Uzbekistan Cracks Down on Foreign Firms

New restrictions will make it harder for companies, especially from the U.S., to do business in the mineral-rich former Soviet republic

One of the world's biggest open-pit gold mines is officially bankrupt because of a tax bill. In mid-August an Uzbek court said Zarafshan-Newmont, a joint venture 50 percent owned by the U.S. mining giant Newmont Mining, owed the state $48 million in back taxes and declared it bankrupt.

Uzbek officials opened a criminal probe into Zarafshan-Newmont's operations and staffers, froze its bank accounts, and blocked shipments from the venture's Muruntau mine, 400 kilometers west of the Uzbek capital, Tashkent. Newmont said the government of Uzbekistan was trying to seize its part of the venture and promised to take it to international arbitration.

Newmont is just one of a number of foreign companies that are finding it harder to do business in Uzbekistan. Coming on the heels of a broad crackdown on foreign-run media and civil-society groups, the new restrictions on foreign companies are yet another sign of the Uzbek political elite's rapidly dwindling appetite for cooperation with Western nations, and the United States in particular.


  In the spring, Uzbekistan’s cabinet canceled the permanent tax preferences and freedom from customs duties enjoyed by enterprises with foreign backing from companies including Newmont, Texaco, and Case New Holland. All three are among the most active U.S. investors in Uzbekistan. U.S. firms have pumped some $500 million into the Uzbek economy in the past 15 years.

Officials said the decision was necessary to “energize investment activity,” “strengthen the stimulating role” of tax preferences and “provide equal rights for foreign investors.” Behind these ambiguous phrases is the fact that as of 1 June, an enterprise with foreign capital can receive tax preferences only for a specified period if Uzbekistan’s cabinet approves it.

One of the companies affected, Uz-Texaco, must now pay customs duties on imported equipment. The company is a joint venture between the Uzbek state and Texaco to provide the Central Asian region with lubricants. Ekaterina Dzu, Uz-Texaco’s marketing manager, however, did not criticize the decision and said the company has excellent relations with local officials, despite a few glitches.

In August, another foreign metals investor, London-based Oxus Gold, was reportedly excluded from developing the zinc, silver, copper, and lead deposits in the Khandiza reserve in the southeast of the country.


  Analysts point to two underlying causes for the actions taken against Western companies: foreign policy and the economic interests of the political elite.

“In the first place, this is connected with a change in Uzbekistan’s foreign policy,” said Dosym Satpayev, director of the Assessment Risks Group, a nongovernmental organization based in Almaty, Kazakhstan.

“I see this decision as based more on politics than economic interests because when the United States and Uzbekistan had better relations, these companies could act more or less freely and make a profit, and Uzbek authorities held no grudges against them,” Satpayev said. “When the situation changed sharply, the government put pressure on them as well as numerous nongovernmental organizations.”

Uzbek President Islam Karimov's government began pressuring NGOs and foreign media in the wake of reports suggesting that the death toll in last year's Andijan uprising was several times higher than officially reported, as well as a growing number of reports of torture and maltreatment of prisoners at the hands of police.

The most recent NGO to be forced out of the country was Crosslink Development International, a relief agency based in the U.S. state of Minnesota, which was shut down in late August when Tashkent City Court found the organization guilty of failing to provide accurate information about its activities and of other charges. The group had been granting small startup loans to businesses run by poor rural families.

Satpayev also mentioned unsubstantiated reports that Uzbek political figures wanted to get a share of Zarafshan-Newmont, especially as metals prices reach record highs, or that Russian business interests were interested in gaining access to the mining concern. Russian gold producer Polyus denied speculation in the press that it would replace Newmont.

“I think the policy on attracting investors to Uzbekistan is highly subjective and linked, to a considerable degree, to Islam Karimov’s preferences,” Satpayev said. “Uzbekistan is now looking more attractive to Russian and Chinese investors because Islam Karimov has changed his preferences.”


  This year the country joined the Eurasian Economic Community, whose other members are Russia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan, and rejoined the Collective Security Treaty Organization, a grouping of the same member states and Armenia, from which it withdrew in 1999. Uzbekistan is also a member of the Shanghai Cooperation Organization for regional security issues, alongside China, Russia, Kazakhstan, Kyrgyzstan, and Tajikistan.

As the country’s relations with the United States and other Western states soured after the Andijan violence in May 2005, authorities ordered Washington to vacate the Afghan operational support airbase it operated on Uzbek territory.

Michael Hall, director of Central Asia projects for the think tank International Crisis Group, believes what's going in the country “is an attempt by the governing elite of Uzbekistan to squeeze every last cent that they can out of the Uzbek economy for themselves.”

“And as their opportunities to do this get fewer and fewer as the current sources of revenue dry up, they'll start looking for the last remaining untouched parts of the economy,” he said. “Obviously, the downturn in U.S.-Uzbek relations also plays into this, but this probably is more of a convenient pretext than anything else. … Karimov has to make sure that there's enough money to spread around to keep the elites happy and content so that they don't make any trouble for him.”

Michael Considine, director for Eurasia affairs and intellectual property issues at the U.S. Chamber of Commerce in Washington, D.C., puts the blame for the situation on “periods of reform and restructure” Uzbekistan is still going through.

On a visit to Tashkent in August, Richard Boucher, the assistant U.S. secretary of state for South and Central Asian affairs, told journalists, “We keep in very close touch with American companies here. … There are companies that are finding it increasingly difficult to do business here. We did discuss these issues today. And I expect we will continue to discuss them in the future.”

If the authorities continue to make life difficult for foreign companies, Uzbekistan may see a fall in foreign investment. The country already has one of the lowest levels of foreign direct investment per capita in the Commonwealth of Independent States. Earlier this year, Deputy Minister of Foreign Economic Relations Sabir Khasanov said foreign firms invested $545 million in 2005, but estimates by the UN Conference on Trade and Development and the European Bank for Reconstruction and Development are that the true figure is about half that amount.

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