In October, Russian President Vladimir Putin made a state visit to Uzbekistan’s capital Tashkent that saw the signing of 785 business deals worth $27 billion in Russia’s most visible move to counter China’s Belt and Road Initiative (BRI) and to block Western trade and investment. Significantly, Putin and Uzbek President Shavkat Mirziyoyev announced the construction of an $11 billion nuclear power plant that will alleviate local power shortfalls and may provide power for export.
China is Uzbekistan’s largest foreign investor and Russia is concerned that China’s Belt and Road Initiative and Asian Infrastructure Investment Bank will boost Chinese influence in Central Asia, which Russia considers in its “near abroad” or zone of “privileged interest.” In addition, Mirziyoyev recently concluded successful visits to the United States and Europe that largely focused on Uzbekistan’s benefits as a destination for investment.
Russia paid attention to “soft power” and cultural issues as well: Putin’s retinue included Foreign Ministry spokeswoman Maria Zakharova, and the rectors of 82 Russian universities to develop education projects to include opening branches of Russian universities and expanding Russian language training.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
The prospective surge of investment in Uzbekistan may present a political challenge to the United States and the West. Though Uzbekistan has so far been reluctant to join the Russia-led Eurasian Economic Union (EEU) and Collective Security Treaty Organization (CSTO), the increase in Russian and Chinese investment will increase their influence in Tashkent.
And Uzbekistan needs the investment.
Uzbekistan has never been a favored destination for foreign direct investment (FDI), which was 0.10 percent of GDP as of 2016, mostly due to heavy regulation and lack of currency convertibility. Infrastructure investment has lagged, with public investment at 0.3 percent of GDP from 2012 to 2015, against an optimal investment of 7 percent of GDP.
The European Bank for Reconstruction and Development (EBRD) highlighted shortfalls in investment in transport infrastructure, information and communications technology (ICT) infrastructure, and investment in municipal infrastructure which is linked to improved service delivery and exploiting the country’s unrealized cultural and tourism potential. The EBRD’s analysis was seconded by the Asian Development Bank (ADB), which identified a need for increased investment in transport and ICT infrastructure.
What should the U.S. do?
First, don’t obstruct foreign direct investment. It will needlessly antagonize China and Russia, and sour the Uzbeks on the United States while Tashkent is working to connect Afghanistan with Central Asia and encourage its economic development and political maturation – a priority U.S. interest. Washington should instead offer Uzbekistan off-ramps so Tashkent can avoid the “sanctions trap” and the “debt trap.”
The sanctions trap will snare Uzbek firms that deal with Russian firms under sanction by the U.S., the EU, or the UN. The U.S. has sanctioned Russian firms for interfering in the 2016 U.S. elections, supporting the Russian invasion of Crimea and incursion into Eastern Ukraine, and supporting the Assad regime in Syria. Companies that deal with sanctioned entities are subject to “secondary sanctions” that are designed to pressure third parties to stop dealing with sanctioned countries or entities.
Firms that are headed by Putin allies or are state-controlled would likely be well-represented in delegations to neighboring countries, and have been targets of sanctions for their support of the regime. Thus, any matchmaking efforts by the Russian and Uzbek governments may result in Uzbek firms partnering with sanctions targets and becoming eligible for secondary sanctions.
If they were sanctioned, Uzbek firms would be bound to Russia and limited in their ability to do business in other countries. The Russians will have recreated a modern version of the state-controlled companies that, under the Soviet five-year plans, existed to produce at the order of the central planners in Moscow.
The U.S. should ensure that information on the targets of U.S. sanctions is available to the local business community. But exhortations to “do the right thing” are just words if not accompanied with options, especially when you’re advising someone to refuse business to satisfy a third party’s objectives.
U.S. encouragement of private sector investment in Uzbekistan, facilitated by the Overseas Private Investment Corporation (OPIC), and Uzbek purchases of U.S. goods, supported by the Export-Import Bank of the United States (EXIM), will ensure Uzbekistan does not become overly reliant on Russia and China.
During Mizriyoyev’s visit to the U.S. in May, Uzbekistan signed over 20 business deals with U.S. companies worth more than $4.8 billion that could sustain more than 10,000 U.S. jobs and open opportunities for billions of dollars in future U.S. contracts. To now, Uzbekistan’s imports of U.S. goods have typically been large capital items like Boeing B-787 airliners or joint ventures, such as the GM Uzbekistan automobile factory. The next step will be to encourage mid-sized U.S. companies to engage the Uzbek market, possibly using the services of the U.S. Trade and Development Agency to support exports in the energy, transportation and telecommunications sectors, where U.S. firms are most competitive.
The debt trap is China’s use of sovereign debt to “bend other states to its will” using the BRI as the lever. In December 2017, an impoverished Sri Lanka was forced to gave China control of the strategic Hambantota port. This was quickly noted abroad and now even China’s “all-weather friend” Pakistan is rethinking its commitments with China.
The United States can help Uzbekistan avoid a bad deal by using its voice and votes in the World Bank and the Asian Development Bank to support funding infrastructure and capacity building in lieu of Chinese capital. Washington can also encourage coordination with the European Bank for Reconstruction and Development to maximize funding available to Tashkent and avoid duplication of effort.
China’s BRI projects will prioritize its need to flow exports to the European market, and Russia’s interest is yoking the country to Moscow, but the Central Asian states needs to develop intraregional transport and communications infrastructure and trade patterns. The U.S. and its Western partners should support regional connections that will encourage economic growth and encourage the intensified relations that were kicked off by President Mirziyoyev’s recent outreach to Uzbekistan’s neighbors.
Uzbekistan will always have intensive relations with Russia due to ties of language, long-term personal relationships, previous business and government dealings, or maybe just force of habit. America’s goal should be to ensure the Uzbeks have options to dealing with Russia and China.
One lever the U.S. can use is the Internet, over 50 percent of which is in English; Russian accounts for 6 percent of Internet content and Chinese accounts for almost 2 percent.
Uzbekistan has a young population that is more connected to the Internet that its elders. Access to the English language will give them access to a wider variety of news and information and avoid the Russian filter that Putin is counting on to keep their eyes on Russia. Some courses of instruction at the Tashkent State Institute of Law are conducted in English and have been eagerly sought by the country’s future advocates. The U.S. should promote the further use of English through the State Department’s English language program and through joint efforts with partners such as the British Council, and use online instruction to maximize the program’s reach.
Uzbekistan won’t easily fall into the arms of its Russian suitor. Mirziyoyev recalled the lack of opportunities for Islamic worship under the previous regime. And Central Asians remember the Russian Empire’s conscription of them to fight in World War I, the region’s subjugation by the Bolsheviks in 1918, the 1928 collectivization and resulting famine and loss of the region’s livestock, the Kazakh famine of 1932 and 1933 that caused the death of almost half that country’s population, and the Great Purge. Uzbekistan’s greatest sacrifice for the Soviet Union is preserved by the World War II Memorial in Tashkent which lists the names of the 400,000 Uzbeks who died in the service of the Red Army.
Uzbeks are clear-eyed about their neighbors. Targeted policies by Washington can “do well while doing good,” that is, promoting U.S. business while giving young Uzbeks options for wider vistas and greater opportunities.
James Durso (@james_durso) is the Managing Director of Corsair LLC.