How Business in Uzbekistan Finds Investors

Despite the coronavirus crisis, Uzbekistan remains one of the most promising regions for investment. As proof, wide-scale international projects on the republic’s territory continue to attract capital from the largest global companies even in a pandemic. Local and foreign businesses demonstrate growing interest in investing in Uzbekistan. According to experts, the republic is one of the countries where projects are highly profitable while many industries have weak competition.

Caught unprepared

Large-scale reforms that are associated with Shavkat Mirziyoyev’s rise to power have affected almost all areas of modern Uzbekistan. Changes in the republic’s business climate are particularly noteworthy. Once closed to outsiders, today the country is opening its doors to investment, little by little. However, it’s too early to say that people willing to invest in the Uzbek economy are lining up in front of those doors.

According to Uktam Hasanov, managing partner of the investment platform Uzinvest.uz, Uzbekistan loudly proclaimed itself as a country with a favorable business climate but was unprepared to actually offer comfortable conditions to attract and keep investors.

«One of the reasons for lost opportunities was the unreadiness of the country’s banking system, which turned out incapable of offering bank guarantees and other tools of investment security to foreign investors. Another reason is the low level of preparedness of civil servants. They often don’t understand an investor is primarily interested in protecting their investments in an unfamiliar country, not in solving the problems of the state or a specific region. Insubstantial promises of local officials did not lead to the expected results,» Hasanov noted.

According to him, only a few investors, who became interested in this market two or three years ago, dared to continue their investment activity in the country. «But I’m certain that those investors who had believed in the prospects and taken the risk without financial security tools did not regret their choice. The safety cushion in the form of high profitability mitigated any possible risks. Today in Uzbekistan you can find projects with a profitability of 80-100%. This is partly due to still lacking tight competition in many market sectors in the country,» the expert emphasized.

Need for reforms and laws

According to Viktoriya Hasanova, head of Uzinvest.uz, to attract investments in the republic’s economy, first, the banking sector needs to be reformed. Namely, there need to be conditions created for foreign financial institutions to enter the industry. «They should come with their classic and innovative financial products, creating a competitive environment and thereby spurring local banks to meet modern requirements of the business community,» Viktoriya Hasanova pointed out.

A reform of the judicial system should accompany the economic transformations in the republic. Uktam Hasanov believes that it’s necessary to ensure protection of the rights and interests of entrepreneurs, as well as to eliminate the practice of unilateral consideration of cases in favor of the state and to the detriment of private individuals. «Such a reform is being implemented, but its pace lags far behind the speed of transformations in other sectors. But such positive changes could instill confidence in foreign investors that their investments are insured by Uzbekistani laws – not merely declared, as it was before the reforms, but really working and protecting the investors’ interests,» Hasanov said.

From project to profit

The Uzinvest.uz platform was specifically created to help potential investors choose the most interesting areas for investment in Uzbekistan, while helping those with ideas or ready-made projects find investors. Moreover, each member of the platform receives protection from risks that occur in investment.

«Our platform can be used by investors and authors of ideas from different countries. Besides Uzbekistan, we work with investors from Turkey, South Korea, Russia and China. Initiators from the Russian Federation, Belarus and Kazakhstan place their projects with us as well. Anyone can invest, be it a large or medium-sized business. By the way, it’s currently much easier for foreign medium-sized businesses to invest in Uzbekistan, since foreign and local investors have the same conditions,» Uktam Hasanov pointed out.

VR technology for schoolkids

At the moment, Uzinvest.uz works with more than 250 Uzbek investors. The website lists over 1,000 projects. There are plenty of IT development companies among those. One such startup is a highly profitable project launched by the Universal Walk company which uses innovative VR (virtual reality) technology in education.

«Originally, the project started as part of the Altair VR franchise, which is a-one-of-a-kind educational content aggregator. We offer to teach the school program to students with the help of modern technologies – so that learning is exciting and informative for them. To get help with bringing our idea to life, we turned to Uzinvest.uz. We found a strategic sponsor almost immediately, and the project was successfully implemented at its early stage in Tashkent’s private schools,» one of the developers of the startup, Alexander Kim, told Kursiv.

Today, Universal Walk’s educational content includes over 80 videos, the list of which is constantly being expanded. These are mainly teaching materials in subjects such as astronomy, natural science, history, geography and biology.

Starting from the new academic year, the Universal Walk project will be implemented throughout Uzbekistan in about 10,000 schools. This is the best indicator in terms of reach and promotion among the 18 countries where this franchise is developing. The estimated capitalization of the project will amount to around $1.5 million. Consequently, negotiations are underway with the relevant departments in order to form a public-private partnership.

«Our research shows that the highest rates of return on investment capital in Uzbekistan are concentrated in the high-tech IT sector which is scalable for the global market, and the real sector of the economy, in niches not occupied by competitors. Uzbek startup entrepreneurs aren’t falling behind their colleagues abroad: on the contrary, every year there are more and more ideas and projects in IT and they are much more enticing than before. One example is the project for a mobile real estate app oriented at the global market. This startup recently was able to attract investment in the seed round, and is now planning to move to funding round A, with an expected profit of over $1 million in the first six months after entering the market. Construction industry projects are also in high demand, and not just construction of residential and commercial properties, but production of building materials as well. However, we expect this sector to dwindle due to the overall economic effect of the pandemic and oversaturation of the market for commissioned spaces,» Uktam Hasanov commented.

To protect money and ideas

Before taking up investment activity, for a long while the founders of Uzinvest.uz specialized in jurisprudence. That’s why they pay special attention to the issues of legal protection of investors and authors of projects. According to Viktoriya Hasanova, one of the main mechanisms for protecting investors’ interests is the conclusion of the so-called repo transaction.

A feature of such an agreement is that, for example, the investor and the author agree to distribute shares in the business on an even 50/50 basis. To insure the safety and return of invested funds, the investor’s share may be temporarily increased up to 90%, on terms of returning up to 40% after investment maturity. This way, the investor gains legal and financial control over the company.

«As a rule, in the process of structuring transactions we go with this exact mechanism of protecting investors’ interests which minimizes legal and financial risks. This procedure was developed by us and it has proved to be a reliable legal tool for investment protection. Where the repo mechanism was applied, investments were not misused,» Uktam Hasanov stressed.

For all members of the Uzinvest.uz platform, there’s also an insurance method which, while unique for Uzbekistan, is the most popular among foreign investors. This type of insurance allows one to minimize liability risks for violating contractual obligations, including loan deficit. The mechanism is designed to insure return on investment and protect against loss of invested funds.