Frontier markets

Uzbekistan's privatisation attracts Chinese and Russian bidders

The former Soviet republic’s messy sale of its prize assets will likely drag out, but ultimately Russian and Chinese investment will trickle down to Uzbeks and boost local stock prices.

Walking along the high street in Tashkent, Uzbekistan, Chinese shops, such as low-cost retailer Guangzho-headquartered Minso, are sprouting up between new luxury apartment blocks and shiny shopping malls. A Hilton hotel opened in October and a Radisson is under construction in the city to cater to an influx of international businessmen and Chinese tourists.

More foreigners in the capital are the most visible sign at street level of Uzbekistan’s decision to open up its economy to the outside world after more than two decades of isolation.

Uzbekistan kicked off a privatisation process this year; up for grabs are the crown jewels of Uzbekistan’s economy, including stakes in oil & gas giant Uzbekneftgaz, flag carrier Uzbekistan Airways and Navoi Mining and Metallurgy Combine – which operates the world's largest open-pit gold mine.

To capture this windfall, Chinese and Russian companies are already scouting for opportunities in the former Soviet republic, said people familiar with negotiations.

“As we plan to sell our strategic assets via an IPO, Chinese and Russian investors will be welcome to participate,” Odilbek Isakov, Deputy Minister in Uzbekistan’s Ministry of Finance told FinanceAsia

Over the last three years, the ministry has seen strong interest from Russian and Chinese investors as well as Turkish and Korean buyers he added, mainly as greenfield investments in construction materials, textiles, the oil & gas sector and electric energy generation.

Uzbekistan’s opening up coincides with China’s push to integrate economic activity across Eurasia under its Silk Road Economic Belt policy. It competes with Russia's Eurasian Economic Union, a similar development initiative.

As a result of its greater economic clout and appetite for raw materials, China is gradually supplanting Russian influence in Central Asian markets. Resource-rich Uzbekistan is the latest Central Asian economy to court overseas investors, following market reforms in neighbouring Kazakhstan.

While Russia remains the major source of imports across the Stans, which were part of the Russian empire for more than a century, exports are increasingly finding their way into China. In Kazakhstan, for example, Russia accounts for over 35% of imports but under 10% of all exports, well behind China, according to data from The Institute of International Finance.

Uzbekistan – located in the heart of Central Asia and the second-largest economy in terms of GDP after Kazakhstan – is high on China’s priority list in the region. Globally, it is one of the top 20 producers of natural gas, gold, copper and uranium.

Projects are mushrooming, Beijing-headquartered Asian Infrastructure Investment Bank said it would finance improving Uzbekistan’s highways in September, with a total of $2.7 billion worth of Uzbek projects under discussion.

A Chinese industrial zone hosting factories owned by China’s Pengsheng has sprung up and a Chinese group is managing the development of the master plan for Samarkand, a historic juncture on the ancient Silk Road of traders between the Middle East and China.

“Uzbekistan has rolled out the proverbial red carpet to Chinese investment,” said Scott Osheroff, the chief investment officer of Asia Frontier Capital’s Uzbekistan fund. He sees foreign investment gradually working its way through the economy to boost the stock market.

For global investors in Uzbekistan, a successful privatisation process could create employment and drive economic growth. That success, however, depends heavily on overcoming infrastructure bottlenecks in the doubly landlocked country, a land surrounded by other countries with no access to the sea, and smoothing the ease of doing business.

The challenge ahead is significant. Policymakers are attempting to push forward complex reforms without creating the social unrest suffered by other developing countries. It will also need to broker deals with the far-more-powerful China to create jobs locally. 


Following the death of long-time ruler Islam Karimov in 2016, Uzbekistan’s second president Shavkat Mirziyoyev launched reforms of the largely state-directed economy.

He instigated a sharp devaluation of the som, the national currency, in 2017 and unveiled a privatisation plan of state-owned companies in April. A separate piece of legislation gives private companies and individuals the right to own land from March 1 for the first time in the country’s history. 

Uzbekistan made its initial foray into international debt markets in February, selling $1 billion worth of Eurobonds.

This created a benchmark for other Uzbek issuers to follow, a challenge quickly taken up by state-owned lender Uzpromstroybank, (Uzbek Industrial and Construction Bank) which issued a debut $300 million bond in late November. 

Uzpromstroybank's chairman Aziz Voitov told FinanceAsia. “As a result of changing regulation, banks are very much more commercial and transparent,” speaking through a translator. 

The funds from the bond are being distributed to 86 projects all over the country to mostly medium and small business enterprises that have export revenue so we’re hedging our foreign exchange risks. The potential exposure of all those projects within the next four or five years will be $1 billion said Voitov. 

The government’s privatisation plan involves auctioning off minority stakes in government-owned banks as well as majority stakes in state-owned enterprises across the banking, construction, food processing, chemicals, energy, as well as the oil & gas sectors. State assets in companies are either being sold on the open market or in blocks on an electronic trading platform called

Uzpromstroybank will also be among the first companies to sell equity. The bank is preparing for an IPO which will likely be in “around two to five years”, depending on the pace of the bank’s transformation said Voitov.

In terms of the preparation, he said: “We’re almost through our biggest challenge: separating customers into segments such as medium businesses, small businesses and retail.”

The bank has international help in getting ready for listing from the European Bank for Reconstruction and Development and the IFC, a relationship that Voitov expects to deepen into capital ties. “Once we transform together the bank, they're going to be investing in our equity,” Voitov said. 


Ipoteka Bank, National Bank of Uzbekistan and Asaka Bank are also preparing to issue debut bonds, Jasur Karshibaev, head of Uzbekistan’s debt management office within the Ministry of Finance told FinanceAsia.

