Uzbekistan: Tashkent Strives to Diversify its Trade Partners

Hoping to emulate the success of Kazakhstan's "multi-vector" foreign policy, Uzbekistan is seeking to diversify its foreign markets, especially for natural gas and cotton -- Tashkent's major cash crop. In recent weeks, Uzbek officials have registered trade gains with several countries in the Middle East and Asia.

Perhaps the most significant Uzbek successes came during President Islam Karimov's late February trip to South Korea. While Karimov was in Seoul, Uzbeknefgaz (UNG), the Uzbek state-controlled energy company signed a joint-venture deal with a South Korean energy consortium. The 50-50 venture will develop the Surgil gas field, which holds an estimated 131 billion cubic meters of gas. Worth potentially $1.84 in foreign investment, the February 25 deal marks the first time that Uzbekistan has partnered with a South Korean entity in an energy-development project. South Korean consortium members include the state-run Korea Gas Corp. as well as Lotte Daesan Petrochemical Corp., LG Corp., STX Energy Co. and SK Gas Co.

Karimov's visit likewise led to an agreement with South Korea's Daewoo International Corp. to conduct geological surveys the Koskudyk and Ashibulak fields in the Ustyurt plateau -- an area that has already been probed by Russian and Chinese companies. Daewoo also agreed to work with UNG to develop mining operations.

In addition, Daewoo obtained a controlling stake in one of Uzbekistan's largest cotton mills, Bukharatex. Under terms of the deal, the South Korean conglomerate agreed to invest $47.5 million for plant upgrades. Daewoo already operates two cotton mills in Uzbekistan.

Karimov followed up on his South Korean success with a March 17-18 visit to the United Arab Emirates, where he secured a memorandum of understanding that seeks to turn Dubai into a trading hub for Uzbek cotton. The arrangement could pave the way for a substantial shift in Uzbek export priorities. "Uzbekistan is a leading producer of cotton and is keen to explore market opportunities in the emerging Asian markets," David Rutledge, chief of the Dubai Multi Commodities Center, said in a March 17 statement.

Indonesia is also attracting Uzbekistan's interest. Officials from the two countries announced the signing of a memorandum of understanding on March 17 that specifies a mutual desire to boost bilateral trade, especially in raw cotton and textiles.

Gulf States figure to be key players in Uzbekistan's diversification efforts. In January, Karimov approved a package of 17 investment projects worth about $800 million, mostly in the agricultural, transport and energy sectors. Financing will be provided by the Arab National and Regional Development Institutions (ANRDI), a group comprising eight national, regional and multilateral development financing institutions in the Gulf region. This investment package will cover projects running through 2012. Prior to the January announcement, Uzbekistan had received an overall total of $200 million from ANRDI member financial institutions since 1991. Elyor Ganiyev, Uzbekistan's trade minister, indicated that Tashkent would seek an additional $800 from Arab financial institutions in the coming years.

If Uzbek officials can reach their assistance target, the ANRDI aid would exceed the total financing received from the Asian Development Bank since Uzbekistan became a member in 1995. To date, the ADB has been one of Uzbekistan's key investors, providing a little over $1 billion in loans for about two dozen projects.

Uzbek activity with South Korea and the Gulf States is indicative of Tashkent's desire to reduce its current level of economic and political dependency on Russia and China. In diversifying its export options, observers say that Uzbekistan is following a diplomatic path cleared by neighboring Kazakhstan. Astana has for years pursued a "multi-vector" foreign policy, in which Kazakhstani officials play outside powers against each other to extract maximum economic advantage. The strategy has been spectacularly successful in enabling Kazakhstan to hike the price of its energy exports. [For background see the Eurasia Insight archive].

Expanding trade ties with Asian and Arab states can also help shield Uzbek officials from pressure exerted by the United States and European Union over human rights and political matters. [For background see the Eurasia Insight archive].

Russia is by far Uzbekistan's closest trade partner, with trade turnover totaling roughly $4 billion in 2007. Moscow, in addition, has pledged to invest more than $2 billion in the Uzbek economy in the coming years. [For background see the Eurasia Insight archive]. On the other side of the trade equation, Russia is the primary destination for Uzbek labor migrants, who annually remit an estimated $3 billion to friends and relatives in Uzbekistan. The remittances are a major factor in keeping the lid on social tension in Uzbekistan, local observers say. Underscoring the importance of Uzbekistan's economic relationship with Russia, Uzbek President Islam Karimov made his first foreign trip after his controversial re-election to Moscow on February 5-6.

China is also an increasingly important trade partner for Tashkent. Beijing's trade turnover with Uzbekistan exceeded $1 billion in 2007. Total direct Chinese investment in the Central Asian nation is estimated at about $500 million, but discussions are continuing on several additional projects worth potentially $1 billion in additional investment, according to Uzbek sources. Observers in the Uzbek capital say Chinese officials have repeatedly expressed an intention to displace Russia as Uzbekistan's top trade partner.

"Tashkent tries to look for alternative political and economic partners elsewhere, but it realizes that its key sources of support are still in Moscow and Beijing," said a Tashkent-based political analyst, who spoke on condition of anonymity. "And it will probably stay that way for a while. However, Tashkent can use new partnerships as a strong bargaining tool in its negotiations with Russia, China and the West, as it has repeatedly, and successfully, done before."