LEGAL ENVIRONMENT FOR INTERNATIONAL INVESTMENTS IN UZBEKISTAN


                                            ROMAN KALIĆ

        Masaryk University Faculty of Law/Westminster International University in Tashkent



Abstrakt

CĂ­lem tohoto pƙíspěvku je pƙiblĂ­ĆŸit čtenáƙi současnĂ© podmĂ­nky pro umĂ­stněnĂ­ mezinĂĄrodnĂ­ch investic
v UzbeckĂ© republice. ÚvodnĂ­ část pƙíspěvku popisuje historickĂ© a geografickĂ© souvislosti
ovlivƈujĂ­cĂ­ investovĂĄnĂ­ v tĂ©to zemi. DruhĂĄ část prĂĄce se věnuje jednak obecně problematice
mezinárodního investování a mezinárodní ochrany zahraničních investic a současně i specifikƯm
investovĂĄnĂ­ v UzbekistĂĄnu. Tato část se rovnÄ›ĆŸ zabĂœvĂĄ vĂœvojem prĂĄvnĂ­ Ășpravy zahraničnĂ­ho
investovĂĄnĂ­ a jejĂ­m současnĂœm stavem. ZĂĄvěrečnĂĄ část prĂĄce poukazuje na některĂ© problĂ©my, se
kterĂœmi se zahraničnĂ­ investoƙi v UzbekistĂĄnu stĂĄle potĂœkajĂ­.

Klíčová slova

UzbekistĂĄn, StƙednĂ­ Asie, tranzitivnĂ­ ekonomika, trĆŸnĂ­ ekonomika, zahraničnĂ­ investice, investičnĂ­
legislativa

Abstract

The purpose of this paper is to give the reader an overview of the current legal conditions for
placing foreign investments in the Republic of Uzbekistan. Its first part describes the historical
and geographical predispositions which still effect international investing in this country. The
second part deals with international investments and their protection in general, as well as with
specifics of placing investments in Uzbekistan. This part also deals with the evolution of law on
international investments and their protection. The final part then points out some of the problems
the foreign investors have to be dealing with.

Key words

Uzbekistan, Central Asia, transitional economy, market economy, foreign investments, investment
legislation


Introduction

Uzbekistan and other Central Asian Countries sometimes seem to be forgotten by most European
foreign investors when looking for a place to invest their capital. This is true even though the
Central Asian republics are strategically located and land-locked between Europe and Asia[1]. The
question arises if it is so because these territories are geographically quite far from Europe,
because of a fear that Central Asia does not offer a secure environment for foreign investments or
simply because of not having enough information about these countries, their investment legislation
and their actual capability of enforcing such legislation. The purpose of this paper is to provide
introductory information about the investment legislation of Uzbekistan, its implementation in
practice and also to point out specific problems the foreign investors have to deal with once
placing their investment in this country. The first part of my paper will briefly describe the
country’s location and history. Its purpose is to make sure that the reader is provided with at
least a basic knowledge of the geographical location of Uzbekistan and its historical background
because both of these are important for further elaboration on as well as for understanding the
investment issues in this country. The second part will introduce some basic facts concerning the
transfer of international capital and the main means of international investment protection. In the
final two parts of my paper I will move onto discussing the current investment legislation and the
problems connected with its application in practice.


1. Geography and History of Uzbekistan

Uzbekistan is the geographic and economic heart of Central Asia. With its population exceeding 27
million people[2], it is the biggest market[3] among other Central Asian countries[4]. Lying on the
ancient Silk Road[5] between Europe and the Far East, the cities of Samarkand, Bukhara and Khiva
have been centers of commerce and trade for centuries and have undergone revivals since the
dissolution of the Soviet Union[6]. Uzbekistan is the only country to border each of the other four
Central Asian republics, as well as Afghanistan and therefore offers an easy access to the entire
Silk Road market of over 142 million people.

