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Analysis: Uzbekistan gains little from Fradkov visit

April 03, 2007
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Author: Monika Shepherd, ISCIP

Russian Prime Minister Mikhail Fradkov recently paid an official visit to Tashkent, the first time a Russian prime minister has done so since 1999. (1) Uzbekistan’s decision last summer to rejoin the Collective Security Treaty Organization (CSTO) and to enter the Eurasian Economic Community (EurAsSec) undoubtedly helped provide the impetus for Fradkov’s visit. Uzbek-Russian relations, which cooled after Uzbekistan withdrew from the Collective Security Treaty in 1999 and joined the GUAM alliance (Georgia, Ukraine, Armenia and Moldova) instead, have been on the upswing for the past few years, resulting primarily in heightened trade relations and increased Russian investment, especially in the energy sector. (2) However, military cooperation, which also was expected to increase, has encountered a few roadblocks, causing Russia to scale back investment in Uzbek military production facilities and even to cancel part of one production contract. (3) Nor have Russia’s investment strategies in Uzbekistan’s hydrocarbon and metal industries quite resulted in the benefits either side was expecting, although some might say that it is the Uzbek government that is currently receiving the short end of the stick. Fradkov’s visit seemed geared to address these problems, as well as to persuade President Karimov to allow further Russian investment into the Uzbek economy.

Unfortunately, the Russian prime minister seems to have fallen short of most of his goals, with his biggest achievement being the establishment of a new joint venture between the Russian and Uzbek aviation industries called UzRosAvia, which will carry out aircraft repair, beginning with Mi-8 and Mi-24 helicopters. The joint venture’s partners will consist of Russia’s Rosoboronexport and Oboronprom and Uzbekistan’s Tashkent Aviation Production Association, named after Chkalov, and Uzmakhsusimpeks and will use the facilities of the Chirchiq aircraft repair plant. Russia’s share in the venture will be at least 51%. Oddly, when asked whether the Russian government was moving ahead with its plans to transfer the manufacture of its IL-76 (Ilyushin) transport planes from the Chkalov plant to Ulyanovsk (in Russia), Fradkov replied: "we are working on this too the transfer and creation of a manufacturing centre in Ulyanovsk ,” then stated "it will take at least a few years to meet a number of existing contracts,” implying that as soon as the Chkalov plant has filled its part of a Chinese order for 34 Il-76 military cargo planes and four Il-78 tanker planes (the order was contracted between China and Russia in 2005 and then subcontracted to the Tashkent Chkalov Aircraft Association), production will be moved back to Russia. (4) The Chkalov plant was originally slated to manufacture all of the planes, but after production delays and cost overruns (due to a disagreement over production costs, the Tashkent Chkalov Aircraft Association refused to sign the production contract with Rosoboronexport in 2006), Chkalov’s share of the order was reduced to only 15 IL-76 aircraft. (5)

Moving production of the Ilyushin aircraft out of Tashkent altogether will be a big blow for the local economy; the Chkalov factory employs 80,000 people and is one of the largest aircraft assembly plants in Central Asia. (6) If production cutbacks cause reductions in the factory’s workforce, it will put a heavy burden on Tashkent’s municipal resources, which already are strained. Another plan being considered is to merge the Tashkent Chkalov Aircraft Association with Russia’s United Aircraft Building Corporation (UABC), which is 90% state-owned and produces aircraft for both military and civilian clients. (7) Should this plan come to fruition, Tashkent might be forced to cede a significant portion of its current profits to the Russian government and will most assuredly lose export rights to the aircraft produced at Chkalov. In fact, Fradkov’s own comment regarding the possible merger was rather ominous, implying that under Russian control, the plant may not have a rosy future: "[the Chkalov plant] is operating, but its prospects need to be soberly assessed.” (8) Thus, what Fradkov gave with one hand, he snatched back with the other, a gravely flawed strategy, if his intention was to create goodwill with President Karimov for future discussions on establishing a Russian airbase in Uzbekistan.

Russia’s recent economic relations with Uzbekistan outside the military-technical sphere have fared somewhat better. Russia has become Uzbekistan’s most important foreign trade partner over the past two years, receiving close to 25% of the country’s foreign trade with bilateral trade worth $2.5 billion by the end of 2006 (an increase of more than $.5 billion from the previous year). Nonetheless, their economic relationship also has experienced a few snags. (9) A joint venture formed between Russian companies Techsnabexport and Rusburmash, the Uzbek State Committee for Geology and Mineral Deposits and the Navoi Mining and Metals Plant to develop Uzbekistan’s Aktau uranium deposit (estimated at 4,400 tons with the possibility of a 50% increase after further exploration; the country’s total uranium reserves are estimated to be 55,000 tons), which was supposed to have been operational by the end of last year, (10) stalled last autumn when the project hit a financing shortfall, according to Nikolai Kuchersky, general director of Uzbekistan's Navoi Mining and Metals Plant. (11)

