Uzbek president's trip to South Korea generates FDI, seeks interest in recently accelerated privatisation of industrial assets

For an authoritarian leader who travels abroad rarely, the fact that the first foreign visit of President Islam Karimov's new presidential term was to South Korea demonstrated an important departure from the well-established pattern of courting China and Russia. It is a testimony to South Korea's growing importance for Uzbekistan's economic development. Uzbekistan represents South Korea's leading trade partner in Central Asia, whereas for Uzbekistan, South Korea was fourth-ranked in its overall trade balance in 2014 with 5.2% compared to Russia's 24.5%, China's 12% and Kazakhstan's 6.1%. Trade turnover between the two countries has been steadily increasing from USD1.2 billion in 2009 to USD1.9 billion in 2014. The composition of bilateral trade is heavily skewed in South Korea's favour as Uzbek exports are mainly limited to cotton and uranium. As Central Asia's most populous country Uzbekistan is potentially a lucrative market for South Korea. Focus on Uzbekistan is consistent with Seoul's New Asia Initiative that aims to strengthen South Korea's international position by expanding its economic ties.

Bumper crop of deals to spur infrastructure improvement, industrial modernisation and defence co-operation

This was Karimov's eighth visit to South Korea and it turned out to be the most productive thus far, if judged by the record 60 bilateral agreements for investment projects worth USD7.7 billion in total. In this regard the announcement by the Korea Eximbank of a USD3-billion loan package for Uzbek banks was unprecedented and reflected confidence in the Uzbek economy. Prior to this announcement, Uzbekistan had already accounted for nearly USD2 billion of Korea Eximbank's investment finance projects. Equally important was the signing of the memorandum of understanding (MoU) between the Uzbek state-owned energy champion Uzbekneftegaz and GS Engineering & Construction Corporation to build a petrochemical plant at an estimated cost of USD4.5 billion. In a parallel development, Korean Air plans to expand the existing air cargo terminal in Navoi and to participate in the modernisation of Tashkent airport, which will cost USD312 million.

Karimov's visit on 27-29 May differed in one other important aspect. For the first time in seven years, the Uzbek state delegation included Minister of Defence Kabul Berdiyev. The Uzbek defence minister toured major defence enterprises and the two sides agreed for the first time to co-operate on military education by establishing regular academic exchanges.

South Korean connection to mitigate civil unrest and demonstrate independent foreign policy

South Korea is the third-largest destination in the world, after Russia and Kazakhstan, for Uzbek labour migrants. Exporting labour has become a crucial social safety valve for Karimov's regime, which is keen to avoid economically motivated protests. These would become more likely if labour migrants were to return en masse. In this regard the economic slowdown in Russia already resulted in a 15.9% reduction in the volume of remittances sent in 2014 compared to 2013. The Uzbek government is increasingly concerned about the return of low-skilled labour from Russia in particular, which explains the hastily developed public works programmes that are, in theory, intended to mitigate potential civil unrest. In this context, the Uzbek government attaches particular importance to Korea as a destination for excess labour. The two countries have developed a legal framework for migration, which on the Uzbek side is regulated by the Agency for External Labour Migration at the Ministry of Labour and Social Protection. As of 2014, according to the Uzbek official statistics, there were close to 15,000 Uzbek workers in South Korea, but the real number is almost certainly considerably higher due to organised crime facilitating illegal labour migration.

For Karimov, cultivating ties with South Korea is also the least risky option in terms of possible adverse reaction from either Russia or China. Due to geographic separation, neither is likely to object to Karimov's overtures with Seoul, which are primarily motivated by economic goals and are not viewed as politically sensitive. At the same time links with South Korea allow Karimov to show both Moscow and Beijing that he can chart an independent path to advance Uzbekistan's development agenda.

Outlook and implications

The record attendance by more than 300 South Korean participants representing both the government and business community at the Uzbek–South Korean business forum in Seoul, which was timed to coincide with Karimov's visit, provided solid evidence of the growing interest in Uzbekistan. Apart from the successful example of the automotive sector in which 20 South Korean companies, including General Motors (GM) Korea, operate 18 plants that produce cars and automotive components in Tashkent, Andizhan, and Khorezm provinces, the topography of South Korean business interests extends across a wide range of sectors such as mining, chemicals, machine-building, textiles, food industry, healthcare, tourism and transportation. Market entry is made easier by 412 joint ventures (JVs) and representative offices of 81 South Korean companies operating in Uzbekistan. Furthermore, the Uzbek government's recent push to accelerate privatisation of major state-owned industrial assets such as Navoi Azot and Ferghana Azot is very likely to generate considerable interest among South Korean companies (see Uzbekistan: 11 May 2015: Uzbekistan's privatisation drive reaches new level amid persistent renationalisation and non-transparent tender risks). Absence of major arbitration proceedings against the Uzbek government filed by South Korean companies indicates both their resilience and the preferential treatment they receive in an otherwise challenging commercial environment.