Opening a Business Business Trends Business Barriers

Business in Uzbekistan
Contents

1. 
   Opening a Business
   
2. 
   Business Trends
   
3. 
   Business Barriers
   

Guide to doing business and investing in Uzbekistan 2014 Edition The information in this Guide is based on taxation law and current practices. It is intended to provide a general guide only on the subject matter and is necessarily in a condensed form. It should not be regarded as a basis for ascertaining the tax liability in specific circumstances. Professional advice should always be taken before acting on any information in the Guide.
Uzbekistan profile and investment climate Investor considerations Uzbekistan is situated in the centre of Central Asia Uzbekistan is double-landlocked Uzbekistan offers young and generally well-educated workforce Uzbekistan is a very attractive consumer market with about 30 mln population Transport and communication systems are well developed Introduction Map The highest point in Uzbekistan is Mountain Adelunga at 4,301 metres (14,111 feet). Uzbekistan is divided into 12 provinces (viloyats) with their capital towns, 1 autonomous republic (Karakalpakstan), and 1 independent city (Tashkent). Province Capital City Population, 2014 data Tashkent City Tashkent 2 352.9 Andijan Viloyat Andijan 2 805.5 Bukhara Viloyat Bukhara 1 756.4 Geography and climate Uzbekistan is approximately the size of Morocco or California and has an area of 447,400 square kilometres (172,700 square miles). It is the 56th-largest country (after Sweden). Uzbekistan stretches 1,425 kilometres (885 miles) from west to east and 930 kilometres (578 miles) from north to south. Bordering Turkmenistan to the southwest, Kazakhstan and the Aral Sea to the north, and Tajikistan and Kyrgyzstan to the south and east, Uzbekistan is not only one of the largest Central Asian states but also the only Central Asian state to border all of the other four. Uzbekistan also shares a short border with Afghanistan to the south. Uzbekistan is a dry, double-landlocked country of which 10% consists of intensely cultivated, irrigated river valleys. It is one of two double-landlocked countries in the world the other being Liechtenstein; and although in the case of Uzbekistan this is less clear, since it has borders with two countries (Kazakhstan in the north and Turkmenistan in the south) bordering the landlocked but non-freshwater Caspian Sea from which ships can reach the Sea of Azov and thus the Black Sea, the Mediterranean Sea and the oceans. Ferghana Viloyat Ferghana 3 386.5 Jizzakh Viloyat Jizzakh 1 226.8 Namangan Viloyat Namangan 2 504.1 Navoi Viloyat Navoi 901.1 Kashkadarya Viloyat Karshi 2 895.3 Samarkand Viloyat Samarkand 3 445.6 Sirdarya Viloyat Gulistan 763.8 Surhandarya Viloyat Termez 2 308.3 Tashkent Viloyat Tashkent 2 725.9 Khorezm Viloyat Urgench 1 684.1 Republic of Karakalpakstan Nukus 1 736.5 Uzbekistan 30 492.8 Source: The State Committee on statistics of the Republic of Uzbekistan, latest available data for 2014.
History The Republic of Uzbekistan has an immensely rich heritage in terms of culture, art and natural resources. The monuments that remain throughout the country bear witness to a long and eventful history in which Alexander the Great, Genghis Khan and Tamerlane the Great all left their marks. The Uzbeks are descendants of nomadic Mongol tribes who mixed with the sedentary inhabitants of Central Asia during the 13th century. The Khanates of Khiva and Kokand and the Emirate of Bukhara ruled the region during the 18th and 19th centuries. Russia became increasingly interested in the region in the 18th century. This interest intensified in the 19th century as Russia and Britain competed for influence in a diplomatic and occasional military struggle known as "The Great Game". In 1865 Tashkent, the richest city in Central Asia fell to the Russians, and by 1873 the last of the region's powerful traditional rulers, the Khans in Khiva, had fled and Russia stood in control of the whole Central Asia. The Central Asian territories initially supported the 1917 Bolshevik revolution in the hope that they could achieve independence from Russia. However, support soon turned to fierce opposition from the nationalist basmachi movement and the Soviet forces were forced to withdraw. Soviet power was re-established in September 1919, although armed opposition continued into the early 1920s. On 27 October 1924 the Uzbek Soviet Socialist Republic (UzSSR) was created, and in May 1925 became part of the Union of Soviet Socialist Republics (USSR). There had been little industrial development in Central Asia under Tsarist rule, although some raw materials were extracted. During World War II, Uzbekistan's industrial base was enlarged by the re-location of factories from the war-zone. Post-war Soviet development policies focused on the exploitation of the country's raw materials, with particularly heavy investment in the production of cotton. By the late 1980s the republic was producing 90% of the Soviet Union's cotton, a one thirds of its gold and half of its uranium. The rise to power of President Mikhail Gorbachev and the greater political and cultural freedom permitted under glasnost (openness) allowed for the wider discussion of economic and ecological issues as well as previously unexamined aspects of Uzbek history. The poor state of the environment as a result of over-irrigation of the cotton crop and the high incidence of birth defects attributed to the indiscriminate use of pesticides were major