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Central Asia Report: October 17, 2003

17 October 2003, Volume 3, Number 35

CURRENCY CONVERTIBILITY IN UZBEKISTAN: ECONOMIC AND POLITICAL IMPLICATIONS. Uzbekistan made its national currency, the som, fully convertible on 15 October when it formally signed Article 8 of the International Monetary Fund (IMF) Charter. The lack of currency convertibility has long been cited as the major obstacle to greater foreign investment in Uzbekistan, as well as being a major sticking point in the country's relations with the IMF and other international lending agencies for many years.

The IMF withdrew its representative in April 2001 due to frustration over Tashkent's reluctance to liberalize the economy -- particularly the failure of President Islam Karimov to honor a pledge in 2000 to restore currency convertibility, which his government suspended in 1996. Under strong pressure from the United States, which formed a strategic partnership with Uzbekistan in the months following the 11 September 2001 terrorist attacks, the IMF returned to Tashkent in 2002 with a staff-monitored economic-reform program but no promises of loans. However, the staff-monitored program was terminated last year after Uzbekistan missed two deadlines to introduce convertibility and make other changes to liberalize trade and agriculture.

Deputy Prime Minister and Economy Minister Rustam Azimov had indicated in June 2003 that Uzbekistan would liberalize the currency by November. Thus the convertibility of the som, formally announced by the government and the Central Bank of Uzbekistan in a letter to the IMF last week (see "RFE/RL Newsline," 10 October 2003), came one month ahead of schedule. It also followed a weeklong IMF mission to Uzbekistan, led by Erik de Vrijer. The mission ascertained that the government and the Central Bank had fully implemented all measures agreed upon under a joint plan of action, Interfax reported on 9 October. Azimov told journalists in Tashkent on 8 October, "We [the Uzbek government] irrevocably accept the obligation that starting 15 October, all currency regulations in Uzbekistan will be made in accordance with Article 8 of the IMF." A joint press release by Azimov and de Vrijer added that Uzbekistan had officially lifted all currency restrictions, including the use of multiple exchange rates. The Central Bank simultaneously asserted that it had eliminated the difference between the official commercial exchange rate and the black-market rate.

Article 8 does not talk about currency convertibility in so many words. Rather, it stipulates that exchange contracts involving the national currency must not be contrary to the exchange-control regulations consistent with the IMF charter. More precisely, Article 8 requires member states not to impose exchange restrictions on the making of payments and transfers for current international transactions. The latter is a term of art. As defined by the IMF Charter (Article 30), payments for current transactions means payments for the import-export of products and services, including short-term banking and credit facilities, interest on loans, and dividends from investments. Current transactions do not encompass capital transfers. In other words, signing Article 8 does not oblige Uzbekistan to remove restrictions on payments for the purpose of transferring capital. Operations falling under that heading would include purchases of foreign stocks or real estate, opening bank accounts, and payments on long-term credits.

Tashkent's decision to convert the som should eliminate the black market in currency trading. It means that foreign investors are more likely to put their money into the country if they know they can take it out, converting profits to hard currency at a rate set by the market instead of the government. Other liberalizing measures recently adopted by the government have included lifting the ban on payments to offshore zones, permitting the purchase of foreign exchange with loan funds, and, as of 1 October, abolishing the requirement that import-export contracts be preregistered with the agency for foreign economic relations. Limits on the purchase of currency both by companies and individuals were also eased. The amount of cash that citizens can freely take out of Uzbekistan was increased from $1,500 to $2,000, and up to $5,000 can be transferred to accounts outside the country, Interfax reported on 1 October.

