CONTROLS ON TRANSFERS AND WITHDRAWALS OF CASH

UNCLAS TASHKENT 000173 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN BEXP ECON EAID EIND EINV ETRD PHUM PREL, SMIG, SOCI, KZ, RS, UZ SUBJECT: CONTROLS ON TRANSFERS AND WITHDRAWALS OF CASH Ref: A) 07 Tashkent 1922, B) 07 Tashkent 2180 ¶1. (SBU) Summary: A December 2007 Central Bank order has resulted in delays for those trying to access foreign currency transfers. Simultaneously, local currency withdrawals have become more difficult as the Central Bank has further limited cash supplies. The two developments appear to be unrelated, but both illustrate the perverse economic consequences of Uzbek attempts to enforce taxation collection, stem inflation and regulate the activities of foreign governmental and non-governmental organizations. Pre-election jitters in December 2007 probably reinforced the Government of Uzbekistan's penchant for strict monitoring of foreign activities. However, in our quest for a silver lining, we note this could also facilitate the Uzbeks' apparent willingness to allow greater non-governmental organization activity, by ensuring that such activity is "under control." End summary. ¶2. (SBU) This cable is SBU and therefore omits names of embassy contacts. Expansion of foreign currency transfer controls -------------- -- ¶3. (SBU) In the run-up to the December 23, 2007 Uzbek presidential elections, the Central Bank of Uzbekistan issued an order broadening the range of foreign currency transfers subject to special screening procedures. First, the background: In February 2004, the Uzbek Cabinet of Ministers had issued its Resolution Number 56, ordering screening of foreign currency transfers into Uzbekistan by foreign governmental and non-governmental organizations. The decree was on its face aimed at monitoring aid, grants and technical assistance. Under the order, all foreign currency transfers subject to the order were to be screened by either the National Bank of Uzbekistan or Asaka Bank. Any other bank receiving a transfer of foreign currency from a foreign governmental or non-governmental organization had to inform the intended recipient that the money must either be transferred to one of these banks or returned to the sender. Asaka Bank and National Bank of Uzbekistan then conducted a screening process, to ensure that the intended use of the funds was acceptable to the Government of Uzbekistan. The decree has been applied since 2004 to local non-governmental organizations, but many foreign non-governmental organizations were allowed to continue executing transfers through their established banks. ¶4. (SBU) An Embassy contact in the banking sector confirmed recent reports that the Central Bank of Uzbekistan in December 2007 issued an order expanding the scope of Resolution Number 56 to all transfers of foreign currency from non-residents to residents of Uzbekistan. Residence is defined as 183 days' or more physical presence in Uzbekistan. The Embassy contact said he believed the order was part of the general pre-election jitters noticed without exception by all observers here. Foreign businessmen and other Embassy contacts began to notice the effects of this order in mid-January, after returning from the holidays. The Central Bank's announcement had not been publicized, and few understood the reasons behind the new difficulties. ¶5. (SBU) Foreign non-governmental organizations are among those affected. In December 2007, a USAID implementing partner that is a foreign (i.e., non-Uzbek) non-governmental organization informed us that it was unable to process foreign transfer currencies through its usual bank. The organization had been told that it must begin processing such payments through either Asaka Bank or National Bank of Uzbekistan. In January 2008, several other foreign non-governmental organizations reported they were being subjected to the order. Although the non-governmental organizations in question were concerned about maintaining adequate cash flow, they did not know whether the Government of Uzbekistan would subject their foreign currency transfers to additional scrutiny. ¶6. (SBU) Comment: The Uzbek government recently agreed to release funds seized in 2006 from two USAID implementing partners (ref B), and political signs point to increased GOU willingness to allow a return of civil society and human rights NGO activity. We do not believe that the new Central Bank order indicates a reversal in this trend. End comment. Enforcing tax collection by limiting cash transactions -------------- -------------- ¶7. (SBU) By late January, Embassy contacts and independent websites also began to report difficulties withdrawing local currency from bank accounts. Businessmen - foreign and Uzbek alike - and those private individuals who actually keep their money in the bank reported significant difficulty withdrawing local currency. Our banking contact said he was unaware of any change in the Central Bank's longstanding practices and suggested that some banks might simply be experiencing shortages of cash. Uzbek banks in particular, he said, have more trouble than foreign joint venture banks in generating cash revenues. However, another well-connected banking contact later told us that the Central Bank indeed was limiting cash supplies to local banks (vice foreign joint venture banks) and that this was an attempt to limit inflation. The Central Bank was limiting cash, he said, throughout the country, but more so in the provinces than in Tashkent. ¶8. (SBU) The