Since 1865 until the revolution in 1917, the territory of today’s Uzbekistan was under the rule of
Russian Tsar. In 1917 these regions initially supported the Bolshevik revolution thinking they
could achieve independence from Russia. When realizing that independence was not possible, the
nationalist opposition managed to force the Soviet military to withdraw. Nevertheless, the Soviet
military power eventually prevailed[7]. On 27 October 1924 the Uzbek Soviet Socialist Republic was
created, and in May 1925 it became part of the Union of Soviet Socialist Republics. 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[8]. The Republic of Uzbekistan then declared its independence of the Soviet Union on
31 August 1991[9]. After gaining the independence, the country was supposed to become “the Tiger”
with the strongest economic potential among the former Soviet republic[10], which would be able to
take the biggest advantage of foreign investments inflow. Compared to Central and Eastern European
post-communist countries which were able to attract the foreign investors to their territories and
to take advantage of the world’s policy of liberalization of cross border investments, Uzbekistan
was unfortunately less ready to do so[11].


2.1. International investing

The transfer of cross-border investments has become a daily reality of today’s more and more
globalized world. In order to promote international investment exchange, the states insist on
mutual facilitation of transfer of international capital and are trying to take all advantages
connected with the inflow of foreign investments.

For developing countries, the placement of foreign investment in their territories does not mean
only acquiring financial capital, but also an opportunity to strengthen the stagnating economy,
acquiring the latest foreign technologies, decreasing unemployment, as well as raising the
qualification of the laborers and managers employed by foreign companies[12]. The advantages for
foreign investors lie especially in the opportunity to use cheaper labor force in the host state,
opportunity to enter new markets and also getting an access to natural resources which are not
available in his home country. The foreign investors, however, don’t feel comfortable to invest in
foreign territory, unless they feel that their investment is sufficiently protected against
non-commercial risks. One of the indispensable conditions for attracting foreign investments is
therefore the creation of favorable legal environment in the host state. In order to stimulate
international investing, the states are usually concluding bilateral investment treaties[13],
accessing to multilateral treaties dealing with international investment protection and passing
national legislation aimed at protection and promotion of foreign investments[14]. Any country
should however bear in mind at all times that the sole acceptance of international obligation in
form of an international treaty or by passing national investment legislation, is not sufficient
and that the protection embodied in these legal acts has to be effectively promoted in practice.
The host country has thus an important duty to guarantee an appropriate protection of foreign
investors property placed at the host state’s territory. Such protection currently lies especially
in providing foreign investor with such treatment as is guaranteed by investment treaties and
investment legislation. Breach of these obligations leads to international responsibility of the
host state and creates an investor’s right to claim compensation at a national court or agreed
arbitral tribunal[15].


2.2. Investing in Uzbekistan

2.2.1. Investment legislation

As for any other country, foreign trade and investment could be the major driving force for
Uzbekistan, which would help to attain higher and more sustainable economic growth rates through
supporting economy modernization and its structural adjustment, creating employment, providing more
opportunities for domestic private sector, facilitating competition, transferring skills, knowledge
and technology, etc[16]. It is obvious that there is a great need to promote foreign trade and at
the same time attract foreign investments. After the collapse of the Soviet Union, the government
of the independent Republic of Uzbekistan did realize the chance and carefully began opening the
door for market economy and working on improving business climate to become favorable for domestic
and foreign investors[17].

