Uzbekistan: From Privatizing Everything To Leapfrogging 50 Years

Five years ago, Uzbekistan, the most populous state in Central Asia, with a per-capita GDP barely above India’s, got a new president. Everyone in frontier markets considered this the moment Uzbekistan finally shed its Soviet-era skin. And investors, especially experienced Western ones in corporate finance, venture capital, and the securities markets in general, are always on the lookout for new investing playgrounds.

Under president Shavkat Mirziyoyev market liberalism and political openness became the new orthodoxy, slowly but surely. The economy started to privatize. Civil society reforms took root. Frontier market bond investors bought in. Private funds were created to capitalize on a country that – once historically isolated – now thinks it can leapfrog 30 years of the post-Soviet past.

Still, just as the Uzbeks were getting started, the pandemic forced a change of focus. It was two steps forward and one step back.

But in the middle of the crisis, surprisingly, some positives emerged in a land some say time has forgotten.

Sturgeon Capital from London was one of the few that spotted the opportunity. They actually created a venture capital fund (simply called Fund 2) that’s invested in six local tech companies, with two more in the works. That’s $10 million all told; a boatload of money in Uzbekistan.

Why there?

For starters, many developing countries follow the trajectory of transition from resources-based economy to a manufacturing, services and high tech powerhouses. Aztech and CTOS in Malaysia got the markets attention now; and then there are the planned IPOs of VinFast Group carmaker and Bamboo Airways from Vietnam in the U.S. And while Malaysia and Vietnam are in the better understood, more appreciated southeast Asia, investors are finding the same product lines elsewhere, says Alex Branton, investment director at Sturgeon Capital. That’s what has brought them to Uzbekistan.

“Plus the valuations are much more appealing to you as an investor and your impact per dollar invested for a company is much bigger,” Branton says.

The notion is that with the average age of around 28 in Uzbekistan, and enough entrepreneurial spirit in Tashkent, the country’s capital, there is no reason why leading edge fintech cannot be found in Uzbekistan next. So, Fund 2 was born.

“It’s a frontier market, so it is inherently volatile,” Branton says. “We have to invest in the kinds of companies that we see are doing well in other emerging markets and we take that tried and tested business model and invest in, and help companies achieve the same aims in Uzbekistan.”

Uzbekistani companies, especially private ones, do not have the same access to easy money like the traditional commodity players there. They need to be profitable fast because there are not a lot of deep pockets looking to hold on to them for years and years. Sturgeon is in for five years; seven years max.

The fundamentals on the ground are often at odds with tech. It’s like a parallel universe for these countries that are going digital before they even improved their basic, old school infrastructure. This is the 50 year leap.

In the past, the state had a chokehold on the economy, Soviet style. Currency wasn’t even convertible. All of this changed with a new President and government in 2016. Taxes were cut. A new currency regime took place that looked more like every other emerging market with an inflation-targeting central bank.

People have been waiting for the large and mostly vacant Central Asian landmass to join the modern economy. China’s Silk Road Initiative has put a spotlight on the region. Now more Western money is paying attention.

Operation Warp Speed

For the modern economy of Uzbekistan, it is worth noting that digital and IT infrastructure currently only make up a weak 2.2% of the economy. It is expected to reach 10% by 2030, with steady investments being made into internet infrastructure, expansion of fiber-optic communication lines, and more affordable internet access.

Internet penetration is 55% of the population. The market potential is huge, and that’s what’s attracting tech investors.

In stark contrast to early post-Soviet infamously isolationist “Uzbek Model”, Mirziyoyev opened the country to the world and wants to roll back the state dominated economy, privatize more assets.

Uzbekistan is slated to sell fully or in part some 620 of the country’s 2,500 state-owned companies, per a 2020 executive order. Today, state-owned enterprises (SOEs) run 55% of Uzbekistan’s economy, compared to 11% here in the U.S.

The main names up for gradual privatization and sale include SOEs like natural gas producer Uzbekneftegaz, gold and uranium miner Navoi Mining and Metallurgy Combine, Uzbekistan Airways, and Uzbekistan Railways companies.

Even the state-owned cotton industry – a strategic sector for Uzbekistan – has seen significant market reforms since 2017. Eradication of forced labor, removal of state production quotas, and ownership transfer to private players are the new hallmarks of an industry that, if it plays its cards right, could become part of a textile supply chain in Asia.

Some of those companies are already public, but will offer more shares to try and make them more liquid. Uzpromstroybank, Asia Alliance Bank, Jizzah Plastics, Quartz, Alokabank and the Uzbek Republican Commodity and Raw Materials Exchange will do a secondary offering at some point in the near future. No dates have been set.

Mirziyoyev is up for election in October. He will run on a platform of continued progress on remaking this moribund economy into a competitive Asian emerging market of the 21st Century.

For foreign money to really take interest, Uzbekistan needs to shed its reputation. Transparency International’s Corruption Perception rankings for them are high. Uzbekistan needs to lower that and convince investors that labor rights are improving at a time when China is being hamstrung by sanctions due to forced labor.

Last year, Tashkent created a new Anti-Corruption Agency to draw the attention from the big international official crime watchdogs like Transparency International. Uzbekistan is currently near the bottom of TI’s Global Corruption Perceptions Index, so this new Agency is supposed to change that.

Part of their aim is also transparency of laws and law enforcement, and predictability of government policy. Does Tashkent do what Tashkent says it will do? All this matters if Uzbekistan is going to compete for capital.

The new agency is supposed to follow the provisions of the UN Convention against Corruption and other international treaties, and will launch an electronic platform called “E-Anticor.uz”, to monitor and evaluate the effectiveness of public authorities and management in combatting corruption and bringing trust to the political power structure in Uzbekistan.

So here is a place that is trying to go from the 1970s straight to the 2020s and skipping the rest. Together with the neighbor Kazakhstan, which is also trying to do the same thing, Uzbekistan joined forces with the U.S. International Development Finance Corporation in January to commit to raise $1 billion over five years to turn these countries into modern, higher tech landscapes.

Like China, they are hopping on the ESG (environment, social, governance) bandwagon early to attract investment from sovereign wealth funds. They put out a 95-page report on their ESG bona fides late last year.

To attract ESG lenders and fund managers, Uzbekistan needs more time, and more years of management that is not seen as corrupt as some current state executives were.

Jamshid Kuchkarov, Deputy Prime Minister of Uzbekistan and their Minister of Economic Development and Poverty Reduction said in a report on May 27 in the Russian language press that the recent growth of interest by foreigners was being met by domestic investors as well. “This suggests that our businessmen have begun to trust the state,” he said.

Daniel Rosenblum, the U.S. ambassador to Uzbekistan, says Mirziyoyev was changing the goals of its previous leaders and was trying to build a post-Soviet state that exists for its citizens, not for the government. The new policy tack sets the table for “a standard that should begin to change things for the better,” Rosenblum told Voice of America last year.

Uzbekistan’s reforms are a marathon, not a sprint.

“You had an aggressive shift in the economy over the last two years,” says Branton. “We had sufficient comfort that there was stability there and felt confident about investing in Uzbekistan.”

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