Uzbekistan went through its first transfer of power in 27 years after the death of its first president, Islam Karimov, on September 2, 2016. Newly elected President Shavkat Mirziyoyev declared that improvements to the business environment through liberalization measures in the banking sector, trade, currency conversion, tax administration, and fighting corruption were among top policy priorities. Although the Uzbek government has traditionally placed significant emphasis on trying to attract increased foreign investment, official documents issued in the months following the death of President Karimov have focused on seeking improvements to the overall business climate, rather than on establishing new programs – or modifying existing ones – explicitly aimed at attracting foreign investment.
Uzbekistan is the most populous country in Central Asia (over 32 million people), with a strong agricultural base and abundant natural resources, including hydrocarbons, gold, copper, and uranium. After independence in 1991 the government announced a number of state-led reforms based on export-oriented and import-substituting industrialization policy, and mainly resisted attempts at liberalization, which resulted in the limited access of private businesses to foreign exchange, an underdeveloped and overregulated banking sector, trade restrictions, and corruption. At the present, the economy of Uzbekistan is still controlled by the government to a considerable extent, and the country has one of the lowest cumulative inflows of FDI in the former Soviet Bloc.
The overall investment climate demonstrated some improvement in recent years – the government simplified business registration procedures, introduced some additional tax incentives for investors, improved private property protection legislation, and streamlined customs regulations. In 2017 the government reduced the mandatory sale rate by businesses of foreign currency earnings from 50 to 25 percent. The president announced upcoming liberalization of the banking sector and transition to a system of free currency conversion. Relevant legislation is currently under consideration.
New private direct investments are critical for maintaining the economic stability of the country, especially after sharp economic slowdowns in Russia and Kazakhstan, Uzbekistan’s main trade partners. Statistics show that in 2014-2016 export earnings of the country decreased by 17 percent and the inflow of remittances by 63 percent. The new leadership has initiated a wide public-private discussion on issues related to the business environment.
The government has been directing almost all foreign investments into export-oriented industries. The oil and gas industry traditionally attracts most foreign direct investments (FDIs) into Uzbekistan. In 2016, over 72 percent of all FDIs and loans were consumed by the oil and gas industry, which generated 13.6 percent of the country’s export earnings. Relatively low oil prices may have led international investors to be more cautious about projects in the country.
Uzbekistan has a long entrepreneurial heritage, and has the potential to become the largest economy in Central Asia. Despite some improvements in recent years, major issues associated with its investment climate are still in place, and the government has yet to provide comprehensive, detailed plans to achieve decisive improvements in the overall investment climate of Uzbekistan.
|TI Corruption Perceptions Index||2016||156 of 175||http://www.transparency.org/
|World Bank’s Doing Business Report “Ease of Doing Business”||2016||87 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2016||Not Ranked||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, stock positions)||2015||$83 million||https://www.bea.gov/
|World Bank GNI per capita||2015||$2,160||http://data.worldbank.org/
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
In 2016 the government of Uzbekistan (“the government” or “the GOU”) declared that further reforms should be focused on qualitative improvement of the business environment. Foreign direct investments are considered one of the important drivers of development in the country. The president challenged all regional governments to improve the attractiveness of their territories for foreign investors and provide progress reports in this area on a quarterly basis.
At the same time, the cumulative inflow of FDIs is still relatively low due to a range of factors, such as limited access to foreign currency, an underdeveloped and overregulated banking sector, trade restrictions, and widespread corruption. According to official statistics, the share of companies with participation of foreign capital is only 1.8 percent (or about 5,135) of the total number of entities operating in the country.
Without the support of state-owned or state-affiliated entities, foreign investors usually 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. Thus, traditionally over 70 percent of all foreign investments have been directed to the oil and gas sector, one of the main generators of export earnings
In 2012, when FDI levels fell well below government expectations, the GOU created the Working Committee on Improvement of Uzbekistan’s Ranking on the World Bank’s Doing Business report. The Committee initiated some improvements to the business climate, such as one-window practices and electronic reporting systems aimed at reducing direct contacts between entrepreneurs and government entities. However, the government has yet to address a number of fundamental problems plaguing businesses and investors. Meanwhile, last year Uzbekistan lost 5 positions in the Doing Business list, now ranking as the 87th among 190 countries.
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.
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 ). These agencies provide investors with consulting services, as well as information and analysis support.
In 2016 and early 2017, senior GOU officials attended a number of government-business media forums and roundtable meetings with local and foreign business representatives, including two roundtables with U.S. companies. The government also published drafts of a law on liberalization of currency regulations and a policy paper on its five-year development strategy for public review. According to a presidential decree issued on October 5, 2016, the position of the business ombudsman is planned to be established under the country’s parliament. The ombudsman is meant to protect the rights and legitimate interests of businesses and render them legal support. In public forums Uzbek officials continue to stress an interest in seeing new companies establish operations in Uzbekistan, but tangible liberalization measures are still under consideration.