The first piece of Uzbek investment legislation appeared in 1994 when “the Law on Foreign
Investments and Guarantees of Foreign Investors Activity” (hereafter 1994 FIL) was passed. This
initial law was replaced four years later by the Laws On Foreign Investments and On Guarantees and
Measures for the Protection of Rights of Foreign Investors which was adopted on 30 April 1998 and
which currently provide the legal framework for international investment in Uzbekistan[18]. These
laws specify the means of foreign investors’ participation[19], the conditions governing
repatriation of profits and earnings as well as the general rights to and guarantees of foreign
investors. These laws distinguish between “enterprises with foreign participation” and “enterprises
with foreign investment which qualify to receive certain benefits. It is stated therein that in
order to create “an enterprise with foreign investment”, the charter capital of the entity must be
at least USD 150,000, at least one participant must be a foreign legal entity and foreign investor
owns at least 30 % of the total charter capital. All other enterprises with foreign investments
which do not meet these criteria are considered to be “enterprises with foreign participation”. In
addition to national legislation applicable to foreign investments, Uzbekistan has also signed a
number of bilateral investment treaties on reciprocal promotion and protection of investment
(BITs)[20] which complement the national legislation aimed at protection and promotion of foreign
investments. The content of these treaties is traditional. They contain the scope of definition of
covered investment, admission and establishment, treatment of foreign investment (national
treatment, most-favored-nation treatment, fair and equitable treatment, non-discrimination),
compensation of damages to the investor in emergency events, prohibition of expropriation of the
investment except for extraordinary cases, guarantee of transfer of funds, and dispute settlement
mechanism, both state-state and investor-state arbitration[21]. The body of Uzbek investment law
therefore consists of both national and international legal norms.


2.2.2. Current Issues of Uzbek Investment Legislation

The biggest problem foreign investors faced in Uzbekistan during the early 1990s, was the legal
uncertainty caused by high frequency of investment legislation’s changes[22]. The first piece of
investment legislation which was purported to change this situation was the above mentioned “Law on
Foreign Investments and Guarantees of Foreign Investors Activity” passed in 1994(1994 FIL).  The
1994 FIL introduced so called “grandfather clause” which gave the foreign investor the opportunity
to opt out of any piece of legislation passed after the registration of its company in Uzbekistan
which “impairs the conditions of investing.”[23] The 1994 FIL guaranteed foreign investors
protection from such changes for “a period of no more than ten years”. The new investment law
passed in 1998[24] (hereafter 1998 FIL) fixed the period of protection from these legislative
changes at full ten years[25]. Despite these great sounding provisions, the real situation was
somewhat different. The foreign investors were in reality not able to take advantage of this
provision because the negative effect of any subsequent legislation was determined by the Uzbek
authorities themselves[26].

According to the 1998 FIL the foreign investor has the right to freely transfer his hard currency
income to and from Uzbekistan. The 1998 FIL then, however, adds that such right exists “pursuant to
the legislation of the Republic of Uzbekistan” and therefore introduces an additional condition
which is to be determined by following Uzbek legislation. This is in contrast with the right
guaranteed by Uzbek investment laws to freely (and “without restriction whatsoever”) to repatriate
profits of foreign investors from Uzbekistan. The above mentioned provision thus grants (again[27])
the Uzbek authorities a great amount of discretion to restrict the freedom of profit repatriation
basically at any time.  International investors has to realize and be aware of the fact that
immediate transfer of hard currency capital is not going to be possible due to pertaining problem
with hard currency conversion and that the  conversion and transfer of hard currency profit out of
the country is in reality not as simple and can last for several months[28] or even longer[29]. As
can be implied from this fact and as was already mentioned above the conversion and following
repatriation of profit can be very burdensome[30].


Conclusion

As can be implied from all of the above, the investment climate of Uzbekistan is far from being
perfect. In spite of the current reality the government realizes its need to attract more foreign
investors in order to start up the economy towards greater growth. At the same time Uzbekistan has
quite a lot to offer to foreign investors as well. As was written already in the first part of this
paper, the Republic of Uzbekistan is strategically located between Europe and Asia and has access
to market of more than 142 million people. Uzbekistan has quite rich reserves of natural resources
and also quite cheap but educated (and young[31]) labor force. All of these facts should make the
country enough attractive for foreign investors. However, international investors are still coming
very slowly especially due to the belief that investing in this country is still too dangerous. The
first step the country has undertaken in order to change this perspective was to begin creating its
national investment legislation and also concluding bilateral investment treaties[32]. The
persisting problem, however, still lies in the frequency of legislative changes and the possibility
of administrative interference in foreign investor’s business. Any potential investor thus has to
realize that establishing in Uzbekistan will not be easy and has to be ready to face the above
mentioned problems with patience. However, if the investor will be able to do that, the reward for
his patience may be very good.