sources of popular dissatisfaction. On 29 August 1991, 10 days after the collapse of the anti-gorbachev coup in Moscow, an extraordinary session of the Supreme Soviet voted to declare the Republic independent, and changed its name to the Republic of Uzbekistan. Direct presidential elections were held on 29 December 1991 and won by Mr Karimov with a reported 86% of the vote. A referendum was held simultaneously in which 98% of participants endorsed Uzbekistan's independence. Mr Karimov won a referendum in 1995, allowing him to 2 stay in office until 2000. He was further re-elected in the January 2000 presidential election. A referendum in January 2002 extended the presidential term in office from five to seven years. Mr Karimov was again reelected in December 2007 for a 7-year term. In December 2011 the Senate of the Oliy Majlis of the Republic of Uzbekistan approved the Law On introduction of amendments to article 90 of the Constitution of Uzbekistan, which envisaged the decrease of the presidential term to a five-years. Government structure and legal system According to the Constitution of 8 December 1992, Uzbekistan is a sovereign, democratic republic. The country is headed by President. The government (Cabinet of Ministers) is subordinate to the Oliy Majlis (Parlament) and the President, who appoints the Prime Minister, deputy Prime Ministers and ministers subject to the approval of the legislature. The highest legislative body is the two-chamber Oliy Majlis, which is elected for a five-year term. The Legislative chamber (lower) consists of 150 members elected by Uzbek citizens based on ballot voting. Members of the higher chamber the Senate are elected from each region of Uzbekistan, the Republic of Karakalpakstan and Tashkent city, by six members from each territory. Sixteen members of the Senate are appointed by the President of the Republic of Uzbekistan out of the most competent citizens with outstanding achievements in and contributions to science, literature and art. The President, with the approval of the Constitutional Court, may dissolve the Oliy Majlis. There are four officially recognised parties which are the People s Democratic Party, Social Democratic Party Adolat, Democratic Party Milliy Tiklanish and Liberal Democratic Party Movement of Entrepreneurs and Businessmen and one movement Ecological Movement of Uzbekistan. People Population Uzbekistan is Central Asia's most populous country. The population of Uzbekistan, reaching more than 30.4million people as of 1 January 2014 is concentrated in the south and east of the country and comprises nearly half the region's total population. Uzbekistan was one of the poorest republics of the Soviet Union; much of its population was engaged in cotton farming in small rural collective farms (shirkats). Nowadays, according to World Bank reports, the fraction of the rural population constitutes 64%. The population of Uzbekistan is relatively young: 25.3% of people are 14 or younger. Uzbekistan is a heterogeneous society dominated by ethnic Uzbeks (80% of the total population). The largest ethnic minority groups are Russians (5.5% of the total  population), Tajiks (5%), and Kazakhs (3%). Many members of the minor ethnic groups have left the country since independence. For instance, many Jews emigrated to Israel or US, and a considerable number of ethnic Germans and Russians returned to their homelands. This has resulted in a loss of many valuable technical, industrial, and professional skills in the country. However, the situation has recently improved and currently Uzbekistan possesses a number of young professionals who received various educational degrees at universities worldwide through the state-funded educational programme Iste dod Foundation. Language The official state language is Uzbek. However, quite a few people in Tashkent and largest cities (including Uzbeks) still use Russian as their native language. Besides, state organisations and businesses use both Uzbek and Russian as their business correspondence languages. Like in many other countries of the former Soviet Union, English is widely educated in Uzbekistan. However, English-speaking population is mostly based in Tashkent. In December 2012 President of Uzbekistan signed the Resolution On measurements on further improvement of the system of studying of foreign languages. In accordance with this Resolution teaching of foreign languages, mainly English, should begin from the first year at all general schools. Religion During the communist years, religious observance was strictly forbidden. Thousands of mosques were closed, observance of Ramadan banned, and wearing veils and sale of the Koran was forbidden. As a result, only a few Uzbeks have an in-depth knowledge of Islam, although the majority of them would describe themselves as Muslims and Islamic traditions run deep. Many mosques have re-opened, and veils are becoming more prevalent. Official government policy is opposed to the emergence of Islamic extremism in Uzbekistan, and has put pressure on the country's Muslim clergy to guard against a rise in extremism. Roughly 99% of Muslims in Uzbekistan are followers of the Hanifism wing of Islam, which is the most liberal school of Islam in terms of religious tolerance. Education Uzbekistan enjoys quite high literacy rate (among adults older than 15) which, in part, is attributable to the free and universal education system. There are 65 higher educational entities in the country State Universities in each regional centre are among