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 entities, 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 license or tax permission for individual entrepreneurship in Uzbekistan.
Restrictions also apply to media, finance, and insurance. 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 minimum fixed charter funding requirements (€10 million for commercial banks, €5 million for private banks, and €1.5-6 million for insurance companies – equivalent to $10.7 million, $5.3 million, and $1.6-$6.4 million), while the required size of charter funds for Uzbek firms is set on a case-by-case basis.
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. The government also uses licensing as a tool to control enterprises in several important sectors such as energy, telecommunications, wholesale trade businesses, and tourism.
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.
The GOU has declared that business facilitation and improvement of the business environment are among its top policy priorities. Due to national demographics, its working-age population is growing by over 250,000 people annually. Therefore, the GOU gives special attention to private businesses and joint ventures that create additional jobs and help the government address the employment issue. Business registration procedures were considerably simplified and streamlined by the introduction of one-window and on-line registration practices and electronic reporting systems. The GOU announced its intention to create four new special economic zones to attract more FDIs. New legislation also created additional tax incentives for private businesses and sought to increase their protection against unlawful actions of government authorities. In 2016, the Ministry of Justice established a special department responsible for the protection of private businesses and foreign investors from meritless claims, unjustified inspections, and other abusive practices of state bodies. Effective January 1, 2017, the GOU banned a wide range of inspections and other forms of interference to activities of private businesses.
New legislation adopted on February 9, 2017, simplifies business registration procedures for all businesses except banks and credit bureaus. Beginning April 1, 2017, foreign and domestic private investors can register their business in Uzbekistan using one of 194 “Single Window Registration” (SW) offices or 24/7 online service of the Electronic Government (EG) website – https://my.gov.uz/en . The procedure requires only electronic submission of an application, company name or trademark, and foundation documents. The SW/EG service will register the company in the Ministry of Justice, Tax Committee, local administration, and other relevant government agencies. The registration fee is equal to one minimum monthly salary (149,755 soum – Uzbekistan’s national currency – or $45 as of February 2017) for local investors and five minimum monthly salaries plus $500 for foreign investors. Applicants may receive a 50 percent discount for using the EG website. The new system reduces the length of the registration process from several weeks to 30 minutes.
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). Foreign companies may also maintain a physical presence in Uzbekistan as “permanent establishments” without registering as separate legal entities (other than with tax authorities). A permanent establishment may have a bank account.
The World Bank ranked Uzbekistan as 25th for the “Starting a Business” indicator in its 2017 Doing Business report.
In general, the GOU does not promote or incentivize outward investments. There is no institution or agency that does outward investment promotion in Uzbekistan. Some state-owned enterprises invest in development of their marketing networks abroad as part of efforts to boost export sales. Private companies that operate primarily in retail, construction and textile businesses widely use outward investments for a number of reasons, including market outreach, accessing foreign financial resources, trade facilitation, and in some cases for withdrawal of capital. The most popular destinations for outward investments are Russia, China, Kazakhstan, Singapore, UAE, and Germany.
Formally, outward investments are not restricted. However financial transactions with some foreign jurisdictions (like Afghanistan, Syria, Libya, and Yemen) and/or offshore tax havens can be the subject of additional screening by the authorities.
2. Bilateral Investment Agreements and Taxation Treaties
Uzbekistan has signed bilateral investment agreements with 53 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 would not 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
According to the Internal Revenue Service of the United States, 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) (signed in 1973 and entered into force in 1976), and, therefore, Uzbekistan does have an existing dual taxation treaty with the United States (https://www.irs.gov/businesses/international-businesses/uzbekistan-tax-treaty-documents ). However, the Tax Committee of Uzbekistan presumes that this agreement cannot be considered as in effect. In 2015, Uzbekistan and the United 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). It is expected that this agreement will enter into force sometime in 2017.
3. Legal Regime
Transparency of the Regulatory System
Uzbekistan has a substantial body of laws and regulations aimed at protecting the business and investment community. Primary legislation regulating competition includes the Law on Competition and Restrictions of Monopolistic Activity (2016), the Law on Competition, the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the Law on Private Enterprise (2003, last updated in 2017), the Law on Investment Activities, and a number of decrees, resolutions and instructions. In late 2016, the GOU publicly recognized the need to improve and streamline business and investment legislation, which is still perceived to be rather complicated, often contradictory, and not fully consistent with international norms. In some cases the government may require businesses to comply with decrees or instructions that are not publicly available. 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, have been easily revocable.
For additional information, please review the World Bank’s Regulatory Governance assessment on Uzbekistan: http://rulemaking.worldbank.org/data/explorecountries/uzbekistan
Practices that appear as informal regulatory processes are not associated with nongovernmental organizations or private sector associations, but rather with local politicians or influential local elites.
