Profit, Not Patronage: Chinese Interests in Uzbekistan

After the “colored revolutions” in the fall of 2003 and the Andijan uprising in May 2005, Uzbekistan has decidedly turned toward Russia and China at the expense of the United States. Although Karimov seeks a new suitor for political protection, military assistance, and financial compensation stemming from America’s exit in the region, Beijing is unable and unwilling to offer the same level of sponsorship as its former benefactor. While China deepens economic ties with Uzbekistan, especially in the telecommunications sector, these developments do not portend a deeper, strategic alliance between the two countries.

Discord between the United States and Uzbekistan has intensified in recent years, and China has sought to exploit this opening to woo Karimov away from the West. Beginning with the events in Georgia, Ukraine, and Kyrgyzstan, Karimov began to think that a U.S.-sponsored civil society program could in fact be a “Trojan Horse,” undermining his own control much more efficiently and rapidly than any Islamist movement. Tensions came to a head at the SCO Astana Summit in July 2005 when Karimov initiated, with others, a call for the United States to set a deadline to withdraw its military bases from the region.

Noticing early Karimov’s growing disaffection with the Americans, China in 2004 offered enticing economic assistance. Hu Jintao signed an agreement for a $950 million loan, and offered $350 million on preferred conditions in a separate deal (Nezavisimaya Gazeta, June 30, 2004). Russia, for its part, also played a role. Putin last year ordered Russian oil and gas giants Lukoil and Gazprom to each sign a billion dollar contract with Uzbekistan. At the SCO Astana Summit, however, the Russians only provided symbolic signs of solidarity, and the Chinese, in turn, sought to augment ties—but only in the economic sphere.

China and Russia probably hinted to Karimov that he might need to better demonstrate his loyalty to his new strategic partners—hence his urgency in demanding a U.S. withdrawal from the Karshi-Kanabad Airbase. Cutting ties with Washington and risking international and internal isolation, Karimov felt that without major external supporters he would otherwise lose guarantees of his own political control. Yet Karimov miscalculated if he thought China would be willing to replace the United States as his benefactor. The sponsorship potential of China fails to reach the same level of that offered by the United States, and Beijing is in fact more concerned with moving beyond philanthropy and gaining access to the Uzbek market.

Chinese Investment in Uzbekistan

The Chinese, knowing little about local business conditions in Uzbekistan, have begun to send delegations and conduct market access studies. After the Astana Summit, Tashkent was host to numerous Chinese economic delegations. In July, a large delegation of 80 businessmen led by Vice Premier Wu Yi visited Uzbekistan and signed a framework agreement on investments worth $1.5 billion. The Chinese made no delay with signing such framework agreements because they understood that they were still far from mutually binding contracts. Unlike Russia, however, China as a potentially more powerful investor still lacks intermediaries in Uzbek society, including its business and elite circles. The Chinese thus explore investment opportunities by appealing directly to Karimov, expecting his personal support.

Chinese overseas ventures are largely influenced by its quest to secure energy resources. China has invested nearly $600 million in Uzbekistan’s energy sector (Pravda Vostoka, July 19), but a lack of complementarity between the two economies prohibits robust trade. Despite serious gas export potential—Uzbekistan holds 1.2 percent of the world’s reserves and ranks second and third among CIS countries for gas reserves and production—the country lacks the pipeline infrastructure to efficiently export gas beyond its immediate neighbors. In addition, gas consumption in China is a minor component of energy consumption: according to the U.S. Energy Information Administration, gas accounts for 3 percent of China’s energy sources, although it is growing at an annual rate of 7.8 percent. The lack of integration in the gas sector makes it unclear how Uzbekistan will repay the Chinese for gas and oil loans and avoid the certain political ramifications of default.

