The Times of Central Asia - update of May 6, 2010

In this issue:

4. Uzbekistan implementing cashless system

1. Point of View: Will Kyrgyzstan learn its lesson? (Kyrgyzstan, May 6, 2010-issue 615) By Giorgio Fiacconi TCA publisher

BISHKEK (TCA) — Forty days after the tragic events of 7th of April which has tragically marked the history of Kyrgyzstan, another demonstration has been announced for May 17th. It is not clear if it will be a demonstration of mourning or protest, probably both. We can only hope that the same will not degenerate into more unrest with the consequences that everybody could witness on March 24, 2005 and April 7, 2010, where looting and damages together with bloodshed has left so many to desire the order of the former Soviet Union.

This time the provisional government should be prepared and able to control a demonstration that, by all means, must be peaceful and orderly. People should be able to air their expectations and demands in a civilized way. But while expectations are many, resources remain limited and satisfaction of these demands will not be easy and will take time. Job creation and improvement of the quality of life mainly in rural areas and villages remain one of the main priorities and this requires security and a completely new investment climate with a totally different fiscal policy from what has been implemented these last twenty years. But the demonstration may also be the stretch of muscle in support of one leader or another in view of the forthcoming election. The sooner the election takes place, the better. The return to legitimacy with a proper elected Parliament and a new constitution is a must if this provisional government is to function with a proper legal mandate. There will be a nationwide vote to elect a new President, with apparently a single candidate in the person of the present head of the Provisional Government, Roza Otunbayeva. This would be a first step, and if the role of the President will be that of the guardian of the Constitution, there is no better person than Roza Otunbayeva, a lady with character and a clean diplomatic past, certainly well accepted by the international community. But the Parliament should also express a new government and a Prime Minister. Whether the proposed new Constitution will allow the Prime Minister to choose his own ministers is not clear, but the composition of the Parliament is of maximum importance if control is to be exercised in an effective way. In the previous Parliament, former President Bakiyev’s Ak Jol party dominated the assembly, creating more of a Presidential Parliament than an independent legislative organ. This must change and presuming that Ak Jol will be disbanded, other parties will all be back in the arena. This brings us back to the electoral code that, together with the constitution, should be completely revised to allow an honest, transparent and democratic election. From the other side, the electoral code should place some sort of restriction to avoid the proliferation of parties and the transformation of the election into a battlefield where one-man parties may create confusion, disorientation and simply a waste of resources. Some threshold of the previous electoral code, aimed at restricting democratic participation by citizens in the political life of the country, including representatives of civil society, should be clearly abolished. We are talking about the requirement of the parties to have a minimum of 0.5 percent of votes in each oblast, with such percentage calculated on the national electoral roll and not on the population of each oblast. This was practically a fixed figure of 13,500 votes to be won in each oblast, in addition to the 5 percent threshold that each party must achieve nation wide. An unfair electoral code will not only exclude members of civil society and several ethnic groups, but will generate tensions between different political leaders. In Kyrgyzstan, there are about 100 registered political parties. For a country of about 5 million people, this is clearly a degeneration of the party system. In the election of 2007, about 50 parties expressed interest in participating in the election, but only 22 were able to submit the necessary documentation. Finally, only 12 were accepted and 3 gained seats in Parliament. What is going to happen in the new election? We expect a new electoral code, a new Constitution, and a new approach, but in Kyrgyzstan, political parties are still known by the personality of their leaders, more than for their policies. The election generally serves to indicate who is more popular, and of course, to mark fierce competition. Unless some party will emerge as a leading force, we can expect the new Parliament to see the participation of several parties and a coalition Government to be the natural expression. This may not mean a united front but a sort of temporary solution since individual personalities will prevail sooner or later. Kyrgyzstan is a society based on clans and this often means business, while clans and whoever represents them will do their best to safeguard those interests. This may provoke tensions, not much between North and South, but more between political leaders and their parties (such as Ata Meken with former speaker Tekebayev, Ak Shumkar with the present acting Finance Minister Sariev, the Social Democratic Party with former Prime Minister Atambayev, among others). The Bakiyev regime curtailed a lot of party activity and now all parties are recovering their strength and will want to participate in the election. Some of them may also absorb members of Ak Jol or people that were in power during the Akayev days. Whatever the case, competition will be fierce and in one way, this will help the plurality of the system. In another way, we run the risk of becoming excessively fragmented. At this stage it is important to see a fair election code and an advanced Constitution that will lead the way to a democratic system where all ethnic groups, north and south, have their place, culture, religion and interest represented. Kyrgyzstan now has the chance of becoming again the most democratic country in Central Asia, leading the way toward poverty reduction and business freedom in respect of the law. The ethnic conflict of 1990, the tragic Aksy event of 2002, the Tulip revolution of 2005 and the tragic events of April 7th should all provide the country unforgettable lessons from which everybody should learn and understand that, in a modern world, you do not solve problems that are mainly of an economic nature with the use of force, killing, looting and property seizure.