them. In addition, several international universities are presented in Uzbekistan, including Westminster International University, branches of the Moscow State University, Russian University of Oil and Gas, Singapore Institute of Management, Turin Polytechnic University, INHA University in Tashkent. There are also a number of technical colleges that are not considered as higher education. Economy General description Uzbekistan has seen few effects from the global economic downturn due to its relative isolation from the global financial markets, and continued its strong performance, registering 8% growth in 2013. GDP growth was driven mainly by favourable trade terms for its key export commodities like copper, gold, natural gas, cotton, and government s macro-economic management (World Bank file, 2013). Although the global financial crisis has hardly affected the domestic financial sector directly, it has slowed exports, remittances, and investment due to slower economic growth in Russia, Kazakhstan and certain other Uzbekistan s large trading partners. Uzbekistan is a country with a GNI per capita of USD 1,900 and PPP equivalent of USD 5,340 in 2013. Economic production is concentrated in commodities: Uzbekistan is now the world's sixth-largest producer and the world's fifth-largest exporter of cotton and the seventh world major producer of gold. It is also a regionally significant producer of natural gas, coal, copper, oil, silver and uranium. Facing a multitude of economic challenges upon acquiring independence, the government adopted an evolutionary reform strategy, with emphasis on state control, reduction of import, and self-sufficiency in energy. The gradualist reform strategy has involved postponing significant macroeconomic and structural reforms. The economic policies have repelled foreign investment, which is one of the lowest per capita in the CIS. For years, the largest barrier to foreign companies entering the Uzbek market has been difficulty in currency conversion. In 2003, the government accepted the obligations of Article VIII under the International Monetary Fund, providing for full currency convertibility. However, strict currency controls and tightening of borders have lessened its effects. Basic public education consists of two levels 9-year primary and secondary school and 3-year college/lyceum. Inflation, though lower than in the mid-1990s, remained University education can be obtained after completing high up until 2003 (estimated 50% in 2002, 21.9% in the college education. 2003). Tight economic policies in 2004 resulted in drastic reduction of inflation, to 3.8% (while alternative estimates based on price of true market basket, put it at 15%). In 2013, the official inflation rate comprised 6.8%. 3
8 The latest estimate of the year-average consumer price index for 2013 was 10.1% (CIA Factbook). The government of Uzbekistan restricts imports in many ways, including high import duties. Excise taxes are applied at high rates to protect locally produced goods resulting in total charges amounting to as much as 100 or even 150% of the actual value of the product, making imported products virtually unaffordable. Import substitution is an officially declared policy. A number of the CIS countries are officially exempt from the Uzbekistan import customs duties. GDP 2012 2013 GDP (USD) 51.98 billion 54.03 billion GDP growth annual 8.2 % 8 % Source: The State Statistics Committee, IMF Uzbekistan was at the second place on the GDP growth rate among the CIS countries in 2013. More than half of the GDP (55.8%) was generated by micro-firms and private enterprise entities. model, turbo IL-114-100. However, in 2010 the Tashkent Economic court initiated bankruptcy proceedings on the plant due to overdue debts and brought external control. Effective from June 2012 the plant ceased production of aircrafts related products. Part of the manufacturing equipment was to be dismantled and sold. The plant started gradual switch to production of other types of products, such as household goods, spare parts to agricultural machinery, building structures etc. Uzbekistan Havo Yullari (Uzbek Airways) is the national aviation company established in 1992. The company offers regular flights to more than 40 cities in Asia, Europe and America. Frequent flyers may enjoy certain benefits, such as free tickets and class upgrades. With establishment of the Free Industrial Economic Zone in the Navoi region, the Navoi Airport has become a logistics centre for international cargo transportation. It is managed by Korean Air. New air terminal started its functions from 26 September 2011. All flights from Tashkent to local destinations are carried out from the new terminal "Tashkent-3, that meets international standards and has capacity of 400 passengers per hour. In 2013, the volume of industrial production grew by 8.87%, agricultural production increased by 6.8% and investment into fixed capital rose by 9.8% as compared to the previous year. Transport Tashkent, the nation's capital and largest city, has a 3-line subway built in 1977, and expanded in 2001 after 10 years of independence from the Soviet Union. Uzbekistan used to be the only country in Central Asia with a subway system (until opening of metro in Almaty in 2012) which is considered as one of the cleanest subway systems in the world. There are municipal operated trams and buses running across the city. Also there are many taxis, both private and company service taxis. Uzbekistan has car and bus producing