Russia’s economic crisis threatens Uzbekistan from within

Authors: Esfandyar Batmanghelidj and Khasan Redjaboev, Bourse & Bazaar Foundation

Russia’s invasion of Ukraine is devastating the lives of Ukrainian civilians and impacting the global economy. Low-income economies that were hit hardest by the COVID-19 pandemic, such as Uzbekistan, are the most vulnerable to supply chain disruptions and potential political unrest caused by the invasion.

Significant attention has been paid to the impact of the Ukraine crisis and Russia’s economic contraction on Uzbekistan. But this analysis is somewhat incomplete — Uzbekistan’s exposure to the crisis does not just stem from the contraction of remittances coming from Russia.

The greatest danger for Central Asian economies emanates from weak political institutions. The economic shock rippling from Russia to Uzbekistan is compounding the economic effects of the COVID-19 pandemic, which had already spurred protectionist economic policy and threatened the reform agenda in Uzbekistan. This new crisis might convince policymakers to impose trade restrictions, price controls and rollback reforms.

Since 2016, bold market reforms have enabled Uzbekistan to unlock higher rates of economic growth. But public sector entities will likely seek further subsidies and preferential schemes from the state, attributing their inefficiency to yet another economic shock. This could further entrench rentierism in an economy that has been taking important strides towards fiscal discipline, privatisation and the targeting of fiscal spending towards private sector businesses and households.

To emerge from the new economic crisis, Uzbekistan must double down on its reform agenda. Policy interventions might be necessary to support businesses given the scale of the economic crisis. But these interventions should be targeted and limited to avoid hobbling reforms. Instead of providing carte blanche support for inefficient businesses — raising the government debt burden — Uzbekistan should condition state aid in ways that support reforms, especially those reforms seeking to reduce state dominance of the economy.

The Uzbek government continues to provide preferential loans subsidies for economic operators and preferential tax regimes in ways that favour state-owned enterprises and politically-connected firms. Economic resources flow from taxpayers to these firms, while households and small and medium-sized enterprises remain vulnerable to economic headwinds. The country’s privatisation plan, a largely untapped source of government revenue, risks being further delayed as state-owned enterprises cite the crisis as a reason to slow critical reforms. The speed and transparency of privatisation auctions should be increased.

The stalled land reform must also be advanced. Agriculture accounts for 28 per cent of the Uzbek economy and employs the same proportion of the labour force. The government should expand property rights reform cover to all types of land, including agricultural land, which would boost private investment and production of food staples now subject to rising prices. This reform could also soften the blow of lower remittances, as repatriated labour migrants could earn their livelihoods as smallholder farmers or agricultural labourers.

In the case of Uzbekistan, a country in which expansive price controls have historically distorted incentives, the temptation to introduce price ceilings should be avoided. Higher prices will encourage producers to increase supply — increased investment by private producers will boost employment and eventually stabilise prices.

The government should continue to prioritise inclusive development by focusing on poverty reduction. Uzbekistan has made progress in measuring poverty. Uzbek President Shavkat Mirziyoyev has acknowledged that 12–15 per cent of the population is living below the poverty line and created specialised registries to capture unemployed youth, vulnerable women and people with disabilities.

Such approaches have also underpinned the rollout of programs targeted at the community level. Some initiatives, such as the free school meals and conditional cash transfers for the purchase of agricultural equipment or livestock, will likely produce mixed results due to distorted incentives. Other community-based initiatives, such as cash transfers for families dependent on labour migrants, record educational subsidies, incentives to hire women and mass health screenings, are more promising.

But citizens are not merely a target for support during periods of economic crisis — they are also a source of economic resilience. The government should continue to engage communities to better target fiscal interventions during the crisis. Uzbekistan’s timely Open Budget initiative gathered 6.7 million votes and offers a powerful platform for local communities to voice their needs in the pursuit of a more efficient allocation of state resources.

Easing the registration and operation of NGOs will result in the broader empowerment of vulnerable populations and better distribution of state aid. This may improve trust in the state institutions by ensuring that a larger portion of aid reaches the intended audiences.

The government needs to carefully delimit policy interventions so as not to derail the broader reform agenda that requires Uzbekistan to move away from excessive state intervention in the banking sector. For a short period, the Central Bank of Uzbekistan instituted recommended exchange rates for the Russian rouble that were effectively compulsory and below market rates. Over 80 per cent of Uzbekistan’s banking sector being state-owned is especially concerning at a time when policymakers are under pressure to expand financial support to banks.

Given the new economic reality, Uzbekistan should prioritise its talks on WTO membership and actively pursue new trade partnerships. To incentivise both local producers and foreign suppliers to continue to meet the needs of Uzbek consumers, fostering free markets is vital. Uzbek policymakers should resist the temptation to revert to the orthodoxies of the planned economy as they devise their crisis response — the best way out of the crisis is to look forward, not back.

Esfandyar Batmanghelidj is Founder and CEO of the Bourse & Bazaar Foundation and a Visiting Fellow at the European Council on Foreign Relations.

Khasan Redjaboev is a Visiting Fellow of the Bourse & Bazaar Foundation and PhD Candidate in Political Science at the University of Wisconsin-Madison.

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