Most rule-making and regulatory authority exists on the national level. Businesses in some regions and special economic zones can be regulated differently, but relevant legislation has to be adopted by the central government and then regulated by national-level authorities.
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.
In late 2016, newly elected president Mirziyoyev initiated publication of draft legislation for public comments, including draft decrees on the government’s five-year development strategy, currency regulation, and creation of new economic zones. Prior to that, publishing drafts of laws and regulations for public review was rather uncommon.
In November 2016, the GOU began to publish some key regulatory actions on a government website (http://strategy.regulation.gov.uz ) for public consideration and comments. Uzbekistan’s legislation digest (http://www.lex.uz/) serves as a centralized online location for current legislation in effect. There are other online legislative resources with executive summaries and comments that could be useful for businesses and investors, including http://www.norma.uz/ and a specialized website of the Uzbek Ministry for Foreign Economic Relations, Investments and Trade (http://www.uzinfoinvest.uz/eng/ ).
Formally the Ministry of Justice and the Prosecutor’s Office of Uzbekistan are responsible for oversight to ensure that government agencies follow administrative processes. However, foreign investors report that local officials inconsistently interpret laws, often in a manner detrimental to private investors and the business community at large.
As of now, there is no centralized online location for Uzbekistan, similar to the Federal Register in the United States, where key regulatory actions or their summaries are published.
GOU officials have publicly suggested that improvement of the regulatory system is critical for the overall business climate. The government’s new five-year development strategy (Action Strategy on Five Priority Development Directions of Uzbekistan for 2017-2021), adopted in February 2017, includes a range of targets for upcoming reforms, such as ensuring reliable protection of private property rights; removal of all barriers and limitations for private entrepreneurship and small business; creation of a favorable business environment; suppression of unlawful interference of government bodies in the activities of businesses; improvement of the investment climate; decentralization and democratization of the public administration system; and expansion of public-private partnerships. In the past there were some efforts to improve legislation related to private entrepreneurship and foreign investors, but legislative changes were never fully observed in practice.
Previously implemented regulatory system reforms often left room for interpretation and were accordingly enforced subjectively. In the past five years, new or updated legislation has continued to leave room for interpretation and has contained definitions that have been rather unclear. In many cases private businesses still face difficulties associated with enforcement and interpretation of the legislation.
The scope of business-related regulations in Uzbekistan includes a large number of laws, decrees, resolutions, rules, specific guidelines, and instructions. Usually regulations and rules are developed by relevant government agencies and are approved by the president or relevant ministers, as appropriate. Public laws are subject to parliamentary approval.
The Ministry of Justice and the system of Economic Courts are formally responsible for regulatory enforcement. It is expected that the position of the business ombudsman will be established under the country’s parliament by the end of 2017. The new five-year development strategy adopted by the president in February 2017 calls for raising the role of civil society, non-governmental organizations, and local communities in regulatory oversight and enforcement. Recently the government also offered several drafts of business-related legislation for public comments; the comments, in turn, were publicly available. However, the new regulatory system, including regulatory enforcement mechanisms, has yet to be developed under the five-year development strategy.
There are a number of research centers and think tanks that are involved in the development and review of regulations. These include experts that work in various government agencies or state-owned enterprises, as well as research centers funded by the government and international organizations like UNDP. However, except under rare circumstances, their scientific studies or analysis on the impact of regulations are not publicly available. In February 2017, the president ordered the creation of a new Strategy Development Center. The Center, which is to function as an NGO, will involve the work of a number of local organizations, including the Independent Civil Society Monitoring Institute, the Legislation Monitoring Institute, the Chamber of Commerce and Industry, the Chamber of Advocates, the Academy of Public Administration, the National Association of Electronic Media, and the National Association of NGOs. The Center is intended to consolidate efforts of these institutes to facilitate expert and public discussions on reforms outlined in the aforementioned five-year development strategy.
International Regulatory Considerations
Uzbekistan is not a member of the WTO or any existing economic blocs. No regional or other international regulatory systems, norms, or standards have been directly incorporated or thoroughly referenced in Uzbekistan’s regulatory system – although Uzbek officials often claim the regulatory system incorporates international best practices.
Legal System and Judicial Independence
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. Existing legislation which implies legal enforcement of contracts through economic courts or arbitral authorities includes the Civil Code, the Law “About the Contractual Legal Base of Activities of Business Entities” (No. 670-I, issued August 29, 1998, and last revised August 20, 2015), and a number of other decrees and resolutions.
