RFE Energy System Envisions Serious Reforms

UZBEKISTAN COMMERCIAL NEWS UPDATE

Date: June 2007

Author: Jahangir Kakharov, BISNIS Representative, Tashkent, Uzbekistan,

NOTE: THIS COMMERCIAL UPDATE IS DRAWN FROM THE UZBEK PRESS AND OTHER OPEN SOURCES AND SHOULD NOT BE INTERPRETED AS OFFICIAL U.S. GOVERNMENT INFORMATION

Natural gas: Uzbekistan tilts to China

TASHKENT. May 30 (Business Week) - Uzbekistan's fresh agreement with the Chinese to build a 530-kilometer natural gas pipeline to China shows that the Central Asian nation is trying to break Russia's dominance over natural gas exports and boost revenue, BusinessWeek reports. The pipeline is planned to have a capacity of 30 billion cubic meters a year, half of the nation's current annual production, the report said. Sitting on huge reserves of natural gas, the country annually produces more than 60 billion cubic meters of gas, nearly a quarter of which is exported to Russia, Kazakhstan, Kyrgyzstan, and Tajikistan. Nine and a half billion cubic meters was exported to Russia in 2006 and even more is expected this year. Most of the remainder of the nation's natural gas production is consumed domestically. Shavkat Majitov, first deputy chairman of the state-run Uzbekneftegaz company, told journalists the deal with China would allow the country to sell its gas at prices much higher than the Russian energy conglomerate Gazprom is now paying. The deal with China was signed in April. "A producer wants to sell gas at a higher price," Majitov said. "I can't say that we sell gas at a low price but our price is much lower than the price at which Gazprom sells it at Western markets." Uzbekistan sells gas at US$100 per 1,000 cubic meters, significantly less than the price Russia gets selling gas to the West. Given the rising demand for clean-burning energy on world markets, some officials in Uzbekistan believe Russia's domination of the market is depriving Tashkent of much-needed revenue and has hampered modernization of the industry. Much of the industry's infrastructure was built during the Soviet period. Gazprom has signed deals to tap new gas fields and help modernize the system. But Tashkent stalled in granting Gazprom licenses to exploit new deposits of gas. The Chinese deal and delay in granting exploration licenses is not seen as an assault on Uzbekistan's relations with Russia. "An attempt to get out of Russia would be suicide," said an official from Uztransgaz, a gas transport subsidiary of Uzbekneftegaz. The Russian industry defends the price it pays for natural gas from Uzbekistan, and one industry representative says Russia will continue buying the gas whereas the Chinese venture could take years to come to fruition. Yuri Shafranik, chairman of the Association of Petroleum and Gas Producers of Russia, considers US$100 per 1,000 cubic meters "a fair price." He downplayed the gas pipeline to China, noting that Russia has an established operation in Uzbekistan and has access to Europe's lucrative market. Uzbekistan and China still must agree on a 25-year pricing formula and repayment schedule that must be approved by the two governments. Also uncertain is whether China would commit to one or two pipelines: Beijing has also signed a deal with Turkmenistan that provides for China to buy 30 billion cubic meters of Turkmen gas each year for 30 years, starting in 2009, through a pipeline that would cross Uzbekistan.

Boeing to deliver two 787-8 Dreamliners to Uzbekistan Airways

TASHKENT. May 31 (UzA) - Uzbekiston Havo Yollari (Uzbekistan Airways) national company and Boeing corporation have announced an order of two Boeing 787-8 Dreamliners for the Uzbek airline, UzA reported. At a press conference on May 30 in Tashkent, Uzbekistan Airways said the new 787s will allow the airline to increase frequencies and add new internationally. "The 787-8's size and superior range open up a wider choice of destinations that we can offer our customers," said Valeriy Tyan, General Director, of Uzbekistan Airways. With today's announcement, Uzbekistan Airways becomes the first carrier in Central Asia to order the 787 Dreamliner. The 787 produces 20% fewer CO2 emissions and has a 60% smaller noise footprint on takeoff and landings than other airplanes in its size and range category. The Boeing 787 Dreamliner provides passengers with a better flying experience and operators with more efficient commercial jetliners. Using up to 30% less fuel per passenger than similarly sized airplanes, the 787 is designed for the environment with lower emissions and quieter takeoffs and landings. Inside the airplane, passengers will find cleaner air, bigger windows, more stowage space and improved lighting.

