The Republic of Uzbekistan as a Target Market for Russian Exports

The Republic of Uzbekistan is a state located in the central part of Central Asia.

Macroeconomic Situation in the Country

The Republic of Uzbekistan is a state located in the central part of Central Asia. Bordering states: to the east – Kyrgyzstan; to the northeast, north, and northwest – Kazakhstan; to the southwest and south – Turkmenistan; to the south – Afghanistan; and to the southeast – Tajikistan.

The main factor determining the prospects of this geographical direction for exports from the Russian Federation is related to positive changes in the state's economic policy. These are largely due to the past transformation of power and the new political course of the President of the Republic of Uzbekistan, Shavkat Mirziyoyev.

Under the previous leader of the country, Islam Karimov, Uzbekistan, as a rule, ranked last in most per capita indicators among the countries of the Commonwealth of Independent States (CIS). However, with the change of power, a radical transformation of the economic situation in the country occurred - over the past three years, the gross domestic product (GDP) per capita at purchasing power parity (PPP) has increased significantly. By 2020, it exceeded $7 thousand, whereas recently it was at the level of $4-5 thousand. In terms of economic growth rates, Uzbekistan surpasses almost all CIS countries. For example: in 2019 alone, the volume of foreign direct investment increased by 3.7 times and amounted to $4.2 billion, the share of investments in GDP reached 37%, the economic growth rate was 5.6%, industrial production increased by 6.6%, exports – by 28%, and gold and foreign exchange reserves – by $2.2 billion, reaching $28.6 billion.

The country is confidently "gaining weight" in the eyes of the world community, becoming one of the leading states in Central Asia. In terms of many financial indicators, the ratings are growing at a high pace. For the first time, Uzbekistan received a high international credit rating and successfully placed $1 billion in bonds on the global financial market.

Recently, Uzbekistan's positions in the Organization for Economic Cooperation and Development's credit risk rating have improved. In the World Bank and International Finance Corporation's "Doing Business" ranking, Uzbekistan rose by 7 positions, taking 8th place among 190 states in the business registration indicator and entering the list of effective states aimed at liberalizing the economy, which will certainly stimulate foreign partners to invest in promising development projects in Uzbekistan.

Some Features of Exporting to Uzbekistan

The country's membership in various economic associations and unions greatly influences export potential, including the level of market barriers. In previous years, Uzbekistan often changed its directions of cooperation, trying to find a balance between the leading states influencing economic processes in Central Asia – the Russian Federation, the People's Republic of China, the United States of America, and the countries of the European Union. Processes of strengthening or weakening one or another vector of foreign policy often occurred. Currently, the situation has changed and acquired a systemic understanding; a strategy for ensuring economic security has been formed in the country, taking into account its own national priorities, based on the active diversification of its foreign economic ties. Since 2016, Uzbekistan has abandoned foreign policy isolationism and unidirectional focus, thereby partly giving reason for positive sentiments among foreign exporters.

Positive changes in these processes have led to an active dialogue on Uzbekistan's accession to the World Trade Organization, and the final stage of negotiations on the Enhanced Partnership and Cooperation Agreement with the European Union (EPCA), aimed at creating more favorable conditions for mutual trade and softening the foreign trade regime. Also, in 2019, the Uzbek delegation submitted a new memorandum on the foreign trade regime to the WTO for consideration of the country's application to join the organization.

Furthermore, substantive discussions have begun on the inclusion of the Republic of Uzbekistan in the EAEU, and the dialogue itself became possible thanks to the changes adopted since 2017 in the already mentioned foreign economic strategy of Uzbekistan. Note that the First President, since gaining independence in 1991, preferred the concept of neutrality and non-alignment with any associations, be they military or economic, and bet on supporting domestic producers to maintain the viability of the domestic market.

In 2016-2019 alone, Uzbekistan's total trade turnover with the EAEU countries, thanks to the bilateral agreements reached, increased by almost 60% - to $10 billion, which accounted for about 30% of the country's foreign trade turnover.

The total volume of imports in 2019 reached $24.1 billion, which is 2 times more than the 2016 figure. Based on the existing structure of imports of the Republic of Uzbekistan, this country will be of interest as a target market for export to organizations producing machinery and equipment. The share of these types of products in goods imports during the period 2016-2019 was 39.4% - 42.0% of the total structure. In addition, the need for the group of industrial goods increased sharply from 7.5% in 2016 to 17.0% in 2019.