plants, which produce modern vehicles. The car production is supported by the government. The train links are available. They connect many towns within Uzbekistan as well as with neighbouring ex-republics of the Soviet Union. After independence four fast running train systems have been established. Also, there is a sizeable aircraft plant that was built during Soviet era, Tashkent Chkalov Aviation Manufacturing Plant, or ТАПОиЧ in Russian. The plant originated during the World War II, when production facilities were evacuated south and east to avoid capture by advancing Fascist forces. Up until late 1980s, the plant was one of the leading aircraft production centres in USSR, but with collapse of Soviet Union its manufacturing equipment became out-of-date, and most of the workers were laid off. It used to produce more than 10 modifications of cargo aircrafts IL-76, wings for model AN heavy freight aircrafts, parts of control panel for Boeing and British Aerospace a passenger aircraft 4 There is also a national project for reconstruction of the Uzbek automobile road co-sponsored by the Asian Development Bank and the government of Uzbekistan. The reconstructed automobile road should become a highway to connect the major cities across the country. Communications Local telephone system is currently under extensive reconstruction by digitising old analogue lines. All regions of Uzbekistan are well-covered by the existing telephone system. National telecommunication operator "Uzbektelecom" has 50 points of sales, operating on the principle of "single window" across the country. There are 4 cellular network providers in Uzbekistan, 2 GSM providers and 2 CDMA providers. The number of mobile phone service users exceeded 19.6 million subscribers by the end of 2013. Number of Internet users is rapidly growing every year, reaching about 9.81 million users by the end of 2013. Foreign trade In 2013 Uzbekistan s 5 main trade partners are Russia 27.5%, China - 13%, Kazakhstan - 10.5%, Republic of Korea - 8.2% and Turkey - 4.7%. The main commodities of Uzbekistan that are exported include energy products, cotton, gold, mineral fertilisers, ferrous and non-ferrous metals, textiles, food products, machinery and automobiles (CIA World Factbook). The total export of Uzbekistan for the year 2013 was USD 15,08 billion and the total import amount was equal to USD 13.8 billion. The main import commodities of Uzbekistan are food
9 products, chemicals, metals (ferrous and non-ferrous), machinery and equipment. Global financial crisis has slowed exports in recent years, but from the first quarter of 2010, the revenue growth and export markets began to pick up as a result of high commodity prices and reforms to ease tax burden, as well as good export performance of gold and natural gas supported the country s anti-crisis program s implementation (EIU country report). The government prefers to export gas for hard currency instead of selling it at the domestic market at subsidised prices for local currency, as gas export earnings are vital for funding - industrial sector projects initiated by the government. Large trade surpluses mostly resulted due to increased prices for Uzbek gas exports. The foreign trade turnover increased by 9.8% in 2013 comparing to 2012. 5
10 Business environment Investor considerations Economy is highly regulated by the state Low level of copyright protection Plenty of office space available Business climate Whilst there have been improvements in the recent years in the economic situation in the Republic of Uzbekistan, the economy of the country continues to display some characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the Republic of Uzbekistan and a low level of liquidity in debt and equity markets. The overall business climate may be described as stable, but with a potential for rapid growth in the event of more radical reforms towards market economy and reduced state regulation of the economy. The role of small business and private entrepreneurship in the country s GDP and economy is increasing. In 2013, this sector generated 55.8% of the GDP and created 76.7% of employments to the population. Recognising the importance of the business community in general and private entrepreneurship in particular for the economy, the state constantly updates the legislation in attempts to decrease the tax and administrative burden on the business. Basic tax rate for single tax payment for micro-firms and small businesses, except for enterprises of trade and public catering, was kept at 6% in order to not to increase tax burden, support and stimulate development of small and private businesses. On 7 February 2011, the President of Uzbekistan signed a resolution which is directed at expanding access to commercial bank loans, raw materials and state procurements for small and private businesses. In 2012 the International Financial Corporation provided the first trade credit line to "Asaka" bank in order to promote the growth of small business in Uzbekistan. The Government is also taking measures to improve investment climate of Uzbekistan reducing the number of statistical, tax and financial reports, as well as number of activities subject to licensing and permissive procedures, promoting electronic submission of reports/payments to reduce time spent by businesses for tax filings. Uzbekistan continues to implement Industrial Modernization and Infrastructure Development Program for 2011-2014 covering up to 500 large investment projects in industry sector for USD 50 billion. According to officials during these 5 years production output in machinery and automobile industry, chemical industry, food industry, pharmaceuticals sector and construction materials sector is expected to increase over twice. Uzbek government constantly develops various tools aimed at improving the local business climate. For instance, Presidential Decree No.