Nine years after independence, geography keeps the Central Asian economies isolated from the West, and infrastructure keeps them closely tied to Russia. Uzbekistan, the largest and most diversified economy in the region, has better opportunities than its neighbors to enter the global economy through trade and investment. Policy choices, however, run toward isolation, not integration.
Uzbekistan has a three-tiered foreign-exchange system apparently designed to ensure easy money and safe havens for the privileged few. The government pegs the official rate at around 150 som to the dollar–a great deal for sanctioned importers and for those who can move local assets into dollars abroad. The commercial rate is 200 som to the dollar–a lousy deal for tourists, who have to cash their dollars at this rate at banks and hotels. The black-market rate in March was 850 som to the dollar.
On April 1, President Islam Karimov tightened controls with a decree that requires nonresidents to pay certain transactions in dollars. The som, it seems, is legal tender for some debts only. After the decree, the currency strengthened, driving the black market price of a dollar down from 850 to 650 as more dollars became available. But before long the som is likely to resume its downward slide. The exchange restrictions make investment in Uzbekistan unappealing and capital flight wonderfully attractive.
Since 1996, when the three-tiered system took hold, reserves have fallen by half, to just a billion dollars in a $60 billion economy. The World Bank and the International Monetary Fund have cut off lending and hardly seem likely to relent until policies change and change radically. Last year, in the hope of getting the money to flow again, President Islam Karimov promised to move toward a unified exchange rate by the end of 2000. The latest decree, some argue, is intended only to build up reserves in anticipation of liberalization later in the year. The build-up had best be substantial. Liberalization now would likely bring a flood of som-sellers to market, draining reserves, kicking up prices, and very possibly leaving the economy more isolated and impoverished than before.