From Uzbek Spring to Eurasian Summer: Uzbekistan and the EAEU

_ Yuri Kofner, head, Eurasian sector, CCEIS, HSE, research assistant, IIASA, editor-in-chief, analytical media “Eurasian Studies”. Munich, 30 July 2019.

The new authorities of Uzbekistan have launched an ambitious program of opening and modernizing the economy, its legal system and governance. At the same time the republic began a diplomatic marathon to consolidate good relations and cooperation with the Russian Federation and its neighbors in Central Asia. The central issue now lies in a potential cooperation of Uzbekistan with the Eurasian Economic Union (EAEU). Can the “Uzbek spring” turn into a “Eurasian summer”?

Novrus (Uzbek spring)

With the advent of the new president, Shavkat Mirziyoyev, Uzbekistan has woken up from 20 years of sleep and has already undertaken some significant economic reforms. The national currency can now be traded freely, and currency exchange control has been largely liberalized. Currently, the Ministry of Finance is working on a complete updated tax legislation. The country is rich in cotton and is now turning from a simple exporter of raw materials into a regional center for the textile industry. Pharmaceuticals, agriculture and the automotive industry are other growing sectors of the Uzbek industry. And we ought not forget that over 33 million energetic people live in Uzbekistan.

Throughout the country one can feel the new spirit of dynamic socio-economic progress. This spirit has engulfed everyone, and the plans of the government are indeed ambitious. One of the official aims is to convey the feeling that in Uzbekistan foreign investors “will find a hospitable government and a hard-working labor force”.

Socio-economic development

Thanks to a young and growing population, Uzbekistan has a large labor market. Of the 32 million inhabitants, 50% lives in cities and the other half in rural areas. 19.4 million people are of working age. Every year, 300 000 students study at 72 universities in the country.

Table 1. Indicators of socio-economic development of the Republic of Uzbekistan (2017)

  2014 2015 2016 2017 2018
GDP per capita (current $, bln) 173.6 188.5 202.2 215.2 231.4
GDP growth (annual %) 7.2 7.4 6.1 4.5 5.1
Population (mln) 30.8 31.3 31.8 32.4 33.0

Source: World Bank Group.

Uzbekistan is the fourth largest economy in the Commonwealth of Independent States (CIS) and ranks 85th in the world overall. In 2017, its real GDP amounted $48 billion. GPD per capita was $1 490 at current prices or $6 930 by PPP. The republic shows significant progress in the World Bank Group’s “Ease of Doing Business” rating: from 2016 to 2017, it climbed 13 places from 87th to 74th.

A comprehensive state modernization program, amounting to more than 30 billion US dollars, is aimed at introducing significant reforms in legislation, the economy and the social sphere. The government intends to turn foreign direct investment into a priority area for Uzbekistan. This is a good opportunity for Russian manufacturers of machinery and equipment, since the fall of the ruble in 2015 made the export of Russian goods more price competitive compared to Chinese exports. Russo-Uzbek cooperation would be beneficial to both parties: Uzbekistan needs to reduce its dependence on the prevailing bias towards China for the supply of machinery and technologies, and Russia needs to increase non-oil exports.

The economy of the republic stands on three pillars: agriculture, the textile industry and car assembly.

Agro-industrial complex

Due to favorable climatic and soil conditions, Uzbekistan is one of the world’s largest producers of fruits and vegetables. The government is actively promoting agro-industrial policies aimed at increasing the efficiency and long-term sustainability of the agricultural sector. Extensive land resources, a skilled labor and low production costs ensure a relatively high competitiveness of the sector. The size of the agro-industrial complex is estimated at $5 billion with a steady growth of 6 – 7% annually. The development strategy of Uzbekistan until 2021 envisages a more efficient use of land and water resources, an increasing export fruits and vegetables, as well as creating comfortable conditions for exporters of agricultural products.

With a possible ascension to the Eurasian Economic Union, the production of fruits and vegetables in the southern republic could be an important complement to the EAEU’s food security, most of territories of which are located north of 50° north longitude, i.e. comparable to Canada and Northern Europe. At the same time, the Uzbek agro-industry could be a significant competitor to its Armenian and Kyrgyz counterparts.

Textile industry

Cotton, yarn, clothing and hosiery and fabrics are the main segments of production in the textile sector and constitute, respectively, 54%, 28%, 18% of exports in this industry. Over the past 10 years, the export of Uzbek textiles has steadily increased. In 2017, it amounted to $1.3 billion.

