1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
In 2016 the government of Uzbekistan (“the government” or “the GOU”) declared that further reforms should be focused on qualitative improvement of the business environment. Foreign direct investments are considered one of the important drivers of development in the country. The president challenged all regional governments to improve the attractiveness of their territories for foreign investors and provide progress reports in this area on a quarterly basis.
At the same time, the cumulative inflow of FDIs is still relatively low due to a range of factors, such as limited access to foreign currency, an underdeveloped and overregulated banking sector, trade restrictions, and widespread corruption. According to official statistics, the share of companies with participation of foreign capital is only 1.8 percent (or about 5,135) of the total number of entities operating in the country.
Without the support of state-owned or state-affiliated entities, foreign investors usually have limited business opportunities in Uzbekistan. The government generally welcomes investors and investment projects that are in line with its import-substitution and export-oriented industrialization policy, and discourages investments in import-consuming sectors. Thus, traditionally over 70 percent of all foreign investments have been directed to the oil and gas sector, one of the main generators of export earnings
In 2012, when FDI levels fell well below government expectations, the GOU created the Working Committee on Improvement of Uzbekistan’s Ranking on the World Bank’s Doing Business report. The Committee initiated some improvements to the business climate, such as one-window practices and electronic reporting systems aimed at reducing direct contacts between entrepreneurs and government entities. However, the government has yet to address a number of fundamental problems plaguing businesses and investors. Meanwhile, last year Uzbekistan lost 5 positions in the Doing Business list, now ranking as the 87th among 190 countries.
Formally, foreign investors are welcome in all sectors of the Uzbek economy. According to law, the government cannot discriminate against foreign investors based on nationality, place of residence, or country of origin. However, government control of key industries can have discriminatory effects on foreign investors. For example, the GOU retains strong control over all economic processes and maintains controlling shares of key industries, including energy, telecommunications, airlines, and mining. The government regulates investment and capital flows in the raw cotton market and controls all silk sold in the country, dampening foreign investment in the textile and rug-weaving industries. Partial state ownership and influence are common in almost all key sectors of the economy.
Foreign investors can get consultations, business registration and other legal assistance from Uzinfoinvest agency, which operates as a branch of the Ministry of Foreign Economic Relations, Investments and Trade (http://www.uzinfoinvest.uz/eng/ ), or from the Chamber of Commerce and Industry of Uzbekistan on a contractual basis (http://www.chamber.uz/en/index ). These agencies provide investors with consulting services, as well as information and analysis support.
In 2016 and early 2017, senior GOU officials attended a number of government-business media forums and roundtable meetings with local and foreign business representatives, including two roundtables with U.S. companies. The government also published drafts of a law on liberalization of currency regulations and a policy paper on its five-year development strategy for public review. According to a presidential decree issued on October 5, 2016, the position of the business ombudsman is planned to be established under the country’s parliament. The ombudsman is meant to protect the rights and legitimate interests of businesses and render them legal support. In public forums Uzbek officials continue to stress an interest in seeing new companies establish operations in Uzbekistan, but tangible liberalization measures are still under consideration.
Limits on Foreign Control and Right to Private Ownership and Establishment
Formally, Uzbekistan guarantees the right of foreign and domestic private entities to establish and own business enterprises and to engage in most forms of remunerative activity. The state reserves the right to export gold, and the government maintains a monopoly on cotton exports. Natural gas, cotton and gold are Uzbekistan’s largest sources of foreign exchange earnings. There are isolated cases of foreign companies that have entered the natural gas and cotton production sectors with some success. In theory, private enterprises may freely establish, acquire, and dispose of equity interests in private businesses, but in practice, this is difficult to do because Uzbekistan’s securities markets are underdeveloped.
Private capital is not allowed in some industries and enterprises. The Law on Denationalization and Privatization (1991) lists state assets that cannot be privatized, including: land with mineral and water resources, the air basin, flora and fauna, cultural heritage sites, state budget funds, foreign and gold reserves, state trust funds, the Central Bank, enterprises that facilitate monetary circulation, military and security-related assets and enterprises, firearms and ammunition producers, nuclear research and development enterprises, some specialized producers of drugs and toxic chemicals, emergency response entities, civil protection and mobilization facilities, public roads, and cemeteries.