In the first two quarters of 2020, the share of machinery and equipment in the import structure of the Republic of Uzbekistan was 41.4%, and industrial goods – 8.8%; this statistic essentially indicates that half of the imported goods are related to the industrial sector.

In the reporting period, the volume of imports amounted to $7 billion 841 million, which is $1.5 billion or 16% less than the previous year.

A significant volume of imports in the highlighted sectors consists of goods used in the production process as "intermediate" (raw materials, components, spare parts), which contributes to ensuring the full production cycle for the output of finished products, increasing production volumes, and expanding the range of manufactured goods.

These trends are based on the implementation of large infrastructure projects and the creation of production complexes in the country. Note that in the structure of exports from the Russian Federation in 2019, this group of goods accounted for 15%.

Due to geographical location, the key foreign trade partners for Uzbekistan are traditionally its closest neighbors. According to data on product imports into the country in 2019, the main exporters were China - 22.0%, the Russian Federation - 17.8%, the Republic of Korea - 11.4%, Kazakhstan - 8.7%. In recent years, the positions of Turkey – 5.5% and Germany - 3.7% have been strengthening.

Within the framework of conducted marketing research on various commodity markets of the Republic of Uzbekistan, we often note the not fully realized potential of Russian companies, even considering Russia's overall second place as an importer to Uzbekistan.

For example, in one of the sub-segments of the construction equipment market exported to the Republic of Uzbekistan, there was a high concentration of companies from China - up to 80%, while the products of Russian manufacturers, not inferior in technical and price characteristics, were at the level of 5-10% of the total import volume. This is due to many factors, including the applied model of financing supplies, as well as the role of state bodies of importing countries.

Another example is the market for feed for agricultural animals, where a high share is held by the country's closest neighbor - the Republic of Kazakhstan, while not fully covering the existing demand, since the need is very high, growing, and large volumes are required to satisfy it.

In both of the listed cases, the main obstacle to entering these markets was the cooperation model, which most companies from the Russian Federation are not ready for at the moment.

Recommendations for Russian Exporting Organizations

Despite the consequences of the pandemic related to the coronavirus infection, in the economic publication "Asian Development Outlook 2020," the Asian Development Bank forecasts the growth of Uzbekistan's gross domestic product (GDP) in 2020 at the level of 4.7%, which is less than last year's figure of 5.6%, but is a fairly positive forecast. In the country, measures will continue to be implemented to improve the transparency of business processes and the entrepreneurial climate, creating favorable conditions for foreign investments in Uzbekistan.

Russian companies wishing to start working in this market should pay special attention to the channels of entry, since in different directions there is a need for various forms of cooperation (for example, registration as a tax resident and opening representative offices and trading houses, or traditional work through a distributor network).

Furthermore, for companies, it is important to comply with the legislation of the Republic of Uzbekistan regarding the necessary regulatory legal acts, including product certification. This is the "flip side of the coin" of the country's non-integration into the EAEU space. For many product groups, internal Uzbek certification and licensing are not yet required; Russian documents can be provided. However, the list of such goods is constantly shrinking. For example, many types of special clothing cannot be imported into the country for free circulation without obtaining permits.

The best prospects for exporting to the Republic of Uzbekistan are open to companies producing industrial goods, machine tools, machinery, and construction and engineering equipment.

For each individual market, it is advisable to conduct special marketing research, at least desk research, which will provide answers to questions on how to achieve success in the Uzbek market with minimal time and resource costs. As with Russian exports and imports, for Uzbek foreign trade, it is possible to purchase customs declaration databases that describe all the details of trade transactions between counterparties. This allows for obtaining important, reliable information about imports into the country (including Russian ones) at a moderate cost, and thus making correct and relevant conclusions as a result of marketing research and forming a commercial proposal that is interesting for potential partners.

Recall that export pricing has distinctive features compared to pricing for the domestic market; in this case, it is worth paying separate attention to such fundamental factors in export as: delivery basis, customs clearance, transport and warehouse logistics. After conducting marketing research on the selected market, it is advisable to proceed directly to the search for potential partners, which can be entrusted to specialized export-oriented organizations, since it is not always possible for the in-house commercial services of companies to cover the extensive sphere of export activities.

In conclusion, we note that one should not bypass the national flavor and cultural traditions of Uzbekistan in the process of preparing and conducting negotiations. The ability to build communications correctly, taking into account the mentality of Uzbek partners, provides great advantages when entering the market of this country. Personal communication is very important, which should be prepared and agreed upon in advance. Hence, business missions, as well as trips to specialized exhibitions in the Republic of Uzbekistan, can be quite effective.