The competitiveness of this industry is based on skilled labor, a long tradition of textile production, availability of raw materials along with inexpensive energy resources, and, despite the continental location of the republic, relatively good access to regional and international markets.

Access to the EU market: In 1996, Uzbekistan and the European Union signed a Cooperation and Partnership Agreement (CPA). It provides a reduction in import duties and customs payments for Uzbek enterprises from 12 to 6%, which will help increase the country’s exports to the European Union. The next goal in the negotiations is to reduce European customs duties to 0%.

Access to the EAEU market: In 2013, the CIS FTA Agreement was signed between its parties and the Republic of Uzbekistan. The agreement entered into force on 16 May 2014. Except for some goods that are mentioned in the annexes to the agreement, the parties allow each other to export goods without import duties and without quotas. Uzbekistan plans to reform its textile sector further and is already transforming from a simple exporter of cotton raw materials into a regional center for the textile industry. The Agreement on Cooperation in the Textile, Clothing and Knitting Industries signed by the leaders of Russia and Uzbekistan on 19 October 2018 will undoubtedly help in achieving this goal and will be one of the bases for the country’s potential Eurasian integration in the future.

Automotive industry

Surprisingly, but fact: after Russia, Uzbekistan has the largest auto industry in the CIS. The production of passenger cars in Uzbekistan has steadily increased, reaching 140,000 units in 2017 (in 2016 – 88,000). The government has taken specific measures aimed at stimulating investment in this sector: reducing taxable profits, concessions on VAT and customs duties, as well as concessions on the payment of property tax on legal entities. The main car production plants are located around Tashkent, Samarkand and Khorezm, as well as in the Fergana Valley.

To date, projects have already been implemented for the joint production of cars, buses and cargo vehicles between the Kazakh and Uzbek enterprises GM Uzbekistan, Sam Auto and Asia-Auto. The creation of joint automobile production in Kazakhstan is an attempt by Uzbek automakers to circumvent restrictions on the export of Uzbek cars to the EAEU market, which are associated with the rules for the minimum level of localization of production. New joint ventures in Kazakhstan should allow GM Uzbekistan to produce and sell their cars in the EAEU space in a more preferential mode.

At the same time, the potential ascension of Uzbekistan to the Union would allow it to leave its car factory in the country, and, accordingly, keep taxes and jobs inland.

Nuclear power

On 19 October 2018, the presidents of Uzbekistan and Russia officially launched the project for the construction of a nuclear power plant in the republic. Cooperation in the use of nuclear energy began as a result of an intergovernmental agreement signed in December 2017. “Rosatom” is ready to build in Uzbekistan a nuclear power plant based on power units with VVER reactors with a capacity of 1200 MW. The nuclear power plant will provide the country’s economy with a reliable and relatively cheap source of environmentally friendly electricity. The future nuclear power plant will produce at least 20% of the electricity in the country, which will be a powerful incentive for the intensive development of all sectors of the economy. Moreover, by creating a high-tech atomic cluster the republic will be able to significantly increase the scientific and educational potential of the national labor force.

Trade policy

Uzbekistan, implementing its own model of economic reforms, still focuses on a policy of stimulating its own production by holding up a mainly protectionist customs and tariff regime. At the same time, as part of the customs reform, Tashkent reduced customs tariffs for more than 8.000 goods. The average import tax rate is now 6.45%. Other innovations include the introduction of green customs corridors and control based on risk assessment at border crossings.

The main trading partners of Uzbekistan in 2017 were China (20.2%), Russia (17.5%) and Switzerland (16%). In Switzerland, the republic sells gold from the Muruntau deposit (the export of gold is equally important to Kyrgyzstan). The EU-28 accounts for 10.5% in the geographical structure of the country’s trade, and the EAEU – 28%.

