The Kyzyl Kum desert, which covers the vast majority of Uzbekistan, is both a blessing and a curse for the country. Its deposits of copper, gold, uranium, aluminium, natural gas and oil, among other resources, guarantee a steady inflow of foreign investors, eager to cash in on the country’s natural wealth. At the same time, powerful sandstorms originating at Kyzyl Kum plague many Uzbek cities and villages, and the climate in the country is often seen by visitors as dry and unwelcoming.
Recently, however, investors could experience storms of a different kind, with the country's business climate starting to resemble the country’s weather. Oxus Gold, a UK gold and silver mining company listed on London’s Alternative Investment Market, announced in February 2011 that it was exiting Uzbekistan. This was a sudden move, considering that the company’s 50% stake in Amantaytau Goldfields (AGF) in the Kyzyl Kum desert was bringing record profits thanks to gold's high prices. Official statements from Oxus pointed to extensive audits conducted by the Uzbek authorities, in order "to find reasons to justify putting AGF into liquidation".
To make matters worse, in August Oxus chief metallurgist Said Ashurov was sentenced to 12 years in jail for espionage. Oxus describes the charges as "fabricated".
Shortly after Mr Ashurov's conviction, Uzbek security forces and police raided the Lakeside Golf Club in Tashkent, which belongs to the South Korean Shindong Enercom Company. According to The Korea Herald, guests of the golf club described the intervention as "brutal and unfair". This show of force by Uzbek authorities comes depsite the strong economic relations between the two countries. According to fDi Markets data, between 2003 and 2011 South Korean companies have invested $1.23bn in Uzbekistan.
Despite strong links between Uzbekistan and Germany, a similar situation occurred in the raid on a German bakery in July 2011. Security forces entered premises owned by Steinert Industries in Yangiyul, handcuffed employees, and seized goods at the property, ranging from cell phones to loaves of bread.
"The Uzbek government showed once again that it is less interested in creating an environment conducive to the growth of foreign business or international investment than in continuing to maintain its absolute control over all potentially independent initiatives in the country,” says Steve Swerdlow, researcher in the Europe and central Asia division of Human Rights Watch (HRW).
Mr Swerdlow, who as the head of HRW's office in Uzbekistan was tracking violations of the rights of businessmen and women, civil activists and journalists in the country, has seen his Tashkent office closed and found himself expelled from Uzbekistan on charges he describes as "bogus".
Given its abundance of natural resources, however, the temptation to invest in Uzbekistan proves to be hard to resist. In August, South Korean president Lee Myung-Bak announced in Tashkent that South Korea will build a gas chemical plant in Uzbekistan, in a deal worth $2.6bn. Other mega-investments come from such powerful corporations as Russia's Lukoil, which announced plans to expand production of gas in the country by 30% each year until 2017 and investment to $5bn, and Malaysian oil and gas company Petronas, which together with Saudi Arabia's Delta Oil plans to build a gas processing plant worth $500m at Gadzhak field.
At the same time as these announcements were being made, another big name was preparing to kick-start its operations in the country. General Motors' new $522m plant will not only be the first automobile engine plant in the country, it will also be a symbol of co-operation between Uzbekistan and the US, according to the US secretary of state, Hillary Clinton, who visited the venue in October 2011. The new plant in Tashkent is GM’s second enterprise in the country, and as GM spokesman Johan Willems told fDi: "[The company] did not notice any dramatic change in the business climate in Uzbekistan in recent months."
The American-Uzbekistan Chamber of Commerce (AUCC), which groups the US representatives of companies present in Uzbekistan, questions the charge of increasing hostility towards foreign investors. "The investment climate has improved. Uzbekistan continues to work on its legislative, financial, tax and other frameworks that are to create a favourable climate for foreign investments,” the AUCC states in an e-mail to fDi.
Mine of challenges
There is no straightforward answer to the question regarding investment climate and business perspectives in Uzbekistan. GM, Lukoil or Petronas have invariably much more clout than companies such as Oxus Gold or Steinert Industries; any problems that they face would invariably impact upon relations between Uzbekistan and the respective countries of these powerful corporations. Also, the investment environment varies from sector to sector.
"[Gold mining] is an industry that doesn’t require large FDI anywhere. The national gold operators have enough financial strength to finance most of the local projects," says Alexander Ignatov, president of Ignatov & Co, a Moscow-based international consultancy. Mr Ignatov adds that in the case of high-profit margin industries, what really matters for the Uzbek government is not money but know-how, and if the company provides advanced technologies, it should be able to conduct its operations fairly securely.
Anna Walker, a central Asia and south Caucasus expert at global risk consultancy Control Risks, says that although at times foreign companies can suffer because of the shifts in Uzbekistan’s external political relationships, the growing number of cases against foreign businessmen may also be attributed simply to the fact that there are more overseas companies operating in the country, so in some cases charges of breaking the local law are legitimate.
So should investors that are not as powerful as GM or Lukoil leave other US and Russian companies to battle the Kyzyl Kum sandstorms and business storms themselves? According to Ms Walker, not necessarily so. "It is still possible to conduct business successfully in Uzbekistan, but it is essential for companies to do their homework before entering the maket so as to enable them to mitigate the potential risks and [after setting up operations in Uzbekistan] observe fully the terms of their investment contract and Uzbek legislation,” she says.