Mirziyoyev built it and investors came in droves, but did the yield justify investing despite the accompanying risk? 

In the early dawn of its post-Soviet independence, Uzbekistan’s strongman president Islam Karimov set the country on on an isolationist course, which persisted through the 1990s, 2000s and for much of the current decade.* In September 2016, Karimov suddenly passed away, opening a path for his long time prime minister Shavkat Mirziyoyev to assume the reins of power. In his two and a half years in the top job, President Mirziyoyev has pushed through wide-ranging economic and political reforms, including opening the country for tourism, ending cotton slavery, and re-establishing ties with neighboring countries. Two weeks ago, the country took another leap forward by entering global capital markets, with the sale of its 5 and 10 year Eurobonds.

The sale, which took place on February 13th, raised $1B in dollar-denominated debt, split between 5 and 10 year bonds. 5 year notes sold at a 4.75% coupon, while 10 year notes were auctioned at 5.375%. Uzbekistan was rated as a BB- credit by both S&P and Fitch in late 2018.

The debt offering is the latest sign of the government’s strategy to liberalize the Uzbek economy and re-engage with the global economic community. Uzbekistan intends to follow up its international market debut with a flurry of corporate issuances and more sovereign debt sales. Despite ample investor appetite for Uzbek sovereign debt, Uzbekistan’s short-term dollar-denominated bonds are unnecessarily risky for any prudent investor in the post-Soviet region.

Country Background

Uzbekistan is the largest country in Central Asia and the fourth largest in the former Eastern bloc, behind only Russia, Poland, and Ukraine. Unlike those three, however, Uzbekistan’s population is skyrocketing, projected to grow by 23% over the next 30 years, which will see the country’s population vault past the 40 million mark.**

Uzbekistan’s economy revolves around gold, agriculture, and cotton, and to a lesser extent other raw materials such as copper, lead, tungsten, uranium, and zinc. Prior to 2017, the country’s economic data was regarded as highly unreliable, with facts and figures often heavily inflated at the request of the Uzbek government. GDP growth was regularly reported to have been around 7-8% annually for over two decades. Actual economic growth under the new Mirziyoyev government has been steady around 5%, and is likely to stay within 50 basis points of that for the next half decade, according to the World Bank.

Gold accounts for 44% of Uzbekistan’s total export revenues. The country is home to the world’s largest open pit gold mine, Muruntau, from which over 56 tons of gold is extracted annually. Cotton is the economy’s other bedrock: Uzbekistan is the world’s fifth largest exporter of cotton and the world’s eighth largest producer. Meanwhile, agriculture accounts for a fifth of Uzbekistan’s (admittedly mediocre) $50B GDP and employs over a quarter of the labor force.

Internationally, Uzbekistan is well-positioned. It is the only country in Central Asia to border each of the other ‘stans. Much of the vital road and rail infrastructure of Kyrgyzstan and Tajikistan passes through its territory—leverage Uzbekistan has often used in its local disputes. Furthermore, Uzbekistan is often regarded as the region’s second most powerful country. Only oil and uranium rich Kazakhstan is more influential, though Uzbekistan has the region’s largest military. Unlike its northern neighbor, Uzbekistan is also shielded from China and Russia by smaller states, and is thus less vulnerable to power projection.

Plans are underway to create a rail between Uzbekistan and Iran through Western Afghanistan, which would allow Uzbekistan to access Iran’s ports on the Persian Gulf. Another source of economic optimism is China’s Belt and Road Initiative. The project will link Uzbekistan and other Central Asian countries together as part of a trading corridor that will stretch from China to Europe.

Uzbekistan’s main security threat stems from its 85 mile border with Afghanistan. To minimize the spillover of drugs, arms, and extremism, Uzbekistan has heavily militarized the banks of the Amu Darya river that separates the two countries. Thus far, security has been maintained, and with the situation in Afghanistan heading toward possible stabilization, Uzbekistan’s geographic position is looking increasingly positive.

Current Government

Mirziyoyev’s 30 months in office have seen major reforms that have profoundly changed the nature of Uzbekistan’s economy and cosmetically liberalized its society. Social reforms have included legalizing the Muslim call to prayer, releasing thousands of political prisoners, and permitting bars and nightclubs to extend their late night hours.

