“Want to find one of the world’s latest and largest emerging markets? Look to Uzbekistan”

As the joke has it: “Uzbekistan didn’t leave the Soviet Union, the Soviet Union left Uzbekistan.” The country, for all intents and purposes, remained a Soviet Republic from its independence right up until the 2016 death of Islam Karimov, the nation’s only president and last leader of the Uzbek Republic of the USSR. In a fascinating turn of events, as arguably one of the most closed countries in the world –beaten out by North Korea and Turkmenistan, among a select few others – Uzbekistan has made historic strides in just the past few months indicating a new future for the country and creating an opening for MNCs to discover opportunities in one of the world’s newest and most appealing emerging markets.

Source: Frontier Strategy Group

What has happened?

  • Exchange rate reform: The most dramatic and important change occurred in early September when the central bank stopped supporting the som and moved to a free-floating currency. While the depreciation has been massive (nearly 100%) and inflation has naturally picked up as a result, the move will prove to be very beneficial to the country. The black market for the som – and opportunities for mass corruption – has ended, and full currency convertibility will be restored over time. Domestic firms can now buy and sell currency freely to purchase imports, and MNCs can repatriate profits with currency controls removed.
  • Improved business environment: Moreover, the government has been consistent in its support over the past year for attracting FDI and improving the investment climate. In particular, the European Bank for Reconstruction and Development (EBRD) is opening an office in Tashkent and has approved financing two projects this year for the first time since 2007. The government also intends to open a new business district and technopark in 2018. Meanwhile, Uzbek diplomatic delegations have been making serious overtures in Western capitals to inform multinationals that Uzbekistan is open for business and is taking input from foreigners to understand how to make the market more appealing for investment. More business-friendly market reforms and reduced state regulation – particularly focused on the banking and agricultural sectors – are also being discussed.
  • Improved regional ties: Aside from these critical domestic improvements, indicative of the country’s changed course, Uzbekistan has made overtures to all its neighbors to improve historically strained (or even hostile) relations. Most recently, Uzbekistan has reached out to Kyrgyzstan, Tajikistan, and Turkmenistan to resolve long-standing border and resource disputes, while for the first time introducing flights to/from Tajikistan. Likewise, Human Rights Watch has been admitted to the country and the BBC has opened an office in Tashkent.

The changes are not only momentous but also timely, as the country emerges from an economic slowdown on account of the crash in commodity prices since late 2014. The market will face some struggles in 2018 in light of the massive devaluation (from roughly UZS 4 against the US dollar to UZS 8); however, stronger government revenues from rising commodity export prices, increasing exports to the revived economies of Kazakhstan and Russia, improved remittances from Russia, and government policy will help offset the economic damage from the devaluation-induced inflation pressures. Importantly, the government is planning to increase social spending (e.g. child support payments) and subsidies to state-owned corporations in core sectors of the economy (e.g. utilities), which dominate the economy, while adjusting customs tariffs to limit imported inflation.

Source: Frontier Strategy Group

Don’t be blind to risks

Naturally, considerable political and economic risks exist as a result of such sweeping and comprehensive changes. Politically, the government runs the risk of a reversal of reforms, as seen with an experiment with reforms in 2003, from inter-elite power struggles emanating from those vested interests being harmed. While this remains a risk factor, President Shavkat Mirziyoyev has successfully consolidated his political control over the past year and sidelined a number of high-power, entrenched elites, diminishing their ability to oppose his new policy direction.

On the economic side, many pressures are arising. Utility tariffs have been raised to reduce the burden on the state’s budget, shifting more of the onus on to the backs of the citizens, hurting purchasing power. Interest rates have already been raised to 14% (from 5%) to tame rising inflation, hurting access to credit. Perhaps most concerning is the pressure on the banking sector, as seen in neighboring Russia, Kazakhstan, and Azerbaijan – all of whom have had to handle massive currency depreciations over the past few years. While problematic, the matter is manageable as the state has maintained extensive control and support of the sector since independence and the banking sector has little foreign currency exposure in light of the nation’s historic self-imposed international isolation. Matched with the banking sectors’ strong profitability and low external public debt, the government has the requisite reserves to recapitalize distressed banks in the unlikely case of a crisis.

What does it mean for MNCs?

Firms already in the market will naturally struggle from the damaged purchasing power in 2018, particularly from the competitive advantage of cheaper Russian, Chinese, or other regional imports that can eat further into market share in 2018. Offering promotions while focusing on basic products and smaller package sizes to retain market share in the coming year is likely the best strategy in light of the potential to improve profitability over time in the market.

More strategically, the country is moving in the right direction to attract further investment interest. First and foremost, MNCs interested in initiating or deepening investments in the market need to develop the critical relationships with appropriate state officials to gain market access in their sector. For such a nascent and illiberal emerging market, relationships remain critical to gaining a foothold. In addition, identifying the core customer base and evolving customer segments in this fluid market will be key to winning in the future.


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