Uzbekistan

Bureau of Economic and Business Affairs
Report
July 5, 2016

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Executive SummaryShare    

Uzbekistan has a long entrepreneurial heritage, and with a population of over 31.5 million has the potential to become the largest economy in Central Asia. Its overall investment climate demonstrated some improvement in recent years – the government has simplified business registration procedures, introduced some additional tax incentives for investors, improved private property protection legislation and streamlined customs regulations.

Concerns remain. The greatest concerns facing foreign and private investors are access to currency conversion, frustrating bureaucratic processes, an onerous system of taxation, an overregulated banking system, and punitive customs laws and procedures. In addition, expropriations and politically motivated inspections of businesses have damaged Uzbekistan’s reputation as an investment destination and sharpened a critical element of risk in its business climate.

The government has been directing almost all foreign investments into export-oriented industries. Over 75 percent of Foreign Direct Investment (FDI) traditionally was consumed by the oil and gas industry, which generate 26 percent of the country’s export earnings. But with low oil prices, a number of large international investors became more cautious and suspended their projects in the country.

As a result of continued decline of the regional economic environment in 2015, Uzbek exports and remittances declined by 9 percent and 50 percent respectively.. In order to generate additional sources of foreign currency inflow, the government initiated ambitious privatization programs. However, the government has yet to demonstrate its will to achieve real improvements in the overall investment climate of Uzbekistan.

Table 1

Measure

Year

Index or Rank

Website Address

TI Corruption Perceptions index

2015

153 of 168

https://www.transparency.org/cpi2015

World Bank’s Doing Business Report “Ease of Doing Business”

2016

87 of 189

http://www.doingbusiness.org/rankings

Global Innovation Index

2015

122 of 141

http://www.wipo.int/econ_stat/en/economics/gii/

U.S. FDI in partner country ($M USD, stock positions)

2014

$73 million

http://bea.gov/international/di1usdbal.htm

World Bank GNI per capita

2014

USD 2,090

http://data.worldbank.org/indicator/NY.GNP.PCAP.CD


Millennium Challenge Corporation Country Scorecard

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a per capita gross national income (GNI) of $4,125 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/pages/docs/doc/report-guide-to-the-indicators-and-the-selection-process-fy-2015.

1. Openness To, and Restrictions Upon, Foreign InvestmentShare    

Attitude toward Foreign Direct Investment

The government of Uzbekistan ("the government" or “the GOU”) has declared attracting foreign direct investment a core policy priority. According to official statistics, there are over 4,800 companies with participation of foreign capital operating in the country. At the same time, Uzbekistan has one of the lowest cumulative inflows of FDI in the former Soviet Bloc due to a range of factors. These include limited access to foreign currency, an underdeveloped and overregulated banking sector, trade restrictions, government involvement in trade and commerce, and widespread corruption.

Without support of the government or state-affiliated entities, foreign investors have limited business opportunities in Uzbekistan. The government generally welcomes investors and investment projects that are in line with its import-substitution and export-oriented industrialization policy, and discourages investments in import-consuming sectors by controlling access to currency exchange.

In 2012, when FDI levels fell well below government targets, President Karimov created the Working Committee on Improvement of Uzbekistan’s Ranking on the World Bank’s Doing Business report, and issued a number of decrees aimed at improving the business environment. These decrees emphasized one-window practices and electronic reporting systems aimed at reducing direct contacts between entrepreneurs and government entities. Although Uzbekistan's ranking has improved from 166th in 2012 to 103rd in 2015 and 87th in 2016, the GOU's measures have not addressed a number of fundamental problems plaguing businesses and investors.

Formally, foreign investors are welcome in all sectors of the Uzbek economy. According to law, the government cannot discriminate against foreign investors based on nationality, place of residence, or country of origin. However, government control of key industries can have discriminatory effects on foreign investors. For example, the GOU retains strong control over all economic processes and maintains controlling shares of key industries, including energy, telecommunications, airlines, and mining. The government regulates investment and capital flows in the raw cotton market and controls all silk sold in the country, dampening foreign investment in the textile and rug-weaving industries. Partial state ownership and influence are common in almost all key sectors of the economy.

Other Investment Policy Reviews

There were no investment policy reviews of Uzbekistan completed by the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD) in recent years.

Laws/Regulations on Foreign Direct Investment

Legislation protecting foreign investors includes the Law on Foreign Investments, the Law on Guarantees and Measures on Protection of Foreign Investments, the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the Production Sharing Agreements Law, the Law on Investment Activities, and a number of other decrees and resolutions.

Uzbek law provides the following rights to foreign investors:

  • To decide the amount, kinds, and channels of investments;
  • To conclude agreements to carry out investment activity;
  • To own, use and dispose of investments and the results of investment activity;
  • To patent inventions, models and industrial samples belonging to the foreign investor;
  • To repatriate profits from Uzbekistan or to reinvest them into Uzbek entities;
  • To obtain financial resources in the form of credits and loans;
  • To convert local currency into foreign currency;
  • To possess and use land on terms provided by the legislation;
  • To receive compensation for investments/assets in case of expropriation by the state; and
  • To receive compensation for losses incurred due to illegal activity/decisions of the state.

Uzbekistan’s investment legislation provides a range of guarantees for foreign investors, including:

  • Protection against discrimination based on nationality, place of residence, or country of origin;
  • Fair and equitable treatment;
  • Protection from harm caused by retroactive implementation of legislation;
  • In the case of changes to legislation, the right to apply at their own discretion those provisions of the new legislation which provide for better conditions for their investments;
  • Protection from interference by the state in the economic activity of foreign investors which are carried out in accordance with the law; and
  • Any change in legislation that worsens foreign investment conditions shall not be applied to those investments until ten years following the date of the investments.

Though the government nominally guarantees these rights, the legislation and regulatory acts are ambiguous and contradictory. Several of the rights, such as converting and repatriating profits and conducting business without government interference, are routinely violated, with currency conversion difficulties most frequently cited by foreign firms as the greatest impediment to doing business in Uzbekistan.

In principle, the judicial system upholds investor rights and the sanctity of contracts. The judiciary is not independent, however, and regularly favors state-owned or government-affiliated entities. Foreign investors have reported numerous procedural infractions in both the Economic and Criminal courts of Uzbekistan and the Embassy is aware of a number of cases in which foreign companies did not receive timely payments from local partners.

Local legislation contains a number of exceptions allowing for state interference and impunity. Corruption is a constituent factor in legal proceedings, primarily in disputes between private businesses.

More information on the laws, rules, procedures and registration requirements for foreign investors is available through www.lex.uz - Uzbekistan's legislation digest, or in the specialized website of the Uzbek Ministry for Foreign Economic Relations, Investment and Trade: http://www.uzinfoinvest.uz/eng/.

Business Registration

Foreign and domestic private investors and entities may establish and participate in a variety of legal forms of business, ranging from partnerships to joint-stock companies to wholly owned enterprises. Depending on the extent of foreign participation, a business can be defined as an “enterprise with foreign capital,” or EFC (less than 30 percent foreign-owned), or as an “enterprise with foreign investment,” or EFI (more than 30 percent foreign-owned and with a minimum charter capital of $150,000).

Legislation, including the Law on Joint-Stock Companies and Protection of Shareholder’s Rights, issued in 1996 and last updated in 2014, sets a range of standards to protect the interests of minority shareholders.

EFI businesses must register with the Ministry of Justice while EFCs can be registered by the regional governor’s office (Khokimyat). In theory, EFCs can register their business online through the Electronic Government website - https://my.gov.uz/en – if the size of the equity capital is smaller than $150,000. According to the law, the registration process should take no more than seven business days after submission of a complete application package. The World Bank has raised Uzbekistan’s Starting a Business indicator to 42 in 2016 from 64 last year, reflecting the introduction of an online one-stop shop and streamlined registration procedures. More information about business registration procedures in Uzbekistan can be obtained here: http://www.uzinfoinvest.uz/eng/investment_guide/fdi_notification_and_registration/, and here: http://www.doingbusiness.org/data/exploreeconomies/uzbekistan/starting-a-business

Foreign companies may also maintain a physical presence in Uzbekistan as permanent establishments without registering as a separate legal entity (other than with tax authorities). A permanent establishment may have a bank account.

Foreign investors can get consultations, business registration and other legal assistance from Uzinfoinvest agency, which operates as a branch of the Ministry of Foreign Economic Relations, Investments and Trade (http://www.uzinfoinvest.uz/eng/), or from the Chamber of Commerce and Industry of Uzbekistan on a contractual basis (http://www.chamber.uz/en/index). Formally, there are no criteria set for investors to be eligible for applying.

