As currencies across the region take a battering, Uzbekistan’s sum is holding relatively steady – officially. Unofficially, it’s a different story: the sum has plunged by nearly 50% against the dollar on the black market since the beginning of 2015, indicating that Tashkent is suffering far more from the economic storm hitting the region than it is prepared to let on.

The national currency in one of the world’s tightly controlled economies has fallen from around UZS3,200 to the dollar on the black market at the beginning of 2015 to UZS6,200, in line with the currencies of regional energy-exporting peers – the Kazakh tenge and the Azerbaijani manat. However, unlike these currencies, which had been tightly pegged to the dollar until August and December 2015 respectively, the sum’s black-market exchange rate slid relatively gradually.  

On the black market the sum's movements are largely influenced by market forces, with occasional interference by vested interests controlling the market who artificially, and temporarily, “strengthen” the sum’s value by spreading rumours, or during subscription campaigns to buy locally-manufactured cars in order to buy out cash dollars circulating in the country.

In contrast, the official exchange rate of the sum set by the Central Bank of Uzbekistan depreciated from UZS2,422.4 to the dollar at the beginning of 2015 to UZS2,841.6 on February 9, resulting in a 14.8% loss in value. Even though the sum officially depreciated much slower than on the black market, the pace of depreciation was faster than the 9.1% in 2014 and 10.9% in 2013.

Tight controls…

The slow pace of the sum’s official depreciation is explained by tight government controls over the country’s foreign trade in major commodities such as natural gas, gold, cotton and cars, and the profits vested interests make by having access to foreign currency at the official exchange rate and selling it on the black market.

On February 2, Uzmetronom.com, a website believed to be linked to the Uzbek security services, reported a government crackdown on one such group involving the chairman of Asaka Bank. The group arranged deals to buy Uzbek-made cars for cash dollars (buying cars for dollars doesn’t entail such long waits as in the case of buying for sums). The website claims that the group, protected by high-ranking government officials, charged dollars at the black market rate but transferred sums to GM Uzbekistan, a carmaker, at the official exchange rate, pocketing over half of the dollars to sell them on the black market.

Unlike, Kazakhstan, Azerbaijan and Turkmenistan, another tightly controlled country, Uzbekistan doesn’t depend heavily on exports of hydrocarbons and its economy and exports are more diversified, Farkhod Aminjonov, a senior research fellow specialising in Uzbekistan at the Almaty-based Eurasian Research Institute, explains: “Uzbekistan’s gas exports are not comparable to gas exports of Turkmenistan or oil exports of Kazakhstan, which is why low energy prices don’t affect the Uzbek economy and the currency as much as they affect the others,” he tells bne IntelliNews.

The analyst estimates Uzbek energy exports to account for about 20% of the country’s exports, which favourably compares to about 60% in Kazakhstan and 90% in Turkmenistan and Azerbaijan. According to BP Statistical Review of World Energy 2015, Uzbekistan exported 8.5bn cubic metres (bcm) of gas in 2014 against Turkmenistan’s 41.6 bcm, Kazakhstan’s 11.4 bcm and Azerbaijan’s 7.7 bcm (Kazakhstan also exported 62.4mn tonnes of oil and Azerbaijan 35.2mn tonnes in 2014, according to official statistics).

… create black market

The Uzbek economy’s lesser dependence on energy exports, government controls over foreign trade and the economy, and the country’s low exposure to global economic trends because of the government’s isolationist policies mean the authorities in Tashkent can maintain the exchange rate as low as they want, given the Central Bank is not obliged to sell foreign currency at the rates it sets.

Since the population and businesses still need foreign currency to travel abroad or trade with foreign countries, Uzbekistan has for long time had a thriving black currency market which is mostly regulated by earnings Uzbek labour migrants or traders make abroad.

Before the Russian economic troubles caused by the low price of oil and Western sanctions imposed for Moscow’s annexation of Crimea and meddling in eastern Ukraine, Uzbekistan used to send millions of migrant workers to Russia alone. In 2012, labour was the country’s largest export item as remittances sent via money transfer systems such as Western Union and MoneyGram to Uzbekistan from Russia alone totalled $5.7bn, or equivalent to 16.3% of GDP at the black market exchange rate, whereas official earnings from gas and other energy exports were $5.02bn (14.3% of GDP) and from cotton $1.25bn (3.6% of GDP).

Uzbekistan’s export earnings from labour migration would be even more impressive if money brought by labour migrants from Russia in cash, together with money Uzbek labour migrants earned in other countries are added to the $5.7bn – given the huge difference between the official exchange rate and the black market rate, one can boldly assume this money is converted into sums on the black market.

However, as the price of oil fell and Western sanctions arrested Russia’s economic growth and weakened the ruble, official remittances fell by 16% y/y in 2014 from a peak of $6.63bn in 2013 and further by 56% y/y to $2.06bn in the first nine months of 2015.

The Kazakh tenge and the Azerbaijani manat lost in value against the dollar last year as much as oil did, while the sum’s losses against the dollar on the black market are comparable to the fall in remittances. This means the pace of the sum’s depreciation will be on a par with a decrease in the supply of dollars on the black market, businessmen in Tashkent suggest.

At the same time, they don’t rule out that the sum may fall to UZS10,000 against the dollar, losing almost 40% in value this year. They complain to bne IntelliNews that a nearly 50% drop in the value of the sum on the black market in the past year has almost halved their earnings in dollar terms.

“The dollar rate is growing but my prices for cakes and biscuits I bake, which are in sum, remain pretty much the same,” a baker complains to bne IntelliNews. Like in other dollarised economies in former Soviet countries, people in Uzbekistan carry out major transactions such as property or car purchases in dollars. They also keep their savings in dollars to protect them against inflation and currency fluctuations, the baker explains.

Entitlement to dollars

Although the Central Bank explicitly states that it is not obliged to sell foreign currency at the rates it sets, ordinary people are officially entitled to access foreign currency in commercial banks, the rates of which slightly differ from the official rate to reflect the costs of cashing-in. However, they were banned in early 2013 from buying already-hard-to-access cash dollars from commercial banks; instead those who can prove their foreign travels are allowed to buy $2,000 per quarter on plastic credit cards to spend abroad.

bne IntelliNews’s enquiries made at major commercial banks in Tashkent have established that it is still hard to buy dollars even on plastic cards. Bank clerks explain that they only sell dollars when they buy foreign currency from their clients or when their clients deposit them. An acquaintance working at the foreign currency department in one of branches of the country’s largest commercial bank, the National Bank (not a central bank), in Tashkent told bne IntelliNews that the beginning of the year was the best time to get hold of non-cash dollars at his bank as it abolished months-long lists of people queuing to buy foreign currency at the end of last year and started new ones.