Tashkent, Uzbekistan (UzDaily.com) — Uzbekistan’s economy is experiencing rapid growth, with GDP increasing by 6.4% in the first half of 2024. Last year, foreign investments doubled, opening up new opportunities for the development of large enterprises. But what about small and medium-sized businesses? Where should they turn for financing, and who is willing to take the risk and invest in young entrepreneurs?

In an interview, expert Alexander Ivanov discusses how SMEs in Uzbekistan can attract private capital and government support.

Uzbekistan’s economy continues to grow actively. In the first half of 2024, GDP grew by 6.4% year-on-year. Experts from the International Monetary Fund forecast continued growth in the future.

One of the drivers of this growth is the high pace of foreign investment in local businesses. Since 2022, foreign investment has doubled, reaching US$7.2 billion within a year. In the second quarter of 2024, businesses plan to utilize US$8.12 billion in foreign investments. Additionally, Uzbekistan is in the process of joining the World Trade Organization (WTO), which will open new development opportunities for the country.

However, investments primarily flow into large businesses in sectors such as mining, energy, and transportation. Small and medium enterprises will have to undertake considerable efforts to expect the same level of support, according to Alexander Ivanov, CEO of "Russian Assessment."

— Alexander, you have dedicated 25 years to assessing large companies, real estate, and intellectual capital. What can you say about the investment potential of Uzbekistan?

— Uzbekistan’s economy is one of the most dynamically developing in the post-Soviet space. Since 2017, we have witnessed explosive growth. The country has the potential to become one of the economic leaders in the region. There is a solid foundation for development: a large population of over 37 million, abundant resources, major enterprises, and developed infrastructure.

The development of small businesses is the backbone of the country’s economy, and its growth is also vigorous: in 2024, 618,944 small enterprises were registered in Uzbekistan, nearly double the figure from 2020.

— How has the investment climate for SMEs in Uzbekistan changed over the past few years?

— Previously, the government focused its efforts on attracting investments into large businesses. This is understandable, as large companies guarantee economic stability.

We can see the results: many international investors have entered the country. In the first quarter of 2024, the volume of investments in fixed assets in Uzbekistan amounted to approximately US$8.5 billion. Of this, 23% came from China, 13.8% from Russia, 8.5% from Turkey, and 7.2% from Saudi Arabia.

Currently, the investment climate for SMEs is undergoing significant changes—there is targeted regulation of investment flows to stimulate the development of SMEs.

— Are you personally witnessing these changes?

— Ten years ago, when I attended another conference in Uzbekistan, during coffee breaks, they would always offer instant coffee or three-in-one. Finding good coffee in the city was almost impossible. Now, there are coffee shops on every corner in Tashkent, offering excellent coffee and a wide variety of options. The development of coffee shops is a clear indicator of the dynamic growth of not only SMEs but also the entire economy.

I see explosive growth in bakeries and pastry shops, which manage to maintain a balance between homemade baked goods and mass production. There has always been high employment in the food service sector in Uzbekistan, but Tashkent has never had such a number of cafes before—there’s a vast assortment of offerings and natural products thanks to the specifics of Uzbekistan’s market. All these SMEs need support, whether from government or private funding.

— The most obvious solution is to take out a loan from a bank, right?

— It’s difficult to obtain loans; banks are eager to lend to stable enterprises with strong cash flow and sufficient collateral. SMEs are considered risky borrowers. Small businesses submit reports annually, lacking management structures, and have no assets to serve as collateral. Moreover, there is a very formal external control process, which typically involves just "paying taxes and sleeping soundly." No one delves into the internal processes of the business.

— If bank financing for SMEs is practically inaccessible, what alternatives exist? Should we rely on government support?

— Small businesses should focus on attracting private capital and participating in government programs. For venture businesses, one option is to find a business angel—a private investor willing to fund a promising project. Government support is beneficial, but it always comes with limited resources and volumes, plus an enormous number of regulations and procedures that must be strictly followed.

The essence of small business lies in flexibility and quick decision-making and actions. Often, small businesses cannot withstand the regulatory burden of these procedures.

I have seen several times how large structures, such as banks, buy or invest in IT companies. Just imagine what a young IT company is like—these are teams operating outside of regulations, where creativity is paramount: some work during the day, some at night, discussing and changing things on the go. Everything is very dynamic. And then comes a state bank with its regulations and protocols, where high officials spend 70% of their time on correspondence: incoming, outgoing, deadlines, meetings. And they say: now you must live by our corporate policy and must comply with templates, write reports, and protocols about your work.

What happens to such a business? It cannot handle this administrative load, and the team falls apart. Therefore, the finance department should indeed regulate cash flows, but it shouldn’t interfere in the regulations.

— One of the key sources of business financing worldwide is Private Equity—attracting private investment capital. How does this work in Uzbekistan?

— Investment funds offer more flexible conditions than banks. They mainly select businesses that are far from listing shares on stock exchanges. They choose the optimal time for themselves when a company has good growth potential but is still inexpensive. They take it under their wing and help it grow and mature. I would call them "forest sanitarians"—they select promising entrepreneurs and take on the unconditional risks, as not all projects become profitable.

Imagine a company with good growth potential. Private Equity enters the business for the long term, typically 5-10 years, with a clear exit strategy. This type of investor is in it for the long haul and offers favorable repayment terms.

The goal of a Private Equity fund is to ensure that the business grows and provides the required return. Shareholders want to participate in management, creating a board of directors and structural elements within the business that allow for long-term growth. They control how money is used and what actions the CEO takes. Not everyone is ready for this. If everything goes well, the investor exits the company, but if things go poorly, they start to intervene in the management, changing processes, and sometimes the founders of the project are forced to leave their own business.

— What factors prevent foreign investors from engaging with Uzbek SMEs?

— First, foreign investors place great importance on the presence of progressive corporate law, which includes corporate agreements and flexible financing instruments, among other things. Secondly, there must be legal provisions that allow for the employment of foreign specialists. Thirdly, the existence of private land ownership is crucial; many potential investors will not invest in businesses (manufacturing, hotels, shopping centers) if there is no right to land ownership. By the way, land privatization in Uzbekistan is ongoing, and there are already good examples.

— How can SMEs position themselves to attract both local and foreign investors?

— Any small or medium-sized business must mature enough to attract investment, especially if it involves equity financing rather than debt financing like loans. It’s essential to clear out any “skeletons in the closet”—to ensure legal and tax transparency, establish processes, and demonstrate a track record of success. And, of course, to organize the legal structure.

— If all these points are met, where should they look for investors?

— They should participate in exhibitions, business events, forums, conferences, and investor meetings. Preparing presentations about their business is crucial. They should apply for government grants and strive to obtain government support—this is a good way to make themselves known. It’s also essential to engage with crowdfunding platforms. Taking an active stance is vital; if they just sit and wait for money, it won’t come.

— Which sectors of Uzbekistan’s economy are the most promising for investment in 2024, and why?

— There is still a gap in the market for modern warehouses in Uzbekistan. This segment is virtually non-existent in the republic, especially regarding storage for agricultural products.

Agriculture is a very promising sector, particularly concerning the storage and processing of agricultural products. Other top niches for SMEs include information technology, tourism, services, food and beverage, retail, gas stations, and maintenance services.