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Saturday, October 22, 2016

Russian business in Uzbekistan is under threat

Care of Islam Karimov is unlikely to improve the position of Russian business, repeatedly collide in Uzbekistan with a blatant racket on the part of state structures. Moreover, the situation may even deteriorate. But there are factors that can be to the benefit of Russia and the gas contracts, only one of them.

The change of power in Uzbekistan is unlikely to make it easier for Russian companies doing business in this country. Cronyism, high levels of corruption, breach of agreements, seizure of assets – all of this domestic business is not just faced in the country and incurred significant losses. And in the future of the company from the Russian Federation may face additional difficulties if local elites decide to break the current when Islam Karimov, the practice of balancing between different geopolitical forces will become more oriented to the West or China.

“To conduct serious business is impossible”

“In Uzbekistan, the economy of team, and without the political “roof” to conduct serious business is impossible”

The volume of trade between Russia and Uzbekistan is relatively small. Last year, according to the FCS, it was only half a percent of the total value of the foreign trade turnover of the Russian Federation or 2,837 billion. That was enough to take fourth place in the list of main trade partners of Russia in the CIS, after Belarus, Kazakhstan and Ukraine, but the gap between these three countries is quite significant – last year, the share of Uzbekistan accounted for only 4.3% of trade of the Russian Federation within the CIS. Trade with neighbouring Kazakhstan, for example, was four times more.

The balance of trade with Uzbekistan is in favor of Russia: the volume of Russian exports to Uzbekistan in 2015 amounted to 2,235 billion dollars, almost four times more than the cost of Uzbek exports to Russia (601,8 million dollars). The range of our exports include timber, engineering products, metals, fertilizers, food products. In turn, Russia buys Uzbek textile and finished products of light industry (accounts for about half of imports), as well as gas for further sale abroad and the cars assembled at the company Daewoo.

“In Uzbekistan, so no significant natural resources in Kazakhstan and Turkmenistan. In addition, in the Uzbek economy, there is a strict administrative regulation – there is no market economy as such. The economy of Kazakhstan and Russia can be considered a market, and in Uzbekistan, the economy of team, and without the political “roof” to conduct serious business impossible. Foreign businesses in Uzbekistan are generally quite difficult, again, it is not Kazakhstan. In Uzbekistan, according to international estimates, corruption is very high, and without serious political cover for Russian business there better not to go” – describes the overall picture of the business climate in the country the Director of the Analytical center of the Institute for international studies of MGIMO Andrew Kazantsev.


In 2014, Islam Karimov acknowledged that many criticized him for staying too long in office. “Criticize me, but I’m staying. I criticize, but I want to continue to work. What’s wrong?” – rhetorically asked oneto specific atmosphere of domestic companies have experienced repeatedly. The first scandal with shameless weaning of Russian business occurred in 2010, when the decision of the Tashkent city court on transfer of the income of the Uzbek state assets company “Wimm-bill-Dann Tashkent” – “a daughter” the largest Russian manufacturer of juice and dairy products Wimm-bill-Dann”. The occurrence of this holding to the Uzbek market took place in 2003, when it signed an agreement on the modernization of the country’s largest dairy “Tashkentsut” and the creation on its basis of joint venture “Wimm-bill-Dann Central Asia Tashkent”. Investments in the Uzbek company “Wimm-bill-Dann planned in the amount of 7-10 million dollars, the Russian company was for seven years exempt from income tax and customs duties for import technological equipment. But in the end the Uzbek authorities accused her of willful failure to fulfill investment obligations, and along with other sins, and then to seize the assets recognized as “instrument of crime”. Then one of the basic shareholders “Vimm-the bill-Dann” David Yakobashvili called the forced nationalization of the enterprise is a political decision, but a wide resonance in Russia, this story was not in the business community, then much greater attention was attracted by the sale of “Wimm-bill-Dann” company PepsiCo.

Daughter and “daughter”

Just a few months in Uzbekistan began a new phase of “extraction” of Russian property. At this time in view of the authorities got a cell company Uzdunrobita” – “daughter” of the Russian operator MTS. In June of 2012, its management was accused of several economic crimes, and soon after that the sanctions spread from top management to the entire company. License Uzdunrobita” for the provision of cellular services has been revoked, the company had to sue for bankruptcy, after which its property was put up for auction. For MTS this story is meant not only huge losses (2008-2012 capital expenditure of the company in Uzbekistan made up about one billion dollars), but the loss of a very promising market. In Uzbekistan, MTS in 2010 launched the first in the CIS LTE network, and a year later, this country accounted for 2.2% of the revenues of the MTS group, and business margins here were better than in other regions. Minimize activities in Uzbekistan significantly affect the company’s financial performance in 2012 – both for the costs of lawsuits had to create a reserve in the amount of $ 500 million.