Interior of Samarkand Mosque (Photo from gotouz.com)

But these changes do not uproot the foundations set by the Karimov regime—at their core, Tashkent’s policies are not socially liberal. For example, the use of the Islamic threat as a pretext to suppress opposition to the regime remains a vital part of domestic strategy. Though most of Uzbekistan’s Muslims are moderate, the government uses any instances of extremism as a pretext for political repression. Extremist groups certainly exist, but they are neither numerous nor united enough to stage a coup or replace the current government. The regime’s use of extremist Islam has become a self-fulfilling prophecy: outlawing and repressing certain religious groups has radicalized other members of society and inspired new recruitment. The bottom line is the government fears a color revolution in Uzbekistan, but an uprising seems far-fetched in the near future. However, it must be noted that Uzbekistan’s young demographics are favorable insofar as the government is able to provide opportunities for the younger generations. Without opportunity, the young members of its population may become a leading driver of political instability, similar to what happened in the Arab countries in 2011. For now, however, Uzbekistan’s power and laws are squarely in the hands of the ruling regime, while civil society and opposition parties have negligible power.

Mirziyoyev’s regime has accumulated little debt and some respectable savings in its short time in power. In 2018, Uzbekistan registered a fiscal surplus of 3.4%, driven by the increased financial autonomy of its municipal governments and improved tax transparency. Furthermore, in 2018 the government reported a 20.9% debt-to-GDP ratio, well above the ‘BB’ rating median of 47%. Low government debt will likely continue in the medium term, supported by Mirziyoyev’s fiscal conservatism and large revenue collections stemming from high domestic GDP growth.

Instead of following Deng Xiaoping’s route (widespread economic liberalization coupled with political repression) or Gorbachev’s route (rapid economic liberalization coupled with political liberalization), Mirziyoyev appears to have opted for a third route, implementing moderate political liberalization coupled with wide-reaching economic liberalization. Such a nascent state cannot afford bad press but it also cannot afford to have a legitimately democratic society.

Economic Development

In the 1990s, Uzbekistan rejected the prevailing liberal ‘Washington consensus,’ instead opting for a more state-led model of growth. The central government continued its control over large swathes of the economy through burdensome regulation of the private sector and the preponderance of state-owned enterprises. The model worked until the early 2000s, but by then cracks were beginning to show. It prevented the reallocation of labor and the restructuring of industry, which led to very low productivity. Mirziyoyev’s steps towards a more liberal economic model have added some dynamism to Uzbekistan’s economy, but it retains more in common with post-communist countries like Belarus than burgeoning emerging markets in South America or Asia.

Shavkat Mirziyoyev (Photo by sputniknews-uz)

After years of isolation from international markets, financial flows are beginning to make their way back into the country. In March 2017, for the first time in 14 years, the EBRD began to re-engage with Uzbekistan. By December 2017 it had re-opened an office in Tashkent and made its first loans to Uzbek entities since the early 2000s. The EBRD’s re-entry into Uzbekistan is not an isolated event. Under the country’s new leadership Tashkent has secured funding from the World Bank, International Finance Corporation, the Asian Development Bank, the Asian Infrastructure Investment Bank, and the Silk Road Fund.

Capital has flowed into Uzbekistan from East Asia and Europe in response to its reformist economic agenda. The most significant change came in early September 2017, when the government modernized Uzbekistan’s foreign exchange market and removed the som’s peg to the US dollar. That day, September 5, 2017, the som devalued by 48% to UZS8,100 per dollar from 4,210 per dollar. Since then, it has marginally appreciated, with the central bank intervening only in extremis to ease volatility. Shortly after, Tashkent lifted the country’s draconian capital controls. There has also been a relaxation of visa requirements and a renewed push for free trade agreements.

Recognizing the country’s positive economic trajectory, rating agencies have given Uzbekistan a BB-/B1 rating. In addition to its sovereign debt capital fundraising, Uzbekistan plans on taking in $4.2B in FDI this year. To ensure a positive environment for foreign investors, the Tashkent Stock Exchange (TSE) is creating a council of foreign investors to help govern the exchange. In addition, the TSE is altering its transaction rules; foreigners may now invest but still need central bank permission to buy shares of local Uzbek banks. This last stipulation is a major impediment that must be overcome: the TSE’s most actively traded stocks are Uzbek commercial banks that make up 75% of total turnover. Two banks, Turkiston PJSCB and Kapitalbank JSCB, account for 34% of trading volume on the exchange.

Reforms in the TSE, as well as Uzbekistan’s increasingly positive economic outlook have impelled 50 local companies to plan IPOs between now and the end of 2020. Increased activity in the TSE through trading volume and IPOs will drive FDI and economic growth, spurring an expected cycle of economic improvement over the medium term.

Financial Institutions

The Central Bank of Uzbekistan has been subject to a variety of Mirziyoyev reforms, in line with the government’s goal of improving foreign economic relations and providing greater transparency to domestic economic policy. In June 2017, Mamariso Nurmuratov was appointed Chairman of the Central Bank, replacing the late Faizullah Mullajanov, who served as the bank’s head since 1991. As noted above, three months into Nurmuratov’s tenure, the Central Bank reunified domestic exchange rates, which previously consisted of an official rate, a separate rate for securities exchange, and a ‘black market rate’. The implementation of a free floating market, along with the abolition of limits on foreign exchange trading, served to ease corruption and facilitate foreign import and export dynamics. Despite its rapid depreciation following domestic currency liberalization, the som has stabilized due to increased activity in foreign financial markets, and an improved domestic business environment.

