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Prospects of Iran-Uzbekistan Strategic Economic Partnership

19 Jun 2023 - 14:22

Translator : Mohsen Shahrafiee

The relations between Tehran and Tashkent have experienced a growing trend in recent years. However, trade exchanges of less than one billion dollars, and the lack of mutual strategic dependencies can still provide instability in this trend. Meanwhile, software infrastructures such as preferential trade agreements (PTAs), agreements in the field of customs information exchange, electronic transfer of business and economic data, money transfer, transit agreements and other things like that, can lead to stabilization of this trend. If governments focus on large projects as well as the systematic development of interactions in some specific areas - in such a way that irreplaceable complementary roles are defined for Tehran and Tashkent - they can create this geo-economic interdependence, and stabilize development trends in bilateral economic and trade exchanges.

By: Omid Rahimi

Since 2017, Uzbekistan has gone through a certain process of development and reform. In many estimates, this country is one of the important regional hubs in the fields of politics and economy in Central Asia and the former Soviet Union. Thus, the development of interactions with this country can be one of Iran's Eurasian neighborhood and strategic policy. Despite the existence of broad capacities in politics and security fields, as well as the existence of common views on important issues such as Afghanistan, the economy and geo-economy is still the key axis and the main driving force of these interactions. Therefore, the development of strategic areas of economic cooperation can prepare the ground for strengthening interactions in other areas as well. In this report, we try to examine the driving forces and perspectives of Iran-Uzbekistan economic cooperation, by looking at geo-economic interdependencies.

The latest economic and business status
One of the fastest sustained economic growths in Central Asia - and the former Soviet Union in general - has been experienced by Uzbekistan in recent years. By focusing on stopping the sale of raw materials, industrial development, and optimal internal use of energy resources, this country has been able to experience an industrial development process, along with strengthening regional trade. In 2022, the total foreign trade of the country exceeded 50 billion dollars, and experienced a growth of 18.6 percent (equivalent to 7.84 billion dollars), which is considered a suitable leap in the post-COVID era. According to statistics, Uzbekistan's exports this year reached 19.3 billion dollars, experiencing a growth of 15.9 percent. Although the gold export in 2022 has formed the main part of Uzbekistan's foreign exchange earnings with a growth of 21.1 percent, we have also seen promising indicators in the field of other key industries, especially industrial machinery. The table below shows the growth of non-gold exports in Uzbekistan in 2022 based on official reports.
Industry Growth rate in 2022 Total exports
Textile products 8.6% 3.18 billion dollars
Fruits and vegetables 19.7% 1.15 billion dollars
Gas 25.4% 910.9 million dollars
Oil and oil derivatives 210% 168.1 million dollars
All kinds of fertilizers 18.3% 409.9 million dollars
Grains 19.7% 357.7 million dollars
Machinery and equipment for electricity production 510% 172.9 million dollars
Industrial machinery and its parts 280% 81.6 million dollars
In the field of imports, this country has exceeded 30 billion dollars, with a growth of 20.4%. In this area, with the growth of grain imports to 1.07 billion dollars (28.9% growth), food industry to 477.8 million dollars (67.6% growth), oil and oil derivatives to 1.27 billion dollars (9.8% growth), medicine and medical equipment to 1.6 billion dollars, plastic materials to 836.6 million dollars (35.4% growth), and iron and steel to 2.51 billion dollars (20.2% growth), we have witnessed the growth of the country’s market. This clearly proves the development of Uzbekistan's trade as well as its acting role in the field of regional and international trade. So, this country can be considered an important business partner for Tehran, due to its cultural commonalities and geo-economic ties.