Businesses with a foreign share of ownership may choose to be qualified as small enterprises or micro firms. Small businesses in Uzbekistan are eligible for a range of incentives, including registration and taxation. These include easing registration – no mandatory requirement to have a company seal – and simplified or unified taxation, which replaces profit tax, VAT, property tax, land tax, social infrastructure development tax, as well as contributions to the road fund, school development fund and pension fund. The current average rate of the unified tax is 5 percent on gross revenue (established for FY2016). By the law, newly registered micro-firms and small enterprises can get a one-year grace period for unified tax payments, with subsequent repayment of the tax within 12 months after the grace period is over. Small businesses also can get a two-year grace period for any additional taxes that can be imposed by the legislation. Uzbek legislation provides additional tax incentives to small businesses that produce goods subject to excise tax, IT software, and agricultural products, as well as for those who generate exports.

According to the current legislation, the category of small business can be applied to micro-firms and small enterprises. To be qualified, businesses should meet the following criteria:

  • Micro-firms are businesses with:
  • 20 or fewer employees in manufacturing;
  • 10 or fewer employees in services or other non-manufacturing areas; and
  • 5 or fewer employees in retail and catering.
  • Small enterprises are businesses with:
  • 100 or fewer employees in light and the food-processing industries, metal works and instrument manufacturing, wood processing, furniture and building-materials industries;
  • 50 or fewer employees in mechanical engineering, metallurgy, fuel, energy and chemical industries, agriculture, construction and some other manufacturing industries; and
  • 25 or fewer employees in science, transport, communication, services (except for insurance companies), trade, public catering and other non-production areas.

Note: All numbers above indicate the average annual number of employees.

According to official statistics, in 2015 small businesses contributed 56.7 percent to the GDP and provided 77.9 percent of all active jobs in Uzbekistan.

Industrial Promotion

The GOU encourages FDI through various tax incentives offered to companies investing in the following industries:

  • Agricultural, Construction, Building & Heavy Equipment
  • Chemicals, Petrochemicals, Plastics & Composites
  • Consumer Goods & Home Furnishings
  • Energy & Mining
  • Food Processing & Packaging
  • Health Technologies
  • Industrial Equipment & Supplies
  • Information & Communication
  • Metal Manufacturing & Products
  • Textiles, Apparel & Sporting Goods
  • Travel

Please see Performance Requirements and Investment Incentives in this document for more details.

The government maintains the following list of projects where it is seeking foreign investors and technical assistance:

http://www.uzinfoinvest.uz/eng/investment_projects/list_of_prospective_investment_proposals_for_attraction_of_direct_foreign_investment/

For detailed information on GOU programs to attract foreign investments, visit the Ministry for Foreign Economic Relations, Investment and Trade’s dedicated website: http://www.uzinfoinvest.uz/eng/.

Limits on Foreign Control and Right to Private Ownership and Establishment

Formally, Uzbekistan guarantees the right of foreign and domestic private entities to establish and own business enterprises and to engage in most forms of remunerative activity. The state reserves the right to export gold, and the government maintains a monopoly on cotton exports. Natural gas, cotton and gold are Uzbekistan's largest sources of foreign exchange earnings. There are isolated cases of foreign companies that have entered the natural gas and cotton production sectors with some success. In theory, private enterprises may freely establish, acquire, and dispose of equity interests in private businesses, but in practice, this is difficult to do because Uzbekistan’s securities markets are underdeveloped.

Private capital is not allowed in some industries and enterprises. The Law on Denationalization and Privatization (1991) lists state assets that cannot be privatized, including: land with mineral and water resources, the air basin, flora and fauna, cultural heritage sites, state budget funds, foreign and gold reserves, state trust funds, the Central Bank, enterprises that facilitate monetary circulation, military and security-related assets and enterprises, firearms and ammunition producers, nuclear research and development enterprises, some specialized producers of drugs and toxic chemicals, emergency response, civil protection and mobilization facilities, public roads, and cemeteries.

There are several official limits to foreign investment. Foreign ownership and control are prohibited for airlines, railways, power generation, long distance telecommunication networks, and other sectors deemed to be related to national security. Foreign nationals cannot obtain a patent for individual entrepreneurship in Uzbekistan.

Restrictions also apply to media, finance, insurance, and travel. Foreign investment in media enterprises is limited to 30 percent. In finance, foreign investors may operate only as joint venture partners with Uzbek firms, and banks with foreign participation face fixed charter funding requirements – €10 million ($11.3 million) for commercial banks, €5 million ($5.7 million) for private banks, and €1.5-6 million ($1.7 million - $6.8 million) for insurance companies – while the required size of the charter funds for Uzbek firms is set on a case-by-case basis. In the tourism sector, foreign ownership cannot exceed 49 percent.

Privatization Program

Although in 1998 the government declared a policy of institutional and economic reforms (such as restructuring and privatization) in order to attract more investment into the country, in general, it has made limited progress despite ongoing privatization attempts. The GOU has banned privatization of large state-owned enterprises, such as international telecommunications providers, power generation and distribution companies, railways and airlines, explaining that these have national strategic interest. Many investors note a lack of transparency at the final stage of the bidding process, when the government negotiates directly with bidders before announcing the results. In some cases, the bidders have been front companies associated with influential Uzbek families registered abroad.

At the end of December 2015, the GOU set a requirement for joint stock companies registered in Uzbekistan to have at least a 15 percent share owned by foreign investors by July 1, 2016. Exceptions will be made for companies that produce and process primary strategic raw materials, natural monopolies and suppliers of socially important goods and services at state-regulated prices. Joint stock companies with a 15 to 33 percent share owned by foreign investors are getting a range of privileges, including holidays for income, property, and social infrastructure taxes, unified tax payments and mandatory contributions to the Road Fund. Foreign shareholders of local joint stock companies are exempted from paying dividend taxes for the period before January 1, 2020. After July 1, 2016, joint stock companies that fail to comply with the new foreign ownership requirements will be liquidated or reorganized.

On February 10, 2016, the GOU issued a follow-up resolution with a list of 25 joint stock companies where at least 15 percent of state shares should be offered to foreign investors. The list includes some large state-owned companies such as Uzbekyengilsanoat (light industry), Uzbektelecom (fixed-line and long-distance telecommunications), Uzbekiston Pochtasi (postal services), Matbuot Tarqatuvchi (printed media distribution), Uzsanoatexport (machinery exports), Markaziy Ipodrom (Tashkent hippodrome), and the Uzbekistan Stock Exchange, as well as five commercial banks – Asaka Bank, Qishloq Qurilish Bank, Agrobank, Ipoteka Bank and Microkreditbank. The resolution also provides a larger list of 64 joint stock companies for 15 percent privatization through emission of additional shares. It includes wine and vodka producers, construction subsidiaries in the energy industry, and others.

Uzbekistan’s most recent denationalization and privatization program was finalized by the GOU on April 28, 2015. It provides for sale of state-owned shares in 68 enterprises to foreign investors, sale of state-owned shares and assets in 1,179 enterprises to the private sector under condition of a specific investment commitment or through public transparent auctions, and liquidation of 609 non-performing enterprises (such as underutilized public facilities and warehouses and maintenance shops of irrigation-construction and maintenance divisions in rural areas).

In 22 out of the 68 so-called “strategic enterprises” where part of the state-owned shares are being offered to strategic foreign investors, the state or state-owned organizations will hold the majority of shares (51 percent). The list includes four chemical plants: two large fertilizer producers – Navoiazot and Ferganaazot, in which the state is offering a 49 percent share to potential foreign investors and will continue to hold the remaining 51 percent, and two polymer plants, where almost 100 percent of shares are being offered for sale. Others of the so-called “strategic enterprises” are smaller or have been in a non-operational condition for nearly 15 years. There are also two commercial banks, one of which is a former private bank that was nationalized, two insurance companies, and a 60 percent share in a bankrupt company registered in Russia.

The main mechanisms for selling state assets are usually open tender or auction, but often the process is transparent only at the initial stage. In some cases the government uses local or international financial consultants for privatization of large enterprises, and foreign investors are invited to participate only after an enterprise has been evaluated. In June 2012, the government allowed foreign investors to buy state-owned, low-liquidity facilities at zero redemption cost under condition of a specific investment commitment.

Screening of FDI

The government closely scrutinizes all foreign investment, with special emphasis on sectors of the economy that it considers strategic, including mining, cotton processing, oil and gas refining, and transportation. There is no standard and transparent screening mechanism, and the legal framework is designed to protect domestic industries and limit competition from abroad. Outcomes of such screening reviews are frequently predetermined. Screening can be used to limit investment in certain industries and by certain countries, depending on Uzbekistan’s current policy priorities, and can also contribute to a lack of transparency and benefit local elites.

The government also uses licensing as a tool to control enterprises in several important sectors such as energy, telecommunications, wholesale trade businesses, and tourism. Often licenses for business operations in these sectors are issued by agencies that themselves have commercial interests in the sector.

A charter fund of an enterprise with foreign investment of $20 million or more needs special government approval, usually in the form of a Cabinet of Ministers resolution, to register the enterprise. Smaller investments in certain sectors of the economy also require permission from government authorities, although there is no official list of what these sectors are and enforcement is perceived to be random. In any case, filing for a standard business license is mandatory.