The conflict around “Uzdunrobita” observers directly connected with the business interests of the daughter of Uzbekistan’s President Gulnara Karimova in the field of Telecom. At the beginning of last year, the international organization for the study of crime and corruption (OCCRP), based in Sarajevo, presented the report, which indicated that a total of Karimov through various affiliates has received from operating in the territory of Uzbekistan Telecom operators more than a billion dollars as payment for transactions and other services.

History with MTS, according to OCCRP, was as follows. At the beginning of last decade, Karimov was able to establish control over the “Uzdunrobita” – 20% of the company shares she donated the American International Communication Group, and another 31% received it from the state. Then “Uzdunrobita” was completely sold MTS for 376 million dollars, and in one of the trades involved an offshore structure Swisdom belonging to the civil husband Karimova Rustam Madumarov. As “looking” the statement of the CEO was raised which was surrounded by the daughter of Uzbek President businessman Behzod Ahmedov, and the immediate reason for the sensational story with MTS in Uzbekistan was his conflict with Karimova. Without waiting for the arrest, Akhmedov fled Uzbekistan, after which Uzdunrobita” became easy prey to Uzbek law enforcement officers.

However, the “spin” of the assets of MTS was the last “triumph” of Gulnara Karimova, at the time considered five minutes to be the official successor of his father. The insatiable appetites of the daughter of the President is clearly irritated a significant part of the political elite of the country, and in the fall of 2013 after appearing in Internet publications with dirt on her surroundings, she was in disgrace. The end customer of these publications was called the chief of the Uzbek security Service Rustam Inoyatova, who is also the patron of the Prime Minister of the country Shavkat mirzijaeva one of the main contenders for the post of the leader of Uzbekistan.

The disgrace of a father turned to Gulnara Karimova’s house arrest, and for a group of MTS to return to Uzbek market. In September 2014, MTS received 50.01% of the Russian-Uzbek joint venture Universal Mobile Systems LLC (UMS) and soon resumed its work in the country. According to the latest annual report of MTS throughout the year, UMS managed to increase the number of subscribers from 200 thousand to one million, and in 2015, Uzbekistan fell 1% revenue of the company.

However, the outcome of this conflict should not be considered a victory for the Russian business, said Andrei Kazantsev, as MTS were able to resume operations, but the company suffered huge losses. At the same time, the expert said, it is wrong to speak of any conductors of Russian interests in the elite of Uzbekistan and count on the fact that the Russian business there are allies. “The Uzbek political elite is very isolated relative to external players, it has a closed clan character and loyal first and foremost to his leadership. So it was in Soviet times: even Andropov cleaning (the famous “cotton case”) showed that the Uzbek elite was subordinate to Moscow in name only,” says Kazantsev.

The history of gas success

Fortunately, the domestic relations of large business with Uzbekistan are not limited to scandals with “Vimm-the bill-Given” and MTS in the fuel and energy complex of the Russian-Uzbek cooperation develops quite positively. The main agents of Russian influence in this sector – LUKOIL and Gazprom, have long engaged in Uzbekistan large-scale projects on gas production (the country ranks in his inventory 11th in the world).

The implementation of the first investment project of LUKOIL in Uzbekistan on a group of fields Kandym-Khauzak-shady-Kungrad began in 2004, when it signed an agreement on production section (SRP) for a period of 35 years (in 2014 it was extended for 7 years – to 2046). By 2020, the holding plans to reach a production level of more than 16 billion cubic meters of gas per year, and the income of the Uzbek state for the entire period of implementation of the projects of LUKOIL to exceed $ 40 billion.

Uzbekistan is in principle for LUKOIL, one of the most important areas of international expansion in the gas segment. In the report of the holding company last year said that here are concentrated the most efficient gas projects. Only on foreign projects of the holding now accounts for 34.6 per cent of marketable gas production, over half of which is produced in the Uzbekistan. Last year, production was increased by 28.6%, and investments of LUKOIL in the Uzbek development projects amounted to 55 billion is the second largest investment region after the Caspian sea.

For Gazprom, Uzbekistan is one of the few foreign countries where the largest Russian company has operations. At the end of 2002 Gazprom and Uzbekneftegaz signed an agreement on strategic cooperation in the gas industry, which is the development of Shakhpakhty field. Total production of Gazprom in Uzbekistan in the past year amounted to 357,4 million cubic meters of gas a year earlier and 334 million the ratio of “national treasure” with the Uzbek elite there were quite constructive. The latest evidence of this was the gas conflict with neighboring Turkmenistan, which occurred at the beginning of this year. After a long litigation with the “Terminator” about the prices on the purchase of Turkmen blue fuel, Gazprom has taken the decision to opt out. At the same time the head of the concern Alexey Miller declared intentions to increase purchases from Uzbekistan. “We highly appreciate the results of the negotiations achieved with our Uzbek friends. Uzbekistan is a reliable partner in the gas sector, and we will continue to develop our mutually beneficial cooperation”, – he said.

