UZBEKISTAN: EMERGING NEW GIANT IN AGRICULTURE AND ENERGY MARKET.

By Shan Saeed

The financial markets will remain volatile for the next 18 months as Europe continues to bleed and has yet to recover. I see bloodbath in the financial markets, social unrest and investors losing wealth globally. Investors are moving their capital where wealth preservation is considered to be high on agenda. Capital flows where the money is guaranteed a return and safety. Globally, countries are competing to attract foreign capital and investment. Legal framework, political and economic harmony is redefined by the governments to support reforms in their countries. Lately counties from Central Asian Republic are emerging very strongly due to vast resources of energy and agriculture presence. Uzbekistan is benefiting from vast natural resources which are attracting lot of foreign investment in the region. Uzbekistan with a GDP size of $52 bn [ PPP $106 Bn] is booming with GDP expectation to touch 7%. According to economist magazine, Uzbekistan is rated as one of the top countries achieving GDP growth rate of over 5% along with countries from Africa, Asia and South America.  The population of Uzbekistan is just 30 m and youth carries the huge ratio in that percentage. This is a good sign for a country that is just 20 years old and is already in the take off stage of its economic life cycle. The per capita GDP is around $1760 [ PPP $3,550]  expected to grow further as economic boom takes the positive trajectory. Demand from Russia and other neighboring countries have made energy and agriculture products much dearer. High global prices for Uzbekistan’s raw-material exports, including gold, gas and cotton, will drive the economy to the next level of economic prosperity going forward.  I have a very high opinion of the Uzbek people and of the country’s potential. They are motivated, diligent, and well-educated.

MACRO PERSPECTIVE ABOUT INVESTMENT AND GROWTH ABOUT UZBEKISTAN

Government economic vision:

Behavior is a better indicator than any published remarks. And the government's behavior in regard to economic questions shows that they want to move forward to bring about economic change going forward to compete globally. However, there are erected high barriers to foreign goods to try to boost their own consumer goods and agricultural production and tried to keep their smaller neighbors, most notably Tajikistan, from decreasing their reliance on Uzbekistan for energy and transit. There are few issues that government needs to sort out in order to attract more foreign investment in the country which holds enormous potential. They've taken steps beyond self-sufficiency in recent years and are now trying to push many businesses off of natural gas and to coal or wood to meet their heating and energy needs so they can sell domestically produced natural gas to higher paying foreign customers.

Investment potential:

The potential is good whereby lot of market remain untapped in this region. Uzbekistan is potentially a large market for consumer goods and there are opportunities in manufacturing and resource extraction. However, the government needs to spell out it economic policy in advance to gather interest from local and foreign investors. It is not uncommon for the government to change rules or for officials suddenly to engage in rent-seeking behaviors (often in very passive-aggressive ways that are somewhat unique to Uzbekistan).

GDP Growth Rate:

Most official figures put it between 7% and 9%. I and many other independent economists believe that GDP growth rate will touch 7% this year. Given rises in prices for commodities Uzbekistan produces and exports, the official growth rate is not entirely impossible, but there are many anecdotal indicators that growth in the economy is doing nothing to stave off declines in infrastructure and quality of life in many parts of the country.

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Safety of Investment

Particular investments need to be very carefully researched. Very large, high profile investors have done moderately well in recent years. Investor’s confidence is important to get more and more foreign investment in the country. More foreign investors are coming in to take advantage of the huge reserves in energy and agriculture market. The business climate is getting better and financial landscape is getting into a professional mode. Hopefully Uzbekistan will gain economic strength with more local and foreign investment.

Infrastructure

Good for the most part. The road and rail lines connecting the major cities and providing access to neighboring countries is pretty good and improving. As far as I know, the electrical infrastructure is fairly decent as well. However, straying too far from the capital or the main arteries, it is easy to find many signs of decay. 

ENERGY MARKET: THE DRIVER OF NEW GROWTH.

I think energy is probably the area where there are the most opportunities. For whatever reason, there seems to be less turbulence in the energy industry in Uzbekistan. It could be that it is high visibility and profitable enough that it is controlled more closely by the government than other industries. Also, most of the customers and investors have neighboring countries and from countries with fairly stable relations with Uzbekistan's government.