NGMK's northern unit exceeds gold production target by 8.9%

TASHKENT. June 4 (Uzreport) - Uchkuduk is the heart of Navoi Mining and Smelting Plant (NGMK). More than half a century ago geologists found uranium deposits here and in 1958 industrial development of the field in Central Kyzylkum was launched. Today the Northern Mine Administration is one of the largest divisions of the NGMK, which produce and process gold and uranium, as well as consumer goods. According to the figures published by the NGMK, in the first quarter this year as a result of development of new open casts and technology renewal, production, as a percentage of the result for the same period last year, made up 153.8%. The gold production plan was exceeded by 8.9%. Improvements are also observed in the sector of uranium production. Within a short period the workers of the plant carried out construction and mining-preparatory works which made it possible to launch local-sorption units and meet the production targets. The plant is implementing the state programme on uranium production for 2007-2012. According to the programme, the Northern Mining Administration is to raise sulfuric acid production to 450,000 tons annually and taking into account partner enterprises – to 490,000 tons annually by 2012. For this purpose, by 2012 the division is to raise the plant's capacity coefficient through the construction of a new OU-70 tank and furnace, replacement of absorption towers, construction of a new cooling tower and assembly of modern acid coolers.

Tender on sale of Jarafshan-Newmont assets canceled again

TASHKENT. June 5 (Interfax) - Another tender on the sale of the property complex of the Zarafshan-Newmont gold-mining joint venture, 50% of which belongs to the American Newmont Mining, was canceled due to the absence of tender offers. Interfax quoted Deputy Chairman of the Republican Real Estate Exchange Ravshan Saidov saying that the decision on the rescheduling of the tender should be made by the JV's creditors' club. This was the fifth attempt to sell the assets of the enterprise recognized as bankrupt. The first trades scheduled for 18 December 2006 did not take place as only one offer was received. No offers were received for the subsequent tenders invited in January, March and May of this year. The creditors refused to reduce the price at all stages of the tender.

On 29 September 2006, the Economic Court of Uzbekistan satisfied the tax claims, and initiated bankruptcy procedure against Zarafshan-Newmont. In July 2006, tax agencies filed a case on the tax debts of the enterprise for 2002-2006 in the amount of 61 billion soums (approximately US$49 million). In August of the same year gold and a part of the company's assets were arrested.

Zarafshan-Newmont JV was set up in 1992 by American Newmont, State Committee for Geology and Mineral Resources of Uzbekistan and Navoi Mining and Smelting Plant to process the off-balance ores in the Muruntau open cast (main gold-ore base of Navoi Plant) by the method of heap leaching. In May 1995 JV launched an enterprise worth US$225 million.

At this time the plant processes off-balance ore with a lower content of precious metal (1.1 g/t), which leads to the lower production of gold. In 2005, Zarafshan Newmont produced 7,700 kg of gold against 12,000 kg in 2004. In 2006 JV produced approximately 7,200 kg of gold.

ADB delegation visits Uzbekistan to discuss cooperation

TASHKENT. June 5 (Uzreport) - Top-level delegation of the Asian Development Bank (ADB) paid a visit to Uzbekistan on 4 June to discuss the possibilities of developing and strengthening cooperation. The management of the ADB Department for the Countries of Central and Eastern Asia, headed by the Director-General Juan Miranda discussed the latest achievements in bilateral cooperation and plans for the future at the meetings with the Deputy Prime Minister and Minister of Finance Rustam Azimov, Deputy Prime Minister Ergash Shoismatov, and other officials.

"ADB is glad to assist Uzbekistan in achievement of economic growth through a more intensive support of economic reforms in the country," Mr. Miranda said. "We will be glad to assist the country's economic growth and improvement of the living standards of its population."

In the course of the talks the parties discussed the establishment of long-term cooperation in the sectors of economy which the government finds to be especially important and to which ADB may provide quality services. ADB delegation noted on the progress in economic reforms in the country, including the reforms in the management of state finances, and confirmed its preparedness to provide assistance in the achievement of development goals in Uzbekistan.

