MONTREAL - South Korea has continued its
strong economic penetration of the post-Soviet
Central Asian republics with the signature this
past weekend of an agreement for the construction
of a gas and chemical complex in the Surgil field
of Uzbekistan, in the country's Ustyurt region,
where 130 billion cubic meters of natural gas are
estimated to lie.
This will be the largest
project yet in Uzbekistan's petrochemical sector,
as the joint-venture firm Uz-KorGasChemical has
signed to raise loans of over US$2.5 billion.
Nearly half of the cash for the Surgil
project in Uzbekistan will come from the Asian
Development Bank, China's State Development Bank,
Korea's Eximbank and two Uzbekistan financial
entities. The remainder, in a loan with a term of
16 years, will come from European and Asian
commercial banks, reportedly
including but not
limited to Bayern LB, Credit Suisse, ING Bank and
Siemens Bank.
The deal is a knock-on to
the agreements signed last August by South Korea
President Lee Myung-bak during an economic
diplomacy tour of the region that included visits
to Mongolia and Kazakhstan. In the latter country
alone he signed two agreements each as much as the
$4.2 billion total of deals sealed in Uzbekistan.
In Kazakhstan, South Korea will build two
power plants in Balkhash and a petrochemical
complex in Atyrau, each project worth $4 billion.
South Korea is set to become the number one
foreign investor in Kazakhstan’s industrial plant
and is already Mongolia’s fourth-largest trading
partner, concentrating in the energy and raw
materials sector, including uranium and rare
earths, as well as different parts of the
electricity complex.
The Uzbek
petrochemical deal with South Korea comes less
than two weeks after Uzbekistan's State Statistics
Committee announced a continuing decline in
foreign direct investment (FDI) in the country.
FDI decreased more than 50% during the first
quarter of 2012 to $216 million, from $481 million
during the equivalent period in 2011. Equally
alarming is that it for the whole of 2011, FDI was
down 22% on the previous year.
The Uzbek
currency, the som, became officially convertible
only in 2003, and the financial system is still by
and large unsuited to facilitate foreign
investment in projects that are not headlined by
the economic system. Repatriation of profits
remains a problem, exacerbated by corruption and
administrative arbitrariness.
The British
mining firm Oxus Gold recently quit the country,
and even Turkish entrepreneurs, who have
successfully created a small- and medium-sized
enterprise niche in Turkmenistan, have begun to
stay away from Uzbekistan. It is likely that the
som will continue to depreciate, as the central
bank seems intent on boosting competitiveness and
exports.
Partly in response to these
trends, the government is reported to be seeking
to privatize 500 state firms so as to draw more
FDI into the domestic economy and raise the
technological level in the agricultural,
electronics, energy, gas, metals, oil and
pharmaceutical sectors.
It has tried to
sell such firms to foreign investors in the past,
notably through privatization programs launched
respectively in 1998 and in 2005. Those attempts
were not very successful for the same reasons as
those just mentioned, despite limited reforms
announced to provide incentives for wary foreign
investors. While the domestic economy has
continued to grow according to macroeconomic
indicators, it risks collapsing from the inside if
it cannot draw sufficient FDI.
A United
Nations economic and social survey of the
Asia-Pacific region projects the country's
economic growth at 8% for 2012, down from 8.3% in
2011 and 8.5% the year before. The International
Monetary Fund has attributed this rather laudable
macroeconomic performance to past fiscal
surpluses, high reserves, low public debt, a
stable banking system (despite the need for
"deeper financial sector intermediation"), and
"prudence" in international borrowing.
However, Uzbekistan's economic performance
remains highly dependent on international
commodity demand and prices, particularly for its
principal exports cotton, gas, and gold. The IMF
estimates that 50% of the country's foreign trade
in 2010 was in such commodities. High commodity
prices as well as strong manufacturing exports,
especially automotive products, increased export
revenues in 2011 to create an estimated current
account surplus of 7.4% of gross domestic product.
The United Nations-compiled survey
projects that consumer price inflation will
continue to rise from the 13.5% rate in 2011,
itself up from 9.4% in 2010, as the withdrawal of
subsidies on electricity propel prices, along with
increases in public-sector wages designed to
compensate for price increases. The government
continues to apply price controls on food.
The difficulty of interbank transfers and
other aspects of the national financial system
still requiring reform have incited the creation
of a significant black market, where prices are
naturally higher than those officially set by
central decree.
Dr Robert M
Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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