Commenting on the convertibility of the som, de Vrijer said it was "an important step for Uzbekistan, but it is not a panacea for all the problems besetting the Uzbek economy." He added, "An important thing it will do is to clearly expose the problems that need to be addressed, instead of hiding them behind the veil of an overvalued exchange rate" (see "Uzbekistan: Som Day Has Arrived, As Currency Convertibility Is Announced,", 10 October 2003). He urged Tashkent to improve the business climate by deepening market reforms and privatization, easing trade restrictions, and ensuring the rule of law, AP reported on 8 October. De Vrijer also stressed that the authorities should meet their obligations on pensions and wages. Some observers have worried that Tashkent might try to bolster the currency by delaying payment of salaries at state-run enterprises.

Meanwhile, Azimov hedged about the effect that currency liberalization will have on prices, RFE/RL reported on 9 October. He guaranteed to journalists that inflation would not skyrocket, forecasting that a maximum rate of 8 percent-8.5 percent for 2003 and the same for 2004. But regarding prices Azimov said, "We cannot guarantee stability of prices because it is not the task of the government. He added, "We can guarantee stability of monetary-credit policy, guarantee that there will not be any intervention in the monetary and inflation process from the side of the government and Central Bank."

Given the economic advantages of a convertible currency, it may be asked why its liberalization has taken so long, especially if one is inclined to believe that Karimov has been personally committed to the idea since he backed it publicly in 2000. The untold story behind the reintroduction of a convertible som is the executive's backstage battle with special interests within Uzbekistan -- special interests, it should be added, brought into being by distortions in the national economy pioneered by the executive itself. Economic activity is still tightly controlled by the state. The lack of currency convertibility, although it has stifled the country's overall economic development, has certainly been beneficial to business cliques and most probably various government officials with the power to divert or monopolize resources. (Indeed, many government officials have extensive business interests.) A soft and overvalued som allowed Tashkent to protect indigenous industry at the price of severely hobbling foreign trade. Furthermore, it allowed the government to strictly ration hard currency, which it provided only to favored firms on an application basis. This system of allocating foreign reserves was both nontransparent and helped to institutionalize corruption, as it advantaged those businesspeople with access to hard currency and the government contacts that could supply it.

How was convertibility pushed through against the resistance of some powerful entrenched interests? What deals, threats, or compromises did Karimov make, who are the winners and losers, and what are the political ramifications? As the government signed Article 8 this week, some Uzbekistan watchers had a strong feeling they were seeing only the tip of the iceberg.

ANOTHER SHOOTING ON KYRGYZ-UZBEK BORDER... Uzbekistan's border policies have regularly been a source of contention and tension with its neighbors. In the last year alone there have been complaints about Tashkent's obstinacy about frontier delimitation (from Kyrgyzstan), its unilateral decision to mine its border zones (Kyrgyzstan and Tajikistan), provocative military exercises near the border (Turkmenistan and Tajikistan), and its closure of the border to choke off hard-currency trading (Kazakhstan and Kyrgyzstan). Most recently it has been Uzbekistan's trigger-happy border guards that have caused the most resentment -- with the Uzbek government's refusal to admit fault coming a close second.

A fresh border incident involving a neighbor occurred on 10 October when Uzbek guards opened fire on a group of villagers on the Uzbek side of the border, killing two Uzbek citizens, and wounding one Uzbek and one Kyrgyz man (see "RFE/RL Newsline," 14 October 2003). According to one version of the events reported by Kyrgyzinfo on 13 October, the Uzbek villagers, many of whom apparently earn their living smuggling scrap metal and fertilizer into Kyrgyzstan, were fired upon when they ignored an order from the guards. The Kyrgyz citizen, who works as a gardener on the Uzbek side, was among the Uzbek villagers. A Kyrgyz village official said the Uzbek guards apologized and offered to pay the medical expenses of the injured Kyrgyz.

On 14 October, the Uzbek Foreign Ministry gave its version of events. It said that seven Uzbek citizens who were trying to smuggle cotton into Kyrgyzstan ignored an order to stop from Uzbek border guards. The guards opened fire on the group after the smugglers tried to attack them. The Kyrgyz gardener was an innocent bystander, the ministry said (see "RFE/RL Newline,"15 October 2003). Kyrgyzstan has long protested the use of firearms by Uzbek border troops on the two countries' common border. A diplomatic row erupted in July after an Uzbek border guard shot dead a Kyrgyz citizen in the Kyrgyz border town of Karasuu while he was crossing into Uzbekistan over a wooden bridge about half a kilometer from the official border crossing (see "RFE/RL Newsline," 18 July 2003).