Russian investment in Uzbekistan’s natural gas industry has been quite successful lately, with both Lukoil and Gazprom garnering substantial shares in various production sharing agreements (PSA’s) with Uzbekneftegaz. (12) However, Gazprom has been slow to actually carry out its investment promises, causing concern among Uzbek officials that the company was failing to fulfill its contractual obligations. (13) In February, Gazprom announced its intention to acquire the majority of the Swiss Zeromax GmbH company’s oil and gas assets in Uzbekistan. Zeromax is co-holder in an estimated ten joint and subsidiary enterprises, as well as owning a number of gas stations. The company’s subsidiaries are involved in laying gas pipelines and building other energy facilities – thus, Gazprom stands to gain a wide range of assets, if its bid for the Zeromax assets is successful. (14) An unspecified number of Zeromax’s assets reportedly are controlled by Gulnara Karimova, President Karimov’s daughter. (15) Fradkov was very positive about Lukoil and Gazprom’s involvement in the Uzbek oil and gas industry, stating: "This in general enables us to raise cooperation in the gas industry to a qualitatively new level and to speak in practical terms of the resources of independent companies with the leading role being played in this market by Gazprom.” (16) However, he made no mention of the current disagreements over Gazprom’s investment obligations, which could mean that the issue was simply swept under the rug, to be dealt with at a later date, hopefully before Gazprom officials make their bid for the Zeromax assets.

Other thorny issues, such as Uzbekistan’s roughly $700 million debt to Russia (on which no payments have been made in nearly 10 years) and a substantial imbalance in car exports (UzDaewoo exported more than half of the 110,000 automobiles it produced to Russia, whereas Uzbekistan imported only 3,500 cars from Russia) also were not resolved, although the two sides did agree to begin negotiations regarding the debt repayment, once again. (17)

In sum, Fradkov’s visit was most notable for what it did not accomplish and for the wide range of issues that still need to be resolved, if the Russian government hopes to gain an even larger foothold in Uzbekistan’s energy and metal industry, as well as in its military sector. Moscow may not consider the Uzbek government’s dissatisfaction with Gazprom and its undoubted annoyance over the stalled uranium venture to be of great consequence, but if these issues are not resolved in the near future, it could bode ill not only for further Russian investment in the Uzbek economy, but for the investments held by Russian enterprises there now. President Karimov has pulled the rug out from under a number of Western companies engaged in joint ventures in Uzbekistan; Russian companies should not naïvely believe themselves to be immune.

Source Notes:
(1) "Russian Premier Due In Uzbekistan For Cooperation Talks,” 6 Mar 07, Regnum; BBC Monitoring International Reports via Lexis-Nexis Academic Universe.
(2) "Back in the CSTO – Uzbekistan returns to the fold,” The ISCIP Analyst, Volume XII, Number 7 (20 July 2006).
(3) "Delivery terms for Il-76 aircraft to China may be revised,” 7 Mar 07, RIA Novosti via GlobalSecurity.org at http://www.globalsecurity.org/wmd/library/news/china/2007/china-070307-rianovosti01.htm.
(4) "Russian-Uzbek Cooperation In Aviation Set To Grow Following Top-Level Talks,” 7 Mar 07, Interfax; BBC Monitoring International Reports via Lexis-Nexis Academic Universe.
(5) "Delivery terms for Il-76 aircraft to China may be revised,” 7 Mar 07, RIA Novosti via GlobalSecurity.org at http://www.globalsecurity.org/wmd/library/news/china/2007/china-070307-rianovosti01.htm.
(6) "Tashkent Aircraft Plant (TAPO),” GlobalSecurity.Org via http://www.globalsecurity.org/military/world/russia/chkalov.htm.
(7) "Russia, Uzbekistan discuss Tashkent aircraft builder joining UABC,” 7 Mar 07, RIA Novosti via http://en.rian.ru/world/20070307/61705886.html.
(8) "Uzbekistan's Aircraft Makers May Be Folded Into Russian Corporation – Fradkov,” 7 Mar 07, Interfax; OSC Transcribed Text via World News Connection.
(9) Sergei Blagov, "Uzbekistan Harbors Energy Development Plans; Russia Ready To Help,” 15 Feb 07, EurasiaNet Business and Economics via http://www.eurasianet.org/departments/insight/articles/eav021507a.shtml.
(10) "Uzbekistan To Form Uranium Joint Venture With Russian Companies,” 1 May 06, Asia Pulse via Lexis-Nexis Academic Universe.
(11) "Uzbekistan, Russia decide on joint uranium plans,” 1 Nov 06, Interfax; Thomson Dialog NewsEdge at http://www.tmcnet.com/usubmit/-uzbekistan-russia-decide-joint-uranium-plans-/2006/11/03/2045953.htm.
(12) Sergei Blagov, "Russian Economic Ties With Uzbekistan Hit Turbulence,” 8 Mar 07, Eurasia Daily Monitor (Jamestown Foundation), Volume 4, Number 47 via http://www.jamestown.org/edm/article.php?article_id=2371978.
(13) "Russian Premier Says Uzbek Visit "Serious Step" To Deeper Dialogue,” 7 Mar 07, ITAR-TASS; BBC Monitoring International Reports via Lexis-Nexis Academic Universe.
(14) "Gazprom To Buy Swiss Zeromax's Project Assets In Uzbekistan,” 1 Feb 07, Interfax Oil & Gas Report for 01 - 07 Feb 07, N 05 (774); OSC Transcribed Text via World News Connection.
(15) "Russia to continue making windfall profits at Uzbekistan’s expense,” 23 Feb 07, The Times of Central Asia via Lexis-Nexis Academic Universe.
(16) "Russian PM Praises Russian Oil, Gas Companies In Uzbekistan,” 7 Mar 07, Interfax; OSC Transcribed Text via World News Connection.
(17) Blagov, "Russian Economic Ties With Uzbekistan Hit Turbulence,” Eurasia Daily Monitor (Jamestown Foundation), ibid.

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