Friday, 08 March 2013

Uzbekistan's Ban On Sale Of Foreign Banknotes Signals Upcoming Devaluation Of Uzbek Currency

Published in Analytical Articles

by Nargiza Majidova (03/06/2013 issue of the CACI Analyst)

Starting from February 1, 2013, a ban on purchasing cash in foreign currency was introduced in Uzbekistan. From now on foreign currency banknotes can be obtained only through non-cash operations as a prepayment order on the bank account. On February 4, regional mass media reported that Uzbekistan’s government was ordered to reduce the quantity of imported goods, and to substitute these with locally produced ones. These currency regulations of Uzbekistan’s National Bank could signal an upcoming devaluation of Uzbekistan’s currency. An alternative interpretation is that the measure aims to preserve Uzbekistan’s hard currency reserves and to protect the business interest of local entrepreneurs. 



BACKGROUND: The ban on selling foreign banknotes to physical persons will primarily limit the circulation of the most widely used unofficial currency in Uzbekistan – the U.S. Dollar. In Uzbekistan, purchases of for example real estate or cars are usually done in U.S. Dollars rather than the local Som. This is primarily a matter of convenience, as the largest banknote of the Uzbek Som amounts to 1000 Soms, equaling no more than US$ 0.35. As the market prices for cars vary from several thousand to several hundred thousand dollars, it is highly inconvenient to make payments in Uzbek Soms.

In fact, Uzbekistan has not had an effectively operational official currency exchange mechanism since the 1990s. According to domestic bank regulations, every citizen of Uzbekistan has the right to “purchase” up to US$ 2000 on a quarterly basis. In practice, however, if this right was widely exercised, there would be no foreign cash available in the bank reserves. Thus, the foreign currency “black market” has been the primary supplier of foreign banknotes, applying an exchange rate one third higher than the official rate. Nevertheless, black market currency has been very popular among the Uzbek public, as it has not applied any regulations to the amount of cash available for purchase.

As the ban was introduced, the “black market” exchange rate began to fluctuate dramatically, going up by 10% and down. A sudden sharp deficit of foreign currency on the black market caused an unprecedented level of demand and panic among the local population. Adding to the public concern was a number of arrests of “black market” operators and car traders who were performing their operations in foreign currency, namely US dollars. Furthermore, the situation was aggravated by the fact that the international currency plastic bank cards that Uzbek authorities introduced as the only legal means for purchasing foreign currency within Uzbekistan and for free use outside the country have either proven not to be accepted by certain banks outside Uzbekistan or have strict cash withdrawal limits (US$ 200-400 per day in different countries and different banks). Some people have reported that these cards were not accepted for purchases via internet, and for other non-cash transactions.

IMPLICATIONS: Along with the view that the regulations aim to protect the state’s foreign exchange reserves, many experts think that the Uzbek Som is about to undergo devaluation. Considering that the ban on foreign currency purchases in Uzbekistan was accompanied with an order to reduce the import of goods and substitute them with local produce, a devaluation of the Som could serve as a means for increasing exports. An increase of the currency exchange rate makes imported goods expensive and stimulates production inside the country. In addition, by outlawing purchases of foreign currency the authorities deprive the population of a possibility to invest saved money, thus stimulating more spending on goods and services, which eventually benefit the state budget.

The National Bank of Uzbekistan explained that the aim of the initiative is to strengthen the status of the Uzbek Som as “the only legal tender in Uzbekistan” and “to meet international standards for preventing money laundering.” It is clearly a desperate move by the Bank, and it remains to be seen whether the ban will deter any determined individuals from using foreign currency and continuing exchanges on the black market. As of today, local sources report that the foreign currency black market still operates, albeit exercising slight caution and not as openly as previously.

Yet, many Uzbeks whose subsistence depends on remittances sent from family members primarily residing in Russia fear that the measure could restrict their access to the U.S. Dollars and Russian rubles they currently receive through money transfer services. At the moment, however, several local sources report that residents have so far not experienced problems in claiming dollars wired to Uzbekistan using bank transfers, or Western Union-type systems. Nevertheless, several reports exist on problems with the international bank cards to be used for withdrawal of foreign currency outside Uzbekistan, which were introduced as part of the new policy. These are often not accepted by foreign ATMs and banks, thus blocking access to transferred funds.

For the next couple of months, experts provide a bleak outlook for the prospect of economic stability in Uzbekistan. Local observers already report rising prices for basic goods and a likely expansion of the shadow economy. The latter is also a consequence of the mentioned regulations on importing goods to Uzbekistan, which now requires loads of paperwork.

Simultaneously, analysts note that it is difficult to imagine that Uzbekistan’s limited domestic manufacturing potential would be capable of providing substitutes in sufficient quantity and quality to offset the expected price fluctuations. The result of a small survey conducted by the independent information service of Uzbekistan’s among retail traders in Tashkent suggest that most traders are ready to sell local goods, although some import is still needed – especially of goods like coffee or fish, which cannot be produced locally. Many entrepreneurs consider the regulations to send worrisome signals about their future operation and levels of profit, while all agreed that it will affect their customers, which will now have to pay more for all goods, imported as well as locally produced.

Uzbekistan occupies place 162 out of 177 in the U.S. Heritage Foundation’s Index of Economic Freedom. The republic is not considered to have a free economy. The measure once again represents an attempt by Uzbek state authorities to improve a poor economic performance by exercising control over the free market mechanisms.

CONCLUSIONS: While the Uzbek authorities claim to pursue a good cause by banning the sale of foreign currency to physical persons, the immediate effects do not seem to have a positive impact on the population at large. The State Tax Committee, the state agency responsible for investigating crimes related to foreign currency exchange, warned that breaking the law may lead to criminal charges against physical persons. For now, the main effect of the new regulations is abnormal fluctuations of the currency market for U.S. Dollars, public concerns over expenses and remittances, and increased incentives for an expanded shadow economy.

On the other hand, non-cash operations is a normal procedure widely practiced in many countries of the world. The newly introduced regulation stipulates a wider use of this practice in Uzbekistan, without cutting people off from the use of foreign currencies. Furthermore, it has been suggested by several analysts that the regulation provides Uzbekistan’s citizens with increased possibilities to obtain foreign currency legally and without supporting the black market, which used to buy foreign banknotes directly from the banks and sell them at a profit of up to 40 percent. Conversely, the new regulations imply that the national bank’s rate will be applied for new foreign currency bank accounts. In this light, many analysts downplay the panic and discontent among local population as exaggerated.

AUTHOR’S BIO: Nargiza Majidova holds a Master degree in Political Science from Central European University in Budapest, Hungary. She is currently Monitoring and Evaluation unit manager at an international NGO in Tajikistan. 

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