The contractual law of Uzbekistan is established by the Law “About the Contractual Legal Base of Activities of Business Entities.” It determines the legal basis of the conclusion, execution, change, and termination of economic agreements, the rights and obligations of business entities, and also the competence of relevant public authorities and state bodies in the field of contractual relations. Economic disputes, including intellectual property claims, can be heard in the Economic Court and in the Superior Court of the Republic of Uzbekistan. These courts’ judges are appointed for five-year terms. This judicial branch also includes regional, district, town, city, Tashkent city (a special administrative territory) 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’s interpretations.
Court decisions or enforcement actions are appealable though an appeals process that can be initiated in accordance with the Economic Procedural Code and other applicable laws of Uzbekistan.
Laws and Regulations on Foreign Direct Investment
Legislation protecting foreign investors includes the Law on Foreign Investments (No. 609-I, issued April 30, 1998, and last revised in 2014), the Law on Guarantees and Measures on Protection of Foreign Investments (No. 611-I, issued April 30, 1998, and last revised in 2014), the Law on Guarantees of the Freedoms of Entrepreneurial Activity (No. 69-II, issued May 25, 2000, and last revised in 2012), the Production Sharing Agreements Law, the Law on Investment Activity (No. 719-I, issued December 24, 1998, and last revised in 2013), the Presidential Decree On Additional Measures to Ensure the Accelerated Development of Entrepreneurial Activity, Comprehensive Protection of Private Property and Substantial Improvement of Business Climate (issued October 5, 2016), and a number of other decrees and resolutions.
More information on the laws, rules, procedures and registration requirements for foreign investors is available through http://www.lex.uz, Uzbekistan’s legislation digest, or via the specialized website of the Uzbek Ministry for Foreign Economic Relations, Investments and Trade: http://www.uzinfoinvest.uz/eng/ . Uzbek legislation in English also can be found at https://cis-legislation.com/docs_list.fwx?countryid=011&page=1 .
Competition and Anti-Trust Laws
Competition and anti-trust legislation in Uzbekistan is governed by the Law on Competition (ZRU-319, issued January 6, 2012, and last revised in 2015). 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 directly and through its territorial units, as well as through its non-profit consulting unit, the Antimonopoly Policy Improvement Center. There were no significant competition-related cases with the involvement of foreign investors over the past year.
Expropriation and Compensation
Formally, private businesses are protected by legislation against baseless expropriation, including the Law on Investment Activities and the Law on Guarantees of the Freedoms of Entrepreneurial Activity. The government may seize foreign investors’ assets due to violation of legislation, and for arbitrary reasons such as revaluation of assets and site-development programs. By law, the government is obligated to provide fair market compensation for seized property.
Uzbekistan has a history of expropriations. Profitable, high-profile foreign businesses are at greater risk for expropriation, but smaller companies are also vulnerable. According to Uzbekistan’s State Statistics Committee, authorities closed about 21,500 businesses in 2016, or about 80 percent of all businesses liquidated last year. In previous years, a number of large companies with foreign capital in the food processing, mining, retail, and telecommunications sectors faced expropriation. In cases where the property of foreign investors is expropriated for arbitrary reasons, the law obligates the government to provide fair compensation in a transferable currency. But in most of the cases the private property was expropriated based upon court decisions after the owners were convicted for breach of contract, failure to complete investment commitments, or other violations.
Decisions of Uzbekistan’s Economic Court on expropriation of private property can be appealed in the Superior Court of the Republic of Uzbekistan in accordance with the Economic Procedural Code or other applicable local law. Reviews usually are quite slow. Some foreign investors have characterized the process as unpredictable and non-transparent.
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.
Investor-State Dispute Settlement
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.
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, including the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1992 CIS Agreement on Procedure for Settling Disputes Arising Out of Business Activity, and other bilateral legal assistance agreements with individual countries. Currently there is no such treaty that covers 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. Complainants may seek recognition and enforcement of foreign arbitral awards pursuant to the New York Convention through the economic courts. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling.
Currently Uzbekistan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States. The governments of the United States and Uzbekistan signed a bilateral investment treaty in 1994, though the agreement never entered into force.
Post is aware of numerous cases of commercial or investment disputes involving foreign companies. These have included asset seizures, expropriations, or liquidations; lengthy forced production stoppages; and pressure to sell off foreign shares in joint ventures. These cases have involved a variety of sectors, including food production, mining, telecommunications, and agriculture. Although government actions in such cases have been undertaken under the guise of legal enforcement, some observers have claimed more arbitrary or extralegal motives were at play.
Foreign investors should have no reasonable expectation that the government will honor an international arbitration verdict. The Constitutional Court of Uzbekistan ruled in 2006 that the written consent of all parties involved is required to recognize an international decision. There have been several cases, however, in which international arbitration awards were successfully collected.
Although in many cases involving investor-state disputes in Uzbekistan were associated with immediate asset freezes, almost all of them were followed by formal legal proceedings.
