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Uzbekistan's Strongman Means Business (Int'l Edition)


International -- Intl' Business: UZBEKISTAN

UZBEKISTAN'S STRONGMAN MEANS BUSINESS (int'l edition)

In the dusty, mineral-rich state of Uzbekistan, there's only one boss: President Islam A. Karimov. He rules like a khan, repressing opponents and dispensing favors to allies. Ordinary citizens need no reminder of who runs the show. In the sprawling capital of Tashkent, traffic cops stand on every corner and the secret police are as active as the Soviet-era KGB.

Karimov certainly won't win any human-rights awards. But foreign investors are beginning to notice the regime's stability. "Karimov is definitely in control and definitely committed to a free market," says John Selby, finance director of BAT Central Asia Ltd. Last November, London-based BAT Industries bought control of the state tobacco company. Like BAT, plenty of other multinationals are now moving into Uzbekistan, making it one of the hottest investment areas in the former Soviet Union.

TAX HOLIDAY. Taking a cue from China's leaders, Karimov is trying to create a market economy from the top down. He supports a go-slow approach, hoping to avoid the economic chaos that has gripped neighboring Russia. Few state enterprises have been privatized yet, but the government is constructing hundreds of buildings to lease out to private retailers. And Karimov has already mandated laws to attract foreign investment, including a five-year tax holiday on profits. As a result, joint ventures generated some $610 million in business in 1994.

To be sure, companies such as Newmont Mining Corp. and BAT would not bother with Uzbekistan unless it had something to offer. The Central Asian country is one of the world's largest producers of gold and cotton and has deep reserves of oil and gas. But Karimov's iron grip gives investors a degree of confidence that the rules of the game won't be changed overnight, as they can be in Russia, Kazakhstan, or Ukraine. Newmont and others have even persuaded the government to codify the terms of their joint venture in presidential decrees. Says Steve Edds, Newmont's controller: "In Russia, you can't get a meeting with a high-level official to negotiate a decree, and if you do, a lower branch of government might not respect it."

Karimov has ensured that he plays the leading role in shaping policy. The top Communist official at the time of the Soviet Union's breakup, he was recently reelected president in a referendum that offered no other candidates. Karimov has banned the opposition party, whose leaders, according to Moscow papers, were imprisoned on charges of plotting a coup. He also sits on the press, but many Uzbeks support him for his swift executions of gangsters.

SECOND THOUGHTS. Karimov sometimes nudges deals along himself. When BAT wanted a controlling stake in the tobacco monopoly, company managers balked. But Karimov, who hoped to use the $300 million BAT deal as an investment showpiece, persuaded them to change their minds. Says Selby: "With [Karimov's] support, we pushed through a number of sticking points."

It's no surprise that relationships are vitally important for new businesses here. Lonrho PLC, the London-based mining company, has hired the son of former Uzbek Communist boss Sharaf Rashidov to head its Tashkent office. "He understands the business culture here, so he's a huge asset to us," says Darren Stock, Lonrho's financial manager. The Coca-Cola Co. franchise in Tashkent also has good connections. Mansur Maqsudi, president of the venture, is married to Karimov's daughter, while Mansur's brother, Farid, is chairman. Sounds quite cozy, but Farid swears he does not get special favors. To start up a Coca-Cola business, "it took us 18 months to negotiate and finalize the deal," he says.

With Uzbekistan so steady, even cautious bankers and insurance companies are moving in. The European Bank for Reconstruction & Development and Barclays Bank PLC arranged a $135 million syndicated loan for Newmont's gold project. And the American International Group has formed a joint venture to provide commercial risk insurance in Uzbekistan.

However, potential investors would do well to remember that in Uzbekistan, you cross the authorities at your peril. One foreign engineering company was booted out of the country after two of its employees went drinking and picked a fight with some policemen. No one, Uzbek or Westerner, is exempt from Karimov's law and order.

UZBEKISTAN AT A GLANCE

POPULATION 21.5 million

GDP GROWTH Down 17% since 1991

GOLD RESERVES 4,000 tons

OIL RESERVES 350 million tons

DATA: REPUBLIC OF UZBEKISTANBy Patricia Kranz in Tashkent


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