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Uzbekistan

Uzbekistan adopts single currency exchange rate

The Uzbekistan government has taken the long-awaited first step towards liberalizing the country's harsh currency controls. In typical Uzbek fashion, this first step — contained in Resolution No. 171 of the Cabinet of Ministers "On the Improvement of the Procedure for Accounting and Reporting with Respect to Currency and Export-Import Operations," April 28 2000 — is extremely limited and, in some respects, even secretive. Nonetheless, the fact that the government has taken any action at all is likely to be welcomed by foreign investors and multilateral financial institutions, which have pressured the government for some time to lift its controls and make the local currency — the soum — freely convertible.

As background, Uzbekistan has had, in practice, three exchange rates for several years: (i) an official exchange rate; (ii) the 'commercial' exchange rate; and (iii) the black market rate easily obtainable at bazaars throughout the country in violation of the law. The official rate has been the rate used for the calculation and payment of taxes, customs duties and other mandatory payments to the government. At the end of April, the rates for $1 were:

Official: 149.38 soums

Commercial: 225-230 soums

Black market: 710 soums

Under Resolution No. 171, all accounting, statistical and other official records and methods for assessing customs payments and settlements with respect to import-export operations are to be calculated using what is called "an exchange rate of the over-the-counter currency market as established on the interbank currency market" of Uzbekistan. Effective May 1, this new rate is set at 231 soums per $1. It will be adjusted weekly by the Central Bank.

Although the wording of this resolution lacks clarity, it appears that, as a practical matter, the official rate has been abandoned in favour of the commercial rate, thus ending the three exchange rates era, and giving Uzbekistan only one non-black market exchange rate. It also means, of course, that the soum has depreciated by approximately 36% when using the non-black market rates.

There are at least two reasons behind Resolution No. 171. First, the new exchange rate will allow the government to collect additional tax revenues and other mandatory payments at a higher rate where the payments are calculated in hard currency but paid in soums (eg, excise taxes and customs duties). More importantly, it appears to be a step towards the gradual liberalization of the Uzbek currency regime and, in particular, towards a freely convertible soum.

According to Resolution No. 171, the Ministry of Justice must submit proposals to amend legislation to conform to this resolution by May 13. In addition, Baker & McKenzie has learned that the government will soon adopt procedures to implement and clarify the resolution and, in particular, to clarify how the new rate will be set.

Like other sensitive Uzbek government pronouncements, Resolution No. 171 contains two paragraphs which are captioned "Secret" in the official publication. Typically, the "Secret" portions of Uzbek resolutions are those which are the most controversial or which grant special benefits to particular parties. Whether that is the case with Resolution No. 171's "Secret" paragraphs remains to be seen. Given the importance of this resolution, it is unfortunate that it is not fully transparent.

Mr Masters and Mr Saparov

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