Large privatization deals with involvement of foreign investment require approval of the State Tender Commission (STC), an interagency body created in 2006. The STC is authorized to select investors for offered packages of shares without going through tenders or other transparent procedures. It will also decide on the privatization of enterprises that have foreign loans taken under GOU guarantee, and the sale of state assets and shares in enterprises to foreign investors. The IFC is providing technical and advisory assistance to the government in regard to this program.

The government reserves the right to cancel the registration of any business or withdraw licenses at will. Lengthy government inspections may lead to punitive sanctions or subsequent closures. The main GOU agency that makes the decision on the outcome of business screening reviews is the Ministry of Justice. This ministry registers a business and may also initiate termination of its registration. According to legislation issued in January 2016, it is also responsible for the protection of private businesses and foreign investors from meritless claims, unjustified inspections and other abusive practices of state bodies: on February 1, 2016, the ministry created a new specialized department to handle these responsibilities.

Uzbekistan’s Economic Court can also decide to close an enterprise, and its decisions can be appealed in the Superior Economic Court in accordance with the Economic Procedural Code or other applicable local law. Reviews usually are quite slow. Some foreign investors, including U.S. firms, have characterized the process as unpredictable and non-transparent, making it a potential tool for forcible takeovers of businesses.

Competition Law

The main entity that reviews transactions for competition-related concerns is the State Committee for Privatization, De-monopolization and Development of Competition. This agency is responsible for developing a competitive environment, limiting monopolistic activities and regulating natural monopolies, reorganizing economically insufficient ventures, supporting the development of entrepreneurship, protecting consumer rights, and controlling advertising activities. The Committee operates both directly and through its regional units, as well as through its non-profit consulting unit, the Antimonopoly Policy Improvement Center.

2. Conversion and Transfer PoliciesShare    

Foreign Exchange

Uzbekistan adopted Article VIII of the IMF's Articles of Agreement in October 2003 and, thus, committed to currency convertibility for current account transactions. Formally, foreign investors are guaranteed transfer of funds in foreign currency into and out of Uzbekistan without limitation, provided they have paid all taxes and other financial obligations in accordance with legislation. Local authorities may stop the repatriation of a foreign investor’s funds in cases of insolvency and bankruptcy, criminal acts by the foreign investor, or when directed by arbitration or a court decision. In practice, however, multiple informal restrictions remain in place. The government reportedly issues banks confidential instructions regarding which orders are to be filled. U.S. companies regularly report long delays and are often only granted a portion of the requested sum for convertibility. Currency conversion problems represent the single largest impediment to FDI in Uzbekistan; this problem appears unlikely to change in the near future.

The Central Bank of Uzbekistan regulates the official exchange rate of the local currency, the soum. It maintains gradual official depreciation of the soum to about 15-17 percent per year.

There are two legal exchange rates in Uzbekistan: the commercial (wire-transfer) rate and the exchange booth rate (2,845 and 2,900 soum per U.S. dollar, respectively, as of February 2016). Some businesses use a semi-official exchange mechanism through the Uzbekistan Commodity Exchange, where the dollar value is usually three times higher than the official rate.

Individual entrepreneurs often trade on the illegal (black) market, which trades at its own rate (6,100 soum per U.S. dollar in February 2016), and which currently exceeds the official exchange booth rate by roughly two times. Despite their widespread use, these currency exchange operations are illegal.

There have been no recent changes in the rules regulating current account transactions. Banking regulations mandate that the currency conversion process should take no longer than two weeks, but current lag times range from three months to well over a year, making import of intermediate goods, raw materials, and manufacturing components difficult or impossible without recourse to illegal operations on the black market, or higher-cost operations on the commodity exchange. During these delays, the entire amount to be converted is impounded by the Central Bank of Uzbekistan in a non-interest bearing account, contrary to existing legislation. The government enforces tight foreign exchange control methods in its efforts to minimize capital outflow, regulate imports, stimulate local manufacturing, and reduce the country’s dependency on external factors.

Remittance Policies

Investors can use foreign currency income or export earnings to pay remittances and other investment obligations, but only after meeting the government’s mandatory surrender requirements. The GOU mandates that companies exchange 50 percent of their foreign currency earnings for local currency through authorized banks at the official exchange rate. Exemptions to this requirement may be provided to some smaller companies or to majority foreign-owned companies that export manufactured goods for not less than 60 percent of their total profit.

Exchange booths provide services only to individuals and apply rigid limitations. By law, all citizens have access to the exchange booth rate, but in practice exchange booths do not sell foreign cash. Private money-transfer services work only with individuals and have upper thresholds for remittances in foreign currency.

The U.S. Treasury has no currency manipulation records on Uzbekistan. The GOU accelerated its depreciation of the national currency in 2015: the soum lost about 17 percent on the U.S. dollar at the official rate (compared to 10 percent the previous year). The government reportedly maintains large reserves (about 38 percent of GDP) in the Central Bank, which gives it the capacity to control currency depreciation in the near future.

Uzbekistan is a member of the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG), a Financial Action Task Force-style regional body. Its most recent mutual evaluation can be found here: http://www.eurasiangroup.org/mers.php

3. Expropriation and CompensationShare    

The government may seize foreign investor assets due to violation of legislation, breach of contract, failure to complete investment commitments, and for arbitrary reasons such as revaluation of assets and site-development programs. Although the government is obligated to provide fair market compensation for seized property, it has offered less than market value in several recent cases involving foreign and local businesses, and involving individuals. The law obligates the government to provide compensation to foreign partners in a transferable currency, but in most cases, the GOU instead does it with local currency.

Profitable, high-profile foreign businesses are at greater risk for expropriation, but smaller companies are also vulnerable. A number of companies have faced expropriation in the food processing, mining, retail, and telecommunications sectors. According to Uzbekistan’s State Statistics Committee, authorities closed about 17,900 businesses in 2015, or about 75 percent of all businesses liquidated last year.

4. Dispute SettlementShare    

Dispute settlement methods are regulated by the Economic Procedural Code, the Law on Arbitration Courts, and the Law on Contractual Basics of Activities of Commercial Enterprises. The Law on Guarantees to Foreign Investors and Protection of their Rights requires that involved parties settle foreign investment disputes using the methods they define themselves, generally in terms predefined in an investment agreement. Investors are entitled to use any international dispute settlement mechanism specified in their contracts and agreements with local partners, and these agreements should define the methods of settlement. Dispute settlement processes are also included in some bilateral treaties, but there is currently no treaty covering U.S. citizens.

If the parties fail to specify an international mechanism, Uzbekistan’s economic courts can settle commercial disputes arising between local and foreign businesses. The economic courts break down to regional and city courts, with a Supreme Economic Court in Tashkent. Complainants may seek recognition and enforcement of foreign arbitral awards pursuant to the New York Convention through the economic courts.

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

The hierarchy of Uzbek law includes: the Constitution of the Republic of Uzbekistan, constitutional laws, codes, ordinary laws, decrees of the president, decrees of the Cabinet of Ministers, and normative acts. Property ownership is governed by the Law on Protection of Private Property and Guarantees of the Owner’s Rights, the Law on Investment Activities, the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the Civil Code and a number of other decrees and resolutions. Economic disputes, including intellectual property claims, can be heard in the Higher Economic Court, along with the Supreme Court and the Economic Court of the Republic of Karakalpakstan. These courts’ judges are appointed for five-year terms. This judicial branch also includes regional, district, town, city, Tashkent city courts, and arbitration courts.

Formally, the judicial system in Uzbekistan is independent, but government interference and corruption are common. Often government officials, attorneys, and judges interpret local legislation inconsistently and in conflict with each other.

Domestic arbitration bodies in Uzbekistan are represented by Arbitration Courts. According to the Law on Arbitration Courts, parties of a dispute can choose their own arbiter and the arbiter in turn choses a chair. The decisions of these courts are binding. The Law says that executive or legislative bodies, as well as other state agencies, are barred from creating arbitration courts and cannot be a party to arbitration proceedings. The verdict of the Arbitration Court can be appealed by either party to the dispute to the general court system within thirty days of the verdict. Separate arbitration courts are also available for civil cases, and their decisions can be appealed in the general court system. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling. In some cases its authority is limited and co-opted by more influential powers within the government. Judgments against state-owned enterprises are particularly difficult to enforce.

Bankruptcy

The Law on Bankruptcy regulates bankruptcy procedures. Creditors can participate in liquidation or reorganization of the debtor only in the form of a creditor’s committee. According to the Law on Bankruptcy and the Labor Code, an enterprise may claim exemption from paying property and land taxes, as well as fines and penalties for back taxes and other mandatory payments for the entire period of the liquidation proceedings. Monetary judgments are usually made in local currency. Bankruptcy itself is not criminalized, but in August 2013, the GOU introduced new legislation on false bankruptcy, non-disclosure of bankruptcy, and premeditated bankruptcy cases. The World Bank ranked Uzbekistan’s Resolving Insolvency indicator as 75th out of 189 for 2016.