2. ADB holds its first annual meeting in Central Asia (Central Asia, May 6, 2010-issue 615)

TASHKENT (TCA) – With more than 2,500 participants, the first Annual Meeting of Asian Development Bank (ADB) in Central Asia opened in Tashkent, Uzbekistan on May 1.

On May 1st, ADB President Haruhiko Kuroda conducted a press conference focusing immediate attention of those present upon the exceptional results expected of Asian economies in 2010. GDP is expected to achieve 7.5 percent growth over 2009, when the GDP increase only of 5.2 percent. Although still significant, Kuroda said that is poor performance from Asian economies. In comparison with European and United States results, where GDP is expected to grow by 1 or 2 percent, this is an incredible result. Of course, a complete recovery represents a great challenge but there is no doubt that Asia is leading the way to a sustainable recovery that will favorably affect not only the Asian region but the global economy as well. One clear message and an appeal to Asia leaders is the need “to work together to expand cooperation and deepen economic integration”. The global crisis has certainly provided a great deal of lessons and should be looked at as a way to avoid or mitigate future crises. ADB doubles loan portfolio for Uzbekistan With a consolidated portfolio of $1.2 billion, Uzbekistan is one of the main beneficiaries of ADB loans in Central Asia. On the occasion of the Annual Meeting held in Tashkent on May 1-4, ADB President Kuroda doubled that portfolio with the signing of several new loan agreements. The new loans are directed at boosting the energy efficiency of Uzbekistan’s electricity sector with the construction of a new combined-cycle gas turbine. Money will also be provided to improve roads, water, and micro-credit opportunities. One loan of $350 million will help finance the Talimarjan Clean Power project which will be the first 800-megawatt combined-cycle gas turbine in the region. The total cost of the plant is expected to be $1.28 billion with the Japan International Cooperation Agency (JICA) co-financing ($300 million) and the balance to come from Uzbek sources. Other loans involve the reconstruction of over 220 kilometers of road within the CAREC Project Corridor Number 2, which will allow the connection of Uzbekistan to Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan. The Asian Development Bank kicked off its Board of Governors annual meeting in Tashkent on Monday, highlighting post-crisis development for the Asia Pacific region. Addressing the opening session, Uzbek President Islam Karimov warned that a "complex, painful and lasting" process of the economic recovery is lying ahead despite the consensus that the acute phase of the global financial crisis and the economic downturn has passed. Anti-crisis measures such as long-term innovative projects of modernization, technical and technological re-equipment, which aim at deep structural changes and diversification of production, will definitely benefit countries in the post-crisis period, Karimov said. ADB President Haruhiko Kuroda told the Board of Governors that difficulties remain although the situation has improved. "One year ago, we met in crisis. Today, we meet in hope. As the world begins to emerge from recession, it is clear that Asia is leading the global recovery," said Kuroda. "Despite a robust recovery, challenges remain, with some of the region’s smaller and poorer economies still struggling." In order to improve long-term prospects, Kuroda said, Asia "should see itself as not only a producer and exporter of its goods and services, but also a consumer," while pursuing a more socially inclusive growth by increasing investments in health, education and skills training, social safety nets, and infrastructure. It is also important for Asia Pacific countries to further intensify regional cooperation, he added. "Asia is ready to take the next step to weave the strands of subregional efforts into a garland encompassing the region as a whole." ADB launches $9 billion solar energy initiative The ADB on