Bukhara, one of Central Asia’s oldest cities, has long stood as a historical waypoint on the Great Silk Road, where caravans laden with goods moved between East and West. Today, this city is witnessing a new chapter in its storied past—one defined by industrial advancement and economic transformation. Not far from the ancient bazaars of Bukhara, a modern facility belonging to Knauf, a leading German manufacturer of building materials, symbolizes Uzbekistan’s shift towards becoming a global economic hub.
Knauf, a company renowned for its high-quality construction materials, has firmly established itself in Uzbekistan, investing approximately €130 mn. The recent opening of its third factory in Fergana, with a production capacity of 260,000 tons of gypsum board annually, underscores the company’s long-term commitment to the country. The products from these facilities are exported to neighboring nations like Turkmenistan, Tajikistan, and Afghanistan, reinforcing Uzbekistan’s growing role in regional trade. Today, Knauf is just one of 215 enterprises with German investment in Uzbekistan, marking a notable rise in Western business interest since the economic reforms introduced by President Shavkat Mirziyoyev in 2016.
A Surge in Western Investments: Opportunities and Transformations
Since 2016, Uzbekistan has undergone a profound transformation, marked by a series of political and economic reforms that have opened the country to foreign investment. These changes have significantly enhanced the business environment, making Uzbekistan a promising destination for European and American companies. Oybek Shaykhov, head of the European-Uzbek Association for Economic Cooperation, explains, “Western investors are primarily interested in the development of the energy industry, particularly green energy, as well as trade and infrastructure. Uzbekistan is now the most dynamically developing market in the region.”
Companies like Knauf have led the way for Western investment in Uzbekistan, but they are not alone. In 2019, the American industrial gas giant Air Products established its presence in the country, with a significant investment in a gas complex in the Kashkadarya region. Located near the borders with Turkmenistan and Afghanistan, this facility, valued at around $1bn in 2023, converts natural gas into nitrogen, oxygen, and hydrogen. This plant is part of Uzbekistan’s broader strategy to promote cleaner energy and attract green investment. “We occupy one-third of this plant, focusing on producing synthetic diesel, kerosene, and oil—environmentally friendly products widely used in Europe,” a company representative noted.
Air Products has ambitious plans to expand further in Uzbekistan, with new facilities planned in Fergana and Navoi. The strong demand for their products, with orders placed a year in advance, highlights Uzbekistan’s increasing significance in global supply chains.
Economic Reforms Fuel a Favorable Business Climate
The influx of Western investments into Uzbekistan is closely linked to the comprehensive reforms implemented under President Mirziyoyev’s administration. These reforms have focused on improving regulatory frameworks, human rights, and the inclusion of women in the workforce, creating a more favorable environment for foreign businesses. André Algermißen, from the Konrad Adenauer Foundation in Central Asia explained, “The entire political climate has significantly improved, making Uzbekistan a more favorable place to conduct business.”
These reforms have also included measures to make financing more accessible. Despite having almost no state debt before 2016, Uzbekistan has successfully secured loans from international financial institutions at relatively low costs, both before and during the COVID-19 pandemic. This fiscal maneuvering has enabled the government to offer co-investment opportunities and state guarantees, further enhancing its appeal to Western investors.
Yet, while Western investments are growing, traditional partners like Russia and China remain integral to Uzbekistan’s economy. In May, Russian President Vladimir Putin visited Tashkent, discussing plans to increase gas supplies and construct Central Asia’s first nuclear power plant in Uzbekistan. However, even as it strengthens ties with Russia and China, Uzbekistan is keen to diversify its international partnerships, particularly since geopolitical tensions have risen following Russia’s invasion of Ukraine in February 2022.
Balancing Investments: Navigating Eastern and Western Partnerships
Uzbekistan’s strategic location and its efforts to balance relationships between major powers have made it an attractive investment destination. The country has been actively diversifying its investments to avoid over-reliance on any single partner, particularly in sectors like mining, infrastructure, and energy. “Our objective is to attract investments that create high-added-value products, not just extract raw materials,” an economic advisor stressed, highlighting the government’s focus on sustainable economic growth.
While Uzbekistan continues to maintain robust economic relations with China, its largest investor, it also sees a surge in European and American interest. In the first quarter of 2023 alone, Chinese investments in Uzbekistan amounted to $8.5bn. China is heavily involved in developing critical infrastructure, including transport networks, under its Belt and Road Initiative. One key route, the Trans-Caspian Corridor, runs through Central Asia to Europe, serving as a crucial link for both Chinese and European trade interests.
Reviving the Silk Road: A Modern Trade Hub
Uzbekistan’s strategic ambition is to become a modern hub for trade between Europe and Asia, echoing its historical role on the Silk Road. “Uzbekistan is finding common ground with all its partners, whether they are from Russia, China, or Western countries,” said Shaykhov. The presence of global brands like McDonald’s, Starbucks, and KFC, alongside giants like Air Products and Knauf, illustrates the country’s growing attractiveness as a global business destination.
However, challenges remain. According to economist Yuliy Yusupov, Uzbekistan is still heavily dependent on Russia—not just in terms of trade and investment but also due to the millions of Uzbek migrant workers in Russia who send remittances home. “These remittances are a significant contribution to the country’s economy, but their sustainability is uncertain,” Yusupov warned. He pointed out that factors such as the devaluation of the Russian ruble could impact these income streams, highlighting the need for economic diversification.
Looking Ahead: A Balanced Approach to Growth
As Western companies reassess their presence in Russia, many are shifting their focus to Uzbekistan and other Central Asian markets. The geopolitical landscape has driven European companies to seek new bases in the region, relocating offices and resources from Moscow to Tashkent and Almaty. “Uzbekistan and Kazakhstan have become appealing alternatives where companies can transfer their resources, including human capital, from Russia,” noted a trade expert.
While Uzbekistan remains committed to observing Western sanctions, it also continues to engage closely with China, a key trade partner and investor. China’s investments in critical infrastructure and its role in enhancing transport corridors between Asia and Europe further solidify its importance to Uzbekistan’s economic future.
Ultimately, Uzbekistan aims to maintain a delicate balance, seeking to attract investments from diverse sources to avoid dependence on any one partner. “The revival of the Great Silk Road is more relevant than ever for Uzbekistan,” said a government representative. “The country is becoming a vital link between Europe and Asia, poised to capitalize on its strategic location and favorable business climate.”
With ongoing reforms, a strategic approach to foreign partnerships, and a commitment to fostering a dynamic investment environment, Uzbekistan is well-positioned to emerge as a key player on the global economic stage, bridging the gap between East and West in the 21st century. /// nCa, 20 September 2024 (cross post from Daryo.uz)