Literatura:

[1] Baker & McKenzie – CIS, Limited; Doing Business in Uzbekistan. January 2007


[2]  Dowling, M., Wignaraja, G., Central Asia After Fifteen Years of Transition: Growth, Regional
Cooperation, and Policy Choices. Office of Regional Economic Integration, Asian Development Bank,
2006.


[3] Newman, A., Investing in Uzbekistan: A Rough Ride on the Silk Road. 30 Law & Pol’y Int’l Bus.
1998-1999


[4] PriceWaterhouseCoopers; Business and Investment Guide Uzbekistan, 2007


[5] Sornarajah, Sornarajah, M.,  The International Law on Foreign Investment: 2nd ed., Cambridge
University Press, 2004


[5] United Nations Development Programme, Capacity Building and Strengthening Foreign Trade and
Investment Promotion Institutions in Uzbekistan.


[6] United Nations Development Programme, Uzbekistan; In Focus: Prospects for establishment of
“one-stop-shop” for foreign investors and enhancement of investment dispute resolution system.
30/4/2008, http://www.undp.uz/en/news


[7] United Nations Development Programme, Investment Guide to Uzbekistan, 2007



KontaktnĂ­ Ășdaje na autora – email:

romankalis@seznam.cz
________________________________

[1] Dowling, M., Wignaraja, G., Central Asia After Fifteen Years of Transition: Growth, Regional
Cooperation, and Policy Choices. Office of Regional Economic Integration, Asian Development Bank,
2006.

[2] Which is approximately half of the whole population of Central Asia. www.mzv.cz

[3] GDP of Uzbekistan is currently approximately 12 billion USD (12 billion in 2004, 12.9 billion
in 2005, and approximately 11 billion in 2006)

[4] Kazakhstan, Tajikistan, Kyrgyzstan, Turkmenistan.

[5] UzbekistĂĄn has been the Gross roads of the most important trade route in history, the Great
Silk Road. UNDP, Investment Guide to Uzbekistan, 2007

[6] Baker & McKenzie – CIS, Limited; Doing Business in Uzbekistan. January 2007

[7] Even though the armed struggle for independente continued until the early 1920s.
PriceWaterhouseCoopers; Business and Investment Guide Uzbekistan 2007

[8] PriceWaterhouseCoopers; Business and Investment Guide Uzbekistan 2007

[9] Uzbekistan is a presidential republic with bicameral legislature. The country is a member of
the Commonwealth of Independent States (CIS), the United Nations, the International Monetary Fund,
the World Bank, the European Bank for Reconstruction and Development, the Organization for Security
and Cooperation in Europe, the Asian Development Bank, the Organization of the Islamic Conference,
and several other international organizations. Baker & McKenzie – CIS, Limited; Doing Business in
Uzbekistan. January 2007

[10] „Upon its declaration of independence in September 1991, the Republic of Uzbekistan appeared
poised to take the lead among its Central Asian neighbors in attracting foreign investment”.
Newman, A., Investing in Uzbekistan: A Rough Ride on the Silk Road. 30 Law & Pol’y Int’l Bus.
1998-1999

[11] “Less than a decade after independence, Uzbekistan has fallen far short of investors’ initial
expectations. In comparison with other Central Asian nations – particularly Kazakhstan – Uzbekistan
has failed to lure, and, more revealingly, to retain foreign investment”. Newman, A., Investing in
Uzbekistan: A Rough Ride on the Silk Road. 30 Law & Pol’y Int’l Bus. 1998-1999

[12] „For transitional economies foreign direct investments (FDI) has a special significance as it
can accelerate the modernization of their economies not only through capital inflows but also
through the transfer of technology and business and management skills“. UNDP, Investment Guide to
Uzbekistan, 2007

[13] So called „Bilateral treaties on reciprocal promotion and protection of foreign investments“.