There are several official limits to foreign investment. Foreign ownership and control are prohibited for airlines, railways, power generation, long-distance telecommunication networks, and other sectors deemed to be related to national security. Foreign nationals cannot obtain a license or tax permission for individual entrepreneurship in Uzbekistan.
Restrictions also apply to media, finance, and insurance. Foreign investment in media enterprises is limited to 30 percent. In finance, foreign investors may operate only as joint venture partners with Uzbek firms, and banks with foreign participation face minimum fixed charter funding requirements (€10 million for commercial banks, €5 million for private banks, and €1.5-6 million for insurance companies – equivalent to $10.7 million, $5.3 million, and $1.6-$6.4 million), while the required size of charter funds for Uzbek firms is set on a case-by-case basis.
The government closely scrutinizes all foreign investment, with special emphasis on sectors of the economy that it considers strategic, including mining, cotton processing, oil and gas refining, and transportation. There is no standard and transparent screening mechanism, and the legal framework is designed to protect domestic industries and limit competition from abroad. The government also uses licensing as a tool to control enterprises in several important sectors such as energy, telecommunications, wholesale trade businesses, and tourism.
Other Investment Policy Reviews
There were no investment policy reviews of Uzbekistan completed by the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD) in recent years.
The GOU has declared that business facilitation and improvement of the business environment are among its top policy priorities. Due to national demographics, its working-age population is growing by over 250,000 people annually. Therefore, the GOU gives special attention to private businesses and joint ventures that create additional jobs and help the government address the employment issue. Business registration procedures were considerably simplified and streamlined by the introduction of one-window and on-line registration practices and electronic reporting systems. The GOU announced its intention to create four new special economic zones to attract more FDIs. New legislation also created additional tax incentives for private businesses and sought to increase their protection against unlawful actions of government authorities. In 2016, the Ministry of Justice established a special department responsible for the protection of private businesses and foreign investors from meritless claims, unjustified inspections, and other abusive practices of state bodies. Effective January 1, 2017, the GOU banned a wide range of inspections and other forms of interference to activities of private businesses.
New legislation adopted on February 9, 2017, simplifies business registration procedures for all businesses except banks and credit bureaus. Beginning April 1, 2017, foreign and domestic private investors can register their business in Uzbekistan using one of 194 “Single Window Registration” (SW) offices or 24/7 online service of the Electronic Government (EG) website – https://my.gov.uz/en . The procedure requires only electronic submission of an application, company name or trademark, and foundation documents. The SW/EG service will register the company in the Ministry of Justice, Tax Committee, local administration, and other relevant government agencies. The registration fee is equal to one minimum monthly salary (149,755 soum – Uzbekistan’s national currency – or $45 as of February 2017) for local investors and five minimum monthly salaries plus $500 for foreign investors. Applicants may receive a 50 percent discount for using the EG website. The new system reduces the length of the registration process from several weeks to 30 minutes.
Depending on the extent of foreign participation, a business can be defined as an “enterprise with foreign capital,” or EFC (less than 30 percent foreign-owned), or as an “enterprise with foreign investment,” or EFI (more than 30 percent foreign-owned and with a minimum charter capital of $150,000). Foreign companies may also maintain a physical presence in Uzbekistan as “permanent establishments” without registering as separate legal entities (other than with tax authorities). A permanent establishment may have a bank account.
The World Bank ranked Uzbekistan as 25th for the “Starting a Business” indicator in its 2017 Doing Business report.
In general, the GOU does not promote or incentivize outward investments. There is no institution or agency that does outward investment promotion in Uzbekistan. Some state-owned enterprises invest in development of their marketing networks abroad as part of efforts to boost export sales. Private companies that operate primarily in retail, construction and textile businesses widely use outward investments for a number of reasons, including market outreach, accessing foreign financial resources, trade facilitation, and in some cases for withdrawal of capital. The most popular destinations for outward investments are Russia, China, Kazakhstan, Singapore, UAE, and Germany.
Formally, outward investments are not restricted. However financial transactions with some foreign jurisdictions (like Afghanistan, Syria, Libya, and Yemen) and/or offshore tax havens can be the subject of additional screening by the authorities.