UZBEKISTAN: DESPITE CLAIMS, ECONOMIC CRISIS HITS HOME

UNCLAS SECTION 01 OF 03 TASHKENT 000921

SENSITIVE
SIPDIS
DEPARTMENT FOR SCA/CEN
EEB/IFD/OMA
AND EEB/EPPD

E.O. 12958: N/A
TAGS: ECON EFIN SOCI UZ
SUBJECT: UZBEKISTAN: DESPITE CLAIMS, ECONOMIC CRISIS HITS HOME


1. (SBU) SUMMARY. First quarter macroeconomic
results show that the real sectors of the Uzbek
economy are already facing serious problems created
by the downturn in the world economy. Despite GOU
claims to the contrary, analysis of official
statistics indicates that total exports in the
first quarter of 2009 decreased by 5 percent while
imports grew by 24 percent. The export share of
hydrocarbons was 52.5 percent -- three times higher
than in the same period last year -- thereby
pointing to a significant reduction of non-energy
exports. Uzbekistan's positive trade balance in
the first quarter was achieved mainly due to high
prices for natural gas and a strong import
substitution policy. Continued weakness in the
demand for gas in Europe and the CIS may begin to
offset this factor in subsequent quarters. Sources
in various industry sectors unofficially admit that
many factories are not operating at full capacity
due to a lack of demand. International experts
expect that the Uzbek economy will demonstrate
growth in 2009, although much depends on the GOU's
ability to meet and address the economic challenges
created by the global economic crisis. END SUMMARY

FIGURES DON'T LIE, BUT LIARS CAN FIGURE
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2. (SBU) An official report issued by the State
Statistics Committee of Uzbekistan says that
exports in the first quarter of 2009 totaled USD
2.5 billion and increased year-on-year by 6.1
percent. However, if compared with the same GOU
statistics from last year, exports in the first
quarter of 2008 totaled USD 2.6 billion, which
would indicate a decrease of about 5 percent. At
the same time, imports grew significantly -- by 24
percent to USD 2.3 billion from USD 1.8 billion
(year-on-year). The positive trade balance in the
first quarter was achieved mainly due to high
prices for natural gas and the GOU's strong import
substitution policy, implemented partially through
the withholding of currency conversion to
importers. The share of cotton in total exports
dropped to 8.8 percent compared to 16 percent in
2008 (year-on-year),while the share of
hydrocarbons increased from 16.8 percent to 52.5
percent. The share of machinery (mainly cars
produced by the GM-Uzavtosanoat joint venture for
export to the Russian and Kazakh markets) also
declined to 2.2 percent from 8.3 percent in 2008.


3. (SBU) Uzbekistan's largest trading partner is
still Russia at USD 1.1 billion for the quarter of

2009. Exports to Russia increased by about 50
percent -- from USD 411 million to USD 603 million
year-on-year -- due mainly to increased gas prices,
while imports have decreased from USD 519.5 million
to USD 453.4 million. The largest non-CIS trade
partners are China (USD 677 million) and
Switzerland (USD 594 million). The case of
Switzerland is particularly interesting, as trade
turnover with this country in the first quarter of
2008 was only USD 205.3 million (USD 1 billion for
the year as a whole). This dramatic increase in
trade with Switzerland reflects a gas export scheme
that involves a Swiss subsidiary of Gazprom
Germania called ZMB Schweiz and a company called
Zeromax, which belongs to "private Uzbek
shareholders." (COMMENT: First Daughter Gulnara
Karimova is believed to be closely tied to Zeromax,
which is registered in the tax haven of Zug.)

CRISIS HITS INDUSTRY
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4. (SBU) It is difficult to make objective
assessments of the real consequences of the crisis
in Uzbekistan, as most statistics are not
publically available or are not reliable.
Moreover, official media do not report any "bad
news" about the domestic economy. However, the
reduction of total exports and the increased share
of gas in their structure demonstrate a significant
reduction of other non-energy exports.


5. (SBU) The textile industry, considered one of
the most promising export oriented sectors in
Uzbekistan with strong local content potential,
faced serious challenges due to a sharp drop in
external demand. The Deputy Hokim (Governor) of
the Shaikhontohur district of Tashkent City
unofficially told us that four textile factories in
his district have been idle since January because
of a collapse in sales. These companies have no
money to pay salaries, forcing them to cut jobs,
and local banks will not extend credit to augment
their working capital. The Turkish manager of the
foreign-owned Sirkachi textile factory said that
many textile joint-ventures are not operating and
are having a hard time selling finished goods.
According to his assessment, about 500 people have
lost their jobs in textile factories in the city of
Tashkent alone. Many Turkish investors are trying
to sell their assets in the country. An Indian
investor who owns the large Spentex Textile Company
said that he has already lost USD 25 million in

2009.


6. (SBU) The automotive industry, another large
export-oriented sector of the Uzbek economy, has
also been adversely affected by the crisis. GM-
Uzbekistan sales in Russia, the main export market
for the company, were 18,196 units in January-April
2009, which is 45 percent less than in the same
period in 2008. The company has had to sell its
most popular models on the domestic market for U.S.
dollars in order to "imitate" export sales.


7. (SBU) The energy sector has been the main
generator of Uzbekistan's export earnings in 2009.
The export of energy in the first quarter grew to
USD 1.3 billion from USD 662 million in 2008 thanks
to an export price that has nearly doubled since
last year. However, the sustainability of these
prices is uncertain. Russia, the main importer of
natural gas from the region, is facing significant
problems. First, the demand for Russian gas in the
European Union in February-March fell by 60 percent
(year-on-year); second, Ukraine, the largest gas
importer in the CIS, reduced its gas imports by
more than 40 percent, and CIS countries overall
imported only 55 percent of last year's volumes;
third, domestic demand for gas in Russia fell by 6-
8 percent. This has led Russia's Gazprom to reduce
its gas imports from Central Asia. According to
industry reports, Gazprom has reduced its intake of
gas from Turkmenistan by 90 percent since April 9,
and this means that Uzbekistan is generating less
income from transiting Turkmen gas to Russia.
Those same reports say Gazprom is trying to
renegotiate prices and volumes for 2009 with both
Turkmen and Uzbek suppliers.

COMMENT
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8. (SBU) The GOU has been taking every opportunity
to repeat the message that Uzbekistan is less
affected than other countries by the global
financial crisis thanks to the smart economic
policies of President Karimov. To some extent this

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is true. The GOU's projection for GDP growth in
2009 is 8 percent. International experts and IFIs
also believe the Uzbek economy will demonstrate
stable GDP growth in 2009: the IMF's projection is
7 percent, the World Bank's is 5-6 percent, and the
Economist Intelligence Unit predicts 2.5 percent
growth.


9. (SBU) Uzbekistan is unlikely to stave off the
impact of the crisis much longer. Macroeconomic
results in the first quarter and the situation in
various industries show that the real sectors of
the Uzbek economy already face serious problems
created by the sharp deterioration in the external
environment. Uzbekistan's economic performance in
2009 will depend on the GOU's ability to meet and
address economic challenges created by the crisis.
The GOU's current policy, focused on import
substitution and exports, needs to be reconsidered
with more attention to domestic consumption and
improvement of the investment climate in non
export-oriented sectors.
NORLAND