An opportunity for Russia in Uzbekistan

Russia has been trying, and often succeeding, to maintain its influence in Central Asia ever since the collapse of the Soviet Union.

It’s not alone, of course – the United States, China and Turkey are also interested in the region’s resources and geostrategic potential.

But as the rest of the world focuses on the COVID-19 pandemic and the U.S.-China rivalry, and as the rest of the region focuses on marquee issues such as Ukraine and Nagorno-Karabakh, Moscow is widening the gap of influence in a key Central Asia linchpin: Uzbekistan.

Russia’s interest there is obvious. Central Asia insulates Russia from the rest of Asia, and is an important source of labour and production. And though Uzbekistan isn’t the economic powerhouse of the region, it sports its largest population and biggest military. The country is also rich in oil, natural gas, gold, coal and uranium, and has a ton of fertile land.

After the Soviet Union fell, Moscow struggled to maintain influence in Uzbekistan, which preferred independence and neutrality so as to diversify its imports and exports and secure loans from other patrons. In 2012, it adopted what it called the Concept of Foreign Policy, a document that gave the government in Tashkent the right to refuse entry for military blocs and foreign military bases. Under current President Shavkat Mirziyoyev, the country began to open up more to international cooperation. Market reforms he has carried out since his election in 2016 were critical to modernising the Uzbek economy. Migrant workers, for example, whose remittances account for about 10% of Uzbekistan’s economy, received more opportunities to go to other countries.

Plenty still go to Russia, but increasingly more go to Kazakhstan, South Korea, Turkey and Europe.

Politically, the Uzbek government is much more cooperative than it used to be with Turkey, Russia, the United States and China, which has already surpassed Russia as a trading partner and has become a key investor and creditor to the country.

Uzbekistan has been hesitant to join Russia’s Eurasian Economic Union (EAEU) for fear that it would lose some of its sovereignty, and intends to join more attractive international organisations such as the World Trade Organisation.

GDP growth fell

As in virtually every other country, the COVID-19 pandemic put a kink in Uzbekistan’s political agendas. Gross domestic product growth fell sharply to 1.6% in 2020 from 5.8 in 2019.

But growth is growth, and as bad as this drop seems, Uzbekistan was one of the few countries in Eurasia to actually accomplish it last year, thanks in part to agricultural production and competent anti-crisis measures. Uzbekistan even managed to maintain a certain level of stability. The budget deficit increased slightly from 3.9% of GDP in 2019 to 4.4% of GDP in 2020.

External public and government-guaranteed debt rose to 37.9% of GDP. Gold and foreign exchange reserves, which still account for 60% of GDP, cushioned Uzbekistan from the worst of the economic shocks. More, because of the pandemic, consumption grew and, according to some sources, became the main driver of economic growth for the first time in more than 10 years.

Unfortunately, this is not enough for Uzbekistan, which still desperately needs external markets. In particular, it needs reliable and long-term projects to spur economic growth. The country has been maturing economically over the past four years, and if it wants to continue to do so, it will require investment and access to foreign markets, since it usually takes time to restructure the established development model and feed economic growth.

This is where the pandemic has really hurt; its biggest supporters in Turkey, China and the European Union are too preoccupied with their own recoveries to pay Uzbekistan much mind.

The pandemic played into Russia’s hands in this regard, since Moscow is one of the few governments that can offer Uzbekistan demand, investment and goods in these trying times.

And it was able to capitalise on Uzbekistan’s weakening ties with China. China is still a major trading partner, but Uzbek migrants note that it has become more difficult to travel to China in recent years, which just so happens to correspond with Beijing’s repressions against Muslim Uyghurs.

A year before the pandemic, the Chinese embassy suspended the issuance of individual tourist visas for Uzbeks. Moreover, China’s imports from Uzbekistan fell by more than 30%, while Uzbek imports from Russia increased. Nonresource imports, which constitute 90% of the total portfolio, fared especially well, growing by 15.6% to $4.2 billion.

Put simply, Russia saw a chance to persuade the pragmatic and profit-seeking government in Tashkent to move closer to Russia – for example, by giving it observer status in the EAEU last December.

But more than that, Russia understands Uzbekistan’s needs: new equipment to empower the manufacturing sector to expand output, large and medium-sized industrial enterprises to create production chains, and so on. Russia is capable of helping Uzbekistan meet these needs.

While other countries were closing their borders and slowing down international supplies, Russia was making moves. In late 2020, Russia’s VEB.RF and Uzbekneftegaz signed an agreement on opening a credit line of up to 40 million euros ($48 million) to expand supplies of Russian exporters to the oil and gas sector.

More, Russia announced plans to invest $900 million in the development of the largest natural gas field in Uzbekistan, Mustakillikning 25 Yilligi, which is believed to contain more than 150 billion cubic meters of raw gas. And VEB.RF, in partnership with Gazprombank and the Russian Agency for Export Credit and Investment Insurance, is considering the possibility of participating in a project to overhaul Uzbekistan’s gas transportation system.

All the while, Russia has tried to play up the benefits of full membership in the Eurasian Economic Union, which would give Uzbekistan preferential access to the markets of countries with which the EAEU has signed free trade agreements (Vietnam, Iran, Singapore and Serbia), would at least approximate the benefits of WTO membership, and would provide access to a large market for Uzbek agriculture.

Russia has also noted the thousands of production chains and common infrastructure links that form the framework of Eurasian economic integration and often talks about the readiness of the bank to finance interstate programs.

Accordingly, Uzbekistan approved a roadmap for interacting with the union in March that should deepen cooperation with members in the agriculture sector.

Tashkent still has some hang-ups about joining, of course. Chief among them is the loss of its neutrality, one of the bedrocks of its foreign policy, and the potential loss of control over tariffs and non-tariff measures. Hence why Moscow tries to focus on the perks of exporting labour, increased capital and access to markets.

Either way, bilateral trade will only grow. That’s good news for Russia, even if Uzbekistan never joins the EAEU. Moscow’s influence will therefore only deepen as other countries tend to their own houses.