Investors Unwelcome

by Nathan Hamm on 3/20/2011 · 17 comments

Uzbekistan recently demonstrated again that it is not a safe environment for foreign investment (to say nothing of business in general). The target this time was Swedish cosmetics company Oriflame; authorities froze the company’s assets and accounts while it’s under investigation for tax violations and illegally importing beauty products. This, of course, isn’t too out of character in a country where every noticeable part of the economy and society is either under the thumb or in the pocket of the elites running the country. (The action against Oriflame comes amidst attacks on other businesses and the closure of the Navoiy street consumer electronics shops.)

Kyrgyzstan, too, seems to be working to build a reputation for being a poor environment for outside investors. As if a reputation for regular popular unrest — some of which has seen business in the capital torched — wasn’t enough to make potential investors skittish, the attack on a South African mining company in Talas has to give foreign businesses second thoughts about working in Kyrgyzstan, especially with the government signalling that businesses will need to negotiate local politics on their own to survive.

Although mining companies provide much-needed employment, training and amenities to residents in frequently remote spots in the country, local authorities complain about a perceived lack of consultation.

In an effort to avoid that, the government is working on laws requiring mining companies to work more closely with local authorities.

In other words, they’re saying that finding and paying protection to whoever calls the shots locally will be the law of the land. Not to be too cynical or to downplay the passions that large investment projects do actually incite in the public, but “a mob of young men, some of them drunk and on horseback” makes this sound much more like a local elite sent out his gang of karate or billiards enthusiasts than it does a heartfelt expression of public sentiment.

The more often things like this happen, the lower and lower the bar gets preventinng additional actions of the sort. In fact, it seems that it has well and truly become normal and accepted practice for strongmen not getting their way to unleash their sportsmen. With large investors joining the list of normal and accepted targets, it can’t be long before investors considering Kyrgyzstan decide it simply isn’t worth it.


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This post was written by...

– author of 2992 posts on Registan.net.

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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{ 17 comments }

Don Bacon March 20, 2011 at 10:54 pm

Really?

Robert Blake, Assistant Secretary of State for South and Central Asia filed his diary March 10 after a recent visit to Central Asia.

Blake: “The purpose of our annual bilateral consultations with Uzbekistan and with the other Central Asian states is to broaden and deepen our cooperation with them. I think our talks with Uzbekistan were very successful in that regard. We had very detailed conversations about how we can work together more on things like Afghanistan, how we can expand cooperation on science and technology, how we can expand work on human rights inside Uzbekistan, and a huge number of other areas. So it was a very friendly, constructive conversation and I think bodes very well for our future relations.

“I had a private sector delegation come with me of some of our top American companies who are interested in doing more business in Uzbekistan. I think they had very good talks not only with members of the Uzbekistan government but also with the private sector there. So I think there are a number of good leads that they have as a result of those talks.

“We already have some big countries like General Motors who are producing cars in Uzbekistan. It’s a very large market there. But big companies like Honeywell, for example, I think would like to do more in the energy field, which is an emerging sector.”
http://www.state.gov/p/sca/rls/rmks/2011/158579.htm

Nathan March 20, 2011 at 11:20 pm

Yes, really. This isn’t too different than years past and it rarely amounts to anything. GM works in part because the Uzbek govt needs them so they can keep claiming they have a prestigious auto factory funded by foreign investors.

Don Bacon March 21, 2011 at 10:44 am

Thanks very much.
Then if the US Central Asia — Silk Road strategy of increased investment is faltering, it makes one of its principal components — the AfPak War — even more questionable.
Blake outlined the program in a recent speech.
http://www.state.gov/p/sca/rls/rmks/2011/155002.htm

Don Bacon March 21, 2011 at 10:51 am

Can you please give us more on this?
I’m interested particularly in State’s working with taxpayer funds via USAID funneled to AmChams to assist US corporations outsource US jobs through investment, job training, etc. — plus of course the AfPak angle I mentioned above — war as corporate welfare, or War is a Racket as my guru Smedley Butler famously said.
I’ve done a lot of research on Kazakhstan and the State/AmCham work there.
Thanks again. Fascinating stuff.
Follow the money!

Andrew Moriarty March 21, 2011 at 3:03 am

I think that Unocal’s and Bridas’s relationship with the Taliban in the 1990′s proves that International corporations will deal with anyone and are not adverse to paying bribes. That’s assuming that it will be profitable in the end, of course.

Nathan March 21, 2011 at 10:14 am

Bribery’s not the problem so much as it is that the bribery or protection money doesn’t buy you anything in Kyrgyzstan. Anymore, it seems like it’s just going to get someone to come shake you down to pay them as well.

Ian March 21, 2011 at 8:04 am

I know nothing about what Oriflame is really up to, but they’ve run into problems with other overly-sensitive governments:

Iranian authorities may have been unhappy with the way Oriflame allows women to work as a network of independent sales consultants for the company. Iranian authorities allege that the West uses the country’s once-vibrant civil society to foment public discontent against the country’s hard-line Islamist rulers.