International Commercial Arbitration and Foreign Courts
Alternative dispute resolution institutions of Uzbekistan include arbitration courts (also known as Third-Party Courts), and a number of specialized arbitration commissions. Businesses and individuals can apply to arbitration courts only if they have a relevant dispute-settlement clause in their contract or a separate arbitration agreement. The Civil Procedural Code and the Commercial Procedural Code also have provisions that regulate arbitration.
The main domestic arbitration body is the Arbitration Court. General provisions of the Law on Arbitration Courts are based on principles of the UNCITRAL model law, but with some national specifics – namely that Uzbek arbitration courts cannot make reference to non-Uzbek laws. According to the Law, 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. Either party to the dispute can appeal the verdict of the Arbitration Court 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. Arbitration courts do not review cases involving administrative and labor/employment disputes.
Foreign arbitral awards or other acts issued by a foreign country can be recognized and enforced only if Uzbekistan has a relevant bilateral or multilateral agreement with that country. If international arbitration is permitted, awards can be challenged in domestic courts. However, currently local economic courts do not have a solid mechanism for enforcement of foreign courts’ decisions. Foreign businesses may wish to consult with a local law firm in order to avoid delays or other unexpected outcomes of their cases in local economic and arbitration courts.
Most investment disputes with involvement of Uzbek state-owned enterprises (SOEs) reviewed by domestic courts have been suspended prior to a final decision due to plea bargains –or have been decided in favor of SOEs. 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 other elements within the government. Judgments against SOEs are particularly difficult to enforce.
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. In its 2017 Doing Business report, the World Bank ranked Uzbekistan 77th out of 190 for the “Resolving Insolvency” indicator.
4. Industrial Policies
Uzbek 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 investment 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.
Foreign Trade Zones/Free Ports/Trade Facilitation
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. A Free Industrial and Economic Zone (FIEZ) was created in 2008 in the Navoi region; the Special Industrial Zone (SIZ) was established in 2012 in Angren City of Tashkent province; and the SIZ Jizzakh appeared in March 2013 in Jizzakh region, with a branch in Syrdarya region. Each economic zone was created for a period of 30 years from the date of its establishment, with the possibility of extension.
Businesses that invest in these zones were promised various incentives, including tax holidays; 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. However, due to slow improvement of the business climate in the country and a number of other reasons, these special zones failed to boost FDIs, contrary to government expectations. Only $223 million of FDIs had been attracted to all industrial zones by the end of 2016.
A new Presidential Decree signed in October 2016 unified the legal and economic status of the FIEZ and SIZs and renamed them as Free Economic Zones (FEZ). The decree identifies the following directions for further development of FEZs:
- establishing unified and most favorable conditions for foreign investors;
- attraction of FDIs to create modern production with high levels of local sourcing, ensuring deep processing of local mineral resources and production of competitive products with high added value, promotion of industrial specialization of free economic zones and development of industrial cooperation;
- gradual transition to a “one window” principle in all free economic zones that provides for rendering all types of public services, including licensing procedures;
- development of production, engineering-communication, transport and social infrastructure, as well as development of modern infrastructure to provide high-quality logistics services;
- organization of training opportunities in higher and secondary special professional educational institutions with regard to current and future needs of FEZs for a skilled labor force.
Now all businesses operating in the territory of FEZs can make foreign currency transactions with local vendors and expect the following privileges:
Exemption from paying land tax, income tax, tax on property of legal entities, tax for accomplishment and development of social infrastructure, single tax payment for micro-firms and small enterprises, as well as obligatory contributions to the Republican Road Fund and off-budget Fund for Reconstruction of Schools, Colleges, Lyceums and Medical Institutions; and
Exemption from customs payments (except customs clearance fees) for equipment, materials, and components imported to cover their own production needs, as well as for building materials that cannot be sourced in Uzbekistan for the projects approved by the government.
The term of privileges specified above depends on the amount of investments, which can be:
- 3 years for investments from $300,000 to $3 million;
- 5 years for investments from $3 million to $5 million;
- 7 years for investments from $5 million to $10 million; and
- 10 years for investments of $10 million and above, with a 50 percent reduction of income taxes for the subsequent 5 years.
Activities of FEZs are governed and coordinated by the FEZ Administrative Council. The government plans to establish four additional FEZs: Urgut (Samarkand province), Gijduvon (Bukhara province), Hazorasp (Khorezm province), and Kokand (Fergana province).
Performance and Data Localization 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. Legislation 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. 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.
To qualify as an enterprise or business with foreign investment and be eligible for tax and other incentives, 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:
- $400,000 for joint-stock companies (except financial institutions);
- $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.
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.
Tax incentives for foreign investment are essentially the same as for local enterprises participating in an investment, 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.
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.
5. Protection of Property Rights
Property ownership is governed by the Law on Protection of Private Property and Guarantees of the Owner’s Rights. Uzbek and foreign entities may own or lease buildings, but not the underlying land. Mortgages are available for local individuals only, but not for legal entities. There are no mortgage and liens securities in Uzbekistan.