Investment Disputes

A number of investment disputes involving foreign investors and contractors have occurred in Uzbekistan in recent years, mainly in the mining, textile, telecommunications, food processing and trade sectors. Most disputes involved nonpayment or delayed payment for goods or services by state entities. Disputes within joint ventures are also common, as local partners must balance their commitments against heavy government pressure and corruption. Some disputes are further complicated by tax authorities, who can seize assets or sequester funds from a company account before a court reviews the case. The general public has limited information about investment disputes, as official media either do not cover the disputes at all or present biased comments. Because of this, and due to limited access to the media, the reaction of nascent civil society business organizations on these disputes is minimal.

International Arbitration

The Law on Guarantees to Foreign Investors and Protection of their Rights permits resolution of investment disputes in line with the rules and procedures of the international treaties to which Uzbekistan is a signatory. If international arbitration is permitted, awards can be challenged in domestic courts. Uzbekistan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States.

A party may file an international arbitration suit with an economic court in Uzbekistan even after the parties have agreed to an international arbitration forum. Generally, this will not hinder potential or ongoing international arbitration proceedings because an economic court would delay the case, assuming the second party denies the jurisdiction of the economic court prior to the first party making its statement on the merits of the case.

ICSID Convention and New York Convention

Uzbekistan is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a signatory to the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). In November 2006, the Constitutional Court of Uzbekistan issued its ruling that ICSID arbitration does not stipulate the consent of the involved parties to have their dispute settled at the international level. In practice, this means that Uzbek courts do not recognize foreign businesses' attempts to defend their interests in international courts unless all parties first give their consent in writing.

Duration of Dispute Resolution – Local Courts

In commercial litigation, parties may file an appeal with the same court within one month from the date of rendering the judgment. After the appeal, an uncontended party may file for cassation to the Supreme Economic Court. Alternatively, the party can skip the appeal and request cassation within one month from the date of the judgment coming into force. Appeal and cassation proceedings each require one to two months.

In practice, there is a vast backlog of cases in certain city and regional economic courts, especially in Tashkent city and in the Tashkent region. Even once a hearing date is set, procedural complications might further delay proceedings (e.g. experts, witnesses, or parties to the case may fail to appear in court; parties may request additional time to prepare evidence), forcing the court to adjourn the hearing multiple times.

Claimants can seek recognition and enforcement of foreign arbitral awards pursuant to the New York Convention through economic courts. Formally, courts should accept jurisdiction within ten days of the date the complainant filed the lawsuit or petition, and the court should render a decision within one month of accepting jurisdiction. Upon request of a judge, the chair of the economic court can extend the period for rendering a decision by one month. In cases of commercial litigation, the decision must enter into force within one month of rendering, while cases of enforcement of foreign arbitral awards must go into force immediately once the court renders the decision.

5. Performance Requirements and Investment IncentivesShare    

WTO/TRIMS

Uzbekistan is not a member of the WTO and has several practices that do not conform to WTO requirements on Trade-Related Investment Measures (TRIMS). Many of these practices reflect Uzbekistan’s import substitution policy, including tax breaks for exporters, non-tariff barriers for imports, and poor records in protecting intellectual property rights. Uzbekistan’s application for WTO membership was submitted in 1994, but its Working Party has not met since 2005. The GOU has made some positive statements suggesting a more active WTO accession effort, but also stressed that Uzbekistan does not want to accelerate accession to the WTO at the cost of its economic interests.

Investment Incentives

After the decline of FDI in 2011-2012, the GOU introduced new investment incentives in its attempt to restore confidence to foreign businesses, but concerns about government interference and bureaucratic obstacles continue to discourage investors. In practice, the government has often used its right to cancel the registration of any business or to withdraw its license. Government inspections, often initiated by competing elite interests, frequently lead to punitive sanctions or closings. Foreign investors also limit or reduce their activities in the country due to challenges caused by arbitrary and non-transparent state involvement and corruption.

To qualify as an enterprise or business with foreign investment, the share of foreign investment must be at least 30 percent of the charter capital of a company. The investment must consist of hard currency or new equipment, delivered within one year of registering the enterprise. The minimum requirements for charter capital for certain incentives are: 1) $400,000 for joint-stock companies (except financial institutions); 2) $150,000 for ventures in other sectors of the economy, except those registered in Karakalpakstan and in Khorezm province, where the requirement is $75,000.

Other legislation provides a number of incentives for businesses qualified as enterprises with foreign investment. These include:

  • Enterprises with foreign investments operating in specified industries and located outside of Tashkent city and Tashkent province are granted tax holidays for a period of three years if the FDI exceeds $300,000; five years if it exceeds $3 million; and seven years if it exceeds $10 million. The privilege applies to enterprises with foreign investments conducting businesses in 20 specific industries, which include the production of electronics, leather products, textiles, apparel, silk, various building materials, foodstuffs, chemical products, pharmaceuticals, packaging materials, renewable energy generators, coal, industrial and agricultural machinery, glass, microbiological products, and non-rubber toys. The GOU will only grant the tax holiday if the company reinvests at least 50 percent of the tax savings and the investor does not require a sovereign guarantee.
  • The GOU grants new foreign investors ten-year immunity to changes in tax legislation if they invest at least $5 million.
  • The government will build all required external utilities, engineering, and communication networks at its own expense for projects with investments exceeding $50 million and when the share of foreign investors exceeds 50 percent;
  • Foreign investors are able to buy state-owned, low-liquidity facilities at zero redemption cost if they make specific investment commitments. In January 2014, this right was also granted to local private investors;
  • Goods produced and imported by a foreign investor who invested more than $50 million are exempt from customs duties.
  • Enterprises with foreign investment can receive exemptions from customs duties for: industrial and technological assets imported by foreign investors and enterprises with foreign investment for their own use; production parts, components and materials of their own production imported by foreign legal entities with more than $50 million of direct investments; goods, works, and services required for operations under a Production Sharing Agreement (PSA) imported by a foreign investor within the project documentation; goods of foreign investors exported in accordance with the PSA; and equipment and spare parts imported in line with contracts that have GOU approval and support. The exemptions are applicable only during the first two years after registration of the enterprise.
  • Joint ventures with foreign participation in the oil and gas sector carrying out exploration work have a seven-year tax holiday from income tax from the extraction start date. In certain cases, the Cabinet of Ministers may provide foreign companies engaged in prospecting, exploration and production of oil and gas additional privileges, preferences and concessions based on direct negotiations between the competent authority and the strategic investor.
  • The corporate income tax rate is 7.5 percent for businesses, 15 percent for commercial banks, and 35 percent for entertainment firms. Companies may reduce their taxable income by the amount of funds directed at modernization of production facilities through the purchase of new equipment, new construction, or renovation of buildings and structures. The reduction amount cannot exceed 30 percent of the company’s total taxable income. If, in the current tax period, the amount of funds allocated for the above purpose exceeds 30 percent of total taxable income, the remaining amount may be deducted in subsequent tax periods within five years (from the date the cost was incurred, but from the day of commission for new equipment purchases).
  • Enterprises that export goods or services (except raw materials) benefit from a 50 percent reduction in income tax if the company's exports account for not less than 30 percent of the total sales of produced goods, and a 30 percent reduction in income tax if the company's exports account for 15-30 percent of the total sales of produced goods.
  • Newly established enterprises are exempt from property tax for two years from the moment of their registration. This incentive does not apply to enterprises created through liquidation or by reorganization of existing manufacturing enterprises or their separate divisions, nor does it apply to entities created under existing enterprises or to production facilities that rent their property and equipment.
  • Various types of new technological equipment are exempt from customs duties and value added taxation (VAT). The Inter-Ministerial Resolution of the Ministry of Economy, Ministry of Finance, Ministry of Foreign Economic Relations, Investments and Trade, and the State Customs Committee approve the list of such equipment. Production-related assets imported by a foreign investor or an enterprise with foreign share above 33 percent are exempt from customs duties. In the event of the sale or transfer of imported equipment for export within three years from the moment of its import, the GOU will rescind this privilege and the company must pay the VAT. Assets imported as a part of investment commitments under a privatization agreement with the GOU are exempt from VAT payments. Medicines and medical products that have no locally manufactured equivalents are also included on the exemptions list, as are raw materials and semi-finished goods used for children’s footwear production.

Tax incentives for foreign investment are essentially the same as for local enterprises participating in an investment program, localization, or modernization program. Enterprises with significant investment (more than $20 million) in priority sectors or registered outside Tashkent city or province can negotiate special benefits by concluding an investment agreement with the government, including additional tax and customs incentives, government guarantees and co-financing. These incentives generally require approval by the Cabinet of Ministers.

Research and Development

The Government welcomes participation of foreign investors in research and development programs, and has committed to create a national prioritization of innovation projects. The GOU does not regulate participation of foreign firms in government/authority-financed and/or subsidized research and development programs, nor will it privatize major state-owned R&D enterprises.