In March 2018, the Central Bank announced an inflation-targeting economic policy framework. High inflation is currently one of the major challenges to Mirziyoyev’s currency reforms: inflation was reported at 17.9% in 2018 due to utility price adjustments, public sector wage increases, a weak som, and rapid domestic growth. However, analysts expect that number to drop gradually to 16.8% in 2019 and 14% in 2020.

Central Bank of Uzbekistan (Photo by norma.uz)

Nurmuratov’s Central Bank has proven itself both accommodating and transparent with regards to interest rate management. In September 2018, interest rates were raised from 14% to 16% to relieve inflationary pressures. The hike was the first since June 2017, when the domestic rate was raised 5% to curb speculative demand for credit resources and potential inflation shocks caused by the liberalization of the som.

It is worth noting that the Central Bank has limited influence over domestic monetary credit conditions; roughly 60% of credit in Uzbekistan is allocated at ‘preferential’ terms, while only 20% of som-based credit is subject to market-rate, or ‘commercial’ terms. As the central bank continues to transition towards inflation-targeting, Nurmuratov must address the high rate of credit segmentation in som-based lending. Furthermore, the central bank must provide improved tools for regulating and influencing monetary policy in the face of rising inflation. As of now, the Central Bank has indicated its willingness to regulate potential excessive liquidity and growth through altering the banking reserve ratio. However, it remains to be seen how much of an impact altering said ratio will have.

Despite high inflation, Uzbekistan has a robust external balance sheet that has been further strengthened since the stabilization of the som in 1H18. Foreign exchange reserves were reported at $27B at the end of 2018, while sovereign net foreign assets were reported at 46% of GDP (corresponding to ~15 months of current external payment). Uzbekistan’s external liquidity is unparalleled across similar emerging market countries. As a point of reference, the ‘BB’ median for sovereign net foreign assets is 0.7% of GDP, while the current external payment is 5 months. Uzbekistan’s current external liquidity ratio of 625% will continue to provide ample room for Nurmuratov to navigate domestic currency challenges.

Furthermore, Uzbekistan relies on its sovereign wealth fund – the Uzbekistan Fund for Reconstruction and Development (UFRD) – for funding procurement and government financing flexibility. The UFRD serves to relieve external and fiscal backing limitations through its extensive balance sheet: it reported $18B in AUM, with $11.5B in international reserves. The vast majority of housing developments, strategic infrastructure, and other large-scale industrialization projects were financed by the UFRD from its inception in 2006 until domestic currency liberalization in 2017. Since then, international private banks have gained a greater footprint in the country; deals totaling over $1B have since been completed by Deutsche Bank, Commerzbank, and the EBRD.

Initial Bond Offering

On February 14th 2018, Uzbekistan completed its first international debt offering, by selling $1B of dollar-denominated debt, issued across two tranches, both of which are detailed below:

The offering follows the international debut of Uzbekistan’s struggling neighbor Tajikistan in 2017 and an issuance by regional hegemon Kazakhstan in 2018. Despite a tough 2018 for emerging markets amid a rising dollar, increased global borrowing costs, and contagion fears, both issuances have seen continuous demand. Tajik bonds, for example, have returned 0.3% since their debut a year and a half ago, compared with an average loss of 0.4% for emerging market bonds across the same timeframe. Investor appetite for Uzbek debt is described as ‘feverish’ — the initial bond offering was oversubscribed by 8 times at one point — and somewhat reminiscent of Tajikistan’s oversubscribed debut bond sale.

Unlike Tajikistan’s B-, ‘highly speculative’ credit rating (S&P), Uzbekistan received a long-term credit rating of BB- by both S&P and Fitch in mid-December 2018, and a B1 rating by Moody’s in early February 2019. Credit agencies highlighted the country’s high levels of liquid assets, elevated economic growth and low public debt. However, the junk-rating was buoyed by Uzbekistan’s high dependence on commodities, high levels of inflation, weak institutions, and low GDP per capita. In fact, Uzbekistan’s $1,200 GDP per capita is the lowest among all BB- or better-rated sovereigns.

Uzbekistan has indicated that it will use the proceeds of its first Eurobond to finance infrastructure projects while spurring new job creation. However, the country’s international bond debut is more important than the amount of capital raised in itself; Mirziyoyev is seeking to challenge his country’s historic aversion to foreign debt, as involving international investors will not only spur domestic economic growth but also likely improve corporate governance, as well as providing greater institutional transparency and accountability. Furthermore, Uzbek Finance Minister Jamshid Kuchkarov has stated that the February 14th issuance will likely be followed up with more regular sovereign debt offerings, while several banks (Joint Stock Commercial Bank Asaka, SCM Ipoteka Bank and National Bank of Uzbekistan) have shown interest in a potential 2019/2020 international debt issuance.