The World Bank ranked Uzbekistan 75th in the world in the Registering Property category of its 2017 Doing Business Report, up from the 81st spot the previous year, indicating that the GOU has simplified property-transfer procedures. More details can be reviewed here: http://www.doingbusiness.org/data/exploreeconomies/uzbekistan#registering-property
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.
Legally purchased but unoccupied property can be nationalized for several reasons, including past due debts for utility or communal services, debts for property taxes, and in some cases for security considerations. Unauthorized takeover of unoccupied property by other private owners (squatters) is not a common practice in Uzbekistan. Usually authorities inspect the legitimacy of property ownership at least once every year.
Intellectual Property Rights
The concept of registering intellectual property (IP) is still new to Uzbekistan. In 2013, Uzbekistan withdrew its reservation to Article 18 of the Berne Convention for the Protection of Literary and Artistic Works, and adopted a Trade Secret law in 2014. In 2011, the GOU made an effort to improve IP rights (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. Uzbekistan has not yet acceded to the WIPO Copyright Treaty as well as the WIPO Performances & Phonograms Treaty (known collectively as the WIPO “Internet” Treaties). Uzbekistan is a consumer, but not a significant producer, of pirated material. Most software is unlicensed, included that used in government ministries.
Uzbekistan’s new Customs Code (which came into force on April 22, 2016) allows rights holders to control the importation of intellectual property goods. The Code introduced a special Customs Record procedure, which is based on a database of legal producers and their distributors, however customs officials still lack clear legal ex officio authority to enforce IPR without a notice from the right holder.
In 2016, the IPAU detected 878 IPR violations and initiated 6 criminal and 106 administrative cases with confiscation of 55,486 counterfeit products. The agency also has experience in enforcing the protection of foreign trademarks.
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 IPR. The USTR noted that current enforcement remains weak and criminal penalties for IPR violations are insufficient to provide a deterrent effect.
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).
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
6. Financial Sector
Capital Markets and Portfolio Investment
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 had left the market by 2010 due to capital losses brought about by the global financial crisis. The few portfolio managers remaining invest primarily in the insurance and leasing sectors
Uzbekistan has its own stock market, which has been traded through Tashkent Stock Exchange, the main securities trading platform and the only corporate securities exchange. 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.
Current economic policies have not facilitated the free flow of financial resources into the product and factor markets. In January 2017, the GOU announced its plans of using more stock market instruments in meeting its privatization targets.
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.
Formally, foreign investors are able to get credit on the local market. 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
There are 27 commercial banks, including 3 state-owned banks; 11 partly state-owned joint-stock banks; 5 banks with foreign capital; and 8 private banks. Commercial banks have over 4,600 branches and retail offices throughout the country.
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. In August 2016, Moody’s Investors Service announced it was “maintaining its stable outlook on the Uzbek banking system.”
Official information on non-performing assets is not publicly available. According to the World Bank, the share of nonperforming loans to total gross loans is about 0.4 percent. A majority of Uzbek commercial banks have earned “stable” ratings from international rating agencies.
In January 2017, the banking sector’s capitalization was about $3.2 billion and the value of total bank assets in the whole country was equivalent to $27.1 billion. Included in this amount are the assets of the two largest state-owned banks, which together hold about $17 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/en/kreditnye-organizatsii/ ).
In general, any banking activity in Uzbekistan is subject to licensing and regulation by the Central Bank of Uzbekistan. Foreign banks prefer establishing joint-ventures with local financial institutions. Currently there are five banks with foreign capital operating in the market, and six foreign banks have accredited representative offices in Uzbekistan but do not provide direct services to local businesses and individuals. Information about the current status of Uzbekistan’s correspondent banking relationships is not publicly available.
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.
Foreign Exchange and Remittances
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. Companies regularly report long delays and are often only granted a portion of the requested sum for convertibility. In late 2016, the government published draft legislation on liberalization of currency exchange. But the law has not been adopted, and it remains unclear if this problem will subside in the near future.
There are two legal exchange rates in Uzbekistan: the commercial (wire-transfer) rate and the exchange booth rate (3,357 and 3,414 soum per U.S. dollar, respectively, as of February 2017). Some businesses use a semi-official exchange mechanism through the Uzbekistan Commodity Exchange, where the dollar value in soums is usually three times higher than the official rate.
Individual entrepreneurs often trade on the illegal (black) market, which trades at its own rate (6,900 soum per U.S. dollar in February 2017), and which currently exceeds the official exchange booth rate by roughly two times. Despite their widespread use, these currency exchange operations are illegal.
The Central Bank of Uzbekistan regulates the official exchange rate of the soum. It has lately maintained gradual official depreciation of the soum to about 15-17 percent per year.