Performance Requirements

There are several restrictions and quantitative limitations on employment of foreign nationals in Uzbekistan. The chief accountants in banking and auditing companies must be Uzbek nationals. The law also requires that either the CEO or one member of a Board of Directors be a citizen of Uzbekistan. In the tourism sector, only Uzbek nationals can be professional tour guides. All foreign citizens, except those from certain countries of the former Soviet Union, need visas to work in Uzbekistan and all individuals must register their residence with authorities. A new law permits foreign investors and specialists to obtain multi-entry visas for the period of their contract, but the procedure has yet to be developed. To apply for a visa, American citizens must submit documents regarding their company to an Uzbek Embassy or Consulate.

Foreign workers must also register with the Ministry of Labor and Social Protection. The Agency on Foreign Labor Migration under the Ministry of Labor is responsible for quantitative control over employment of foreign nationals in various industries. For example, the number of foreign nationals in energy companies that operate in the country under Production Sharing Agreement terms cannot exceed 20 percent of the total number of employees, and additional foreign personnel can be hired only if there is no qualified local labor.

Permission from the government is not required to invest in Uzbekistan, but the GOU’s economic policy maintains an intense focus on import substitution and export-oriented industrialization. Investors in non-priority sectors should expect to have more difficulty importing capital and consumer products than those in priority industries.

Uzbek legislation stipulates that the government must apply requirements to use domestic inputs in manufacturing uniformly to enterprises with domestic and foreign investments, but in practice, this is not always the case. There are no requirements for using only local sources of financing. The government welcomes foreign investors mainly in the areas of localization, building local production capacities, and developing export potential.

Uzbekistan does not have a uniform law on enforcement of performance requirements. Local authorities may use various enforcement procedures, including registrations, licensing, and tax inspections. Investors are often required to present long-term investment commitments with set target investments and job-creation goals before the government will approve their registration and licensing.

Data Storage

The legislation does not require data storage within the country, or transfer of technology or proprietary information; such transfers are negotiated between the foreign investor and its local partner.

6. Protection of Property RightsShare    

Real Property

The GOU passed its Law on Protection of Private Property in September 2012. Uzbek and foreign entities may own buildings, but not the underlying land. Mortgages are available for local individuals only, but not for legal entities. Local businesses often use real estate leaseback services. There are no mortgage and liens securities in Uzbekistan. The legislation on private property rights does not differentiate traditional use rights of indigenous peoples, tribes or farmers.

All land in Uzbekistan is owned by the state. Legislation governing the acquisition and disposition of property poses relatively few problems for foreign investors and is similar to laws in other CIS countries. Property ownership is generally respected by local and central authorities. District governments have departments responsible for managing commercial real estate issues ranging from valuations to sale and purchase.

The World Bank ranked Uzbekistan 87th in the world in the Registering Property category of its 2016 Doing Business Report, up from 113 the previous year, indicating that the GOU has simplified property-transfer procedures by eliminating the requirement to provide several different no-encumbrance certificates, though it also increased the costs associated with property transfers.

Intellectual Property Rights

Uzbekistan has been on the Watch List of the U.S. Trade Representative’s (USTR) Special 301 Report since 2000 due to a lack of significant progress on intellectual property rights (IPR). The USTR noted that current enforcement remains weak and criminal penalties for IPR violations are insufficient to provide a deterrent effect.

The concept of registering IP is still new to Uzbekistan. In 2011, the GOU made an effort to improve IPR protection by setting up the Uzbek Agency for Intellectual Property (IPAU), which unifies responsibility for IPR issues. Uzbekistan also introduced several amendments to IPR law, as well as amendments to civil and criminal codes to enforce stricter punishment for IPR violations. In 2015, the IPAU detected 737 IPR violation cases and initiated confiscation of 217,000 counterfeit software and audiovisual products. The agency also has experience in enforcing the protection of foreign trademarks. Uzbekistan is a consumer, but not a significant producer, of pirated material. The country does not host a Notorious Market for pirated and counterfeited American products (as defined by the Office of the United States Trade Representative).

There are set rules and procedures for registration of each type of intellectual property. The process may take 10 days for registering trademarks and copyrights, and up to 60 days for registering patents. The official body that oversees registration is IPAU or its authorized divisions. The agency coordinates its IPR protection efforts with local law enforcement agencies, customs, and tax authorities.

In general, businesses report that IP registration is not an issue, unlike its enforcement, which is often a difficult and lengthy process. The main challenge is that the IP holder must file its claim through the local court system, and local legislation does not anticipate enforcement of IP rights for non-resident claimants.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Contact at the U.S. Embassy in Tashkent:

Timothy J. Bugansky
Economic Officer
Telephone Number: +998-71-140-2111
Email address: BusinessInUzbekistan@state.gov.

Country/Economy resources:

AmCham Uzbekistan:
Tatyana Bystrushkina
Executive Director
Telephone Number: +998-71-140-0877
Email address: amcham.director@amcham.uz

Country resources: Local law firms that are members of the American Chamber of Commerce in Uzbekistan (AmCham): http://amcham.uz/membership/membership-by-sector/law/

7. Transparency of the Regulatory SystemShare    

The legislation regulating private investments is complicated, ambiguous and contradictory. Foreign investors report that local officials inconsistently interpret laws, often in a manner detrimental to private investors and the business community at large. In addition, the government may require businesses to comply with decrees or instructions that are not publicly available. Companies are particularly concerned with the lack of consistent and fair application of the Law on Foreign Investment, which outlines specific protections for foreign investors. To avoid problems with tax and regulatory measures, foreign investors often secure incentives through Cabinet of Ministers decrees, approved directly by the President. These, however, are easily revocable.

Only a few local legal, regulatory, and accounting systems are transparent and fully consistent with international norms. Although the GOU has started to unify local accounting rules with international standards, local practices are still document- and tax-driven with an underdeveloped concept of accruals.

There are almost no legal restrictions on foreign participation in industry standards-setting consortia or organizations, with exceptions in the media and tourism industries. Bureaucratic procedures, particularly licensing and financial reporting, are time-consuming and often contradictory, and government-owned banks, ministries, and agencies routinely interfere in business operations.

Publishing drafts of laws and regulations for public comment is uncommon in Uzbekistan. Regulatory bodies often introduce changes and amendments to commercial legislation without notice, which creates disputes and misunderstandings even among state institutions. The government often amends requirements for licensing, registration, and other permits without notice, creating opportunities for rent seeking as this creates more opportunities for government functionaries to reject documents on various technical grounds. In 2014, foreign and local investors had the opportunity to review and comment on some upcoming legislation, but such instances are rare. For additional information, please review the World Bank’s Citizen Engagement in Rulemaking assessment on Uzbekistan: http://rulemaking.worldbank.org/data/exploreeconomies/uzbekistan/2014.

Practices that appear as informal regulatory processes are not associated with nongovernmental organizations or private sector associations, but with local governors or influential local oligarchs.

8. Efficient Capital Markets and Portfolio InvestmentShare    

In general, the GOU has not made a priority of attracting portfolio investments, as it prefers what it calls strategic investors, capable of providing new technologies for specific local industries. A number of international fund management companies have worked in the country in the past, investing in various industries through the stock market or in the real estate and construction sectors. Most of these funds left the market by 2010 due to capital losses arising from global financial problems. The few portfolio managers remaining invest primarily in the insurance and leasing sectors. The stock exchange mainly hosts equity and secondary market transactions with shares of state-owned enterprises. In most cases, government agencies decide who can buy and sell shares and at what prices, and it is often impossible to locate accurate financial reports for traded companies.

Uzbekistan has relatively good liquidity indicators. Its gross official foreign reserves in 2015 were close to $24.4 billion, or 38.4 percent of GDP. The gross external debt to GDP ratio was about 16 percent. While the government has declared full commitment to honoring its obligations under IMF Article VIII, in practice, persistent difficulties with currency conversion are a major deterrent to investors.

The private sector has access to a restricted variety of credit instruments and the isolated and overregulated financial system yields unreliable credit terms. Access to foreign banks is limited and is usually only granted through their joint ventures with local banks. Commercial banks can, to a limited degree, use credit lines from international financial institutions to finance small and medium businesses.

Money and Banking System, Hostile Takeovers

Low exposure of Uzbekistan’s banking system to global financial markets has shielded the sector from the effects of the global financial crisis. Large state-owned banks control about 60 percent of the sector’s total assets and capital and are virtually agents of the government in implementing its development strategy. Privately owned commercial banks are small niche players. Banks are closely monitored by the government, which imposes non-core functions including tax withholding and client financial oversight that keep confidence in the banking sector very low. Commercial banking in Uzbekistan has also been affected by direct government intervention in foreign exchange and financial markets.

