Political Risk Remains Elevated Amid Succession Uncertainty

BMI View: We do not see the recent limited transfer of powers to the Prime Minister in Uzbekistan as a sign that President Islam Karimov has outlined a clear succession strategy or is willing to de-centralise power from his office. While we expect Karimov to remain in power following 2015 presidential elections, uncertainty regarding succession will continue to damage the country's investment profile.

The succession strategy of Uzbek President Islam Karimov has become somewhat less uncertain give the apparent fall from grace of his daughter Gulnara Karimova, long speculated to be among the candidates to take over for the aging president. However, there remains a significant lack of transparency over the process that will continue to damage the country's investment profile.

In April the parliament of Uzbekistan passed a law broadening the powers of the prime minister, a post currently held by Shavkat Mirziyoyev. In addition, parliament was granted additional oversight over the activities of the cabinet, specifically in terms of economic and financial affairs. While this might be interpreted as a succession strategy becoming clear, or the beginning of a gradual de-centralisation of power, we view the changes as cosmetic in nature and see no concrete clarification on the issue of succession. There is little doubt that these directives came directly from Karimov, who has shown no sign of loosening his absolute control over all aspects of Uzbek governance.

Weak Growth Outlook For Main Trading Partners
Uzbekistan - Main Export Markets, % of Total

BMI View: We do not see the recent limited transfer of powers to the Prime Minister in Uzbekistan as a sign that President Islam Karimov has outlined a clear succession strategy or is willing to de-centralise power from his office. While we expect Karimov to remain in power following 2015 presidential elections, uncertainty regarding succession will continue to damage the country's investment profile.

The succession strategy of Uzbek President Islam Karimov has become somewhat less uncertain give the apparent fall from grace of his daughter Gulnara Karimova, long speculated to be among the candidates to take over for the aging president. However, there remains a significant lack of transparency over the process that will continue to damage the country's investment profile.

In April the parliament of Uzbekistan passed a law broadening the powers of the prime minister, a post currently held by Shavkat Mirziyoyev. In addition, parliament was granted additional oversight over the activities of the cabinet, specifically in terms of economic and financial affairs. While this might be interpreted as a succession strategy becoming clear, or the beginning of a gradual de-centralisation of power, we view the changes as cosmetic in nature and see no concrete clarification on the issue of succession. There is little doubt that these directives came directly from Karimov, who has shown no sign of loosening his absolute control over all aspects of Uzbek governance.

Health permitting, we expect Karimov to remain in power following presidential elections in 2015. The coming years will see Uzbekistan confronted with key challenges on the domestic and international front, making any transition at this time fraught with risks. Falling commodity prices and significant economic slowdowns in most of Uzbekistan's major trading partners, including Russia, Ukraine, Turkey and China, will make maintaining domestic growth rates and preventing rising social tensions significantly more challenging.

Weak Growth Outlook For Main Trading Partners
Uzbekistan - Main Export Markets, % of Total

Meanwhile, the withdrawal of International Security Assistance Forces (ISAF) from Afghanistan will pose key security risks, including the potential for a spike in Islamic militancy and increased tensions with neighbouring Central Asian states ( see 'Afghan Withdrawal To Raise Central Asia Tensions', 24 May 2013). Furthermore, with bilateral relations with Russia damaged by Uzbekistan's withdrawal from the Collective Security Treaty Organisation in 2012, there remains a risk that Russia could attempt to bring any new Uzbek leader back under its sphere of influence.

Regardless of timing, the eventual transition of power will have huge implications for political and social stability, policy continuity and external relations. This will require a new leader to successfully navigate the domestic bureaucracy and system of patronage which Karimov has developed over his two decades in power while maintaining economic growth and preventing external tensions from escalating. As such, even if Karimov remains in power for now, political uncertainty will remain a source of unease for potential foreign investors, who already face an extremely challenging operating environment.

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Geography: Uzbekistan
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