Eurasian Summer

In October 2018, Vladimir Putin held talks with Shavkat Mirziyoyev in Tashkent on the margins of the first Uzbekistan-Russia interregional cooperation forum. Following their results, the leaders signed an unprecedentedly large package of documents on cooperation between the two countries in the trade and economic, energy, scientific, cultural, humanitarian, educational, social and labor spheres. Among them is an economic cooperation program for 2019–2024; a program of cooperation in the cultural and humanitarian sphere for 2019–2021, an agreement on the establishment of branches of Russian universities in the Republic of Uzbekistan. This new stage of partnership between Moscow and Tashkent raises hopes that the republic will soon decide on obtaining observer status with the EAEU. Or even about joining the Union …

In late June 2019 Uzbekistan’s president Shavkat Mirziyoyev cautiously expressed the possibility of his republic becoming a new member of the EAEU. As for now, Tashkent is still reviewing the experience of other member states of the Union, in particular that of Kyrgyzstan. The EAEU, as any more or less advanced integration bloc, involves the elimination of barriers to trade in the common domestic market and the transfer to the supranational level of some of the national sovereign powers, in particular those related to the authority to regulate customs and tariff issues.

However, the traditional priorities of the “Uzbek model” so far always has been to protect its own market and domestic producers.

The system of mutual preferences, which were agreed upon the accession of Uzbekistan to the CIS FTA, is still quite suitable for Tashkent. A proposal by some Russian experts to cease the work of the CIS FTA in order to push the rest of the Commonwealth countries to intensify cooperation with the EAEU seems short-sighted and even harmful.

At the same time, the number and nature of agreements signed by Uzbekistan with Russia, and before that with Kyrgyzstan, Tajikistan and Kazakhstan, speaks of the country’s objective desire to qualitatively deepen multilateral trade and economic cooperation in the Eurasian region.

The first step on this path could be to grant observer status to Uzbekistan with the Eurasian Economic Union. This could happen by 2020.

In the future, one of the most interesting and promising areas for the expansion of Eurasian integration could be the idea of a “deeper linkage between the formats of the EAEU and the Commonwealth of Independent States”, proposed as one of the priorities of the Russian presidency of the EAEU in 2018.

In order to implement such a format, the Eurasian Economic Commission (EEC), together with the Eurasian Development Bank (EDB) and the member states of the Union, could, by 2020, develop a “Strategy for a deeper interconnection between the EAEU and CIS formats”. As an annex to such a strategy, one could develop specific action plans to deepen the cooperation of the EAEU with each of the CIS countries separately.

Further, in addition to the existing CIS FTA Agreement, the EEC and the Uzbek government could sign the “Agreement on deep and comprehensive trade and economic cooperation”, which would imply a certain harmonization of the trade and economic policy of Uzbekistan with that implemented in the Eurasian Economic Union . The agreement could affect important areas of integration of mutual interest to the parties: tariffs, technical regulations, labor migration, transport, digitalization and, most importantly, industrial cooperation.

At the same time, it is worth considering the possibility of accompanying this agreement by launching a number of specific infrastructure and investment projects in Uzbekistan by the Eurasian Development Bank (EDB). To do this, Uzbekistan first would need to become a shareholder in the EDB. That this is possible, without being at the same time a member state of the EAEU, shows the experience of Tajikistan. This developing country is not a member of the Union but is a member of the EDB and the associated Eurasian Fund for Stabilization and Development (EFSD). And from this, Dushanbe derives significant benefits: six investment projects of the bank worth a total of $ 51.4 million are being implemented in the country. Additionally, the economy received US $ 110 million from EFSD to ensure macroeconomic stability.

In this regard, it is noteworthy that the EDB announced its desire to invest in the agrarian sector, the auto industry and the extractive industries of Uzbekistan and is considering the possibility of opening a representative office in the country.

In parallel, the EEC and the EAEU member states could think about launching a so called “EAEU Eurasian Partnership” with the goal of a deeper linkage of the EAEU and CIS formats. Such a project could include humanitarian cooperation. The similarity in the names with the EU Eastern Partnership is not accidental. The EAEU Eurasian Partnership could be modelled after its European visa-a-vi by carefully studying all the positive and problematic lessons from Eastern European experience.

A step-by-step deepening of trade and economic cooperation between Uzbekistan and the Eurasian Economic Union (from bilateral agreements to the status of an observer state with the EAEU to a “Deep and Comprehensive Trade and Economic Cooperation Agreement” to participation in a potential EAEU “Eurasian Partnership”) would allow the republic to receive an “individual five-course menu” of maximum economic benefits by paying the minimum “price” in the form of the transfer of national powers to a supranational level. Then by the time when and if Tashkent will be ready to join the Eurasian Economic Union, it will also receive the right to co-define the rules of the Eurasian economic bloc and the common market of a quarter-billion people.

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