Central Bank of Uzbekistan actually limits banks' access to cash for two reasons - to facilitate taxation collection and to stem inflation. First, tax collection: Limiting cash supplies theoretically forces businesses to comply with rules that require all institutions (i.e., businesses, institutions and other entities that are not individual persons) to conduct all transactions via bank transfers. Only payments for salary and "salary-equivalents" are exempt. Even minor purchases of supplies must be made via bank transfer, with some allowance for urgent needs. The Central Bank has the right to collect the cash deposits of all banks at the end of every banking day but has normally refrained from doing so. ¶9. (SBU) Banks in Uzbekistan cannot, as banks in most countries do, turn to the Central Bank for cash whenever they wish. Requests for cash must be for accepted purposes, such as salary payment. Moreover, cash is in short supply within the banking system, and a clear pecking order is said to exist in filling requests. Requests to pay salaries to employees of governmental bodies and state ventures, for example, hold precedence over requests to pay salaries to employees of an ordinary private company. Connections matter, as well. ¶10. (SBU) Another aspect of Uzbek banking regulation is the requirement that businesses deposit all cash with their banks at the end of every day. The taxation authorities bear primary enforcement responsibility, and many businesses in this cash-based society evade the requirement. Limiting inflation by blocking access to local currency? -------------- -------------- ¶11. (SBU) A well-connected banking contact confirmed that the Central Bank is currently limiting cash supplies to local (i.e., Uzbek) banks, particularly in the provinces, and that this is an effort to combat inflation. This comports with the prevalent theory among many of our foreign and local business contacts. The practice is known within the local banking community as "cash collection." The Central Bank has few anti-inflationary options at its disposal. Interest rates are adjusted only about once per year, with other banks following along, and other orthodox policy options are limited. ¶12. (SBU) The Government is understandably concerned about inflation. Authorities have raised pensions, government salaries and the minimum wage by over 40 percent in the past year. This, as well as restrictive import substitution policies and a worldwide increase in food prices, has led to price increases that are severely impacting the standard of living for most Uzbeks. Staple foods are up 30 percent in the past year (and over 100 percent for bread in the past eighteen months),and housing prices in Tashkent have become an increasing burden for most residents. The government's official 2007 inflation figure of 6.8 percent is clearly inaccurate. Young and middle-aged men and women continue to leave for jobs in Russia and Kazakhstan, while Tashkent continues to experience an inflow from the provinces. Perverse consequences of cash policies -------------- ¶13. (SBU) The Government's cash policies will probably drive an increasing number of businesses into the illegal cash economy. Anecdotal information suggests that this is already far more widespread than most of our contacts care to admit. This will tend to benefit those who have ready access to cash and/or who have inside connections. In fact, the requirement that businesses conduct all transactions, even minor supplies purchases, via bank transfer has reportedly already produced a cottage industry of fly-by-night entities that camouflage cash transactions with "official" bank documentation. This documentation is then submitted to the tax inspectors. Many of these fly-by-night entities are rumored to be run by government insiders. In a country ranked 175 out of 180 in Transparency International's 2007 Corruption Perceptions index, this is as easy to believe as it is difficult to confirm. Uzbeks take it in stride: it's better than Tajikistan -------------- -------------- ¶14. (SBU) Uzbek citizens throughout the country seem to be taking their economic difficulties in stride. The government is flush with excess cash from a booming commodities market. Remittances from the one to three million Uzbeks working abroad (in a country of 27 million) account for up to 20 percent of GDP and keep many families fed and clothed. A fair number of Uzbeks prosper in legitimate as well as not-so-legitimate business. As some Uzbeks have pointed out, this is a country that has survived much worse, and, relative to some of its neighbors, it remains a decent place to live. ¶15. (SBU) Moreover, decent (though in some sectors aging) Uzbek infrastructure and general living conditions on the ground remain at odds with abysmal economic indicators and seemingly counterproductive economic policies. One visiting World Bank official recently remarked that the numbers point to a foundering state, but few who have visited would call it that. Comment: How long will the paradox last? -------------- ¶16. (SBU) How long this paradox can last is anyone's guess. However, with the possibility that a global economic downturn could impact both the commodities markets and the Russian economy (and hence Uzbek remittances),it bears some thought. The bank policies described above are among the many Uzbek policies that hinder a broad-based economic growth and jeopardize Uzbekistan's chances of weathering an eventual rough patch. NORLAND