Financial Crisis: Uzbekistan in the Tail of the Storm

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E.O. 12958: DECL: 2019-01-15
TAGS: ECON EFIN SOCI UZ
SUBJECT: Financial Crisis: Uzbekistan in the Tail of the Storm

REF: a) DEPARTMENT FOR SCA/CEN, b) EEB/IFD/OMA, c) EEB/EPPD

CLASSIFIED BY: Nicholas Berliner, Pol-Econ Chief; REASON: 1.4(B),(D)


1. (SBU) Summary: Although spared from the initial fall out of the
global financial crisis by its isolation, Uzbekistan could face
growing economic difficulties in the second half of 2009.
Uzbekistan is vulnerable on three fronts: 1) reduced remittances
and increased unemployment among the ranks of an estimated 2
million labor migrants working in Russia and Kazakhstan; 2)
declining commodity prices, particularly for cotton; 3) reduced
demand for industrial exports and deferral of capital investment.
Although the higher export price paid by Russia for Uzbek gas could
help offset some of these effects, particularly for Uzbekistan's
current account, the fate of the country's labor migrants is a
major concern for the Government that could even lead to eventual
social unrest in the country. End Summary.



Isolated bliss?

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2. (SBU) Uzbekistan is largely cut off from the world of
international finance and there has been little foreign investment
in the domestic banking sector. This is as much the result of
policies that have sought to maintain state control over the
"commanding heights" of the economy and effect a gradual transition
towards a more market-oriented system as it is a result of
Uzbekistan's political isolation and unpredictable business
environment. The GOU has also actively pursued a policy of import
substitution that has kept consumer selection limited and prices
high, but has also ensured that the bulk of commodity and resource
export earnings have remained in the Central Bank's coffers as a
stabilization fund that is the equivalent of 5 to 8 percent of GDP
(approximately $1.8 billion). Likewise, the equity and securities
markets are virtually non-existent here. Consequently, the market
declines that have buffeted other economies have been felt only by
the Uzbek oligarchs and apparatchiks who have managed to squirrel
away investments abroad. For the vast majority of the Uzbek
population, market trends have little immediate relevance.



Cut off from reality, but not from the world economy

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3. (C) Some in the GOU see the crisis as the ultimate vindication
of their "go slow" economic policies that have favored gradualism
and maintenance of state control over true economic reform or
liberalization. Foreign Minister Norov has made this point to us
on several different occasions. However, isolation from financial
markets does not mean that Uzbekistan is isolated from the world
economy. The GOU is likely to face serious challenges as the
crisis moves from the financial sector to the real economy,
resulting in reduced remittances from Uzbek migrants abroad, higher
unemployment, lower demand for cotton, and falling industrial
exports and investment.



Reduced remittances and unemployment

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4. (SBU) Although nobody is certain of the figures, there is
consensus that upwards of 2 million Uzbeks are working abroad in
various capacities. The majority of these are men who are employed
in the construction and energy sectors in Russia and Kazakhstan.
Their remittances account for up to 10 percent of Uzbekistan's GDP,
approximately $2.2 billion. More importantly, they are the sole
source of income for numerous families, particularly in
Uzbekistan's provinces where some towns are now virtually devoid of
working age males. Anecdotal evidence already suggests that more
and more of these migrants have been returning to Uzbekistan this
winter. As many work in construction, the winter return is not
unusual as projects in Russia and Kazakhstan come to halt because
of cold temperatures. However, word here is that many of these

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workers will not find jobs waiting for them in the spring as the
confluence of the financial crisis and lower energy prices buffet
the economies of Russia and Kazakhstan.




5. (C) There are few reliable figures regarding unemployment rates
in Uzbekistan and wages for the vast majority of workers hover at
subsistence levels. Uzbekistan's economy has little capacity to
absorb additional job seekers. This presents a major challenge for
the GOU, as swelling ranks of young, unemployed males could lead to
unrest, rising crime rates, and even provide recruits for
extremists. One embassy contact posited to us that Uzbek workers
in Russia, living together in relative isolation as a consequence
of xenophobia there, have actually been more sensitized to their
Muslim identity by this experience and, if not already radicalized,
could prove more receptive to radical ideologies upon their return.
Whether this is the case or not, the newly returned unemployed are
one of the most troubling potential consequences of this crisis for
Uzbekistan.



Cotton

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6. (SBU) The world's second largest cotton exporter, this crop
alone accounts for another 10 percent of Uzbekistan's GDP.
Declining prices, coupled with boycotts initiated by major
retailers due to the use of child labor in the cotton harvest in
Uzbekistan, already appear to have had an impact. With prices in
2008 ten percent lower than in 2007, a significant portion of
Uzbekistan's 2008 crop remains unsold and market prices are
currently below the cost of production. A degree of this reflects
the usual fluctuation in prices, but lower demand in Uzbekistan's
primary export markets - China and Bangladesh - is having an
impact. Market conditions at the time of this year's fall harvest
could have a particularly negative impact on Uzbek farmer, as the
state would likely lower the price it offers them in order to
secure its margin on export sales.



Falling exports

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7. (SBU) Uzbekistan exports finished and semi-finished goods,
including automobiles, aircraft, textiles and chemicals, primarily
to the Russian and Kazakh markets. Falling demand for these
products has already been felt with the return from Russia of
thousands of unsold Nexia automobiles produced by the Uzbek-GM
joint venture in Asaka in Andijon Province. The fallout from this
contraction affects not only the exporting companies themselves,
but also their suppliers and other dependent industries.




8. (SBU) Adding to the difficulties of the manufacturing sector
will be the increasing scarcity of credit. Many industries in
Uzbekistan that survived the Soviet collapse operate on the margins
of profitability (or below) and are in desperate need of capital
investment to expand output and efficiency. A prolonged tightening
of international credit markets could mean that many of the
investments Uzbekistan needs to enable its economy to grow will be
deferred, thus further eroding growth and employment.



Energy export growth a cushion

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9. (SBU) Despite falling energy prices globally, the price
Uzbekistan agreed with Russia's Gazprom for gas exports for the
first quarter of 2009 is substantially higher than the 2008 price:
$340 per thousand cubic meters (tcm) vs. $165/tcm last year. This
price has led to a surge in gas exports as the government tries to
capture this windfall (at the expense of cutting off large numbers

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of domestic consumers). Also softening the blow to Uzbekistan's
current account are lower oil prices. As a net importer of oil,
the fall in prices since the summer of 2008 has relieved pressure
and helps to lower the cost of production for many industries and
agriculture.



Comment

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10. (C) Uzbekistan no doubt faces serious challenges in the year
ahead, depending on the course of the world economy. Large swathes
of the population already survive on the margins, highly dependent
on remittances from their relatives abroad. A deep and sustained
worldwide downturn could ultimately have very severe consequences
for the Uzbek economy. Although the GOU and its security apparatus
maintain a tight grip on this society, no regime can suppress
popular discontent indefinitely. The situation here is still a
long way from that point, but with largely exogenous factors
determining the economy's course, the situation could look quite
different later in the year. The relative social peace that the
GOU has achieved over the last decade stems largely from its
capacity to deliver security (the late 1980s and early 1990s were
marked by rampant crime in Tashkent and elsewhere) and modest but
steady economic growth. If the population begins to struggle
economically as a result of the crisis, authorities here could have
reason to be concerned.
BUTCHER

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