UZBEKISTAN: SPECTER OF CORRUPTION STIFLES

C O N F I D E N T I A L TASHKENT 000771 SIPDIS E.O. 12958: DECL: 07/03/2018 TAGS: PGOV PREL KCOR ECON BTIO EPET SOCI UZ SUBJECT: UZBEKISTAN: SPECTER OF CORRUPTION STIFLES ENTREPRENEURSHIP REF: TASHKENT 113 Classified By: Political Officer Tim Buckley for reasons 1.4 (B,D) ¶1. (C) Summary: On July 1 poloff met with an affluent, well-connected young acquaintance from Bukhara whose extended family has successfully established a syringe-making factory. The family is also planning to diversify and start another factory to manufacture diapers. The young man wants to start a luxury inter-city bus service in Uzbekistan, for which the Korean Import-Export Bank has agreed to extend credit; however, he would have to risk the existing businesses as collateral. He has seen first-hand how corruption can ruin a business but knows what it takes to succeed in this environment. Nonetheless, he is rightfully afraid that powerful actors will either exact too much of the pie or squeeze him out altogether. He also offered insights about dubious higher education credentials in Uzbekistan. This is an interesting case study in how the omnipresent specter of corruption in Uzbekistan stifles entrepreneurial activity even among the privileged classes. End summary. Syringes and Diapers -------------- ¶2. (C) Poloff, who previously served as a Peace Corps Volunteer in Bukhara, met with an acquaintance who graduated from the same high school where poloff taught English classes. The 24-year old young man is bright, fluent in English (as well as Russian, Uzbek, and Tajik),and hails from an affluent and therefore well-connected family. He drives a USD 15,000 Daewoo Nexia for which he paid upfront in cash. He recently relocated to Tashkent, where there are better business contacts, and he frequently travels throughout Europe and Asia building client networks. His extended family has successful enterprises: his father is in the cookie industry, although poloff's acquaintance has been more closely involved with his uncles and cousins in a successful syringe-making factory in Bukhara. Employing more than 80 people in a refurbished factory, it is the kind of homegrown investment Bukhara sorely needs as a supplement to tourism. ¶3. (C) The acquaintance and his relatives are in the process of refurbishing another factory in Bukhara to manufacture diapers, which would create decent jobs for nearly 100 additional Bukharans (nonetheless, he said the regional hokim, or governor, apparently could care less about the 
broader economic impact). They deliberated between Chinese and Italian suppliers for non-woven fibers with which to produce the diapers, and ultimately chose the Italian supplier because of its willingness to extend credit. Raising the Roof -------------- ¶4. (C) The acquaintance said his extended family is comfortable with setting up and running businesses in Bukhara because they know how the system works at the local level. This involves "the right permissions" through the local and regional government. He reminded poloff that all Uzbek businesses "have to have a roof," that is, paid protection (Note: This is consistent with what we have long known about even small businesses such as neighborhood bakeries. Reftel). Rather than extortion from a separate organized crime ring, in Uzbekistan the "roof" involves direct channels within the government or its agents in which an enterprise arranges payments for operating licenses, taxes, and overhead cuts. This is at least a known quantity, and one just must be careful not to get too successful and attract attention. Butterfly Express -------------- ¶5. (C) The ambitious young man wants to take advantage of what he sees as a vast untapped market in Uzbekistan -- luxury domestic ground transportation. Indeed, poloff commiserated from Peace Corps experience about uncomfortable 14 hour bus journeys between Tashkent and Bukhara on stuffy, overcrowded Soviet-era buses that leave when they are full (not according to a schedule) and offer terrible service and unpredictable pricing (spiking during periods of peak demand). Our acquaintance has seen how better bus networks operate on his world travels, with Turkey and China being particularly suitable models. He even designed a logo and picked out the name -- the Butterfly Express -- and set out in search of approximately USD 1.5 million in capital. Since his proposed enterprise involves a broad geographic scale, he also explained that he would need to negotiate a higher-level "roof" upfront, which Bukharan agents would have to pass up the chain to coordinate. The Cost of Doing Business -------------- ¶6. (C) Not surprisingly, Uzbek banks denied the loan request. Impressively, through contacts made on his trips to Seoul, the acquaintance successfully presented his vision to the Korean Import-Export Bank, which is willing to provide a loan, but only with the established businesses as collateral. This is where the fear factor in Uzbekistan supersedes the regular risk that entrepreneurs should expect. He is rightfully afraid that higher powers (he mentioned the President's daughter, Gulnora Karimova, as an example) will take notice of his business model and either: A) exact progressively larger and untenable cuts until the business fails, and/or B) simply muscle him out of business altogether in order to take over the market. The young entrepreneur has no expectation that he can operate such a venture without paying any "overhead," but the difficulty is trying to calculate how much corruption he can absorb as a cost of doing business before it exceeds the breaking point. He is reluctant to give up the good life he already has with his family's successful enterprises in Bukhara and will likely walk away from the plan. A First-hand Lesson in Uzbek Business Fundamentals -------------- -------------- ¶7. (C) While the acquaintance was studying at the prestigious Westminster University branch in Tashkent, he took a job working with a Canadian-Uzbek venture called International Petro Chemical. One of the projects was to purchase paraffin wax, an industrial byproduct with commercial applications, from the Ferghana Oil Refinery, from where his company would then ship it overland for resale. There was a contract in force listing an agreed sales price of USD 450 per ton; however, in reality the refinery would never sell at that price. Officially, on the bank records, the transactions were indeed listed at USD 450, but it was necessary to personally visit the Ferghana Oil Refinery and pay an additional USD 100 per ton to the Director in a sealed envelope. Thus, hidden costs mounted (this is apart from operational overhead such as permits, shifting tax requirements, etc) and International Petro Chemical ceased operations a few months ago and fired its Tashkent staff -- more good jobs lost and investor confidence shaken. "Free Attendance Policy" -------------- ¶8. (C) The reason the acquaintance was able to accept the position with International Petro Chemical was because the university he was attending offered "a free attendance policy," in which he could opt out of actually showing up for his courses. Instead, he regularly picked up handouts "and of course it was mandatory to sit for the exams." Nonetheless, he claimed it was an excellent education and assured me he did attend some courses personally. (Comment: This type of story is typical of educational institutions in Uzbekistan, about which poloff can personally attest from Peace Corps experience. Yet Westminster, commanding thousands of U.S. dollars in annual tuition and in partnership with its namesake university in the United Kingdom, is supposed to be different. Just a few years after opening its doors it already has established itself as an elite university, but this young man's experience demonstrates that academic standards do not appear very rigorous. Ironically, the real world experience he gained working with an ill-fated business enterprise was probably more relevant for an aspiring Uzbek businessman than any lectures he might have attended. End comment.) Comment: -------------- ¶9. (C) This young entrepreneur's story offers a glimpse of what it takes to be successful on the tilted playing field of the Uzbek economy as well as an example of how the certainty of corruption can dull even some elites' appetite to pursue business opportunities. It is encouraging that there is an entrepreneurial spirit among Uzbekistan's talented young generation, but even well-connected rising stars learn early on that they better not take too many chances. Echoing these themes, a French businessman who has operated a variety of real estate, perfume, and other ventures in Uzbekistan since 1993, told the Ambassador recently that good "social" connections and close adherence to the letter of the law in Uzbekistan's legalistic context were pivotal in enabling him to ward off predatory practices from various quarters and stay in business. NORLAND