Official information on non-performing assets is not publically available. According to the World Bank, the share of nonperforming loans to total gross loans is 0.4 percent. A majority of Uzbek commercial banks have earned “stable” ratings from international rating agencies.

The Law on the Securities Market requires businesses that issue securities (except government securities) to publish annual reports, which should include a summary of business activities for the previous year, financial statements with a copy of an independent audit, and material facts on the activities of the issuer during the corresponding period.The average capital adequacy ratio of local banks exceeds 23.3 percent, and the liquidity rate is 64.5 percent (as of January 1, 2016). From 2009 through 2013, the government initiated a 40 percent increase in state-owned bank capitalization and encouraged private banks to do the same. In January 2016, the banking sector’s capitalization was about $2.9 billion and the value of total bank assets in the whole country was equivalent to $24.2 billion. Included in this amount are the assets of the two largest state-owned banks, which together hold more than $15 billion.

Uzbekistan maintains a central bank system. The Central Bank of Uzbekistan (CBU) is the state issuing and reserve bank and central monetary authority. The bank is accountable to the Supreme Council of Uzbekistan and is independent of the executive bodies (organization chart of the bank is available here: http://www.cbu.uz/eng/node/41991).

Foreigners and foreign investors can establish bank accounts in local banks without restrictions. They also have access to local credit, although the terms and interest rates do not represent a competitive or realistic source of financing.

There are no clear rules on hostile take-overs. Very few Uzbek private companies are listed on international stock markets, and a threat of hostile takeover by foreign investors has never been a major subject of concern.

9. Competition from State-Owned EnterprisesShare    

State-owned enterprises (SOEs) dominate those sectors of the economy recognized by the government as being of a national strategic interest. These include energy (power generation and transmission, and oil and gas refining, transportation and distribution), metallurgy, mining (non-ferrous metals and uranium), telecommunications (fixed telephony and data transmission), agriculture (cotton processing), machinery (the automotive industry, locomotive and aircraft production and repair), and transportation (airlines, railways, municipal public transportation).

Some large state-owned holdings engaged in commercial activities act as government institutions. The Law on Privatization and Denationalization, with a number of subordinate acts, contains a list of sectors/industries where the GOU has banned participation of private businesses.

The government owns majority or blocking minority shares in numerous non-state entities, ensuring substantial control over their operations, as it retains the authority to regulate and control the activities and transactions of any company in which it owns shares.

The published list of major Uzbek SOEs is available on the official GOU Website (for companies, large holdings, and banks): http://www.gov.uz/en/pages/government_sites

There are no clear statistics on SOEs’ expenditures allocated to research and development (R&D). Local SOEs, including joint ventures with large foreign investors, have larger budgets to fund research and development activities.

In theory, private sector or foreign companies can be more competitive than local SOEs in sectors that are not under the control of state-owned monopolies, but their potential is limited because the government restricts private enterprise activity in these sectors. For example, in 2004 the government granted exclusive control of the country’s international telecommunication networks to the state-owned Uztelecom Company. This forces all providers of voice and data transmission services, including internet and IP-telephony, to use only Uztelecom switches to access long-distance and international channels. Going beyond technical restrictions, the providers must also conduct their financial transactions with international partners through Uztelecom, as well.

The government controls procurement activities of companies in which it has partial or minority interest, even in the case of private businesses. These companies are required to procure goods and services through an open tender process, which the government regulates.

Uzbekistan is not a party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO) as it is not a member of the WTO.

By law, SOEs are obligated to operate under the same tax and regulatory environment as private businesses. In practice, however, private enterprises do not enjoy the same terms and conditions. The government leverages registrations, licensing, and currency conversion to protect quasi-governmental institutions and companies from commercial competition. Private businesses face more than the usual amount of bureaucratic hurdles if they compete with the government or a government-controlled firm. Furthermore, a heavy tax burden also limits competitiveness of private firms (according to the World Bank’s latest Total Tax Rate report, Uzbekistan holds 115th place among 189 ranked economies of the world). Most SOEs have a range of advantages, including various tax holidays, as well as better access to local and external markets, smoother access to financing, and more predictable currency conversion. Additionally, SOEs are usually not subject to legislative budget constraints unless they are in low-priority industries.

OECD Guidelines on Corporate Governance of SOEs

The GOU created some of its largest SOEs by simply renaming existing government entities and, in some cases, those enterprises still exercise governmental powers. For example, Uzbekneftegaz National Holding Company dominates the oil and gas industry and foreign investors need its approval to do business in the sector, although there is no legislative mandate of this power. Most SOEs are registered as national holding companies or joint-stock companies, and usually a minority share in these companies belongs to employees or private enterprises. At present, Uzbekistan does not adhere to the OECD Guidelines on SOE Corporate Governance.

The Center for Management of State-owned Assets under the State Committee of Uzbekistan for Privatization, De-monopolization and Development of Competition is responsible for management of state-owned assets (http://gkk.uz/en).

Although SOEs have boards of directors, typically one or more members will be a government official, and senior executives report directly to relevant ministries or the Cabinet of Ministers. Generally, SOEs must consult with the government before making significant business decisions.

There is no third-party market analysis on SOEs’ ties to the government. Although the Law on Openness of State Bodies was adopted in May 2014, local SOEs and the Fund for Reconstruction and Development of Uzbekistan do not often publish annual reports. State-owned businesses and financial institutions are required to submit annual reports to the government, but they are not required to publish them. Local state-owned enterprises in the financial sector are required to submit their financial records for independent audit, as well. SOEs, as well as other Uzbek entities, are subject to domestic accounting standards and rules, which are still not fully comparable with International Financial Reporting Standards (IFRS), though through gradual effort, Uzbekistan has brought about 90 percent of its domestic standards into IFRS compliance.

The likelihood that domestic courts will rule in favor of SOEs is high (see Section 4). Many foreign investors prefer international arbitration in cases of investment disputes with local SOEs, because court processes in local courts are not always transparent and non-discriminatory due to pressure from the government. Judgments against state-owned enterprises are particularly difficult to enforce. Nearly all U.S. businesses operating in Uzbekistan do so in partnership with state-owned enterprises or firms, which are often affiliated with the political elite.

Sovereign Wealth Funds

The Fund for Reconstruction and Development (FRD) of Uzbekistan serves as a sovereign wealth fund. Uzbekistan’s Cabinet of Ministers, Ministry of Finance, and the five largest state-owned banks were instrumental in establishing the FRD, and all of those institutions have membership on its Board of Directors. The GOU stated that the FRD’s equity was $15 billion in 2015, and that it intends to grow the fund to $25 billion by 2020.

The fund does not follow the voluntary code of good practices known as the Santiago Principles, and Uzbekistan does not participate in the IMF-hosted International Working Group on SWFs. The GOU established the FRD in 2006, using it to sterilize and accumulate foreign exchange revenues, but officially the goal of the FRD was to provide government-guaranteed loans and equity investments to strategic sectors of the domestic economy.

The FRD does not invest but provides debt financing to SOEs for modernization and technical upgrade projects in sectors that are strategically important for the Uzbek economy. All FRD loans require government approval.

10. Responsible Business ConductShare    

There is no legislation on responsible business conduct (RBC) in Uzbekistan, and the concept has not been widely adopted, though many companies are active in charity activities, either through their own initiative or at the direction of local government officials.

There are no independent NGOs, investment funds, worker organizations/unions, or business associations promoting or monitoring RBC in Uzbekistan.

At present, Uzbekistan does not adhere to the OECD Guidelines, and there has been no substantial evidence to suggest that the government encourages foreign and local businesses to follow generally accepted CSR principles such as the OECD Guidelines for Multinational Enterprises. The country also does not participate in the Extractive Industries Transparency Initiative (EITI).

11. Political ViolenceShare    

In Uzbekistan there are supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), al-Qaida, and the Eastern Turkistan Islamic Movement in Central Asia, though the GOU has made it a priority to limit the activities of these groups, which have all expressed anti-U.S. sentiments.

In light of domestic and international threats, the government has implemented heightened security measures, such as establishing security checkpoints, restricting access to certain streets and buildings, and deporting nationals of suspect countries. Political and ethnic violence in neighboring southern Kyrgyzstan in 2010 raised tensions and led to substantially increased controls at the Uzbek-Kyrgyz border. In addition, border crossing points with both Kyrgyzstan and Tajikistan, both borders of security concern for the GOU, are often closed for periods of time. Although the border between Uzbekistan and Afghanistan is officially open to traffic, travel restrictions for the region remain in place.

12. CorruptionShare    

Uzbekistan’s legislation and Criminal Code both prohibit corruption. In 2015, the GOU issued two new resolutions. The first was on “Approving the Procedure of Public Electronic Procurement of Essential Goods and Services from Businesses through the Uzbek National Commodity Exchange” (March 26, 2015). The goal is to ensure direct and equal access of small private businesses to public procurements and improve transparency in this segment. The second was on “Measures to Ensure Reliable Protection of Private Property, Small Business and Private Entrepreneurship” (May 15, 2015). This resolution and subsequent amendments to the legislation set a range of procedural rules in order to eliminate rent seeking and bribery temptations through illegal inspections and other inappropriate interference in entrepreneurial activities. Enforcement of anti-corruption measures is arbitrary, however, and there is considerable anecdotal evidence that a large portion of officials use their latitude in interpreting regulations to extract bribes.

