Anecdotes of the Decline

by Nathan Hamm on 4/1/2010 · 21 comments

The latest anecdote indicating serious economic trouble in Uzbekistan is the proliferation of black market currency trading in Samarkand. As the value of the so’m rapidly decreases against foreign currencies like the dollar and the ruble, traders are seeing quick, guaranteed profits in trading currencies.

The official exchange rate for March 30 was set as 1553 sum per US dollar, while in the black market the US dollar could be bought at least for 2230 sum. The purchased US dollars and Russian rubles can be sold with high profit within a week. The dealer can make profit if he buys the currency in one city and sells in the other.

One doesn’t have to search long to find other signs of breakdown in Uzbekistan’s economy. There are many theories about the recent crackdown on big business, but one is that the state simply needs money. Meanwhile, cross-border trading was recently limited in the Ferghana Valley when the Qorasuv was closed to vehicles. Again, there are many reasons for the Uzbek government to do this, one of which is to discourage cash from leaving Uzbekistan. A further potential indicator of how bad the economy is becoming is the restriction on overseas travel for medical workers which, while preventing the spread of “false information,” also keeps doctors from seeking work overseas.

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– author of 2991 posts on 17_PersonNotFound.

Nathan is the founder and Principal Analyst for Registan, which he launched in 2003. He was a Peace Corps Volunteer in Uzbekistan 2000-2001 and received his MA in Central Asian Studies from the University of Washington in 2007. Since 2007, he has worked full-time as an analyst, consulting with private and government clients on Central Asian affairs, specializing in how socio-cultural and political factors shape risks and opportunities and how organizations can adjust their strategic and operational plans to account for these variables. More information on Registan's services can be found here, and Nathan can be contacted via Twitter or email.

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Mark April 2, 2010 at 8:36 am

I was in Samarkand a few days ago and everyone I offered dollars to accepted without hesitation or discretion. Bukhora was the same. Tashkent however was a different story. Changing money was easy enough on the street, but I had a hard time finding anyone willing to accept dollars for goods or services.

Brian April 2, 2010 at 11:32 am

You might also add the regulations that require many people to get their salary’s via debit card instead of cash, a way of limiting the amount of cash circulating in the country.

I hear in Bukhara that getting cash out with the cards will cost you 20%, while shops that can read the cards will still charge you up to 10% to pay with them.

Noah April 2, 2010 at 3:46 pm

Has this actually been enforced, and if so, in what areas? I know it’s something they threatened to do for years (force people to receive their pay on debit cards) but always had to cancel it in the face of obvious overwhelming popular opposition and the practical impossibility of really using those things for everyday purchases.

Brian April 2, 2010 at 8:37 pm

Firsthand reports from family in the Bukhara region is that they are indeed getting paid via plastic card and no one is happy about it. I can double-check the latest numbers later today but a 20% fee to get cash and a 10% fee to purchase goods is what I heard was charged when using them.

Metin April 3, 2010 at 6:33 am

the first (20% for getting in cash) might be true; the second (10% fee for purchase) in inaccurate.
The reason for difference is reportedly in first case (when you pay in cash) you pay less (20%) because you buy ‘illegal’ products, that’s traded in grey markets (with tax avoidance purposes). It is kind of US Americans (or Europeans) buying illegal cigarettes for less money. Plastic cards are partly unpopular, because those making their lives on shatter economy (like traders-speculators from Korasuv bazar) do not want to legalize their business.
As for normal products sold in supermarkets and grocery stores – you pay the same whether in cash or in plastic cards. I just bought gasoline with my plastic card paying 1175 UZ$ a liter of 91 grade oil (approximately USD 1.80 a gallon unofficial exchange rate) with no problems.

Nathan Hamm April 3, 2010 at 2:31 pm

Metin, they’re also unpopular because people are not able to get cash from banks. Opportunities to use the cards are limited and the fees are high (even at banks, when they have money, reportedly). They amount to an additional, de facto tax on incomes. At least if that money was in the grey market it’d be supporting economic activity.

Brian April 5, 2010 at 4:19 pm

I asked about this again and got it verified 20%/10%. It may be a regional thing in the sense that in Tashkent there may be an abundance of shops where a debit card is accepted, but smaller towns like Bukhara have fewer such shops and therefore those that do have the capability of taking payment via card may feel free to charge a fee to accept payment as such. I’m sure there’s a transaction fee just like in most countries, right? So someone’s got to pay for the transaction fee and the card processing equipment. It either comes out as a fee or as a general price increase.

The anecdotal reports (from in-laws) agrees with Nathan as well where just getting cash out of the bank via debit card is very difficult.

Metin April 2, 2010 at 2:19 pm

It is true that gap between official and black market exchange rate is widening. Whether it is an indicator of decline of the economy is however questionable. Depreciation of national currency might be good for private business exporting local products abroad – now demand for locally made products may grow – foreigners are able to buy more uzbek products for the dollar. Imported products are less affordable – consumers might choose their preference for locally made products.
Personally, I am not happy with USD exchange rate increase, as I get my salary in Uzbek sums; I guess those get paid in USD are happy about these changes.

Nathan Hamm April 3, 2010 at 2:28 pm

Metin, any time there’s rapid inflation it’s a bad sign for the economy.

If Uzbekistan made consumer goods or had large agricultural surpluses (and the capacity to export them) this might be the case. And the opportunities for business development are, to put it lightly, limited.

Remember when this happened in 2002 or 2003, it was an abject failure. The only people for whom it turned out well were the folks who had the connections to allow them to circumvent import barriers, access to hard currency at the official rate, and control of retail outlets.