This visit is the second visit this year, in accordance with the agreement reached by the parties in January 2007, which envisages the organization of regular meetings with the aim of strengthening cooperation. ADB is considering the possibility of issuing loans for the total amount of US$500 million in the following three years to the priority sectors of economy, such as state finance administration, agriculture, public education, city and rural water supply, transportation, irrigation and micro-financing.

The parties also discussed the possibility of ADB's launching operations in the private sector of Uzbekistan, including investments in commercial banks and telecommunications sector. Both parties expressed their support of the development of long-term country development strategy. The goals pursued by the Asian Development Bank include the reduction of poverty in the countries of Asia and Pacific region through sustainable economic growth, social development and good governance. Founded in 1966 ADB now has 67 members, of which 48 are in the Asian-Pacific region. In 2006 ADB approved loans and grants as a part of technical assistance for the total amount of US$8.5 billion and US$242 million respectively.

Uzbekistan raises tariffs for transit of cargo to Afghanistan

TASHKENT. June 5 (Uzreport) - The government of Uzbekistan has increased the tariff rate for the transit of cargo vehicles through the territory of the country to the neighboring Afghanistan, Rosbalt quoted State Customs Committee. The tariff for transportation of commercial freight sent from a station in Termez to the Afghan city of Hayraton has been increased from US$5 to US$50 per unit of transport. Railway-automobile bridge of Hayraton was built in the early 1980s and until 1989 it was called Most Drujba (the bridge of friendship). In spring 1997, due to the rule of Taliban in Afghanistan, and for the purposes of security, the Uzbek government closed communication along this only bridge across Amudarya. In December 2001, Uzbek Government and UN signed a protocol on assisting the delivery of humanitarian aid to the Afghanistan. In February 2002 Uzbekistan opened communication on Hayraton bridge, at first only for the transportation of foodstuffs, medications and other humanitarian freights. At this time movement across the bridge is not restricted. In January 2002, in line with the special resolution of the Uzbek government, reduced rates were established for commercial freights transported to Afghanistan from the station in Termez to the Afghan station of Hayraton. For the transfer of one car, Uzbek side charges US$180, for one 40-tonnes container – US$180, and for 20-tonnes container – US$90.

To date, transit of cargo by a motor vehicle brought Uzbek treasury only US$5. The fee is taken in foreign currency directly at the customs posts. According to the State Customs Committee of Uzbekistan, over 80% of cargo is transported to Afghanistan through Uzbekistan by motor vehicles. As stated in the special government resolution, tariffs are increased "for the purpose of improving the efficiency of export and transit cargo transportations to Afghanistan, and timely implementation of measures for technical maintenance and exploitation of Termez-Hayraton bridge". In July 2006, Islamic Development Bank and Japan Bank for International Cooperation expressed their intention to issue Uzbekistan two loans for the total amount of uS$16 million for the development of railway networks, connecting the territory of the neighbouring states. The reconstruction of the bridge across Amudarya is included in one of the projects. The development of the feasibility study is scheduled for the next year.

Government decision simplifies obligatory certification procedures

TASHKENT. June 8 (Uzreport) - Based on the recommendations of the State Demonopolisation Committee, the Cabinet of Ministers of Uzbekistan has passed a resolution No. 104 "On introduction of amendments and addenda to certain decisions of the Government of the Republic of Uzbekistan". The document envisages amendments to the Resolution of the Cabinet of Ministers dated 6 July 2004, particularly the provision envisaging the reduction of the list of products made subject to obligatory certification, the press service of the State Demonopolisation Committee said. Thus, around 250 sub-positions of different types have been excluded from the list, and a declaration procedure is envisaged for the products, such as cigarettes and cigars, tires for trucks, fabrics made of cotton fibre, multi-layer insulation materials, insulated cables, lamp holders, etc. In total around 170 products are made subject to declaration.