...WHILE KAZAKH-UZBEK BORDER ROW WINDS DOWN... The Kazakh government has been engaged in a heated exchange of its own with Tashkent for over a month. In early September Uzbek guards opened fire on a Kazakh villager, Bakdaulet Madagaliev, when he tried to retrieve a cow that had strayed across the border. Madagaliev's horse was killed from under him and he himself was hit in the knee. Nevertheless, he managed to reach a Kazakh border post, pursued by the Uzbek guards (see "RFE/RL Newsline," 10 September 2003). Kazakh officials maintained the shooting was deliberate.

However, Uzbek authorities countered with their own version of the story, reported on 29 September. They said that MadagAliyev was among a group of seven men on horseback who ignored verbal warnings to turn away from the border. When the horsemen did not respond, an Uzbek border guard allegedly fired warning shots into the air, and MadagAliyev was wounded by a stray bullet. (How was his horse killed, then?)

After Kazakh media reacted to the story with indignation, Uzbekistan's Ambassador to Kazakhstan Turdyqul Botayorov accused it of biased reporting and implied that local politicians were trying to stir up anti-Uzbek sentiments. A cycle of mutual recriminations followed. A press statement by the Kazakh Foreign Ministry, reported on 23 September by, contended that the country's border service had registered 1,127 border violations by Uzbek citizens since last November, yet not once had Kazakh guards resorted to force. By contrast, Uzbek guards during the same period had been involved in five shooting incidents on the Kazakh border, resulting in one death and one wounding, the statement said.

Last week the Kazakhs took steps to patch up fraying relations. According to a press release from the Foreign Ministry, reported by Interfax-Kazakhstan on 9 October, Deputy Foreign Minister Nurlan Onzhanov met with Uzbek Ambassador Botayorov to set up a working meeting between their countries' border and customs-service officials.

The bottom line is that, however much its neighbors may regard it as a bully, Uzbekistan carries too much weight in the region for other Central Asians to dare antagonize it for long. Foreign Minister Qasymzhomart Toqaev said as much in a press conference in the capital in Astana on 9 October. He told journalists it was important for the Central Asian region as a whole that Kazakhstan maintain good relations with Uzbekistan (see "RFE/RL Newsline,"10 October 2003). The truth is that it is important for Kazakhstan, too, to keep on good terms with its prickly neighbor to the south.

...AND TAJIKS OPEN BORDERS TO TRADE. Meanwhile the Tajik government bucked the general trend in Central Asia last week when it took steps to make cross-border trade and transit easier rather than more difficult. It adopted a resolution intended to boost trade, economic cooperation, and friendly relations with Uzbekistan and Kyrgyzstan (see "RFE/RL Newsline," 14 October 2003).

The resolution, read out on Tajik radio on 10 October, instructed mayors and district officials in various border areas to construct markets catering to cross-border trade in foodstuffs and consumer goods. The areas mentioned were Sughd Oblast in the north, Murgob Raion in the Gorno-Badakhshon Autonomous Region in the east, central Jirgatol Raion, and the town of Tursunzoda.

The Border Protection Committee and relevant ministries and agencies were charged with simplifying border-crossing and customs procedures for citizens of Uzbekistan and Kyrgyzstan who wanted to sell goods in Tajikistan. They were also told to put necessary security measures in place and establish where the foreign traders would stay while in the country. The markets' preparation and operations are to be overseen by the National Consumers' Union and the Ministry of Economy and Trade. As of 10 October, Kyrgyz citizens were able to cross over freely into Sughd and Badakhshan regions, RFE/RL's Bishkek bureau reported.