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 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 government benefits 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 .
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.
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.
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 the United Nations Development Programme (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 a nongovernmental organization (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. Public review of the legislation can be implemented through a website. (https://regulation.gov.uz ).
Practices that appear as informal regulatory processes are not associated NGOs or private sector associations, but rather with influential local politicians or well-connected local elites.
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 ordered publication of some draft legislation for public comments, including draft decrees on the government’s development strategies, tax and customs regulation, and legislation to create new economic zones. Public review of the legislation is performed through the website, https://regulation.gov.uz . Prior to 2016, publishing drafts of laws and regulations for public review was uncommon.
Drafts of some legislation are published on a government website (https://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, (such as http://www.norma.uz/ and http://www.minjust.uz/ru/law/newlaw/ ). 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.
The Ministry of Justice and the system of Economic Courts are formally responsible for regulatory enforcement, while the Institute of Business Ombudsperson was established in May 2017 to protect the rights and legitimate interests of businesses and render them legal support. 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 development of a new regulatory system, including regulatory enforcement mechanisms outlined in the five-year development strategy has yet to be completed.
Formally, the Ministry of Justice and the Prosecutor’s Office of Uzbekistan are responsible for oversight to ensure that government agencies follow administrative processes. In some cases, however, local officials may inconsistently interpret laws, often in a manner detrimental to private investors and the business community at large.
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 adopted in 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.
A number of previously announced regulatory reforms were implemented in 2017. These include regulations for improvement of the business environment (cancellation of unjustified tax inspections, elimination of the mandatory sale of export earnings, and simplification of business registration and foreign trade procedures), the new law on combatting corruption, and establishment of the business Ombudsperson. Some of earlier announced reforms, such as introduction of a new tax and customs rules and currency exchange regulation, have yet to be implemented.
Previously implemented regulatory system reforms often left room for interpretation and were accordingly enforced subjectively. New or updated legislation continues to leave room for interpretation and contains definitions that are rather unclear. In many cases, private businesses still face difficulties associated with enforcement and interpretation of the legislation. More information on Uzbekistan’s regulatory system can be reviewed at the World Bank’s Global Indicators of Regulatory Governance (http://rulemaking.worldbank.org/data/explorecountries/uzbekistan ).
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, resolutions 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 in 2018), 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 lower-level Economic Court and appealed to the Supreme 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.
On paper, the judicial system in Uzbekistan is independent, but government interference and corruption are common. Government officials, attorneys, and judges often interpret legislation inconsistently and in conflict with each other’s interpretations.
Court decisions or enforcement actions are appealable though a 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 2017), the Law on Guarantees and Measures on Protection of Foreign Investments (No. 611-I, issued April 30, 1998, and last revised in 2017), 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.
In 2017, the President of Uzbekistan signed a number of decrees and resolutions related to foreign investments, including on Creation of the State Committee on Investments (March 31, 2017) and, most importantly, on Liberalization of the Currency Exchange Policy (September 2, 2017).
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 2018). The main entity that reviews transactions for competition-related concerns is the State Committee for Supporting Privatized Enterprises and Development of Competition. This government 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. 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 violations of the law or for arbitrary reasons, such as a unilateral revision of an investment agreement, a reapportionment of the equity shares in an existing joint venture with an SOE, or a public works or social improvement project (similar to an eminent domain taking). 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 22,900 businesses in 2017, or about 86 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 Supreme 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, non-transparent, and lacking due process.
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 have subordinate 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 a Free Trade Agreement (FTA) with an investment chapter with the United States. The governments of the United States and Uzbekistan signed a BIT in 1994, but ratification documents have not been exchanged and the agreement never entered into force.
Post is aware of numerous cases of commercial or investment disputes involving foreign investors. 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 taken under the guise of law enforcement, some observers have claimed more arbitrary or extralegal motives were at play.
In 2013, local authorities initiated criminal investigations against the owners and senior executives of the Muzimpex Company, the local partner of the Coca-Cola Bottlers Uzbekistan joint venture, in which Coca-Cola owns 43 percent of the shares. In February 2014, the government liquidated Muzimpex and presently controls the shares of the company.
U.S.-owned Newmont Mining and the telecommunications company MCT both faced pressure from the Uzbek government to sell their shares in joint ventures in 2006; both agreed to sell them after lengthy legal disputes and neither has returned to Uzbekistan.
Local and non-U.S. foreign companies have also faced expropriation in the agriculture, mining and retail sectors. In September 2012, the Tashkent City Criminal Court seized the assets of cellular telecom provider Uzdunrobita, a 100 percent subsidiary of the Russian company MTS, for financial crimes. An appeals court reversed this decision in November 2012, but upheld the USD 600 million of fines imposed. MTS wrote off its total assets in Uzbekistan of USD 1.1 billion and left the market. In 2013, the government transferred all MTS assets to a state-owned telecom operator after trying unsuccessfully twice to liquidate them. In 2014, MTS dropped legal proceedings against Uzbekistan and signed a settlement.
In October 2011, the government halted the production and distribution operations of a brewery owned by the Danish firm Carlsberg for dubious reasons. The interruption of business lasted 18 months before the company re-opened.
Earlier in 2011, the government initiated liquidation of the Amantaytau Goldfields, a 50-50 joint-venture of the British company Oxus Gold and an Uzbek state mining company.
In March 2011, government authorities also seized a large chain grocery store and approximately 50 smaller companies owned by Turkish investors.
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 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 2018 Doing Business report, the World Bank ranked Uzbekistan 87th out of 190 for the Resolving Insolvency indicator.
The main credit bureau operating in the market of Uzbekistan is Credit Bureau “Credit Information Analytical Center” (http://infokredit.uz/ ). The bureau was created in 2012 by the Uzbekistan Banks Association. The International Financial Corporation of the World Bank has been supporting improved creditor information maintenance through its Financial Infrastructure Development Project. One of the main goals of this project is to develop a credit information sharing system and thereby improve access to finance for entrepreneurs and small enterprises in Uzbekistan.