The trade relations between the two countries have also been growing in recent years. Since 2017, the total trade exchange between Iran and Uzbekistan has increased from 160.2 million dollars to 503.8 million dollars in 2021. The commercial exchanges of the two countries have grown more than 3 times compared to the pre-Covid-19 era, which indicates the existence and revival of extensive economic capacities in this area. In 2021, compared to the same period of the previous year, we have witnessed a 103% growth in the trade exchanges of the two countries. This leap happened in a situation where there were many restrictions on transit through Turkmenistan during the Covid-19 outbreak period, and software infrastructures, such as PTA, was still not established between the two countries. The positive prospects for removing these barriers and the formation of geo-economic interdependence in the region, especially after the war in Ukraine, have made Iran and Uzbekistan to target 2 billion dollars for bilateral trade exchanges within the framework of the joint commission. This targeting will be possible by focusing on the relative advantages of the two countries for each other, and strengthening complementary areas.

Economic advantages of Iran for Uzbekistan
Transit: Iran's unique geo-economic position to provide access to open waters for Central Asian countries is always considered the first and most important economic advantage in bilateral interactions. Uzbekistan which is becoming the industrial, economic and trade hub of Central Asia is naturally required to diversify into safe, short and cheap routes for its international trade. Also, due to the wide diversity that Uzbekistan's foreign trade has found by being present in the new markets of Africa, Southeast Asia and even South America, this issue has become more important than before. At the same time, due to the limitations of using the Russian route after the Ukraine war, as well as the high risk of Afghanistan-based corridors, Iran will become the fastest and safest route for Uzbekistan. On the other hand, the total trade exchange between Tehran and Tashkent reached 776,000 tons in 2021 (with a growth of 100%). This shows that the two countries are in dire need of transit to achieve their $2 billion trade target.

Technical services and technology: During four decades of extensive sanctions, Iran has been able to become a symbol for the localization of global technologies and self-reliance in domestic technical services. Tashkent is fully aware of these capabilities and this has been clearly evident in the interactions of various Iranian and Uzbek institutions in recent years. It seems that Tashkent is interested in this sphere and wants to follow a similar path of technical and engineering self-sufficiency, and reducing foreign dependency. On the other hand, compared to Western countries, the Islamic Republic of Iran is less sensitive to the transfer of technology and providing its up-to-date knowledge to neighboring countries, and transfers these intangible capitals at a much lower cost. Therefore, even for sensitive and "high-tech" industries in fields such as oil and gas, petrochemical, energy and similar cases, there is no serious challenge regarding knowledge transfer in the relations between Tehran and Tashkent. At the same time, Iranian companies provide many of their technical and engineering services with indigenous technologies, at a lower cost than European and even Chinese companies, which has been attractive to Uzbekistan in recent years.

Joint consortia for supplying strategic goods: After the outbreak of the Coronavirus pandemic and even with the start of the war in Ukraine, providing basic goods in the world including grains, sugar, oil and oilseeds, and some other products in high volume, became a serious challenge. The approach of the suppliers of these products also made the conditions of importing countries difficult. Meanwhile, countries with less needs and limited access faced more problems compared to the big buyers of these products. The Islamic Republic of Iran, with a population of 85 million people, is generally considered as one of the major hubs for supplying these products to neighboring countries. Businessmen from Iraq, Syria, Afghanistan, and even Armenia and Turkmenistan buy some of these goods through Iranian companies at a more reasonable price and with a higher reliability. Naturally, the systematic partnership of Uzbekistan with Iran to provide these products in the form of joint consortia can turn the two countries into distribution hubs for these products in the Central Asia region. In this context, Iran has unique capabilities for Uzbekistan, due to its direct sea access, high volume of direct purchases, large shipping fleet, and greater capabilities in providing standard products. The direct supervision of governments on the process of providing these goods, alongside the private sector, also increases the possibility of forming such consortia. Meanwhile, it should be noted that the formation of such consortia for goods produced by two countries (such as petroleum derivatives, some chemical products such as potassium chloride and ammonium sulfate, steel, and similar products) is also applicable bilaterally, not multilaterally.

