and expand telecommunication links. However, there is need for new technology, a gap which foreign investors can fill.

Services

The recently privatised retail and service sector offers interesting prospects for commercial development. Catering, construction, leather, carpet and baking enterprises, among others, are now privatised. Licensing, franchising, and subcontracting arrangements could provide foreign business with a basis to expand operations throughout the country, while upgrading local production and marketing capabilities.

Foreign capital has been involved in hotel construction - recently a 4-star Indian-built hotel was opened in Tashkent, and similar facilities are being completed in Bukhara and Samarkand. There is much room for foreign investment in developing the tourist industry. Uzbekistan is the home of some of the worldþs most famous monuments of medieval Islamic architecture. In the east, the Tien Shan mountains present opportunities for winter sports and trekking.

Currency

Uzbekistan set up its own currency - the sum coupon - in November 1993, when Russia proceeded with its own currency reform. The drop in production and trade during the first years of independence took its toll on the currency, and there followed a period of hyperinflation - about 90% per month. A currency reform in August 1994 brought in the sum, and the inflation rate fell dramatically to between 8 - 20% per month for the rest of 1994, and 5 - 10% per month in 1995.

The legislation is in place for noncash convertibility, which requires a license. At present exporters must surrender 15% of export proceeds at an exchange rate set by the central bank (which is close to the unofficial rate). The Government is committed to making the currency fully convertible within the near future. Major foreign investors have so far negotiated their own agreements for foreign exchange conversion.

Banking

Perhaps the most pressing objective of the Government at present is to stabilise the economy while providing adequate credit facilities through the banking system. The banking system is two-tiered, consisting of the Central Bank of Uzbekistan and about 30 commercial banks. Because of the instability of the currency and general economy during the past 5 years, the most serious problem has been the lack of a credit market allowing for long term loans to promote industrial development. Recent developments include the setting up of the Central Asian American Enterprise Fund and a commercial investment bank by the International Financial Corporation intended to provide longer term loans geared to production.

In addition to the National Bank for Foreign Economic Activity, the Uzbekistan-Turkish Bank, a joint venture with Turkey's TC Ziraat Bank, and Uzprivatbank, a joint venture with a Dutch consortium, provide a full range of services for the foreign investor.

Taxes

The most important taxes include:

* VAT - current rate 18%; levied at production source; imports excluded.
* enterprise profit tax - varies from 18 - 60% according to sector.
* excise tax - varies from 5 - 90% according to sector.
* customs duties - vary from 5 - 50% according to sector. There is discussion of unifying import duties among Russia, Kazakhstan and Uzbekistan.

Current Economic Indicators

Net Material Product fell 11% in 1992, 2.5% in 1993, 2.6% in 1994 and 4% (est.) in 1995, in contrast to over 40% during this period in the other CIS countries. The fact that the Uzbek economy performed better is due to the importance of agriculture in the economy and the stable growth in gold, oil and gas production. The fiscal deficit was 11% of Gross Material Product in 1992, 9% in 1993, and 3.2% in 1994, though this excludes government credits to enterprises (which would increase these figures about 5%). Social sector spending is still 40% of the budget. Official reserves were $1.3b at the end of 1994. The external debt is relatively small - $1b - since Uzbekistan did not inherit any debt from the Soviet Union. Total exports in 1994 were estimated at $3.2b of which around 50% were to CIS countries. There were net capital inflows and a trade surplus of over $600m in 1994.

GOVERNMENT STRATEGY

photos: Mustakillik maidoni, fountains, government meeting

Fostering Private Ownership

The legal foundations for privatisation were laid in December 1991, when Uzbekistanþs parliament enacted a law providing the framework for the denationalisation and privatisation of all government property. The Committee for Management of State Property and Support of Entrepreneurship (GKI) was set up to oversee the transfer of some 77,000 enterprises to private ownership.

In Stage One (1992-93), approximately 40,000 firms were privatised, mostly commercial shops, restaurants, with some in light industry, construction and transport. These were mostly employee/management buyouts, with GKI retaining 51%. 15,000 private farms totalling 170,000 hectares were created. All housing was privatised, including 1.1m apartments at minimal prices.

In Stage Two (1994), almost 3,000 of the 10,000 firms privatised were sold at auctions, by tender or by share issues on the Tashkent Stock Exchange, with GKI retaining approximately 30%. 1,800 major companies are being privatised in Stage Three (1995). Proceeds from the sales go towards post-privatisation support for newly privatised firms through bank loans and loans through the Fund for Assistance in the Development of Small and Medium Business. Chambers of Commerce are being set up across the country to support both private industry and farming. GKI is now working with the World Bank to set up competing investment funds to carry out the privatisation and restructuring of the large scale firms.