Over the past three years, the volume purchases of Gazprom in Uzbekistan decreased significantly – in 2013 they amounted to 5.7 billion cubic meters to CIS countries and 3.7 billion cubic meters to the CIS two years later, only 3.5 and 2.9 billion cubic meters respectively. Therefore, the decision to increase the purchase was for Tashkent is very good news – although not free: as follows from the statements of the Russian holding company, last year an agreement was reached on reducing the price of gas purchases from Kazakhstan and Uzbekistan. At the same time Gazprom was able to enter the Uzbek market of oil, having started its supplies to the Republic.

“The Uzbek elite is quite nationalistic”

“Uzbekistan considers itself a major country in Central Asia and not want to in this region was penetrated by some external force”

Business cooperation between Russia and Uzbekistan, of course, is not a “one-sided” – the Uzbek elite also has many interests in Russia. The most important intermediary in mutual business contacts is considered a native of Tashkent Alisher Usmanov, who is now in the Russian rating Forbes third place with a fortune of 12.5 billion dollars. The main figure in the Uzbek elite, linked to Usmanov, Prime Minister Shavkat Mirziyaev. In 2009, the niece of his wife married a nephew of Usmanov, but this marriage ended tragically in may 2013, the heir of a billionaire crashed in Tashkent on the “Ford Mustang”.

Alisher Usmanov is known in his homeland not only as a businessman but also as a philanthropist, for example, his money in Tashkent was built a large medical complex. But Russian experts have doubts that such a significant domestic business figure to have any significant impact on prevailing in Uzbekistan’s business climate, even if the new President will be Shavkat Mirziyaev. Usmanov acts more like a facilitator and not “the gray cardinal”, said Andrei Kazantsev, emphasizing that further development of business contacts with Uzbekistan more active position of the Russian side: “the Russian government can attend to in order to provide business wishing to operate in Uzbekistan, any guarantees of the political class. We are interested in maintaining stability in the country, especially in the transition period.”

“Both a possible successor to Islam Karimov – Prime Minister Shavkat Mirziyaev and his Deputy Rustam Azimov – people clan. The first is the so-called Samarkand clan and the second in Tashkent, ” says Kazantsev about the future prospects of the country. – So if one of them will head Uzbekistan, you spend they will in the first place the interests of their clans, with the one difference: if mirzijaev is a purely Uzbek man originally from the village considered good by the contractor, Asimov has an Oxford education and, presumably, will be more open to the West. Perhaps this nuance is important for later developments, although there is unlikely to be a serious deviation from the General line, and it lies in the fact that the Uzbek elite is very closed in on myself.”

The quality of Uzbek elite is derived and further developments in such important for Russia, and the possible accession of Uzbekistan to the EAEC. Talk about going a long time, and even Russia has made towards its southern neighbor a number of generous gestures. For example, in December 2014 Vladimir Putin and Islam Karimov agreed to write off the main part of Uzbek debt to Russia in the amount of 865 of 890 million dollars. It was assumed that this should serve “to expand economic ties” between the countries. However, to join the Union in one form or another, Uzbekistan is not in a hurry – even after following the example of Kazakhstan as a full member of the Association in August last year was another country in Central Asia – Kyrgyzstan. And it is unlikely that this situation will change if the successor of Islam Karimov – who would it may.

“The Uzbek elite is not only closed – it is still quite nationalistic: Uzbekistan considers itself a major country in Central Asia and not want to in this region was penetrated by some external force, – said Andrey Kazantsev. – There are examples when Uzbekistan for a short time included in different blocks, for example, EurAsEC and the CSTO, but the real cooperation of Uzbekistan within the framework of these associations was weak, rather, he let deep integration, and all over the fact that membership was suspended. Therefore, even if some form of Uzbekistan’s accession to the EEU will happen, you can predict what will follow”.

However, this does not mean that the issue of integration of Uzbekistan to the EAEC must be removed from the agenda, says associate Professor of the HSE, the member of the Zinoviev club Pavel Rodkin. In his opinion, Tashkent is not able to maintain the previous status quo of multi-vector policies of Islam Karimov and is faced with a choice, to which his vengeance will push forces in the West and in Asia (primarily in China). In this situation, the Eurasian Union is one of economic alternatives for Uzbekistan, which is economically and socially dependent on Russia to a much greater extent than Vice versa. Otherwise, Rodkin stressed, Russia in Uzbekistan may be supernumerary, watching the scramble of Western multinational companies and businessmen from China and South-East Asia. So that further progress of Russian business in Uzbekistan will depend on how well and how quickly the local elite will be able to select the main geopolitical partner.

* Organization in respect of which the court accepted entered into legal force decision on liquidation or ban the activities on the grounds stipulated by the Federal law “On countering extremist activity”


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