Economic advantages of Uzbekistan for Iran
Iran's geo-economic hub in Central Asia: Uzbekistan is located right in the heart of Central Asia, and has easy geographical access to all four countries in the region as well as Afghanistan. At the same time, in the contemporary process of development of Central Asia, Tashkent has historically played a leading role during the last century and has achieved an inspiring position in the field of industry and economy. Uzbekistan also has a great ability to create business trends in Central Asia due to its 35-million population, which is equivalent to half of the entire population of Central Asia. The reform trends and economic development since 2017 have made this country a role model for reforms in the new generation of regional leaders. All these conditions prove that Tashkent is a strategic partner for Iran to establish geo-economic interdependence with Central Asia. In such a situation, Uzbekistan can play the role of an economic hub for Iran. Tashkent, of course, has played this role for many other regional and international actors in recent years, during which a platform of common interests has been created.

The value chain of Textile industry: Uzbekistan is the largest hub of cotton and cotton yarn production in Central Asia. This country is also becoming one of the textile hubs of the region and the world by banning exporting cotton, and even importing it, and trying to limit the export of cotton yarn in the coming years. The Islamic Republic of Iran also has great potential for development of this industry, with a wide history in the textile industry, very high consumption of textiles, and great capabilities in the technical and technological fields of this industry. However, the textile industry, like many other industries, requires the completion of the value chain for the development of domestic and international markets. Uzbekistan is the only actor that has the power, capacity, infrastructure and facilities to play such a complementary role alongside Iran. The textile industry, if activated in Iran, can become one of the important factors for developing the non-oil economy.

Suitable and low-risk investment platform: Despite the fact that the Islamic Republic of Iran is considered a developing country, and the lack of capital has always been one of the obstacles to development in Iran, at the same time, it has always experienced a level of capital overflow. Part of this capital overflow is due to high oil revenues, part of it is due to economic needs, and part of it related to challenges related to the instability of the domestic economy which leads to capital flight. In such a situation, there are suitable and low-risk investment opportunities in Uzbekistan for all three cases mentioned above. Compared to European and North American countries which created many challenges for Iran in terms of sanctions, and compared to the conditions of Turkey, Georgia, and the UAE, this country has many more advantages for investment. Uzbekistan is in the first stage of economic growth, and investing in it can be very profitable. The country also undertakes more predictable behavior and commitments towards investors, which is an advantage to prevent the repetition of some experiences, such as investing in Turkish real estate.

Geo-economic access to Chinese and Russian markets: Being in the heart of transit routes of Central Asia, Uzbekistan gives Iran many advantages for land and rail access to China and Russia. This issue can also be considered as a strategic corridor, especially considering the growing trend of trade exchanges between Iran and Russia, and the development of strategic partnership in the form of the 25-year cooperation agreement with China. Currently, Kazakhstan and Turkmenistan play this role for Iran, and with the addition of Uzbekistan to this corridor, With the addition of Uzbekistan to this corridor, the benefits of this connection can be seen at the international level. Currently, the China-Kyrgyzstan-Uzbekistan railway project, which provides a direct rail access to Urumqi, is in the phase of feasibility studies and then enters the construction phase. If this about-500-kilometer rail corridor is completed, Iran's direct access to China through the Sarakhs-Bukhara rail corridor will be much shorter. The development of this corridor can also have important results in terms of China's access to Europe.

The relations between Tehran and Tashkent have experienced a growing trend in recent years. However, trade exchanges of less than one billion dollars and the lack of mutual strategic dependencies can still cause instability in this process. From this point of view, software infrastructures such as preferential trade agreements (PTA), agreements in the field of customs information exchange, electronic transfer of business and economic data, money transfer, transit agreements and other such things can lead to stabilization of these trends. If governments focus on large projects as well as the systematic development of interactions in some specific areas - in such a way that irreplaceable complementary roles are defined for Tehran and Tashkent - they can create this geo-economic interdependence, and stabilize development trends in bilateral economic and trade exchanges. Such a process naturally requires the definition of a special and enhanced role for Uzbekistan among the regional partners of the Islamic Republic of Iran. It also requires the expansion of the foreign policy of Tehran, in such a way that Uzbekistan, like the countries of West Asia, is prioritized in Iran's foreign policy.
Omid Rahimi, is the researcher of Institute for East Strategic Studies.

Story Code: 3493

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Institute for East Strategic Studies