Aviabalt to issue some US$38m for IL-114-300 aircrafts production in Tashkent – report

TASHKENT. June 8 (Uzbekistan Today) - Aviabalt, a subsidiary of Russia's Technospetstal-Engineering, is expected to bring in 1 billion rubles (nearly US$38.6 million) at the expense of debenture bonds that will be issued, according to Uzbekistan Today news agency. These funds will be used for the purchase of components for the production of IL 114-300, turbo-prop middle-range aircraft, in Tashkent, the report said. In May 2006, Technospetstal-Engineering (St. Petersburg) signed a contract with Tashkent Chkalov Aircraft Association (TCAA) for the production in 2006-2008 of thirty IL-144 planes powered by Russia engines TV-117SM. In accordance with the contract, the airplanes will be fitted with Russian-made avionics, namely, modernized digital aviation complex.

Besides, TCAA is to supply Uzbekistan Airways National Air Company with two IL 114-100 passenger planes till the end of this year. In 2001, TCAA and Uzbekistan Airways concluded a contract for the acquisition of three IL 114-100 planes worth US$21.5 million. In 2002, the National Air Company received its first plane and in early 2003 put it into commercial service for local routes.

The substantial portfolio of orders for this type of airliners is attributed mainly to the problem of renewal of passenger air base of middle-range planes. An-24 and Yak-40 types can no longer satisfy the carriers of the CIS which are experiencing a deficit of the new technology of the said type. Regional carriers in the CIS are ready to purchase new planes. Vyborg, a Russian air company, is already using two IL-114 planes. "This plane will cover its cost within 5-7 years," says Georgiy Nazarenko, Director General of Vyborg. According to him, the company is ready to put into service ten planes a year, which will allow it to carry out air transportation in the northwestern direction. According to Aviabalt estimates, the potential capacity of the market of regional planes in Russia is 250 units. But this is not the limit: considering the fact that investors are starting investing into the development of regional airports, it cannot be ruled out that in the near future the demands for middle-range planes will largelyincrease. This is beneficial for Uzbekistan too, as it will create jobs and bring funds into the state coffers. No doubt, the new contracts will enhance the investment attractiveness of TCAA.

ress release of Government, Central Bank of Uzbekistan and IMF

TASHKENT. June 18 (Uzreport) - A mission of the International Monetary Fund (IMF) visited the Republic of Uzbekistan from 4 June through 13 June 2007. The mission was headed by Ms. Sena Eken, assistant director in the Middle East and Central Asia Department of the IMF.

The purpose of the mission was to review recent economic developments and policies, update the projections for 2007, and continue the constructive policy dialogue with the Uzbek authorities. The mission expressed special gratitude to the authorities for their excellent cooperation and the frank exchange of views.

Following a strong performance in 2006, the Uzbek economy has continued to perform well, with a GDP growth rate exceeding 9 percent in the first quarter, a large external current account surplus, and a further accumulation of foreign exchange reserves. Large increases in net foreign assets have been mirrored in the growth of monetary aggregates. Nevertheless, there are indications that inflation has eased and confidence in the banking system has improved. Fiscal policies have remained cautious, while the tax burden declined and important progress was made in Treasury reforms.

With prospects of continued high growth and a strong balance of payments position, the authorities and the mission agree that the key priorities for Uzbekistan are to ensure continued decline in inflation and develop the financial sector.

To further reduce inflation, the mission emphasized the need to have supportive monetary, fiscal, exchange rate, and trade policies. The mission is encouraged by the intention of the authorities to conduct an appropriately tight monetary policy during the remainder of the year; continue to pursue cautious fiscal policies; adjust their exchange rate policies as economic developments warrant; and further ease impediments to trade, including by adopting the new customs code and ensuring full foreign exchange convertibility for imports.

The authorities and the mission agreed on the importance of developing an efficient financial sector to support growth in the medium term. The mission encourages the authorities to consolidate the improved confidence in the banking system by discontinuing the role of banks in financial oversight and government treasury operations and ensuring that the anti-money laundering regime is in line with international standards.

The mission welcomes the authorities' commitment to address issues related to national income, price, and balance of payments statistics.

The Fund staff stands ready to assist Uzbek authorities in their reform efforts, including through technical assistance in financial sector and statistical data issues.