There have been no recent changes in the rules regulating current account transactions. 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 25 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. 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 dependence on external factors.
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.
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.
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 equity of the FRD had grown to about $15 billion by 2015, up from $1 billion in 2006. The GOU plans to raise the FRD’s equity up 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 sovereign wealth funds. 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.
7. State-Owned Enterprises
State-owned enterprises (SOEs) dominate those sectors of the economy recognized by the government as being of 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 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 for 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.
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.
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 . 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 ).
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.
There is no third-party market analysis on SOEs’ ties to the government. 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 Doing Business report, Uzbekistan holds 138th place among 190 ranked economies of the world in the Paying Taxes indicator). 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.
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.
At present, Uzbekistan does not adhere to the OECD Guidelines on SOE Corporate Governance. 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.
Uzbekistan declaratively subscribes to an ongoing process of institutional and economic reform, such as restructuring and privatization. As of February 2017, 341 state-owned assets are available for privatization (the list can be reviewed here: https://gkk.uz/ru/deyatelnost/direction/privatization ). A government decree issued on January 17, 2017, created additional incentives for privatization of unused state assets. Now privatization of non-strategic assets does not require government approval and can be cleared by local officials. The payment term has been extended from 2 to 3 years. Within five years, investors must have fully fulfilled their investment commitments. The GOU plans to privatize 675 state-owned assets by 2019, including 230 assets at zero cost.
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. The GOU also warned joint stock companies that they would be subject to potential liquidation or reorganization if they failed to comply with the new foreign ownership requirements. (Although in August 2016, the GOU identified 87 noncomplying joint stock companies and extended the deadline until December 31, 2016, the program has not been fully implemented.) Exceptions were 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 receive 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.
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.
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 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.
In general, Uzbekistan has made limited progress in privatization since 1998, when the government declared a policy of institutional and economic reforms in order to attract more investment into the country. 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. Usually state assets offered for privatization consist of auxiliary or ineffective enterprises and unprofitable public facilities. 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 foreign-registered front companies associated with influential Uzbek families.
8. Responsible Business Conduct
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.
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.
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.
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.
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 regarding responsible supply chains of minerals from conflict-afflicted and high-risk areas, 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).
Uzbekistan’s legislation and Criminal Code both prohibit corruption. On January 3, 2017, President Mirziyoyev approved the law “On Combating Corruption.” The law is intended to raise the efficiency of anti-corruption measures through consolidation of efforts of government bodies and the civil society in preventing and combating cases of corruption, attempted corruption, and conflict of interest, ensuring the inevitability of punishment for such crimes.
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 has been arbitrary, however, and there is considerable anecdotal evidence that a large portion of officials have used 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.
The new law “On Combating Corruption” has clear definitions for conflict of interest and attempted corruption. The government also plans to adopt laws “On Administrative Procedures,” “On Public Procurement” and “On State-Private Partnership” in order to improve anti-corruption legislation, to reduce administrative barriers in public-private interactions, and ensure transparency in accessing public resources.
Currently all government procurements have to go through open tender process. 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).
Traditionally, the process of awarding contracts has not always been 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.
The law “On Combating Corruption” prescribes a range of measures for preventing corruption, including through raising public awareness and introduction of transparent rules for public-private interactions. The law, however, does not encourage companies to establish relevant internal codes of conduct.
Currently 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 156 out of 176 rated countries in Transparency International’s 2016 Corruption Perceptions Index.
The very few officially registered local NGOs usually do not investigate corruption cases. But the law “On Combating Corruption” encourages more active involvement of NGOs and civil society in investigation and prevention of crimes related with corruption.
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, has stimulated rent seeking, which public sector employees often justify by pointing out their low wages. Bribery has traditionally been a common tool for obtaining lucrative positions, government contracts, preferences, and exemptions from regulations, as well as for escaping criminal prosecution.
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:
66, Akademik Gulyamov St., 100047, Tashkent, Uzbekistan
Hotline telephone numbers: +998(71) 232-4391, 232-4550
Contact information for the office of Uzbekistan’s Ministry of Justice:
5, Sayilgoh Street, 100047, Tashkent, Uzbekistan
Hotline telephone numbers: +998(71) 1008, 233-4768, 236-0509
10. Political and Security Environment
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 and similar 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. Border crossing points with both Kyrgyzstan and Tajikistan, both borders of security concern for the GOU, have been closed for periods of time in the past. Uzbekistan’s new government, however, has prioritized resolving border demarcation issues and seems inclined to improve legal cross-border trade flows in the region. Although the border between Uzbekistan and Afghanistan is officially open to traffic, travel restrictions for the region remain in place.