The Uzbek subsidiary of Lukoil Overseas started gas production at the end of 2011 at Dzharkuduk-Yangi Kyzylcha, largest field in the company’s Southwest Gissar block in the Kashkadarya region of  southeastern Uzbekistan.  Initial stage production is projected to reach 39 bcf/year.  The field is in the Amu Darya basin. Operating results at year end were quite profitable. In 2011, seismic surveying and exploratory drilling led discovery of Kyzylbairak-Southeast and Shamoltegmas gas fields and identification of several prospects.

The company matured two other prospects for drilling, and it also confirmed the presence of commercial gas volumes in the unexplored area of large Adamtash field, 50 miles north of the border with Afghanistan.  The next steps are to activate a gas processing facility and place Adamtash and Gumbulak fields on production. The $1.2 billion project to establish output of 565 MMcfd includes drilling more than 40 producing wells, building external power supply lines, a gas gathering and processing system, commercial gas pipeline, condensate pipeline, shift camp, field base, and engineering infrastructure.

In early 2011, Lukoil Overseas started production in an initial operating area in the western part of Shady field in the company’s Kandym-Khauzak-Shady-Kungrad project. The project consists of five wells making a combined 140 MMcfd of gas, production, gathering, and metering facilities, and a 21-km pipeline. Khauzak-Shady cumulative production reached 350 bcf of gas in mid-2011…Huge opportunity exists in the oil market in Uzbekistan for foreign investors.

AGRICULTURE: THE  BEST INVESTMENT FOR THE NEXT 5- 10 YEARS.

Agriculture is where Uzbekistan has a lot of untapped potential. Cotton and, to a lesser extent, grains, are still managed by the state with few significant changes from the Soviet period. Fruits, vegetables, etc. that are grown on privately owned plots are governed by more liberal rules. As such, they are very productive and farmers are fairly responsive to the market. I've heard both good and bad anecdotes about making money in agriculture. The Uzbeks have set up an intensive poultry farm and found modest success. There are several other examples of successful farming companies and cooperatives being taken over by elites. So, it's more or less the same as with everything else in Uzbekistan. To successfully invest, a lot of effort has to be put into understanding and constantly mitigating the particular political risks of an investment. Corporate farming is a growing untapped market that provides huge benefit for investors to achieve sustainable profits going forward.

GLOBAL ALLIANCE WITH NATO

NATO is not just another military alliance. It must be counted as something unique and important in human history—an alliance of democratic states committed not merely to mutual defense but also to the promotion of core democratic values.  NATO’s dealings with Uzbekistan require some careful and critical thought. They are strategic partners in the global alliance of military pact. The growing significance of the northern supply corridor in general and Uzbekistan in particular has increased during recent times.

WORLD BANK STRATEGIC PARTNERSHIP WITH UZBEKISTAN.

World Bank Group has entered into strategic Country Partnership Strategy (CPS) for Uzbekistan, providing the framework for World Bank Group assistance to Uzbekistan between 2012 and 2015.

The new Strategy proposes a program linked to Uzbekistan’s development vision of reaching high middle-income status by mid-century.  It was developed based on a broad dialogue with the Government of Uzbekistan and consultations with all development partners, including civil society organizations, academia, business communities, professional associations, and multilateral and bilateral donors.

Through implementation of the CPS, the World Bank intends to help enhance the key elements of the Government’s medium-term growth and development strategy: promoting efficiency, enhancing competitiveness, accelerating diversification, and ensuring social inclusion. A new financing envelope of US$1.3 billion – consisting of concessional International Development Association (IDA) credits and International Bank for Reconstruction and Development (IBRD) loans – reflects the country’s development needs, its income level, economic prospects, economic management, poverty level, and performance of Bank-sponsored programs. It will support projects in the areas of water supply and sanitation, irrigation, energy, transport, and private sectors over the next four years. The Bank will also extend the on-going support for basic services in health and education.

Proposed analytical and advisory services aim to help Uzbekistan prepare a comprehensive sector-wide understanding of future development directions. Horticulture and energy sector strategy development is an example of such engagement. In addition, the CPS envisages a high-level joint strategy development exercise – “Uzbekistan Vision 2030”. This aims to help Uzbekistan define roadmaps to achieve its development goals in collaboration with Uzbek research institutes.