Domestic corruption presents a major risk for sovereign bond holders. Although small improvements have been made, corruption remains widespread. Transparency International gives Uzbekistan a miserly 23 out of 100 rating, making it the 22nd most corrupt country in the world. Corruption on such a scale could lead to inefficient capital allocation, laundering of the proceeds and delays in completing infrastructure projects—all of which would greatly hamper Tashkent’s ability to pay down their debt.

Uzbekistan has also been blessed with an abundance of oil, gas, gold, and cotton. Such a wealth of commodities risks lead to an affliction of the infamous resource curse. The resource curse is a common phenomenon whereby countries endowed with large natural resource reserves never escape mediocre economic output, either because resources are stolen or because the economy never diversifies. Because of its over-reliance on natural resources, the opportunity cost of economic modernization in Uzbekistan may prove too great.

Until September of 2018, Uzbekistan was on a US State Department blacklist for using child labor. Cotton constitutes a major segment of the economy and defines the lives of many Uzbeks. In fact, the largest mobilization of seasonal labor happens in Uzbekistan, when 2.63 million people are forced to work in the cotton fields to fill state quotas. Child labor is easing, but exploitation is not. If the situation ever worsens, foreign capital may flow out of the country as Western actors reject such retrograde labor policies.

Uzbekistan’s reform pipeline drove the bond’s swollen demand. But 30 months of reform is hardly a long-term track record, especially given that from 1991 until 2016 Uzbekistan made only piecemeal attempts at reform. Furthermore Tashkent already has implemented some questionable reforms, including a recently repealed bill that gave tax collectors unfettered access to private bank accounts to withdraw taxes. Its reversal was an encouraging sign, but its original implementation demonstrates that illiberal attitudes and bureaucratic inefficiency are habits that die hard in the new Uzbekistan. It also points to the fact that Uzbekistan likely has some issues in collecting taxes—a key factor in raising revenues to pay back its debts.

Russian-Uzbek oligarch Alisher Usmanov is an influential player in Uzbekistan. He is loosely related to Mirziyoyev and has taken a keen interest in the country since Mirziyoyev rose to power. Currently, Usmanov has control over Uzbekistan’s largest copper mine as well as its most prominent soccer team. He has recently increased his foothold in the country by buying a new metallurgical factory just outside the capital Tashkent. The risk he brings is indirect, but if the US targets Usmanov with sanctions it could affect Uzbekistan’s credit standing and negatively impact its ability to pay down debt and access future debt capital.

Alisher Uzmanov (Photo by openmedia.ru)

Amid the current global environment characterized by rising lending costs, a stronger dollar, and weaker growth in China, it is worth referencing the performance of similar BB- credits in the macroeconomic environment of 2015 – a bear case scenario which does contain several similarities to current macro conditions. During 2015, however, EM sovereign debt underperformance was mostly a tale of local currency debt (JPMorgan GBI EM Global Diversified reported a total return of -15.3% while JPMorgan EMBI Global Diversified netted 1.1%), due to USD appreciation.

If the US dollar appreciates, commodity-dependent Uzbekistan will face reduced demand for its exports followed by a slowdown in GDP growth. Currently, the country’s strong domestic demand and high reliance on imports has led to a current account deficit of 2.7% of GDP in 2018 – a deficit that will certainly widen in the face of a more expensive dollar and less exports. However, Uzbekistan is somewhat insulated from global ebbs and flows due its diversified export base. Furthermore, the central bank’s ample liquidity and foreign bank reserves will provide an additional external buffer against a depreciating som.


Despite an overwhelming appetite for Uzbek debt, the prudent investor will exercise caution. Although there is an increasingly optimistic domestic picture marked by widespread social and economic reforms, it is worth noting the recency of these efforts. The long isolated post-Soviet state is only just entering global capital markets, and still suffers from crippling levels of corruption and widespread poverty. Strong foreign currency reserves and very low government debt provide stability, but Mirziyoyev’s regime still has much to prove.

A mere 4.75% 5 year coupon and 5.375% 10 year coupon do not capture the potential upside needed to account for the risk inherent to this country. As a reference, the 5y offering yields a mere 225 bps premium over the equivalent US 5y TBill, and 121 bps more than BB- rated credit Brazil (USD – April 2024). As such, we defer to the much greater upside in recently reformed equity markets for potential investments in the region, which we will explore in more depth next week.


*Karimov had a brutal reputation even in the region and was known for having political opponents boiled alive.

**Only 39 countries in the world have over 40 million people. Uzbekistan currently is ranked 44th globally by population