Monday launched an ambitious project it hopes will attract $6.75 billion of private investment into solar energy projects in the region over the next three years. The ADB said it would provide an additional $2.25 billion to support a project to generate 3,000 megawatts of solar power by 2012. Though small in scale, the initiative will mark an important step toward meeting a larger portion of Asia’s growing energy demand with clean energy, ADB officials said. The bank did not specify target regions, but said Central Asia’s growing electricity demand, as well as its abundant desert and commitments to offset high carbon emissions, made the area a strong candidate for investment. “With energy demand projected to almost double in the Asia and Pacific region by 2030, there is an urgent need for innovative ways to generate power while at the same time reducing greenhouse gas emissions,” ADB managing director general Rajat Nag said in a statement. “Sustainable solar energy can be the clean power of the future if there are appropriate incentive and financing mechanisms in place,” he said. The ADB said it would set up a separate $500 million fund to help kickstart the Asia Solar Energy Initiative by covering some of the high start-up costs. ADB President Haruhiko Kuroda told reporters the initiative would be a “major platform for sharing information on solar technologies, projects, products and issues, and facilitate the transfer of financial resources to developing countries to reduce technology costs”. The ADB last year provided nearly $1.3 billion for projects with clean energy components. From 2013, its target investment in the sector will increase to $2 billion a year. Uzbek leader blasts neighbors in water row Uzbek President Islam Karimov on Monday blasted his neighbors over their water-management policies, amid a growing dispute over the fate of a massive Tajik hydro-electric dam project. Karimov, addressing the opening of the ADB board of governors meeting, slammed his neighbors for what he said was a lack of foresight about the environmental impact of their policies. “In Uzbek we say ‘where there is no water there is no life’. That’s why, indeed, we treat this problem seriously,” Karimov said. “Unfortunately, some of our neighbors do not treat this issue like-mindedly, especially the countries on the upstream of the rivers. They do not think about what kind of consequences it may lead to,” he added. Tajikistan, the poorest of the former Soviet republics of Central Asia, has pledged to move ahead unilaterally in the construction of a project it hopes will allow it to become a net exporter of electricity. The Rogun dam, which was first conceived as a gigantic Soviet hydro-electric power project, stalled as Tajikistan plunged into civil war in the early 1990s after the breakup of the Soviet Union. But Tashkent fears the dam will damage its vital cotton industry, which depends on water which flows in from Tajikistan and Kyrgyzstan, and negatively impact millions of Uzbeks living downstream. Uzbekistan, which has cut natural gas exports to Tajikistan during their frequent diplomatic spats, held up railway deliveries to Dushanbe earlier this year, leading to a further deterioration in relations between the neighbors. Tashkent has denied that the hold-up was intentional, blaming technical problems. (Compiled from agency reports)

3. LETTER FROM THE STEPPE

Miners: Central Asia’s fearless revolution-busters (Central Asia, May 6, 2010-issue 615) By Charles van der Leeuw special for TCA

ALMATY – Between 1860 and 1960, American companies would show little hesitation in staging coups in Third World (often Latin-American) countries where their industrial and commercial interests were under threat. Their simple aim was to ensure "investor-friendly" regimes were in control in countries where the cheap commodities they sold to their U.S. customers originated. More than a handful of observers also see, right or wrong, Washington’s interventions in Iraq and present-day intrigues regarding Iran as little more than securing cheap oil supplies.

