A B&B Takes on the Powers That Be

Olim Rafiyev tends to like Americans. And why not? They're always up for a game of backgammon--or nardi, as they call the game in Uzbekistan--even though they never win. Playing nardi in the shade over green tea and candied raisins is more than a way of escaping from the desert sun in the ancient city of Samarkand. In the quiet of his little bed-and-breakfast's courtyard, it's a way of escaping the realities of this troubled nation. "Life is good here," he says, referring to the courtyard. "I can't complain."

It's not that he doesn't have something to complain about--he just can't. Uzbekistan is not the kind of place where you publicly complain, criticize, or condemn. The vast majority of the country's 25 million people live in abject poverty as vast resources are squandered, but the press, all state-owned, obediently ignores discontent. President Islam Karimov, the communist-turned-nationalist who ushered the country out of the Soviet Union, has never faced a real election. It's just as well--his opponents would find it hard to manage their campaigns from prison.

That, of course, hasn't stopped the U.S. from employing Central Asia's most populous, powerful, and oppressive nation in the war on terrorism. The U.S. Army has deployed its 10th Mountain Div. in Karshi, 200 kilometers from the Afghan border. They've come to fight Osama bin Laden and the Taliban fundamentalists--a fight Karimov has trumpeted for years, using fear of instability to suppress would-be entrepreneurs like Rafiyev.

BUS LINES. But Rafiyev isn't giving up yet. In fact, he's using the state's own bureaucratic apparatus in a bid to win a few concessions for private business. From the office of his hotel, the Kudbiya & Olim B&B, Rafiyev for a year has been rallying his colleagues in Samarkand to form a kind of tourism chamber of commerce, one capable of lobbying the government and getting results. Tourism is a critical industry in Uzbekistan--according to the government, some 60,000 businesses earn income from travelers, and 300,000 foreign tourists will visit in 2001, up from 80,000 in 1995. Any business providing tourist services must pay "membership" dues to Uzbektourism, the state-run behemoth that controls the old Soviet-era hotels, bus lines, and agencies.

That "membership" was never meant to translate into anything real, but in Samarkand, Rafiyev decided to turn it into an entrepreneurs' club. He and the other members--currently half a dozen, with a dozen applying for membership--meet regularly and have even pressured Uzbektourism to sponsor professional development seminars and trade fairs. "Only small enterprises are allowed," says Amin, a longtime member of Rafiyev's network who shuttles tourists between Samarkand and Bukhara and who declined to give his last name. "We've got some living to do before we get to see capitalism. But we'll get there."

Now, the Samarkand model is beginning to spread around the country, with private hoteliers and tour operators all along the Silk Road banding together to support each other and press for reforms. Top on the agenda is a deep tax cut, ideally eliminating taxes on cash flow and slashing the profit tax to 10%--the maximum, Rafiyev says, entrepreneurs can pay and still stay afloat.

Rafiyev could have been a big success long ago. He was trained as an engineer and began his career at one of Uzbekistan's sprawling state industrial concerns. Shortly after Karimov declared independence in 1991, Rafiyev and a group of colleagues decided to strike out on their own, setting up a company to install and maintain industrial equipment.

But Karimov's policies weren't exactly conducive to private enterprise. Eyeing the nascent Islamist insurgencies in almost every neighboring country, the Uzbek leader decided that pursuing sweeping economic and political reform would be too destabilizing. While Mikhail Gorbachev's reforms had already privatized some 95% of Uzbekistan's housing, Karimov kept everything else within his grasp, especially the mines and farmland that form the backbone of the economy. As a result, while Uzbekistan's exports have risen slightly since independence, gross domestic product has declined by 0.5% over the past decade, according to the World Bank. Per capita GDP, meanwhile, slid 2.4%.

CUT IN HALF. Those brave enough to invest in Uzbekistan have also found themselves thwarted. Most prominently, Korea's Daewoo opened factories in the '90s, making everything from clothing to electronics to cars, banking on Tashkent's promises that profits would be freely exportable. When the government reneged and, later, Daewoo ran into financial trouble back home, UzDaewoo's output fell by half--from 60,000 cars in 1999 to 30,000 in 2000.

Even the International Monetary Fund, which has pumped bailout after bailout into other former Soviet republics, cut its ties with Uzbekistan in April in protest over the lack of reform, especially Karimov's repeatedly broken promises to liberalize foreign-exchange laws. On the other hand, in the wake of September 11, the European Bank for Reconstruction & Development agreed to a $68 million loan to modernize the nation's railroads, though there are conditions attached.

Karimov's support of state-owned enterprises at the expense of entrepreneurs left Rafiyev and his colleagues nearly bankrupt by 1996. Their experiment ended for good that same year, when a cooling unit Rafiyev was working on exploded, leaving him half blind.

Rafiyev's second entrepreneurial adventure began nearly a year later, when he and his wife, Kudbiya, a guide at the Samarkand Hotel, opened an unofficial restaurant in their traditional whitewashed home. It was a hit, and by the summer of 1999, Rafiyev was ready to take in overnight guests. Each of an initial five rooms was given a separate entrance and its own bathroom, in addition to other Western-style touches such as windows with screens. When he opened his doors, he was able to offer a higher level of comfort than any of the Uzbektourism hotels in town, including the one where his wife works. "Uzbektourism wasn't very happy," he says.

SHUT DOWN. But while the authorities were willing to tolerate an off-the-books restaurant, a bed and breakfast that could compete with the hotel cartel was something else. Others who had tried to fly under the radar found themselves shut down and fined.

So even before Rafiyev opened the Kudbiya & Olim B&B, he had begun filing the paperwork--all 100-plus pages of it. Every inch of his property had to be inspected by half a dozen different agencies and insured against nearly twice as many potential dangers. And Rafiyev himself had to be vetted by the Interior Ministry before the Office of Visas & Foreigner Registration would give permission to host foreigners, who are required to register their whereabouts.

Officially, licensing is supposed to be a two-month process--at least, that's what was written in the law in 1995, when Karimov promised to liberalize the rules for small business. Instead, it took two years, as Karimov used a growing Islamic insurgency to increase his powers. With every crackdown, Rafiyev's file was "lost," and the process had to begin again. "We have a well-developed bureaucracy," Rafiyev says wryly.

In December, 1999, Rafiyev finally got his license, but being an honest businessman in Uzbekistan isn't easy. Rafiyev is required to pay a walloping 67.2% of sales in taxes. If there's profit, 25% goes to state coffers. On top of that, there's a property tax of 5% of the business' declared value.

One would think any entrepreneur would crumble under such burdens. But Rafiyev sees it all like a game of nardi. The more spread out your pieces are, the easier it is for an opponent to take them. Stack them all together, and you have a better chance. That's what he and his colleagues are trying to do against Uzbektourism. And Rafiyev doesn't often lose at nardi.

By Sam Greene

Edited by Harry Maurer

    Before it's here, it's on the Bloomberg Terminal.