The government prosecutes a number of officials under anti-corruption laws every year, and punishment can vary from a fine to imprisonment with confiscation of property. Often, prosecutions tend to focus on political dissenters rather than on corrupt, but loyal, government officials or individuals affiliated with the elite.

Formally there is an open tender requirement for all government procurements. Procurement contracts of state enterprises with values of over $100,000 have to be approved by relevant ministries or agencies. Contracts with values over $5 million have to be approved by special Interagency Tender Commissions (ITC):

  • Deputy Prime Minister Gulomjon Ibragimov chairs the ITC for energy, mining, chemical, metallurgy, agriculture, food and processing industries;
  • Deputy Prime Minister Ulugbek Rozukulov chairs the ITC for machinery and electronics industries and standardization agencies;
  • Deputy Prime Minister Batir Zakirov chairs the ITC for utility supply and communal service companies, transport and construction industries;
  • Deputy Prime Minister Adham Ikramov chairs the ITC for environmental and healthcare development projects;
  • Deputy Prime Minister Bakhodyr Hodiev chairs the ITC for education, culture and sport; and
  • Minister Hurshid Mirzakhidov chairs the ITC for information technologies and communication industries.

In reality, however, the process of awarding contracts is not always transparent. Foreign and local individuals have reported numerous incidents of bribe solicitation to U.S. Embassy officers, and foreign investors who refuse to pay bribes have had difficulty in their business operations as a direct result.

There has been no substantial evidence to suggest that the government encourages or requires companies to establish internal codes of conduct that prohibit bribery of public officials. Only a few local companies created by or with foreign investors have effective internal ethics programs.

Uzbekistan is not a participant in any local or regional anti-corruption initiatives. The country ranked 153 out of 168 rated countries in Transparency International’s 2015 Corruption Perceptions Index.

The very few officially registered local NGOs usually do not investigate corruption cases. Local authorities do not welcome the involvement of independent NGOs in such investigations.

U.S. businesses have cited corruption as one of the main obstacles to foreign direct investment in Uzbekistan. Lack of transparency in bureaucratic processes, including procurement tenders and auctions, and limited access to currency convertibility, stimulate rent seeking, which public sector employees often justify by pointing out their low wages. Bribery is a common tool for obtaining lucrative positions, government contracts, preferences, and exemptions from regulations, as well as escaping criminal prosecution. Citizens are routinely compelled to pay bribes to receive public services.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Uzbekistan joined the UN Anticorruption Convention in 2008, but is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Nor does it participate in any notable local or regional anti-corruption initiatives.

Resources to Report Corruption

The main arms of the government tasked with fighting corruption are the Prosecutor General's Office and the Department for Legal Protection of Entrepreneurs and Foreign Investors under the Ministry of Justice (established in February 2016). Currently, no international or local nongovernmental watchdog organizations have permission to monitor corruption in Uzbekistan.

Contact information for the office of Uzbekistan’s Prosecutor General:

Address: 66, Akademik Gulyamov St., 100047, Tashkent, Uzbekistan
Website: www.prokuratura.uz
Hotline telephone numbers: +998(71) 232-4391, 232-4550

Contact information for the office of Uzbekistan’s Ministry of Justice:

Address: 5, Sayilgoh Street, 100047, Tashkent, Uzbekistan
Website: http://www.minjust.uz/en/
Hotline telephone numbers: +998(71) 1008, 233-4768, 236-0509

13. Bilateral Investment AgreementsShare    

Bilateral Taxation Treaties

Uzbekistan has signed bilateral investment agreements with 50 countries. Several agreements, including those with Bahrain, Saudi Arabia, and the United States, have not yet entered into force. In 2004, Uzbekistan and Russia signed a Strategic Framework Agreement that also includes free trade and investment concessions. Uzbekistan has signed bilateral free trade agreements with eleven CIS countries (Russia, Belarus, Ukraine, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Turkmenistan and Tajikistan). In 2005, the government signed an alliance agreement with Russia, which provides for economic cooperation, and Uzbekistan and Ukraine agreed in 2004 to remove all bilateral trade barriers. Uzbekistan joined the CIS Free Trade Zone Agreement in 2014. In December 2015, the GOU officially announced that Uzbekistan is not supporting and not going to join the Free Trade Zone within the Shanghai Cooperation Organization (SCO). See UNCTAD’s database for more details: http://investmentpolicyhub.unctad.org/IIA/CountryBits/226#iiaInnerMenu.

The governments of the United States and Uzbekistan signed a bilateral investment treaty (BIT) in 1994, though the United States never ratified the agreement. In 2004, Uzbekistan signed the regional Trade Investment Framework Agreement (TIFA) with the U.S. Trade Representative's office and its four Central Asian neighbors. The TIFA is a forum to encourage regional trade development in Central Asia.

Uzbekistan is one of the former Soviet republics which are now covered by a taxation treaty with the Commonwealth of Independent States (CIS), formerly known as the Union of Soviet Socialist Republics (USSR); this treaty was signed in 1973 and entered into force in 1976. As such, Uzbekistan does have an existing dual taxation treaty with the United States. In 2015, Uzbekistan and the Unites States signed the Intergovernmental Agreement to Improve International Tax Compliance with respect to the United States Information Reporting Provisions, commonly known as the Foreign Account Tax Compliance Act (FATCA).

14. OPIC and Other Investment Insurance ProgramsShare    

The Overseas Private Investment Corporation (OPIC) began working in Uzbekistan in 1992 and has loaned approximately $229 million over the course of its operations in Uzbekistan, but had no projects in FY2015. Uzbekistan is a developing country member of the Multilateral Investment Guarantee Agency. The Embassy can purchase local currency at the exchange rate set by local commercial banks (2,900 soum per $1 as of February 2016). Local currency is depreciating by approximately 15-17 percent per year.

15. LaborShare    

Uzbekistan has the largest labor force in the region – potentially about 18.5 million, or 57 percent of the country’s total population. About 63 percent of the population is under age 30. With the closure or downsizing of many businesses, it is easy to find qualified employees, and salaries are low by Western standards. According to government and alternative sources, 14 percent of the population live below the poverty level, 5.2 percent are unemployed, and approximately 48 percent of the employed population have low-productivity and low-income jobs. Accordingly, Uzbekistan is the largest supplier of labor migrants among former Soviet republics. Russia and Kazakhstan served as social “relief valves,” together providing jobs for nearly four million Uzbek labor migrants. But recent sharp economic slowdowns and currency depreciation in these countries has caused return migration among members of the Uzbek labor force who had sought work abroad.

About 50 percent of the locally employed population works in the non-agricultural private sector, where the share of the informal economy is quite considerable. Heavy tax burdens, debilitating trade restrictions, and widespread corruption drive many legitimate companies to hide their business records. Although the GOU does not issue an official assessment, local experts estimate that the informal economy makes up as much as 31-35 percent of GDP.

At 97 percent, literacy is nearly universal, but most local technical and managerial training does not meet international business standards. Foreign firms report that younger Uzbeks are more flexible in adapting to changing international business practices, but are also less educated than their Soviet-trained elders. Widespread corruption in the education sector has lowered educational standards as students purchase grades and even entrance to prestigious universities and lyceums.

Legislation requires companies to hire Uzbek nationals for specified positions in banking and auditing companies. The chief accountant must be an Uzbek national, as should either the CEO or any one member of the board of directors. Only Uzbek nationals can be tour guides.

According to Uzbekistan’s Labor Code, labor-management relations should be formalized in a fixed-term or temporary employment contract. The maximum length of a single fixed-term contract is 5 years (http://www.doingbusiness.org/data/exploreeconomies/uzbekistan/labor-market-regulation). The Labor Code and subordinate labor legislation differentiate layoffs and firing. Employees can terminate their employment by filing two-week prior written notice, or apply for leave without pay. Layoff or temporary leaves without pay can be initiated by an employer due to worsening economic conditions. For firing (severance), the employer should personally give two months’ advance notice in the case of corporate liquidation or optimization, two weeks’ advance notice in the case of an employee’s incompetence, and three days’ advance notice in the case of an employee’s malpractice or unacceptable violations. In case of severance caused by corporate liquidation or optimization, an employee should receive compensation, which should not be less than two average monthly salaries paid during his employment plus payment for unused leave (if another form of compensation was not agreed to in the employment contract).

Some small private businesses prefer to use temporary or contract workers for jobs that are not temporary in nature in order to avoid some social payments, taxes, and registration procedures. Such practices are common primarily in the healthcare, education and retail sectors.

Officially, labor legislation cannot be waived or applied differently for private or foreign-owned enterprises, including those that operate in special economic zones.