Metin April 4, 2010 at 6:07 am

inflation and currency depreciation are different things. If USD falls against Euro it does not mean ‘anecdote of decline of US economy’. Consumer prices (unless imported in USD) did not change as you put ‘rapidly’. On the contrary, some foodstuff prices (eg. flour, rice) even fell a bit compared to the end of the last year.
I agree it is not normal that there is such a big gap between official and black market currency exchange – it creates lots of opportunities for fraud. Here I would like to know a bit analytics on the problem, rather than fast conclusions about ‘decline’ (got an impression, it is a wishful thinking). One reason might be indirect protectionism – artificially lowering imports. Another could be government’s desire to keep budget deficit under control. The third might be increased police control over black market (local TV regularly reports news about USD speculators being caught for illegal exchange business) – less opportunities to buy a dollar for those who need it. Note, that none of these does not necessarily speak about declining economy.

Nathan Hamm April 4, 2010 at 12:46 pm

You’re right, they are different things. But, since so many consumer goods are imported, depreciation of the so’m is essentially inflation because purchases have to be made with hard currency. As for why it’s happening, I think it’s a symptom of other factors in the economy — scarcity of cash, probably.

The decline of the economy isn’t something I wish for at all. I wish only the best for Uzbekistan and the Uzbek people.

Brian April 5, 2010 at 4:27 pm

But price inflation in sum is also increasing at a pretty rapid pace as well, no? My understanding is that the rate if inflation of basic foodstuffs is increasing faster than the rate incomes are increasing.

Here’s another anecdote, although the sample size is very small: some wages are being withheld again. An in-law of mine who works for a large state-owned company hasn’t been paid in over 3 months. It’s not as bad as the 6+ months in 2002-03, but I wonder if this is an outlier or if this is happening in other sectors?

Metin April 4, 2010 at 6:29 am

couple of more points:
1) current economic situation is not comparable to that in 2002-2003. Now economy is twice as big as it was then; exports are much stronger now; add to this labor migrants remittances that much exceed the volume of cotton exports right now.
2) as your points

– no doubt that money supports economic activity. But how about ‘dirty money’, say income earned by tax evasion? did people in West forget about Rule of Law? I don’t think so, unless some intentionally do so when they talk about ‘undemocratic regimes’.

bottom line: the title of article is inaccurate. No substantive evidence to support economy is ‘declining’. So, it would make sense to change it to somewhat ‘Anecdotes of Uzbek sums depreciation’ or ‘hidden protectionism’.

Nathan Hamm April 4, 2010 at 12:35 pm

“Decline” did not refer only to the economy, but I think that’s huge. There are plenty of signs of severe cash scarcity out in the provinces. The so’m is rapidly losing value. There are new limits on cross-border trade. There is an assault on big business. (I’m sure these businesses were up to no good, but rare is the big business is doing everything legally in Uzbekistan.) If Uzbekistan is anything like its neighbors, remittances have dramatically declined. All of these things are troubling.

Metin April 6, 2010 at 1:40 pm

severe cash problems in regions are nothing new as other things mentioned. Nevertheless I would not share gloomy perspective on the state of economy. Economic crisis in Russia, Kazakhstan as well as in other countries Uzbekistan trades with is coming to end. Soon demand for uzbek exports will grow. There already signs of it – GM exports are growing as well as demand for labor migrants’ services compared to the last year.
As for cash problems – yeah, they are troubling. Though, the idea of plastic cards is not bad in itself. It is usual that during initial stages of any reforms there are side effects. I live in Tashkent and can say that now cards are accepted in most groceries, drug stores, restaurants with their number growing. That is likely to be replicated in regions too.

DE Teodoru April 3, 2010 at 5:05 pm

Please consider forthcoming Chinese infusion of money and goods.

Dolkun April 3, 2010 at 4:36 am

Metin, Good analysis. This points to a conspiracy by the 20 or so foreigners left in Tashkent to decrease their bill at the bazaar. And good of you to note that while it may not be good for you, it is good for the rest of the country. I applaud your patriotism.

Metin April 13, 2010 at 3:39 pm

The report from Asian Development Bank predicts economic growth in Uzbekistan at 8.5% this year, and 9% in 2011.

michaelhancock April 13, 2010 at 5:05 pm

Economic growth estimates are on par with religious growth estimates – worthless except to tell us the opinions of the report writers.

Also, if you increase your economy (per capita) from $15/person/month to $16/person/month, that’s an 8 percent increase. Meaning that and a buck will get you a cup of coffee.

The lesson here is that an 8% growth for an economy as small as Uzbekistan’s, even if it were true, is not going to mean anything. And if you already know the on-the-street truth of horrible infrastructure, corrupt government officials, etc etc – why look to such a report to fool yourself? Uzbekistan is going to get worse before it gets better… at least because Karimov is uninterested in growing the economy, and getting rid of Karimov is going to hurt a lot, at least in the short run (I’m thinking revolution, rioting in Tashkent, destruction of gov’t and private business property in urban centers, etc.)

Metin April 13, 2010 at 6:10 pm

put emotions aside, what is credible gossips or report of respectable institution?
I agree with you about low per capita income in Uzbekistan. Yes the country is very poor, but not as poor as you put at $15 per capita in month. According to IMF data it is annual per capita income stands at $ 2805.
It looks like that despite ‘lack of political interest in growth’, economy has been expanding.

Metin April 13, 2010 at 6:34 pm

Uzbekistan is going to get worse before it gets better… at least because Karimov is uninterested in growing the economy, and getting rid of Karimov is going to hurt a lot, at least in the short run (I’m thinking revolution, rioting in Tashkent, destruction of gov’t and private business property in urban centers, etc.)

this is a very optimistic scenario. Real life experience of Ukraine, Georgia and Kyrgyzstan shows that things tend to develop in a different way.

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