Involving Foreign Capital

The Government is convinced of the importance of foreign investment in the current reform programme. Beginning in June 1991, Uzbekistan published a series of laws and decrees to facilitate foreign direct investment and trade, including the May 1994 Law on Foreign Investment. In August 1995 the Foreign Investment Agency was set up to coordinate all questions of foreign investment, and to provide a 'one-stop shop' for foreign investors.

Investors may repatriate profits, import goods and sell them locally, lease land, and buy buildings and equipment. They are protected against nationalisation, and an investment insurance fund, Uzbekinvest, has been created in cooperation with the American Insurance Group. Foreign firms may acquire securities and shares in Uzbek enterprises through direct negotiations or on the Tashkent Stock Exchange. The Government is also encouraging investors to acquire unfinished constructions.

Tax incentives of interest to foreign investors - Enterprises with more than 30% foreign capital

* pay a fixed 10% enterprise profit tax.
* have tax holidays for 2 years from the date of registration, or for 5 years if the investment fits the priorities of the national investment programme (agriculture, consumer goods, building materials, medical facilities, agricultural machinery, light industry, and recycling).

Enterprises with less than 30% foreign capital * pay a fixed 18% enterprise profit tax.
* have a 2 year tax holiday, in the first year by 75% (4.5%) and in the second by 50% (9%).
* Nongovernmental organisations providing social services are exempted from VAT.

Where exports are more than 30% of production, the enterprise pays half the normal rate of tax. Furthermore, the hard currency earnings received by the enterprises from the growth of exports shall be exempt from taxes on income and from the compulsory sales to the Central Bank. The same holds for hard currency earnings from the export of scientific and technological products which are reinvested in those areas. Otherwise there is a tax on foreign exchange receipts of 15%.

About 1300 joint ventures from over 50 countries have already been registered. Among the most noteworthy are those with Daewoo of the Republic of Korea, B.A.T. and Rank Xerox of Great Britain, Mercedes-Benz of Germany, and Newmont Mines of the United States. Newmont's gold mining project was named "The Deal of the Year" in 1993 by Project Finance International Yearbook. In cotton production, the Meredith Jones Group (UK) has launched a joint venture with 11 former collective farms, and predicts a 45% increase in output with new methods and equipment, including laser field-levelling, new seeds, and new ginning machines.

In addition, the Government of Uzbekistan has signed economic cooperation trade and investments agreements with many countries, including the United States, France, Turkey, the Republic of Korea, and Malaysia.

WHO TO CONTACT

Visitors to Uzbekistan require a visa which can be issued by one of the Uzbek Consulates abroad (London, Washington, Bonn, Frankfurt, Istanbul, Moscow, Delhi, Karachi, or Tel-Aviv and others), or on arrival at the Tashkent airport. Organisations which can assist foreign business people interested in visiting Uzbekistan are listed below.

The Uzbek Government has set up a number of new ministries and institutions to carry out privatisation, to promote trade, and to facilitate foreign business involvement. The foreign investor's first stop will be the Foreign Investment Agency, which was set up by Presidential Decree August 24, 1995 to coordinate all questions of foreign investment. At present there are two main government bodies dealing directly with foreign investment:

The Committee for Management of State Property and Support of Entrepreneurship (GKI) prepares, evaluates and transfers to private ownership the assets of state-owned companies. Foreign investors are now permitted to acquire the use of such assets in the framework of a joint venture with an Uzbek partner. With its list of privatised enterprises and enterprises earmarked for privatisation, the Committee is an invaluable source of data and business contacts. It is concerned especially with the evaluation, sale and preparation of investment profiles of firms to be privatised.

The Ministry for Foreign Economic Relations (MFER) is responsible for formulating and implementing Uzbekistanþs foreign economic policy, including trade relations with other countries. It is concerned with imports and exports, especially state-to-state deals. It also analyses and prioritises large deals involving foreign investment and credits. It still controls most of Uzbekistanþs cotton exports and all of its exports of nonferrous and precious metals. In addition, it has the function of promoting the transfer of technology and know-how to Uzbekistan through negotiating bilateral trade agreements. The Ministry has also set up a number of foreign trade companies for the import and export of strategic commodities. The MFER issues business licenses to foreign company representatives. All foreign business representatives must register with the MFER. Interservice, in its Accreditation and Accommodation Department, is designed to help foreign businessmen successfully complete the procedures needed to set up op

erations in Uzbekistan and find suitable office space, although this can be done through a number of other agencies (see below).

