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International Financial Relations

Foreign trade traditionally has provided Uzbekistan with supplies of needed foodstuffs, including grain, and industrial raw materials, whereas Uzbekistan exported primarily nonferrous metals and cotton. On the eve of independence, Uzbekistan was a net importer, with roughly 22 percent of total domestic consumption composed of imports, and with exports accounting for 18 percent of production.

Trade Reform in the 1990s

Before the breakup of the Soviet Union, foreign trade was heavily dependent on the Russian Republic. In the 1980s, more than 80 percent of Uzbekistan's foreign trade was within the Soviet Union, with Russia accounting for half of imports and almost 60 percent of exports. The other Central Asian republics accounted for another quarter of Uzbekistan's total foreign trade. Even interrepublican trade was directed through Moscow and organized in the interests of centralized planning goals.

In the early 1990s, the Soviet-era pattern of exported and imported products remained approximately the same: nearly all ferrous metals and machinery, except that relating to the cotton industry, plus about 40 percent of consumer goods and processed foods, were imported. A significant aspect of the trade balance was that a single item, grain, accounted for 45 percent of imports in the early 1990s, as the republic imported about 75 percent of the grain it consumed. Traditionally strong exports are basic metals, cotton-related machinery, textiles, agricultural and aviation equipment, fertilizers, and cotton.

In 1993 about 80 percent of foreign trade, with both former Soviet and other partners, was on the basis of bilateral agreements (see table 23, Appendix). In the early 1990s, such agreements were heavily regulated by quotas, licenses, and distribution controls. In 1993 and 1994, however, the list of commodities requiring export licenses was cut in half, import licensing virtually ended, and the use of fixed quotas was cut by two-thirds. Plans called for adoption of a unified system of licenses and quotas in 1995. Private barter agreements with partners in the former Soviet Union became illegal in 1993; they were replaced by agreements based on international prices. In 1994 the government eliminated its tax on foreign-currency earnings.

In 1993 Uzbekistan's current accounts foreign trade deficit rose to 9.4 percent of gross domestic product (GDP--see Glossary), increasing from 3.1 percent in 1992; at that point, the deficit was financed mainly through transactions backed by the country's gold supply and by bilateral trade credits--measures not sustainable over the long term. Since independence, Uzbekistan has made aggressive efforts to expand foreign trade and to diversify its trading partners (see Foreign Relations, this ch.). Expansion of trade relations beyond the contiguous states of the former Soviet Union has been hindered, however, by Uzbekistan's landlocked position and the complexity of moving goods overland through several countries to reach customers (see Transportation, this ch.).

Foreign Investment

Although limited, the foreign investment law adopted in mid-1991 was a first step in promoting foreign contacts. Foreign investment, which moved quite cautiously in the early 1990s, expanded significantly in 1994 and 1995. By 1995 a variety of United States and foreign companies were investing in Uzbekistan. The United States Stan Cornelius Enterprises, for example, helped cap an oil well blowout at the Mingbulak oil field in March 1992, and the company has subsequently established a joint venture with the Uzbekistan State Oil Company (Uzbekneft) to develop the oil field and explore and develop other oil reserves in the country. The directors of the joint venture expect the Mingbulak Field to remain productive for twelve to twenty years. Likewise, the Colorado-based Newmont Mining Company has established a joint venture valued at roughly US$75 million with the Nawoiy Mining and Metallurgical Combine and the State Committee for Geology and Mineral Resources of Uzbekistan to produce gold at the Muruntau mine. A production rate of eleven tons per year was envisioned at the time the project was financed by a consortium of fifteen British banks.

The United States firm Bateman Engineering also is working in the gold sector, and various South Korean, Japanese, Turkish, German, British, and other companies are investing in a wide range of industrial and extraction operations including oil, sugar, cotton and woolen cloth production, tourism, production of automobiles, trucks, and aircraft, and production of medical equipment and ballpoint pens.

There are some significant barriers to investment. Uzbekistan's landlocked location makes commerce more difficult for potential investors. And, despite new legislation concerning such areas as tax holidays, repatriation of profits, and tax incentives, the investment climate for foreign companies remains problematic. The Karimov regime is relatively stable, but highly bureaucratic and centralized control, lack of infrastructure, and corruption remain major structural impediments that have prevented many joint ventures from getting off the ground. Small and medium-sized foreign firms are discouraged by persistent corruption among the lower-level officials with whom they must deal; larger companies such as Newmont Mining are able to deal directly with top-level politicians. Enterprise taxation rates vary widely, but the rate for joint ventures with more than 30 percent foreign backing is 10 percent. Five-year tax exemptions are granted to such firms in specific areas. All firms must pay a 40 percent social insurance tax to fund the state's welfare and unemployment programs.

Data as of March 1996

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