"Not just on the lending side of the business, but also on the advisory and the IPOs side of the business, we are embarking on a variety of streams of work now that we believe will see interesting results by 2021," Alex Metherell, co-head of global banking at Russian bank VTB Capital told FinanceAsia, adding that as capital markets develop, more work will follow into the future.

In anticipation of a slew of advisory business, investment bankers are travelling to Tashkent. Russia’s VTB  Capital and JP Morgan, are looking to expand their presence in the city, said people familiar with their plans. JP Morgan is one of the few international banks with a representative office in Tashkent. VTB Capital and JP Morgan declined to comment on their future plans.


The sheer pace of reform has caused an administrative logjam and widespread confusion among investors. President Mirziyoyev is pushing so hard for progress that some ministries still mired in the Soviet way of doing business are falling behind or lack the skills and resources to carry out his vision.

Investors report that the sales process is unclear and that its time-table is likely to stretch out for years to come. Frustration is building as officials, that have given the green light to investors’ projects, have moved jobs by the time that the foreigners are next in Tashkent.

“It’s chaos, you have to spend time on the ground to get things done,” said one of the investors.

They also complain that local valuation assessors are setting auction prices at unrealistic levels.

Vegetable oil firms, oil service companies and wineries are priced at up to 30 or 40 times earnings, whereas comparative assets internationally might go for price / earnings multiples of two or three times. This sometimes results in no bids and investors privately negotiate deals directly with officials at prices as low as par value, said one emerging market veteran.

Sales of stakes in Uzbekistan’s largest companies are years off as the government is only now starting to unravel the companies’ spider’s web of units and affiliates in order to ready them for sale to private investors. Uzbekneftgaz, for one, is in the midst of this process.

One Ministry of Finance official told FinanceAsia that the process will take time as most SOEs are moving away from being production-oriented towards being more focused on core businesses and productivity. The SOEs have to hive off non-core assets and implement IFRS accounting standards, a very different set of rules to Uzbek standards. The process could be completed in 2021 he estimated.

Most investors are also waiting for more policy stability. In one high-profile U-turn, Uzbekistan set a value-added tax of 20% on goods in January only to cut it in September to 15%.

There are also some doubts over the government’s commitment to privatisation after it nationalised General Motors’ remaining stake in GM Uzbekistan. The government’s move was foreshadowed by criticism of the car manufacturer for not creating enough jobs locally.

So far, only a handful of state-controlled companies have sold or plan to sell shares this year. Deals include a gradual sell-down of stakes in listed glass manufacturer, Kvarts, Jizzakh Plastics and the sale of the state’s share of the Uzbek Commodities Exchange.

It’s still not clear where Uzbekistan’s largest companies will eventually list but they are likely to follow a local listing with an international listing, with London and Moscow’s exchanges as possible venues, said bankers who have spoken to potential issuers.

Before decisions can be made, the government still has to work out the legislative framework. Between now and the end of 2020 more than 100 different regulations, decrees and laws will be replaced with a single capital markets law.


Much is at stake for Uzbekistan. Potentially massive disruption in the economy created by the privatisation process holds risks for both the government and investors.

State-owned enterprises could haemorrhage revenues in a more competitive market. If this results in mass layoffs, social unrest could derail the reform process as has happened in other developing countries.

The government is particularly sensitive to unemployment rising in the most populous country in Central Asia. Joblessness is already very high; half of the population is under 30 years old, with half a million Uzbeks seeking to join the workforce annually.

“Increasing opposition to reforms could lead to delays and raise uncertainty about the business environment, hampering investment,” said analysts at credit rating agency Moody’s in a research report.

If the government does deviate from its path of reform, or opposition builds to a point where it threatens to disrupt privatisation, then the spread on Uzbekistan’s sovereign bond is likely to widen. If investors do start to pull their money out, then it might even help the government rally support again, something ministers may have had in mind all along as a way of monitoring progress for everyone to see.

“It [the sovereign bond] is an external reference point that they can use as a tool to communicate to the population what they're doing and that the reforms they're putting in place are the right things to do,” Stefan Weiler, Central & Eastern Europe, Middle East and Africa debt capital markets lead at JP Morgan told FinanceAsia. JP Morgan was one of the bookrunners on the offering, alongside Citigroup and Gazprom. 

So far, the bond has performed well. Uzbekistan’s 2029 bond hit a high of 110.91 on December 17, yielding 3.944%.


One widespread criticism of China is that it does not create enough jobs in other countries, especially across sub-Saharan Africa where Chinese companies have imported their own workers.

In Uzbekistan, Chinese state-owned enterprises are keen to sign engineering, procurement and construction contracts – which would give them responsibility for all aspects of the project from design to construction – as a way of stimulating economic growth in their home market, said one of the people familiar with negotiations.

Still, Uzbekistan is keen for investors. Even a small number of new anchor investors would crowd in private investment further down the road. The government is in a strong negotiating position as its debt levels are low and has both Russia, China and competing for its assets.

In the spirit of the nomadic traders along the ancient Silk Road, to haggle for the best deal possible it would just do well to study the experience of other emerging markets in dealing with China.

Back at street level, small businesses are hoping to cash in on the tourist surge once Chinese nationals are granted visa-free status for seven days from January 1, 2020.

Investors, keen to see the foreign investment translate into a more vibrant economy, note that the government needs to avoid the pitfalls suffered by other emerging markets. Chinese tour operators charge for tours outside of Uzbekistan. Once in Uzbekistan the tourists stay at hotels, eat at restaurants, ride on buses and visit souvenir shops all owned by the tour companies, therefore contributing neither employment nor taxable income for the Uzbek government.

“The Uzbek government may not realize the negative effects that potential zero-dollar tourism could have on the country, as it has a history of having caused significant issues in Myanmar, Thailand and Cambodia,” said Osheroff.


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