Investing in Uzbekistan: A Rough Ride on the Silk Road

By Newman, Alisa | Law and Policy in International Business, Spring 1999 | Go to article overview

Investing in Uzbekistan: A Rough Ride on the Silk Road


Newman, Alisa, Law and Policy in International Business


Even with the passage of the first anniversary of Russia's August 1998 financial meltdown, the Russian economy still occupies the media spotlight. Meanwhile, foreign investment in the fourteen other republics of the former Soviet Union receives only limited coverage in the financial press. By the numbers, however, this is not an investment sector to be ignored. In particular, the newly independent former Soviet republics of Central Asia--Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan--have attracted a significant amount of foreign direct investment (FDI). From 1989 to 1998, cumulative FDI inflow for these countries totaled $7.31 billion,(1) not a far cry from the $9.2 billion invested in the Russian Federation over the same period.(2)

Upon its declaration of independence in September 1991,(3) the Republic of Uzbekistan appeared poised to take the lead among its Central Asian neighbors in attracting foreign investment.(4) Although Uzbekistan lacks the vast Caspian Sea oil reserves of Kazakhstan and Turkmenistan, for example,(5) its lands swell with other valuable resources. These are known as Uzbekistan's three "golds": white (cotton), of which it is the world's fourth largest producer;(6) blue (natural gas) of which it is the world's tenth largest producer;(7) and gold, of which it is the world's eighth largest producer.(8) The most populous of the Central Asian nations,(9) Uzbekistan boasts 23.6 million(10) potential consumers and workers with an impressive adult literacy rate of 97.2%.(11) The capital city, Tashkent, has served as a commercial hub since the days of the Silk Road leading from China to the West.(12)

On the political front, Uzbekistan is often touted as the most stable country in a region not necessarily known for its political stability.(13) According to its constitution, Uzbekistan is a secular, democratic, presidential republic.(14) Its president, Islam Karimov, a general secretary of the Communist Party during the Soviet era, rules the country with an iron fist.(15) He maintains tight control of the media and does not hesitate to use the special security forces to subdue rebellious factions of the population, tactics that, according to some, are responsible for his continued political popularity, if not survival.(16) He governs essentially by fiat, engaging the Oliy Majlis (Parliament) merely as a rubber stamp on his laws.(17) Karimov has little sympathy for domestic or foreign hard-line Islamist groups. He has effectively quashed the Islamist political opposition at home through routine imprisonment and show trials.(18) Abroad, he has backed anti-Islamist forces in neighboring Tajikistan and Afghanistan, both times unsuccessfully, although it would appear that he has managed to prevent the violence in these countries from spilling over into Uzbekistan.(19)

Less than a decade after independence, Uzbekistan has fallen far short of investors' initial expectations.(20) In comparison with other Central Asian nations--particularly Kazakhstan, its neighbor to the north--Uzbekistan has failed to lure and, more revealingly, to retain foreign investment.(21) Net FDI in Uzbekistan appears to have peaked, at least in the short-term, at $167 million in 1997.(22) From 1997 to 1998, it is estimated that net FDI in Uzbekistan declined by more than $100 million to $60 million.(23) Since late 1997, only a handful of new foreign investors have set up shop in Uzbekistan, while others have ceased or significantly scaled back operations in the country.(24) Surveying the region, Uzbekistan has been greatly upstaged by Kazakhstan, which is projected to have captured 78% of total FDI in Central Asia for the period 1989 to 1998.(25) Moreover, in 1997, Kazakhstan's FDI rate per capita was twelve times greater than that of Uzbekistan.(26) In addition, the Kyrgyz Republic has eclipsed Uzbekistan and the other Central Asian nations by becoming the first, and to date, only to have signed a membership agreement with the World Trade Organization (WTO). …

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Investing in Uzbekistan: A Rough Ride on the Silk Road
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