A more promising area of cooperation is in Uzbekistan’s telecommunications market. Internet and telephone users are on the rise in Uzbekistan, and China is quickly seeking to establish a regional and global presence in this sector. The two responsible ministries in each country concluded an agreement on telecom cooperation during President Karimov’s visit to China from May 25–27, 2005. Shortly after in June, a Chinese delegation led by Deputy Minister of Information Xi Guohua arrived in Uzbekistan for negotiations (Pravda Vostoka, June 15). Uzbekistan has long sought a buyer for the state-owned Uzbektelecom, and it now seems that Chinese giants China Mobile Communications Corporation (CMCC) and Alcatel Shanghai Bell are ready to strike a deal on purchasing some shares of the state company. They held negotiations in August with Uzbek officials on this matter (Uzreport.com, August 4).

The Chinese are also taking over other parts of telecom market. Alcatel Shanghai Bell, one of China’s companies, with $1.4 billion revenue in 2004, has signed agreements on digitization of the TV broadcasting ($5.85m), modernization and extension of the telecommunication network for 77,982 ports ($4 million), and construction of 400 ground components for a satellite system of data transmission (Pravda Vostoka, July 20).

Another Chinese corporation, Huawei Technologies, one the two largest telecom providers in China with annual gross revenue of $5.58 billion (among which $2.28 billion came from international sales), is to carry out in 2005–06 a $12.5 million project to upgrade the fixed line telephone network of Uzbektelecom (Uzreport.com, June 7).

The third Chinese giant, ZTE, a pioneer of China’s telecommunications equipment manufacturing industry and a provider of telecommunications equipment, mobile terminals, and services, recently signed a memorandum of understanding in July with the Uzbek Agency for Communication and Information (UzACI) to produce telecommunications equipment in Uzbekistan using Chinese technology (Uzreport.com, July 20).

A few curious circumstances are worth noting. First, the inflow of Chinese investment can actually serve to cover Western commercial interests. This is especially the case in example of Alcatel Shanghai Bell, 51 percent of whose shares belong to the French-based Alcatel.

Second, Uzbekistan’s telecommunications sector appears to be on the verge of takeover by China and Russia. The Chinese dominate the modernization of networks in mobile and ground telephone, internet and digital TV services, while the Russians have a significant stake in the market of mobile phone operators. Although Uzbekistan benefits from investments that improve its telephone, TV, and internet infrastructure, China, for its part, is not so enthusiastic in supporting a domestic value-added production capability as it is in selling its own high-tech products.

In addition, Uzbekistan’s telecom sector might be the site of Chinese and Russian conflict, especially over internet services. Uzbekistan’s internet infrastructure turns through three major trunks: 1) via Kazakhstan Telecom then linking to the Russian backbone network and then to Europe; 2) a direct link to Russia provided by Transtelecom controlled by the President Karimov’s younger daughter, Lola Karimova; and 3) the 27,000 km Trans-Asia-Europe fiber optical network (TAE), connecting Frankfurt with Shanghai via the territory of Uzbekistan and 20 other countries. During recent years, the latter two routes have declined in use among Uzbek internet providers for a variety of reasons. Both are more expensive and outdated than the Russian trunk, and the Chinese are imposing internet filters to block websites at the network output level. Another factor is vested interest: the daughters of the Presidents have been engaged in business ties mostly with Russia, not China.

There are certainly limits for expanding Chinese business in Uzbekistan. The consumer market is relatively small, and declining living standards and inefficient and corrupt governance have led to low purchasing power by consumers. The Chinese can only count on the personal guarantees provided by the President to reduce the risk of the corrupted army of low paid bureaucrats and law enforcement officers. In the past, such personal protectionism failed to save Western companies from administrative barriers and extortions. Thus China will inevitably encounter the same need to promote economic and administrative reforms in Uzbekistan.

Not accidentally, all investment deals with Uzbekistan have so far been concluded on the intergovernmental level, as the Chinese are not so enthusiastic for direct investments without guarantees from the Uzbek government. This contrasts with the situation in Kazakhstan, where the government long ago gave up any guarantees for credit and has chose instead to create a favorable climate for foreign direct investments.

The lack of a comparable investment climate in Uzbekistan reflects an environment of atmosphere of wide corruption, nepotism and institutional instability. Chinese investors will need to accept these unstable conditions for their operation in the Uzbek market and rest in Karimov’s goodwill and mood that, as recent history has shown, can change quite suddenly.