PRAGUE, 7 February 2006 (RFE/RL) -- Stability is one of the major factors that influence a foreign investor's decision about whether to invest in a country's economy. Investors want to be sure that neither political turmoil nor a government's unwelcome interference in economic affairs -- such as unexpected changes in legislation -- will result in the investor losing money.
In this sense, economists say, Uzbekistan is not very attractive for foreign investors as the country's political instability increased dramatically after the violent uprising in eastern city of Andijon in May 2005.
Anna Walker, a Central Asia analyst with London's Economist Intelligence Unit (EIU), tells RFE/RL that the political situation as well as the business climate will likely worsen in Uzbekistan in the short term.
"The next 18 months are going to be quite difficult in Uzbekistan, specifically with the approach of the presidential election [in 2007]," she said. "Over the past nine months since the events in Andijon...President [Islam Karimov] has cracked down even more harshly than previously on perceived opponents of his regime. So this is making the environment much more difficult for groups such as nongovernmental organizations, independent media -- which there are very few anyway -- but also international media are finding it increasingly difficult to work there."
Uzbekistan has had economic growth over the past few years. Official GDP for 2005 is yet to be announced, though preliminary data say it is likely to be over 6 percent -- relatively high for a transitional economy.
However, economists say, the growth was not due to structural reforms and development of the industrial and agricultural sectors but rather due to high market prices for some raw materials that are Uzbekistan's major exports -- oil, gas, gold, and cotton.
Uzbekistan, which is among the world's top 10 producers of gold and among the top five in cotton, enjoyed a favorable world market situation in 2005.
Uzbekistan's GDP also grew due to a large amount of investments in the energy sector -- mostly by Russia.
Repercussions Of Andijon
Russia and China are among the few countries that still endorse Uzbek President Karimov after relations with the West soured when Uzbek government troops cracked down on protesters in Andijon in an action that reportedly led to the deaths of hundreds of civilians.
Karimov rejected international calls to conduct an independent probe into the Andijon violence and evicted U.S. troops from Uzbek soil by closing the Karshi-Khanabad air base in the country's south in late 2005.
These actions had a negative impact on the country's relations with Western governments and international financial institutions like the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development.
The European Union imposed a weapons embargo on Uzbekistan and introduced an entry ban for a dozen top Uzbek security officials.
Meanwhile, Moscow stepped up cooperation with Tashkent, and Russia's Gazprom and LUKoil companies continued to invest in Uzbekistan's hydrocarbon sector.
The Economist Intelligence Unit's Walker says Uzbekistan will continue its economic cooperation with Russia as Moscow doesn't demand that Tashkent implement reforms -- something international financial institutions required from Uzbek authorities but official Tashkent has been reluctant to under take.
"Although the [Uzbek] president constantly tries to introduce measures that make the system easier for foreign investors, these are often counteracted by, for example, currency controls, whether they be formal or informal currency controls," Walker said. "Generally, the business environment remains very difficult; for example, in the cotton sector, [or] metals. It certainly is not in their (eds: political elite) interests to implement the sort of reforms that Western multilateral institutions would like to see. In that sense, yes, it's highly unlikely that things will change."
Toshpulat Yuldoshev, a Tashkent-based independent analyst, agrees. He says the Uzbek government has demonstrated little will to implement genuine economic reforms. He adds that state interference in economic affairs of companies remains a widely used practice despite official rhetoric about market reforms: "In the past 15 years, the president has repeatedly said: 'we are implementing democratic reforms.' Laws have been introduced and decrees issued. But they don't work. Why? Because the elite fakes goals as it doesn't implement anything; it doesn't want to achieve anything, because the democratic process, if it starts, will at first hit the base of the dictatorship. If a market economy develops and entrepreneurs gain economic independence, they are likely to revolt against the current administrative-command management [of the economy]."
In 2006, economists say, the Uzbek authorities will see even less incentives to pursue reforms as the price for gold is expected to continue to rise, and Russia will be investing more in Uzbekistan's energy sector.
Thus, the country's GDP will grow more than 6 percent annually in each of the next two years, the Economist Intelligence Unit's analysts predict. But ordinary people are unlikely to feel the benefits of this growth as it will remain hard to set up small and medium-sized businesses and trade will continue to be strictly controlled.
Meanwhile, the political situation is likely to get even more tense and unstable with the government intensifying efforts to suppress dissent, the EIU's Walker forecasts.
Walker says President Karimov will likely try to amend the constitution to enable him to stay in power after his term expires in 2007, or anoint a successor who will provide for Karimov's security and continue his policies. In either case, the analyst adds, prospects for an easing within the political and economic environments are very slim.
(RFE'RL's Uzbek Service contributed to this report.)