The law, including related regulations and statutory instruments, generally provides the right of workers to form and join independent unions and bargain collectively. The law prohibits anti-union discrimination. Unpaid volunteers in public works and workers employed by individuals without documented contracts do not have legal protection. Workers generally do not exercise their right to form and join unions due to fear of retribution. There are no independent unions; existing unions remained centralized and dependent on the government.

The state-run Board of the Trade Union Federation of Uzbekistan incorporates more than 37,600 primary organizations and 14 regional trade unions, with official reports of 60 percent of employees in the country participating. The Office of the President appoints the leaders of the federation; union boards are not involved in electing these leaders to their positions. All regional and industrial trade unions at the local level are state-managed.

By law, all employees of either local or foreign-owned enterprises operating in Uzbekistan have the following rights to:

  • fair and timely payment of wages that should not be less than minimum monthly salary amounts set by the government;
  • a standard workweek of forty hours, with a mandatory rest period of twenty-four hours and annual leave;
  • overtime compensation as specified in employment contracts or agreed to with an employee’s trade union, which can be implemented in the form of additional pay or leave. The law states that overtime compensation should not be less than 200 percent of the employee’s average monthly salary rate (broken down by hours worked). Additional leave time should not be less than the length of actual overtime work;
  • working conditions that meet occupational health and safety standards prescribed by the legislation;
  • compensation of any health or property damages incurred as a result of professional duties through the employers’ fault;
  • professional training;
  • formation and joining labor unions;
  • pensions; and
  • legal support in protection of workers’ rights.

There is no single state institution responsible for labor arbitration. The general court system, where civil and criminal cases are tried, is responsible for resolving labor-related disputes. This can be done on a regional or city level. Formally, workers can file their complaints through the Prosecutor General’s Office. The Ministry of Labor and Social Protection should provide legal support to employees in their labor disputes.

The law neither provides for nor prohibits the right to strike. In recent years, workers in state-owned energy enterprises conducted strikes, demanding timely distribution of salaries. Reportedly, authorities agreed to negotiate, and eventually addressed most of the workers’ concerns. There is no public information about the role of official unions in these negotiations.

Although employees in Uzbekistan enjoy many rights by laws, in practice these laws are subject to arbitrary and inconsistent interpretation. For example, the law prohibits compulsory overtime - only 120 hours of overtime per year are permitted. In practice, overtime limitations are not widely observed and compensation is rarely paid. Wage violations have become quite common in recent years.

Uzbekistan ratified multiple conventions of the UN's International Labor Organization (ILO) (Forty-Hour Week Convention, Holidays with Pay Convention, Right to Organize and Collective Bargaining Convention, Equal Remuneration Convention, Maternity Protection Convention [Revised], Abolition of Forced Labor Convention, Discrimination [Employment and Occupation] Convention, Employment Policy Convention, Workers' Representatives Convention, Minimum Age Convention, Collective Bargaining Convention, and Worst Forms of Child Labor Convention), but employers often ignore the provisions of these conventions.

The Ministry of Labor and Social Protection establishes and enforces occupational health and safety standards in consultation with unions, but anecdotal reports suggest that enforcement is not effective. Although regulations provide for safeguards, workers in hazardous jobs often lack protective clothing and equipment. Labor inspectors conduct routine inspections of small and medium-sized businesses once every four years, and inspect larger enterprises once every three years. The ministry or a local governor’s office can initiate a selective inspection of a business, typically in response to an accident or complaint.

Relevant government agencies and departments inspect both newly registering and operating local businesses and enterprises for enforcement of the Labor Code in respect to labor and employment rights; the Law on Protection of Consumer’s Rights for consumer protections; and the Law on Protection of Nature for environmental protections. Labor or environmental laws and regulations are not waived for enterprises with private and foreign investments.

The law prohibits all forms of forced or compulsory labor, including by children, except as legal punishment for offenses such as robbery, fraud, or tax evasion, or as specified by law. The government does not effectively enforce these laws, and there are high-profile cases in the cotton industry where this has gained international attention. In 2015 the International Labor Organization monitored Uzbekistan’s cotton harvest for child and forced labor, and while it found no systematic use of child labor, it determined that there were “real” risks, and indicators, of forced labor. Independent cotton harvest observers reported that the government’s system of cotton production quotas resulted in widespread use of adult forced labor, particularly state employees in the education and health sectors, to bring in the harvest. Uzbekistan’s harvest labor practices undermine investment in its cotton sector and its ability to export cotton products to Western markets

The latest Observation of the ILO’s Committee of Experts on the Application of Conventions and Recommendations (CEACR), published at 104th ILC session (2015), also raises concerns about the GOU’s record on observing working hours and overtime rules (http://www.ilo.org/dyn/normlex/en/f?p=1000:13100:0::NO:13100:P13100_COMMENT_ID:3193153:NO).

The Labor Code and a number of regulations thereunder were not modified or revised in 2015, and the GOU proposed no substantive changes to labor-related legislation.

16. Foreign Trade Zones/Free Ports/Trade FacilitationShare    

The law on free economic zones, passed in 1996, envisaged the establishment of free trade zones, including consigned warehouses, customs-free zones, and zones for the processing, packing, sorting, and storage of goods.

In 2008, the president of Uzbekistan issued a decree creating a free industrial and economic zone (FIEZ) in the Navoi region. The FIEZ was established for a period of 30 years, beginning in 2009, with possible extensions. Businesses in the FIEZ are promised a special customs, currency, and tax regime, a simplified procedure for entering, staying, and leaving, and provisions by which non-residents can receive labor licenses. Preferences are effective for the entire period of activity of the FIEZ, or until 2038, with the possibility of extension. Businesses registered within the Navoi FIEZ are exempt from most taxes for seven years if their direct investment exceeds €3 million ($3.4 million); ten years if it exceeds €10 million ($11.3 million); and fifteen years if investment exceeds €30 million ($34 million). For five years after the expiration of the tax holiday, businesses with direct investments exceeding €10 million ($11.3 million) enjoy an income tax and unified tax payment reduction of 50 percent, which extends to ten years for large investments (more than €30 million, or $34 million). Business entities registered in the Navoi FIEZ are also entitled to the following types of exemptions (excluding charges for customs clearance):

  • Exemptions from customs payments for the entire period of activity of the FIEZ for imports of equipment, raw materials, and components used for the manufacture of export-oriented goods (excluding charges for customs clearance); and
  • Fifty percent reduction of customs payments (excluding charges for customs clearance) for imported raw materials and components used for the production of goods oriented toward the domestic market.

In April 2012, the Uzbekistan’s president issued a decree on creating a special industrial zone (SIZ) in Angren City in Tashkent province. Businesses in the SIZ are exempt from customs payments (excluding charges for customs clearance) and enjoy holidays for the following taxes and mandatory contributions:

  • Corporate income tax
  • Property tax
  • Social infrastructure development tax
  • Unified tax payment
  • Road tax; and
  • Mandatory contributions to the Republican Road Fund

These exemptions and tax holidays will be granted for the period of three years if the volume of direct investments exceeds $300,000; five years if it exceeds $3 million; and seven years if it exceeds $10 million. Exemptions from customs payments are granted for imported components and materials that are not produced in the country. Preferences are effective for the entire period of activity of the SIZ (30 years from the date of establishment with the possibility of extension). The government has committed to direct $59.4 million for infrastructure development in the SIZ.

In March 2013, the president issued a decree on creating another special industrial zone named “Jizzakh,” to be located in Jizzakh region with a branch in Syrdarya region. SIZ “Jizzakh” provides the same tax and customs preferences as SIZ “Angren.” As in SIZ “Angren,” preferences are effective for the entire period of activity of the SIZ, or for 30 years from the date of its establishment with the possibility of extension.

17. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

Note: In many instances below (indicated by “N/A”), no data has been published by the Government of Uzbekistan, and independent assessments and estimations are also not available. The GOU includes foreign debt inflow in FDI figures. In some reports the GOU may also indicate contractual pledges of FDI, rather than actual investment inflow.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country Statistical source*

USG or international statistical source

USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2015

$63.4 billion*

2015

N/A

www.worldbank.org/en/country

Foreign Direct Investment

Host Country Statistical source*

USG or international statistical source

USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2014

N/A

2014

$73 million

http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Host country’s FDI in the United States ($M USD, stock positions)

2014

N/A

2014

$0

http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Total inbound stock of FDI as % host GDP

2014

N/A

2014

0.11%

N/A

*Source: The State Statistics Committee of Uzbekistan

Table 3: Sources and Destination of FDI

Data not available.

18. Contact for More InformationShare    

Contact at the U.S. Embassy in Tashkent:

Timothy J. Bugansky
Economic Officer
3, Maykurgan St., Yunusabad District, 100093, Tashkent, Uzbekistan
Telephone Number: +998-71-140-2111
Email address: BusinessInUzbekistan@state.gov.