This is why commodity market watchers tend to link political unrest in areas they consider vital for such supplies, those of oil in particular, to price hikes on the futures markets. Until not so very long ago, the ominous names of Saddam Hussein and the leaders of al-Qaeda and the Taliban could pour millions into paper traders’ pockets within hours. How much truth there was in rather demagogic explanations of price hikes remains to be seen, but in any case that seems to be how it was widely perceived. On the surface, it looks as though fears of upheaval near output sites continue to drive commodity prices up. The one-month gold contract on the London Bullion Market closed at $1,133.70 per troy ounce on April 7, on the eve of the outbreak of the latest trouble in Kyrgyzstan. On April 9, it closed at $1,150 an ounce. On April 12, when it already looked like worst was over and the prospect of a long-lasting civil strife in Kyrgyzstan was out of the picture, the contract closed at $1,160. It would have been tempting to link the one-week hike, despite its limited proportion, to the risk of a disruption in Kyrgyzstan’s gold output. But even though BMO Capital Markets, a capital and debt managing fund, brought its qualification of stock in Centerra, Kyrgyzstan’s largest mine operator which hopes to produce over half a million ounces of gold this year, down from an earlier C$16.50 to C$12.50 per common share, panic either on commodity markets or stock markets simply failed to occur. As though to illustrate that fact, another market watcher in the service of Toronto-based Sprott Asset Management by the name of John Embry was quoted by BNW News on April 13th as saying that high prices may well be due to declines in global output, but this is a much broader trend which still has large margins - and on top of it there are other factors as well. "In fact, gold has still a long way to go before it even comes close to matching its peak price during its last major bull run, when it hit an intraday high of $875 on January 21, 1980," the news agency paraphrased the expert in its report. "To do so, it would have to rise to around $2,300 on an inflation-adjusted basis. Hence, inflation, a debased US dollar and shrinking global output will soon converge to act as a springboard for gold’s ascendancy well above the $1,100 level." Kyrgyzstan produces around 1.5 per cent of all the gold in the world and getting new fields on line could double that proportion. In all, Central Asia is sitting on approximately 10 percent of the world’s gold reserves. Deposits are concentrated in Kyrgyzstan and Uzbekistan. With depletion looming in the Americas, Australia and parts of Africa, Asia is many a miner’s hope if not to reverse the approach towards a global reserves replacement deficit, at least to push it back a bit. This in turn means that revolutions and regime changes do not tend to scare miners off in an environment where sales revenues already more than double production costs and continue increasing. Profits simply offset risks to the extent that the risks are well worth it. It also means that new regimes rising from the gun smoke will have little choice but to embrace existing mining ventures as national income-generating powers. After all, revolutions and other, more gradual changes in Central Asia’s political landscape seldom pay but rather tend to cost its domestic economies. This, and little else, has made drillers and delvers in Central Asia all but revolution-resistant. The question remains how exposed Central Asia remains to power shifts and in which direction are they likely to go. The question of succession has been peacefully responded to in Turkmenistan and there is a good chance that the aging leaders in other "stans" will try to avoid Kyrgyz-style upheaval. The risk of domestic trouble is actually overshadowed by that of a confrontation between two or more republics over resources, in particular territory and water. Such confrontations, once they occur, are extremely hard to settle even by the mighty armies of superpowers like Russia and China. Such confrontations would spare most of Kazakhstan’s and Uzbekistan’s remote oil and gas fields, but it would not spare Kyrgyzstan’s mining provinces. This, unfortunately, is bad news for Kyrgyzstan and Tajikistan. The way to their prosperity is blocked by commercial interests which are held by the same investors who represent their hopes for capital generation.

4. Uzbekistan implementing cashless system (Uzbekistan, May 6, 2010-issue 615) By Dilshod Ashurmatov

TASHKENT (TCA) — Uzbekistan has introduced new measures to discourage cash payments.