I doubt that’s the reason, and at risk of reinforcing Andrew’s transnational conspiracy theory, it looks like Oriflame doesn’t know how to play ball in markets that are not really markets.

Turgai March 21, 2011 at 9:12 am

Maybe self-declared style icon GooGoosha wants to take it over?

DA March 21, 2011 at 7:46 pm

How much do you know about the way Oriflame has been doing business in Uzbekistan? As far as I know, they’ve been smuggling a large portion of their products into the country without paying any tariffs. Have you considered a possibility that reality might be an opposite of what you have described? That they’ve been paying bribes to certain people before, and what happened now is a crackdown on their illegal operations?

I think it also helps to be more specific about Oriflame’s investment in Uzbekistan. What is it that they have invested?
Uzbekistan government is not as delirious as you might believe. It follows policies that are straightforward, even if not always effective or useful. The government is obsessed with keeping positive trade balance and preventing foreign exchange from leaving the country through unofficial channels. Government tries to induce importers to start producing goods locally.

Oriflame’s case is the perfect example of what Uzbek government doesn’t want to see. The have been hemorrhaging foreign currency out of the country, not paying tariffs and refusing to localize their production.

In case of GM the situation is quite the opposite. The value of automobile exports right now, rivals that of cotton. GM is untouchable exactly because of its ability to earn foreign currency and willingness to produce locally.

Ian March 21, 2011 at 8:35 pm

Judging by their website, they look like some combination of Avon ladies and Herbalife. I seriously doubt this is a foreign-currency hemorrhaging operation. Not having done any research on it, I wonder how much of a domestic industry in exportable Uzbek women’s cosmetics exists to factor into trade balances here.

Tojik March 29, 2011 at 8:27 am

You’re quite right. When a Central Asian government tries to regulate foreign investors, they rise “bunt” and brand a very simple act of regulation as “unwelcome”, “hostile” and what-not, and portray a picture whereby one would think that all foreign investment is being looted in Central Asia.

C’mon! It is a common practice in the western world (in fact you can find articles online on the US government regulation, almost every day), and nobody brands anything and paints ‘rosy’ pictures.

If Oriflame has done things that are contrary to the laws of Uzbek land, they should pay for it not by loosing their assets and freezing their accounts, of course. The government could impose a hefty fine on the Co, or reach a deal instead of scaring off potential future investors.

Unless, of course, as someone suggested, GooGoosha has laid her greedy eyes on the company.

Laurent March 26, 2011 at 6:38 pm

I have never defended the Uzbek regime before and may never do so again, but my information (supporting DA above) suggests that Oriflame was indeed getting their products into the country in a way that avoided customs duties; and selling it in a way that avoided some taxes. Now then, maybe they tried to do it the legal way and found themselves unable to do it without paying large bribes; and maybe they have been hit now in a broader campaign against non-Gulnora businesses; I don’t know. But not every single thing that an evil, kleptocratic regime does is necessarily evil and kleptocratic in character.

Nathan March 26, 2011 at 6:54 pm

Fair enough.

Tojik March 29, 2011 at 8:34 am

You’re quite right. When a Central Asian government tries to regulate foreign investors, they rise “bunt” and brand a very simple act of regulation as “unwelcome”, “hostile” and what-not, and portray a picture whereby one would think that all foreign investment is being looted in Central Asia.

C’mon! It is a common practice in the western world (in fact you can find articles on the US government regulation almost every day), but nobody brands anything and paints ‘rosy’ pictures.

If Oriflame has done things that are contrary to the law of Uzbek land, they should pay for it not by loosing their assets and freezing their accounts, of course. The government could impose a hefty fine on the Co, or reach a deal instead of scaring off potential future investors.

Unless, of course, as someone suggested, GooGoosha has laid her greedy eyes on the company.

Nathan March 29, 2011 at 9:59 am

Tojik, the “but it’s the law!” argument kind of misses the point. Sure, Uzbekistan is a sovereign state and it should be able to enforce its laws, but if the laws drive investors away, they drive investors away. It’s clear that I don’t have all the details on what was going on with Oriflame, but if, hypothetically, they were unable to find a way to do business legally while making a profit, then that’s a problem for foreign investors, especially when well-connected locals regularly skirt the rules or have them changed so they can make a profit. It definitely scares off potential investors when a government sends the message that rules could be changed or selectively applied at any time unless you happen to be a major heavyweight like GM.

Metin March 29, 2011 at 11:48 am

Nathan, interesting argument. But I think it is flawed as Oriflame did not invest anything to this country. In fact, the company engaged in imports of cosmetics and allegedly used questionable marketing schemes to evade taxes. Relating this case to investment climate makes no sense. That’s not to say investment climate is favorable in Uzbekistan, though.

Kzblog March 30, 2011 at 6:59 pm

The reason Central Asian countries get mote flack for this kind of thing is in your comment. Unless Googoosha has set her eyes on it. The lack of transparency means you never know. Also while I’m sure Goga and her papa and their friends follow the law to the letter, if one of their companies accidentally forgot to pay a tarrif or, and I’m sure this would never happen, tried to pay a bribe, would they be shut down in Uzbekistan?

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