Uzbekistan to implement construction industry modernization program worth US$343m – report

TASHKENT. June 18 (Uzreport) - In 2007-2011 Uzbekistan plans to implement the programme of modernization, technical and technological re-equipment of construction materials producing companies worth some US$343 million, Interfax quoted a source in the management of UzStroyMaterialy (Uzbek Construction Materials) Company.

President Karimov has approved the programme. The programme envisages the implementation of 36 projects at 14 enterprises. For the financing of the projects, US$157.5 million will be drawn from the enterprises' own funds, and US$185.5 million will be attracted in the form of foreign investments.

A major portion of these funds – US$302.4 million – will be used for the modernization of cement production.

It is expected that as a result of the programme, cement production will be increased 1.5 times against 2006 level to 8.326 million tons, slate production – 1.3 times to 545 million conditional slates, ceramic tiles – 1.3 times to 106,500 pieces, mineral wool products – 1.7 times to 40,000 cubic meters, pre-cast concrete – 10.3 times to 40,000 tons. It is also expected that export volumes at the enterprises will be increased 2.2 times to US$120.63 million.

Construction of two small hydroelectric power stations launched

TASHKENT. June 25 (Uzreport) - Uzvodenergo (Uzbekistan Water Energy) Specialised Association (a division of the Ministry of Agriculture and Water Management) has launched the construction of Andijan and Ahangaran Small Hydroelectric Power Stations. The budget of two construction projects totals approximately US$16.9 million, Interfax quoted a source in the Association's management. The source said it was planned to appropriate about US$3.7 million this year. Construction is scheduled to be completed by the late 2008. All works are currently running in accordance with the project plan. The China National Electric Equipment Corporation (CNEEC) has already started the installation of equipment for the energy blocks of the stations.

Early this year, CNEEC signed a contract with the Ministry of Agriculture and Water Management of Uzbekistan for the construction of Andijan and Ahangaran small hydroelectric power stations. The contract envisages the delivery of equipment and chief-assembly of two energy blocks with the capacity of 50MW for the Andijan station, and with the capacity of 21 MW for the Ahangaran station, as well as the training of the personnel. The construction is funded through the US$15.93 million loan of the China Eximbank, provided under the guarantee of the Uzbek government, and UzbekEnergo's own funds. It is planned that Andijan station will produce 171.1 million KW/h of electric energy yearly, and Ahangaran station – 66.5 million KW/h.

In line with the small hydroelectric energy development programme, Uzbekistan plans to build 41 small stations with the total capacity of over 1,180 MW by 2010. The total budget of the programme totals some US$250 million. Currently, about 48 billion KW/h of electric energy is produced in Uzbekistan yearly. The share of hydroelectric power in this makes up only about 10%.

New large beer producer to launch production soon

TASHKENT. June 27 (Uzreport) - The beer market is one of the fast developing sectors of the national food industry. Beer production is growing at the average annual rate of 13%, and in 2006 exceeded 1.2 million hectoliters. The Uzbek beer industry is currently represented by 10 large beer brewing factories, a relatively large number of mini-breweries, and bars brewing beer in limited volumes, primarily for clients.

The largest beer producers of Uzbekistan include Inter-Rohat Uzbek-American JV (Kibray brand), Mehnat-Pivo (Patriot), Almalykpivo, Pivzavod No. 1 Uzbek-Czech JV (Pulsar), Raupxon (Yunusabad), Ziyobakhsh Uni Trading Uzbek-German JV (Asia). The joint production capacity of these producers exceeds 2.2 million hectoliters yearly.

Another large beer brewing factory is under construction. The Baltic Beverages Holding and Sarbast Plus plan to launch the production in July 2007. The brewery's projected production capacity is 1 million hectoliters yearly. It is expected that the launch of the new factory will become a landmark event for the Uzbek beer market. A large new player may seriously affect the sales of the current market leader Inter-Rohat JV, and change the situation in the market in general.

For more information on Uzbekistan, visit BISNIS online at

http://www.bisnis.doc.gov/bisnis/country/Uzbekistan.cfm

or contact: : Jahangir Kakharov, BISNIS Representative, Tashkent, Uzbekistan,

Email: bisnis.tashkent@bcc.com.uz

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov)