As Central Asian and Uzbekistan’s silk road takes shape, political risks must be addressed to attract foreign investors
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As Central Asian and Uzbekistan’s silk road takes shape, political risks must be addressed to attract foreign investors

Monday, 05 July 2021
This is an opinion article by an external contributor. The views belong to the writer.
The "Belt and Road Initiative" aims to connect trade routes of over 70 countries by land, sea and rail.

New initiatives are currently being taken to develop the central Asian economies along the former ancient silk road.

Better infrastructure would of course accelerate trade, attract foreign capital to a region with many investment opportunities, and potentially create new financial hubs. However, there is still much to be done to improve political risk so that foreign companies and investors could more easily evaluate and hopefully decide to enter the new markets, and bring the much-hoped for new foreign direct investments.

The massive Chinese belt and road initiative is one of the major strategic initiatives that would impact the region in the next few years. At the recent Shanghai Cooperation Organisation forum which brings together regional think tanks and NGOs, attention was placed on further reducing political risk if these economies are to benefit and develop at the pace anticipated for.

While there has been some improvement, several countries figure low on the Corruption Perception Index published by Transparency International. Uzbekistan, for example, is recorded on the 146th spot. Despite the fact that it has moved up a couple of places (+9 since 2012), current conditions are still troubling and risky for any unfamiliar financial backer.

This is all the more important when taking into account the region’s wealth in natural energy resources which would have the potential to massively improve the standard of living and transform local economies. The use of public–private partnerships (PPP) is also starting to gain traction.

However, foreign energy players are rightfully concerned about the risks of doing business in the region, and Uzbekistan’s state-owned oil and gas company, Uzbekneftegaz, has been embroiled in several disputes. Back in 2019, for example, it owed China Petroleum several million USD in assistance charges and gear supply costs, which the Uzbek government disagreed with. The Minister of Energy and previous administrator of the organisation’s management, Alisher Sultanov, rejected the claims and requested the latter to demonstrate the obligation in court.

The state owned company is now trying to raise money for its financial recovery to save it from bankruptcy. It has effectively been on “life support” in recent years and is struggling to meet interest payments on a 2 billion USD loan by the Fund for Reconstruction and Development of Uzbekistan.

Another example is that of the major regional oil company Lukoil, which netted a loss of over 400 million EUR from its foreign exploration and exploitation. The loss mainly came from its branch in Uzbekistan due to various forms of reportedly political abuse by its strategic partner Uzbekneftegaz.

It is not only within the energy sector that investors are being exposed. Back in 2013, for example, local authorities initiated investigations of suspected against the owners and management of Muzimpex Company, the local partner of the Coca-Cola Bottlers-Uzbekistan joint venture, where Coca-Cola owns 43 percent of the shares. In February 2014, the government liquidated Muzimpex and took control of the shares.

The United Department of State has previously also highlighted risks in the investment climate in Uzbekistan, specifically noting its unusually high control of several key sectors, such as energy, telecommunications, transportation, and mining.

Uzbekistan has plans of attracting over 7.5 billion USD of FDI in 2021, but for it to become a reality, further steps need to be made to improve transparency and the investment climate in a region sadly fraught with political risk.