УП-4609 of 7 April 2014 establishes a number of measures aimed at attracting investments and improving the business environment in Uzbekistan: As of 1 June 2014 it is prohibited to penalise businesses for violation of legislation regulating relationships with regulators/ state authorities if such legislation is not published on the official websites of the respective regulators/ authorities. Moratorium on tax audits is prolonged till 1 January 2017 in respect of small enterprises that pay taxes in a timely manner and demonstrate sustainable growth and profitability (except for liquidation audits, inspections within criminal investigation, and those associated with the use of state funds and centralised resources). State tax authorities are no longer allowed to freese transactions on bank accounts of a company without a court decision due to non-submission of tax and financial reports and absence of the company at the registered legal address. As of 1 July 2014 the average number of employees for small enterprises operating in labour-intensive industries, in particular in  construction materials industry, food and light industries, is increased from 100 to 200 employees. International agreements Uzbekistan is a member of the United Nations (since 2 March 1992), the Euro-Atlantic Partnership Council, Partnership for Peace, and the Organisation for Security and Cooperation in Europe (OSCE). It belongs to the Organisation of the Islamic Conference (OIC) and the Economic Cooperation Organisation-- comprised of the five Central Asian countries, Azerbaijan, Turkey, Iran, Afghanistan, and Pakistan. In 1999, Uzbekistan joined the GUAM alliance (Georgia, Ukraine, Azerbaijan and Moldova), which was formed in 1997 (making it GUUAM); yet in 2005, the Government of Uzbekistan gave an official notice of withdrawal from the organisation. Uzbekistan is also a member of the Shanghai Cooperation Organisation (SCO) and hosts the SCO s Regional Anti-Terrorist Structure (RATS) in Tashkent. Uzbekistan also joined the Central Asian Cooperation Organisation (CACO) in 2002, which has dissolved in January 2006. In 2006 Uzbekistan joined the Eurasian Economic Community and temporarily withdrew from membership in 2008. There are representative offices of IMF, World Bank, EBRD, ADB in Uzbekistan participating (directly or co-funding) in many social and investment projects. Regulations for business Uzbekistan has a highly regulated economy with a vast number of regulatory authorities. Regulatory authorities The principal regulatory authorities are the Cabinet of Ministers (responsible for the overall regulation of the economy), the Ministry of Finance (responsible for fiscal and taxation policy), the Central Bank (responsible for regulation of banks and monetary policy), the State Tax Committee (responsible for collection of taxes), the State Customs Committee (responsible for collection of customs payments), the Ministry of Economy (responsible for development and implementation of long-term social and economic strategies of the state) and the Ministry of Foreign Economic Relations, Investment and Trade (responsible for foreign trade and attraction of foreign investment). Competition policy Competition is governed by the Law on Competition. The Law is applied to cases when activities of state agencies, legal entities and/or individuals adversely 7 affect the competition in the Uzbek market, and sets a number of measures to prevent such adverse influence. Control over adherence to the Law previously used to be enforced by the Anti-Monopoly Committee. As of November 2012, the control was shifted to the newly established Committee on Privatization, Demonopolisation and Competition Development (Committee on Competition) established in the result of merger of the Anti- Monopoly Committee with the State Property Committee. Price controls The state controls purchase prices for strategically important goods, such as cotton, gold, oil, etc. Prices for utilities and telephone communication are also controlled by the government, as these are provided by the state-owned companies. Consumer protection Uzbek legislation provides for consumer protection (Law of the Republic of Uzbekistan On Protection of Consumers Rights of 26 April 1996). There is also a Federation of societies on protection of consumers rights in Uzbekistan. Consumers may apply for protection of their rights to the above Federation or Committee on Competition either in paper, through the phone or special online resources. Such applications appear to have high resolution rate. For example, as per information provided by Federation during the first six months of 2014 around 3,600 complaints (applications) were filed and 92.6% from them were resolved positively. Patents, trademarks and copyrights Uzbekistan has signed international conventions in patent and/or copyright protection. However, in practice, there are still a lot of publicly sold products of video, audio and software piracy. Uzbekistan is a signatory to the Paris Convention for the Protection of Industrial Property, the Madrid Agreement on Trademarks Protection, and the Patent Cooperation Treaty.