In addition to the above, there are other government bodies the foreign investor should be aware of. The Ministry of Justice registers all joint ventures. If the investment is over $20m, or if the investor requires 100% foreign ownership, approval of the Department of Coordination of External Economic Activity under the Cabinet of Ministers is required.

The Foreign Investment Agency (FIA): It has been set up by the Government with the initial support of UNDP. It will coordinate its work with the global UNIDO investment promotion network - the UN/UNIDO Investment Promotion Service (IPS) - which has offices in Athens, Cologne, Milan, Paris, Seoul, Tokyo, Vienna, Warsaw, Washington and Zurich. IPS offices act as matchmakers and advisers to local businessmen and their prospective foreign partners. They help the country identify potential foreign partners, prepare investment proposals, and evaluate offers received from prospective investors.

All government bodies dealing with foreign investment will work closely with the Agency. All questions from registration to prospective partners can be dealt with here.

It should be kept in mind that interest in a specific sector will best be met by going to the appropriate ministry or kontsern, as some ministries are now called. For instance, to set up a drycleaning or supermarket chain, the investor would also be wise to contact Uzbytsoiuz (the Union of Multiple Service Establishments), which represents all service enterprises and can best advise him on concrete investment opportunities in the area of services. To invest in food processing, he would contact Uzplodovoshchprom. A list of ministries is provided in Annex G of the OECD Investment Guide for Uzbekistan.

Organisations assisting foreign investors (country code 7, area code 3712)

Official Organisations:

National Agency for Foreign Investment
Director Furkhat Makhsudov
9 Navoi St, Tashkent
contact UNIDO for further details

Foreign Economic Relations Department
Director Kh Khakimov
Committee for Management of State Property & Entrepreneurship Promotion
6 Mustakillik maidoni, Tashkent 700008
tel 398721, 394128

Department of Coordination of External Economic Activity
Director Alisher Shaikhov
Cabinet of Ministers
5 Mustakillik maidoni, Tashkent 700008
tel 398461, 398041, 398718
fax 398222

Interservice:

Ministry of Foreign Economic Relations Protocol Department,
16 Sh Rashidov St, Tashkent 700015
tel 391006, 391011, 394558
fax 363565

Tashkent International Business Centre
Tashkent City Administration
Director Anvar Iuldashev
17 Pushkin St, Tashkent 700000
tel 332707, 337288
fax 332707, 338454

Private and quasi-governmental Organisations:

American Business Center (ABC)
Business Info Service for New Independent States (BISNIS)
c/o John D Breidenstine, Commercial Attach‚
Embassy of the U.S.A.
82 Chelanzarskaya St, Tashkent 700115
tel 771407, 771081
fax 776953, 891224 (satellite)

Union of Entrepreneurs
1, Furkat St, Tashkent 700027
tel 459734 459877
fax 394514

Fund for the Assistance and Development of Small and Medium Business
Director Alijon Iusupov
8 Friendship of Peoples St, Tashkent 700043
tel 450645, 451638, 452951

Business Communications Centre
Director Shukhrat Akhundjanov
TACIS Consultant Anders Hedeager
16a Lakhuti St, 5th fl, Tashkent 700015
PO Box 2885
tel 565362, 567733
fax 568722
email: bcctash@bcc.com.uz

Business and Education Centre
Director Konstantin Kazantsev
2 Mustakillik maidoni, Tashkent 700029
tel 394886

Worldwide Investments
Uzbekistan Representative Sergei Krivtsov
1 Maxim Gorky Prospekt, Tashkent 700000
tel 674382, 672404
fax 689460

Centre of Innovation and Management
Director Ilkhom Karimov
16a Lakhuti St, 5th fl, Tashkent 700015
tel 548749, tel/fax 560813, 548877

German Chamber of Commerce
Director Peter Hoehne
6 Murtazaeva St, rm 82/83, Tashkent 700000
tel 891424 (satellite), 349989, 341624 (tel/fax)
email: diht@infotel.tashkent.su

UN Industrial Development Organisation
Country Representative Julyan Watts
4 Taras Shevchenko St, Tashkent 700029
tel 398541, 560221
fax 336965, 891291 (satellite)
email: watts@unido.silk.glas.apc.org

Privatisation Project
Chief Technical Adviser Wojciech Hubner
6 Mustakillik maidoni, Tashkent 700008
tel 391708, 394154
fax 394012
email: hubner@unido.bcc.com.uz