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Uzbekistan: Bureaucracy Deters Foreign Investors

London, 6 November 1998 (RFE/RL) -- A conference on business opportunities in Uzbekistan has heard that the Central Asian country is not getting as much foreign investment as it should, partly because of bureaucratic and administrative barriers.

The London conference, Doing Business in Uzbekistan, has been organized by IBC Global Conferences, a private firm that focuses on trade and investment opportunities in newly emerging markets. It is being attended by a high-level Uzbek delegation.

Khosrow Zamani, associate director of the Central Asian department of the International Finance Corporation, a branch of the World Bank, says Uzbekistan has so far failed to attract the levels of foreign investment warranted by its rich resource base.

Uzbekistan, a nation of 24 million people, is the world's second-largest producer of cotton, the seventh largest producer of gold, and it has extensive oil and gas reserves.

Zamani said Uzbekistan's gradualist approach to reform has allowed it to avoid, at least in the short term, some of the worst negative social and economic effects of the collapse of the Soviet Union. The country has experienced one of the lowest drops in gross national product (GNP) of any of the former Soviet republics.

Uzbek GNP began to grow again in 1996 to 1.6 percent and inflation has been cut from 1,200 percent to an estimated 33 percent today.

But Zamani warned that Uzbekistan must take bold steps toward reform if is to attract significant enough foreign investment to revive its crumbling infrastructure and exploit its resources.

Zamani's message was blunt: Investment capital, he said, is scarce in a world grown suspicious of emerging markets in the wake of the Asian financial crises, the collapse of the Russian ruble and economic problems in Latin America.

Zamani said the government of President Islam Karimov must improve the legal and economic environment if it is to succeed in building a strong private sector.

A major deterrent to investors are the restrictions on current-account convertibility and some other trade curbs. These restrictions led the International Monetary Fund (IMF) to suspend its stand-by agreement with Uzbekistan in 1996.

"The government has done many things right and they are committed but they need to do more in order to compete for capital. One of the key points that everyone questions is the issue of convertibility of currency. People want to see more transparency, less reliance on decrees, and to have less frequent changes of laws of regulations. These are the basics that investors like to see."

The Karimov government has declared its commitment to observe IMF rules on currency convertibility by the year 2000. Kazuya Murakami, director of the Central Asia team of the European Bank for Reconstruction and Development, told the conference that it is important now for the Uzbek government and central bank to outline an implementation schedule for the IMF and to stick to it.

The conference also heard that Uzbekistan has put in place incentives to attract foreign investment. But it heard as well that numerous studies suggest international investors are much more likely to be influenced by issues like infrastructure, human resources, economic stability and liberal foreign-exchange regulations.

So does Uzbekistan offer promise for Western investors? Kimberly Heimert, a U.S. lawyer who has lived in Uzbekistan for the past three years, says it does. Heimert cites as reasons the country's location in the heart of Central Asia, its vast mineral resources, and its proposed part of a new Silk-Road transport link.

"Uzbekistan is a developing market and before any company decides to become a foreign investor in a developing and, therefore by definition, a risky market, it must first ask the question, Are the potential benefits worth the potential risks of being a pioneer investor? Now, everyone encounters some difficulties when they are doing business in Uzbekistan's developing market. However, for many foreign investors, the reasons for doing business in Uzbekistan far outweigh the difficulties they encounter.

But according to Zamani, it is still difficult to open and operate a new business venture in Uzbekistan. As a result, he says, the country is not getting the level of foreign investment that it should.

Zamani says economic policies "should not be based on maintaining the old production structures and government trade organizations." He also says that Uzbekistan should look not to Russia as a transitional model but to the more successful economies of Central and Eastern Europe.

"The model of Russia has not been very successful, so using it as a model all the time and trying not to proceed with reform, might not be the best logic. As against East and Central Europe, where there are cases of success, Poland, Hungary. So Uzbekistan should consider these models to see what they have done, what policy they have, and what are the results."

The factors inhibiting both foreign and domestic investment in Uzbekistan were said to include controls on capital flows, institutionally weak financial systems, an inadequate legal framework, and state regulations on production and land use.