TASHKENT Two men rushed over to an approaching car in a dark market alley. After a brief exchange of words, the driver handed over a few $100 notes and received a pile of Uzbek som in return.
The scene, a common sight in the isolated Central Asian nation of Uzbekistan, is a consequence of government restrictions on the circulation of foreign currency. Newly elected President Shavkat Mirziyoyev has promised to reform policies that have driven such activity into the black market.
It is unclear, however, how much reform Mirziyoyev, who was prime minister for 13 years until he became interim president upon the death of strongman Islam Karimov in September, can or will deliver. The new president is little-known abroad and has a reputation for brutality at home. He inherits a government that is considered among the most authoritarian and corrupt in the world.
During his 25-year rule, Karimov oversaw a Soviet-style planned economy with comprehensive government controls, regulated prices and high customs duties.
"This model provides for a high level of government interference in socioeconomic processes and limits personal initiative and the development of competition and private enterprise," said Yuliy Yusupov, director of the Center for Economic Development, a private think tank in Tashkent. "Market reforms could give a good impetus for an economic breakthrough."
Kate Mallinson, an independent Central Asia analyst based in London, agrees with the urgent need for reform. "The current Uzbek protectionist and autarchic economic model clearly fails to provide widespread prosperity," she said. "[But] reform could alienate some key stakeholders and vested patrimonial interests, particularly as the economic pie is shrinking."
FREER EXCHANGE Under the government's rigid controls over foreign trade and currency exchange, the central bank sets an artificially low exchange rate that makes it difficult to obtain foreign currency. This has created a booming currency black market. In the cash market, dollar notes, euros and Russian rubles are traded at more than double the official rate. Importers, meanwhile, must buy dollars at almost triple the official rate.
According to a draft directive released on Nov. 28, new measures will be aimed at liberalizing foreign exchange policy and improving conditions for foreign trade. Mirziyoyev's administration intends to create "equal conditions" for importers and ban preferential treatment while setting the exchange rate "only using market mechanisms."
The success of these moves will depend on Mirziyoyev's "ability to manipulate vested interests in the economy," Mallinson said. "Elite figures profit hugely from the dual-market system through arbitrage between the official and black market exchange rates. Why would these figures who have governed the country since independence want to change the situation?"
If the government is able to plow ahead, many will welcome the abolition of controls over foreign exchange and trade. Mirziyoyev, who was inaugurated on Dec. 14 after winning 88.6% of votes cast 10 days earlier, stands to gain public support.
"There is certainly a dimension [to the reforms] that has to do with Mirziyoyev's popularity," said Luca Anceschi, a lecturer in Central Asian Studies at the University of Glasgow. "The new president needs to be known internationally and most importantly, across Uzbekistan, so the introduction of a targeted set of reforms is certainly conducive to build[ing] legitimacy, hence reinforcing the president's power."
Despite his poor economic and human rights record, Karimov's popularity among Uzbeks was widely underestimated in the West. His passing, in Mallinson's view, has left an ideological vacuum that risks undermining the prospects of his successor. This has prompted the new administration to address critical issues such as high unemployment and inflation, a sharp drop in foreign remittances, rising support for Islamic extremism, and regional disputes over water and territory.
Despite an official annual economic growth rate of more than 7% for the past decade, millions of Uzbeks seek work abroad. But the economic slowdown in Russia resulting from Western sanctions and low commodity prices has meant that remittances back to Uzbekistan fell from a record high of $5.8 billion in 2013 to $2.6 billion in 2015 and $942 million in the first six months of 2016, according to the Russian central bank.
Problematic economic policies such as excessive reliance on the cultivation of cotton, exports of which bring in around $1 billion a year, have complicated relations with neighbors Kyrgyzstan and Tajikistan, whose rivers feed Uzbek cotton fields. Karimov cut off gas exports to these countries in response to their building of hydroelectric dams.
His passing has offered an opportunity for Mirziyoyev to reset acrimonious relations. After Tajik President Emomali Rahmon, a longtime foe, attended Karimov's funeral in Samarkand on Sept. 3, Mirziyoyev held back criticism when Rahmon officially launched construction in late October of the $3.9 billion Rogun Dam, set to be the world's tallest. Mirziyoyev and Rahmon agreed to re-establish direct flights between Tashkent and Dushanbe for the first time since 1992.
Uzbekistan is also making overtures to Kyrgyzstan to resolve long-standing border and water disputes. On Dec. 24, Kyrgyz President Almazbek Atambayev paid an unexpected visit to Uzbekistan, where he declared, "We should do everything to ensure people don't feel borders" between the nations.
These moves to improve ties, Mallinson said, "could bring much-needed stability to the region."
Uzbekistan managed to draw nearly 2 million foreign visitors in 2015 despite limited transport links and a cumbersome visa process. On Dec. 6, the government announced that nationals of 15 countries, along with those over age 55 from 12 other countries, would no longer require a visa. This change, however, was subsequently postponed until 2021.
At any rate, Mallinson expects that foreign journalists and human rights activists will still have a hard time entering. "If the government is genuinely committed to undertaking long overdue reforms, now is the time to allow unhindered access," she said.
The University of Glasgow's Anceschi agreed that "a wider agenda of political liberalization ... does not seem to be a priority for the new Uzbek leader."
Before assuming office, Mirziyoyev suggested the possibility of direct election of local governors. But such talk remains hypothetical in a country that has never held a presidential or parliamentary election deemed free and fair by Western observers. The Organization for Security and Cooperation in Europe said the Dec. 4 poll that elected Mirziyoyev had "systemic shortcomings" and that the country's legal framework was "not conducive to holding democratic elections." Election monitors from the Commonwealth of Independent States and the Shanghai Cooperation Organization, however, endorsed the vote.
With some incremental reform, Uzbekistan could begin to emulate neighboring Kazakhstan or China, where the state retains significant control of the economy but allows more scope for private enterprise, even if more substantive change remains unlikely.
The installation of Abdulla Aripov, a former deputy prime minister, as Mirziyoyev's replacement as prime minister on Dec. 12 suggests "the Uzbek elite isn't ready to undertake political reform," Mallinson said. Aripov lost his position in 2012 amid U.S. and Dutch investigations into allegations that Scandinavian telecom operator Telia had paid bribes to Uzbek officials. The regulators have asked Telia to pay $1.4 billion to settle the case.
"Aripov's re-emergence as Uzbekistan's government leader so soon after his dismissal for corruption highlights how a thorough reform of the judiciary should be the most imperative consideration for the new administration," Mallinson said.
All in all, she is pessimistic about the prospects of fundamental reform. "Regardless of any economic liberalization, the all-powerful and coercive security structures, [the National Security Service], will remain the dominant institution in the country," she added. "The Uzbek elite isn't ready to undertake political reform."