[14] International Convention on Settlement of Investment Disputes between States and Nationals of
Other States (the Washington Treaty), The Soul Treaty on Multilateral Investment Guarantees Agency,
Energy Charter Treaty.

[15] As was for instance the case in C.M.E. v the Czech Republic (2002)  in which the Czech
Republic was found in breach of investment treaty treatment standards and had to pay compensation
of about USD 300 milion.

[16]UNDP; Capacity Building and Strenghtening Foreign Trade in Investment Promotion Institutions in
Uzbekistan

[17] „After declaring independence the Government adopted a gradual approach to its transition to
market economy. UNDP, Investment Guide to Uzbekistan, 2007

[18] The main legislative acts concerning the rights and responsibilities of foreign investors
consist of:

·         Law of the Republic of Uzbekistan „On foreign investments“ No. 609-I, 30. 04. 1998

·         Law of the Republic of Uzbekistan „On investment activities“ No. 719-I, 24. 12. 1998

·         Law of the Republic of Uzbekistan „On guarantees and means of protection of foreign
investors‘ righs No. 611-I, 30. 04. 1998

·         Law of the Republic of Uzbekistan „On protection of investors‘ rights in equity market“
No. 262-II, 30. 08. 2001

[19] Such are acquiring share in an existing company by participating in auction or tenders
organised under the privatisation program, acquiring share in an existing company by direct
negotiation with the owners of the shares (or by purchasing shares on the stock market), forming a
joint venture with an Uzbek enterprise or individual, establishing a new, wholly owned comany etc.
PriceWaterhouseCoopers; Business and Investment Guide Uzbekistan 2007

[20] By 1 January 2007, Uzbekistan has signed BITs with 48 States (including a BIT with the Czech
Republic). UNDP, Investment Guide to Uzbekistan, 2007

[21] As far as dispute settlement mechanisms are concerned, i is important to note that Uzbekistan
is a member of the International Center for the Settlement of Investment Disputes, as well as a
signatory party to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. UNDP, Investment Guide to Uzbekistan, 2007

[22] „A primary complaint of foreign investors was the legal uncertainty caused by the remarkable
frequency with which the Uzbek government adopted new laws and repeals old ones.”  Newman, A.,
Investing in Uzbekistan: A Rough Ride on the Silk Road. 30 Law & Pol’y Int’l Bus. 1998-1999

[23] Article 11 of 1994 Foreign Investment Law

[24] „The Laws on Foreign Investment and On Guarantees and Measures for the Protection of Rights of
Foreign Investors”, adopted on 30 April 1998.

[25] Article 3 of 1998 FIL

[26] As can be implied from this fact, there has been a great scope of discretion on part of the
authorities and their objectivity was unfortunately doubtful (comment of the author).

[27] See footnote 26

[28] According to information received from a country manager of an international company based in
Tashkent, the conversion lasts six months.

[29] Information provided by the Ministry of Foreign Affairs of the Czech Republic. www.mzv.cr

[30] The Uzbek investment laws often employ disingenuous tactic of granting a right, then
qualifying that right in such a way as to eviscerate it. Newman, A., Investing in Uzbekistan: A
Rough Ride on the Silk Road. 30 Law & Pol’y Int’l Bus. 1998-1999

[31] “The labor force of Uzbekistan possesses a number of important characteristics; it is ample,
literate, young and highly trainable according to the international requirements of the global
office”. UNDP, Investment Guide to Uzbekistan, 2007

[32] As of in January 2007, Uzbekistan has signed bilateral investment treaties on reciprocal
protection and promotion of foreign investments with 48 countries. UNDP, Investment Guide to
Uzbekistan, 2007