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 2018), 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 as 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
Practices that appear as informal regulatory processes are not associated with nongovernmental organizations or private sector associations, but rather with influential local politicians or well-connected 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, President Mirziyoyev ordered publication of some draft legislation for public comment, 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.
The GOU selectively publishes some presidential decrees and government decisions online. 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. As of now, there is no centralized nor comprehensive online location for Uzbekistan’s legislation, similar to the Federal Register in the United States, where all key regulatory actions or their summaries are published. 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 http://www.minjust.uz/ru/law/newlaw/ .
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.
The GOU selectively publishes some presidential decrees and government decisions online. 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. As of now, there is no centralized nor comprehensive online location for Uzbekistan, similar to the Federal Register in the United States, where all key regulatory actions or their summaries are published. 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 http://www.minjust.uz/ru/law/newlaw/ .
GOU officials have publicly suggested that improvement of the regulatory system is critical for the overall business climate. A number of reforms have been implemented in recent years. These include regulations for improvement of the business environment (reduction of the tax burden and 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. On March 2019, President Mirziyoyev instructed the Prosecutor General’s Office to develop a new Code of Enforcement Proceedings. Some of earlier announced reforms, such as introduction of a new tax and customs rules and currency exchange regulation, have yet to be implemented.
The government’s development strategies include 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.
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 unclear definitions. 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 ).
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, 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. A number of GOU policy papers call 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 various reform and development roadmaps of the government has yet to be completed.
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. A specialized Development Strategy Center was created in 2017 as an NGO. Its projects 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 development strategies of the government. In February 2019, the president ordered the creation of a new “National System of Monitoring and Evaluation of the Position of the Republic of Uzbekistan in International Ratings.” This initiative will consolidate efforts of specific scientific institutions and think tanks in the area of regulatory reforms. Public review of the legislation is available through the website https://regulation.gov.uz .
Uzbekistan’s fiscal transparency still does not meet generally accepted international standards, although in 2018 the government demonstrated notable progress in this area. A Presidential Resolution of August 22, 2018, calls for transparency of public finances and wider involvement of citizens in the budgetary process. It also contains measures for harmonizing the budget accounting with international standards, international assessment of budget documents through the Public Expenditure and Financial Accountability (PEFA) and opening the budget for the Open Budget Survey ranking after 2020. The first publication of the detailed state budget for fiscal year (FY) 2018 and the FY2019 budget proposal within the framework of Budget for Citizens project indicates positive developments in implementation of these tasks. Despite this progress, the government still does not release complete information on its off-budget accounts and on their oversight, publishing only some generalized parameters. Information on debt obligations, including contingent and state-owned enterprise debt, are not publicly available. Publicly available budget documents do not provide a substantially complete picture of the government’s expenditures and revenue streams, including natural resource revenues. Budget documents do not include detail on expenditures by ministry or information on allocations to or earnings from state-owned enterprises and detailed information on natural resource revenues. Information on budget-related decision-making and budget audit reports are still rather selective or unavailable.
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 its 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. Economic court 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 laws and a number of presidential decrees and government resolutions. The main laws are:
- Law on Investment Activities (№719-1, 7998);
- Law on Foreign Investments (№609-1, 1998);
- Law on Guarantees and Measures on Protection of Foreign Investments (№ 611-I, 1998);
- Law on Guarantees of the Freedoms of Entrepreneurial Activity (№ 69-II, 2000);
- Law on Free economic Zones (№ 220-I, 1996);
- Production Sharing Agreements Law (№ 312-II, 2001);
- Law on Concessions (№ 110-I, 1995); and
- Law on Investment and Share Funds (ZRU-392, 2015).
In 2018 and in the beginning of 2019, President Mirziyoyev signed a number of decrees and resolutions related to foreign investments, including:
- Decree on Improvement of Investments and Foreign Trade Governance through Establishment of the Ministry of Investments and Foreign Trade of the Republic of Uzbekistan (UP-5643, January 28, 2019).
As of now, there is no real “one-stop-shop” website for investors that provides relevant laws, rules, procedures, and reporting requirements in Uzbekistan. On December 2018, the GOU created a specialized web portal for investors called Invest Uz (http://invest.gov.uz/en/ ), which can provide some useful information. The website of the Ministry of Investments and Foreign Trade (http://mift.uz/ ) offers some general information on laws and procedures, but mainly in Uzbek and Russian language.
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 Antimonopoly Committee (Established in January 2019). This government agency is responsible for advancing competition, controlling the activities of natural monopolies, protecting consumer rights and regulating the advertisement market. 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. 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. However, 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 to 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 chooses 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 out of court settlements –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 2019 Doing Business report, the World Bank ranked Uzbekistan 91st out of 190 for the “Resolving Insolvency” indicator (http://www.doingbusiness.org/en/data/exploreeconomies/uzbekistan#DB_ri ).