In April, Uzbek President Islam Karimov issued a decree on expanding the network of payment terminals using bank credit cards. Experts believe this will raise the cost of using cash and will help concentrate retail sales within supermarkets. The idea to reduce cash payments in the country was a cornerstone in Uzbekistan’s monetary policy. Since the 1990s, the Central Bank has been regularly reducing the share of cash – from 45% in 1994 to 18% in 2008. However, active cash withdrawal began three years ago. In November 2007, a three-year program ‘to integrate free cash in the bank turnover’ was adopted. The program aimed to increase non-cash transactions twofold by 2011, to $700 million through the issuance of five million credit cards and the creation of 30,000 point-of-sale (POS) terminals. To realize this task, banks and trade companies have been granted a number of tax and customs incentives in order to reduce the costs of mass introduction of credit cards among the population. Many experts believe that due to these benefits, the basic principles of the program have already been implemented – over 5.5 million credit cards are currently in circulation, while sales and service centers have over 40,000 terminals. However, the main indicator – cashless retail trade – totals over $500 million annually.

The government has decided “to patch the holes”. President Islam Karimov’s decree has expanded the list of retailers which must accept credit cards, and if they refuse to accept cards they will be fined. The new list included almost all market outlets. To introduce non-cash payments in all of them, in the next two years Uzbek banks will install another 24,800 terminals and 161 ATMs. Advocating a program of action to reduce cash, Uzbek financial authorities usually refer to three main reasons: the fight against financing criminals, reducing inflation, and eliminating the shadow economy.

“If we consider all industries, we can see that a lot of money is still in the shadows through cash,” said Saidullo Abdullayev, director general of Uzbekistan’s Banking Association (UBA). Moreover, a large amount of cash in the country facilitates criminal operations.

Analyst Anvar Jumayev has different opinion: “It does not matter how you make the payments work. There are many countries with low proportion of cash, however, it doesn’t help them reduce criminality.” As for the reduction of inflation, Ilkhat Tushev, an analyst at Central Asia Investments, believes that “money turnover is being reduced due to non-cash payments, making a positive impact on inflation. However, it is naive to believe that non-cash payments will sharply reduce inflation.” Other experts also believe that there are other reasons why the Uzbek authorities are doing away with cash. They consider three more realistic reasons. Firstly, the introduction of non-cash transactions will allow them to manipulate inflation data. Secondly, credit card mandates would concentrate retail business in supermarkets and shopping centers instead of bazaars. Finally, the goal might be to increase the cost of services to transform non-cash money into cash. Such consequences are inevitable if mass transition to non-cash payments is held under administrative pressure. It is possible that the government tries to use any opportunity to reduce inflating prices. According to experts, the Central Bank forecast for cash – from 12 percent to 15 percent in 2010 – is based on the inflation forecast, which is essentially reduced by the government. According to forecasts, in 2010, the retail turnover will grow by 15 percent, and inflation, by 6-8 percent. “This will cause a 20 percent increase in demand for cash,” said analyst Dilmurad Kholmatov. “Thus, 15 percent hides the real inflation rate.” The second area significantly affected by non-cash payments is retail. Under the regulation, all retail outlets larger than 150 square meters are required to accept credit cards. The introduction of payments through credit cards will help to better control shop revenue. The bigger the shop, the easier it is to control its revenue. “Switching to credit cards leaves the buyer no choice of shopping at markets and bazaars, the traditional trading outlets for the East,” believes expert Rashid Jalilov. However, the consolidation of retail is a difficult process and it is impossible to implement it only through regulation measures. The demand for cash can not disappear overnight. “If cash transactions are being reduced artificially, in particular, if the Central Bank reduces cash output, it will lead to increase in demand for cash by enterprises. Thus, banks and everybody who stands behind them will get an opportunity to make good money on that,” explained Jalilov.

By some estimates, 1 billion to 1.5 billion Uzbek sums are exchanged daily. With an average 20 percent commission, profit is somewhere from 200 million to 300 million sums a day. In some months, when the Central Bank is making many efforts to fight cash, the commission for cashing reaches 40 percent. Thus, the commission, which goes into shadow businesses, which in turn may share with officials, is about $130,000-$200,000 per day. “A kind of monopoly system is being introduced. Thus, we will further feed shadow businesses and Uzbek officials,” said Jalilov.

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