11. Labor Policies and Practices
Uzbekistan has the largest labor force in the region – potentially about 19 million, or 60 percent of the country’s total population. About 65 percent of the population is under age 30. 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 Union republics. Russia and Kazakhstan have 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 conceal 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. However, Uzbek employers have been known to circumvent labor laws by not signing contracts for female employees to avoid payment of benefits during maternity leave. 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 of the economic situation. 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).
Officially, labor legislation cannot be waived or applied differently for private or foreign-owned enterprises, including those that operate in special economic zones.
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 legislation;
- compensation of any health or property damages incurred as a result of professional duties through an employer’s fault;
- professional training;
- formation and joining of 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 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 and mining 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 law, in practice these laws are subject to arbitrary and inconsistent interpretation. For example, the law prohibits compulsory overtime – and 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.
13 conventions of the UN’s International Labor Organization (ILO) are officially in force in Uzbekistan:
- Forced Labor Convention;
- Right to Organize and Collective Bargaining Convention;
- Equal Remuneration Convention;
- Abolition of Forced Labor Convention;
- Discrimination [Employment and Occupation] Convention;
- Minimum Age Convention;
- Worst Forms of Child Labor Convention;
- Employment Policy Convention;
- Forty-Hour Week Convention;
- Holidays with Pay Convention;
- Maternity Protection Convention [Revised];
- Workers’ Representatives Convention; and
- Collective Bargaining Convention.
In 2016, Uzbekistan ratified an additional ILO convention: Freedom of Association and Protection of the Right to Organize Convention. It is expected that this convention will enter into force for Uzbekistan by the end of 2017. However, employers often ignore the provisions of these conventions. The most recent observations of the ILO’s Committee of Experts on the Application of Conventions and Recommendations (CEACR) can be reviewed here: http://www.ilo.org/dyn/normlex/en/f?p=1000:13201:::NO:13201:P13201_COUNTRY_ID:103538
On September 22, 2016, Uzbekistan amended the law “On Protection of Labor,” aimed at further improvement of the labor protection system, including occupational safety and health regulations. The Ministry of Labor 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 have traditionally been able to initiate selective inspection of a business, typically in response to an accident or complaint; however, a presidential decree issued in October 2016 sought to abolish unscheduled business inspections.
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. However, the government has not always effectively enforced these laws and in some cases has ignored provisions of ratified ILO conventions. There have been high-profile cases in the cotton industry in which this has gained international attention. Independent cotton harvest observers have reported that the government’s system of cotton production quotas has resulted in widespread use of adult forced labor for the harvest. Such practices undermine investment in Uzbekistan’s cotton sector and the country’s ability to export cotton products to Western markets. The ILO’s report on measures against child labor and forced labor during the 2016 cotton harvest in Uzbekistan notes that child labor has become socially unacceptable since ILO first monitored the cotton harvest in 2013. However, the recruitment process contained risks of forced labor for staff of both public and private entities and students of lyceums, colleges and higher education institutions (http://www.ilo.org/ipec/Informationresources/WCMS_543130/lang–en/index.htm ).
On September 22, 2016, Uzbekistan amended the law “On Protection of Labor,” aimed at further improvement of the labor protection system and in December 2016, the lower chamber of the Uzbek Parliament discussed the ratification of ILO conventions 81 (Labor Inspections), 129 (Labor Inspection (Agriculture), and 183 (Maternity Protection). In 2015-2016, the Labor Code and a number of regulations saw minor modifications mainly related with new rules for employment of local citizens abroad and renaming of the Ministry of Labor and Social Protection to the Ministry of Labor.
12. OPIC and Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) began working in Uzbekistan in 1992 and has loaned approximately $229 million over the course of its operations in Uzbekistan, but had no projects in FY2016. Uzbekistan is a developing country member of the Multilateral Investment Guarantee Agency.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
In many instances below (indicated by “N/A”), no data has been published by the Government of Uzbekistan, and independent assessments and estimations are also not available. The GOU includes foreign debt inflow in FDI figures. In some reports the GOU may also indicate contractual pledges of FDI, rather than actual investment inflow.
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($M USD)||2016||$67.2 billion*||2016||N/A||www.worldbank.org/en/country|
|Foreign Direct Investment||Host Country Statistical Source*||USG or International Statistical Source||USG or international Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||2015||N/A||2015||$83 million||BEA data available at http://bea.gov/international/direct_investment_
|Host country’s FDI in the United States ($M USD, stock positions)||2015||N/A||2015||$0||BEA data available at http://bea.gov/international/direct_investment_
|Total inbound stock of FDI as % host GDP||2015||N/A||2015||0.12%||N/A|
*Source: The State Statistics Committee of Uzbekistan
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available.
14. Contact for More Information
Contact at the U.S. Embassy in Tashkent:
3 Moyqorghon Street, 5th Block, Yunosobod District, 100093 Tashkent, Uzbekistan
Email address: BusinessInUzbekistan@state.gov.