Uzbekistan, one of Central Asia’s largest economies, was for many years a difficult place to conduct business.

After gaining independence in the early 1990s, when the Soviet Union disbanded, its authoritarian President Islam Karimov ruled with an iron fist and established a tightly controlled state-run economy.

Heavily reliant on exports of cotton, gas and gold, mostly to Russia and China, the country was beset by human rights issues and corruption.

Following a massacre in the city of Andijan in 2005, multilateral institutions such as the European Bank for Reconstruction and Development (EBRD) exited the market, citing the difficult political environment.

But after Karimov died eight years ago, his successor, Shavkat Mirziyoyev, sought a different approach and quickly implemented a range of economic and social reforms that were billed as “historic” by the World Bank last year.

The International Labour Union reported in 2022 that Uzbekistan’s cotton industry was “free from systemic” child and forced labour. Previously, an estimated 2 million children and adults were forced to work in the fields each year, the organisation said.

Now, as the energy transition gathers pace, Uzbekistan is angling to be a key producer and exporter of commodities that will be vital for technologies such as wind turbines, electric vehicles and batteries.

Increasingly, Tashkent is looking to forge ever closer ties with partners in the west.

“In Mongolia, they call it the third neighbour policy and it’s known as the multi-vector policy in Kazakhstan and Uzbekistan… they want to increase relations with western countries,” says Hüseyin Özhan, managing director for Central Asia & Mongolia at the EBRD.

There is “very good momentum” behind economic reforms in Uzbekistan and “a lot of interest” from international investors, he says.

Energy and infrastructure have been two key sectors for foreign investors in recent years, with Saudi’s ACWA Power and France’s Total Eren having signed big deals in Uzbekistan. Broadly, there has been a flood of investment into solar plants, wind farms and transport, as well as oil and gas.

Foreign direct investment (FDI) surged to over US$7.2bn in 2023, nearly double the previous year, US government data shows. Traditional partners China and Russia contributed 25% and 13% of inflows respectively, yet there is growing interest from Europe and the Middle East. Germany’s investments in the country have skyrocketed by over 1,000% since 2017, accounting for 4.3% of FDI last year.

Özhan notes that mining, especially for critical minerals and rare earth materials, is another key focus for the government.

Uzbekistan is already a major player, producing copper, uranium and silver, and accounting for 3% of the world’s gold output in 2022. The mining sector remains largely controlled by state-owned enterprises such as Almalyk Mining and Metallurgy Complex (Almalyk MMC) and Navoi Mining and Metallurgy Complex (NGMK).

But in a meeting held last year to discuss the country’s mining prospects, President Mirziyoyev said the state also has “enormous untapped potential” for as many as 32 different critical minerals.

Following the meeting in April, he ordered his government to partner with foreign firms to jointly develop US$500mn-worth of rare earth projects.

Uzbekistan’s soils are rich in critical minerals and metals such as lithium, rhenium, tellurium, germanium, graphite, tungsten and vanadium, and experts say further exploration could yield greater reserves.

“Uzbekistan with its geographical and political positioning, combined with ongoing modernisation in the mining sector, has great potential” to be a critical minerals hub, says Bobur Shamsiev, a partner in law firm Dentons’ Tashkent office.

 

Minerals potential and reforms

Until now, Central Asia’s role as a critical minerals production hub has been relatively limited, with investment activity muted.

“Despite its outstanding wealth of resources, Central Asia is often omitted from analyses of critical mineral supply chains – for example, only Kazakhstan’s resources got a cursory mention in the IEA’s Global Critical Minerals Outlook 2024,” notes law firm Herbert Smith Freehills in a September report.

This may be due to “historically strict non-tariff trade barriers” in the region and an unfamiliar legislative environment, it says.

But Uzbekistan is actively working to improve the business environment and attract foreign investment in the sector. In November, Mirziyoyev formally approved a new subsoil law that regulates the ownership, use and protection of the country’s underground resources.

“Most of the mines and operations in Uzbekistan are owned by the government, but we have provided technical support in the drafting and the analysis of the new subsoil law,” Özhan tells GTR. “The idea is to bring in more international players, to drive more FDI into the country, particularly for critical raw materials.”

The EBRD is providing technical assistance to the country in other areas, such as a pilot programme that will digitise Uzbekistan’s geological data and provide investors with interactive maps showing the country’s terrain and where minerals have been previously detected.

“The data they currently possess dates back to the Soviet times, which is good data, but at that point they were not looking for some of the materials identified as being critical today,” Özhan explains.

“This will help them with licensing and to maximise the value that they can get from this, instead of just providing licenses for specific regions with opaque data… by knowing what the country has, the government can maximise its tenders and drive more interest.”

According to a September report from state advisory agency the German Economic Team, only 16 of 71 identified raw materials deposits are actively mined in Uzbekistan today, highlighting untapped potential.

“Moreover, Uzbekistan has geologically explored only 40% of its territory,” the agency adds.

European and Asian countries have already pledged to boost investment in Uzbekistan’s mining sector, with a view to helping the country map, mine and process critical minerals and rare earth materials.

In April 2024, Uzbekistan struck a memorandum of understanding with the EU aimed at boosting cooperation in the area of critical minerals, by jointly developing projects and “mobilisation of funding”. European Commission executive vice-president, Valdis Dombrovskis, said the agreement with “resource-rich Uzbekistan” will help the EU secure much-needed access to critical raw materials.

In June 2024, South Korea and Uzbekistan co-hosted a business forum and pledged to introduce mechanisms for joint financing in priority areas, “first of all… the deep processing of strategic raw materials”, a statement from the Uzbekistan president’s office said.

Meanwhile, in September, German Chancellor Olaf Scholz travelled to Uzbekistan and discussed broader bilateral relations with Mirziyoyev during talks in Samarkand.

The two leaders outlined a programme for an industrial and technological partnership that would consist of projects worth €9bn in a range of sectors, such as renewable energy, chemicals, textiles and the exploration of critical materials, the state service said.

Countries like Germany are bidding to be the partners of choice for geological surveys and mining projects, another area of opportunity. Following Scholz’s meeting last year, Almalyk MMC secured a €146mn deal with KfW Ipex-Bank and AKA for the initial phase of a copper smelting facility.

Altogether, the announcements highlight a push by western countries to diversify their supplies beyond China, which produces about 70% of all rare earths globally and also “dominates” processing of these commodities, according to Benjamin Godwin, a partner at Prism Strategic Intelligence.

“For example, it [China] controls 77% of graphite production and 100% of graphite refining,” he tells GTR. “By contrast, the United States is 100% dependent on imports of graphite.”

In December, Beijing fired a warning shot to Washington and Brussels when it banned exports to the US of critical minerals that have military applications – namely gallium, germanium and antimony – in retaliation to curbs imposed on its semiconductor industry.

Godwin tells GTR that these restrictions “haven’t had an immediate impact on US purchases of rare earths”, but they are “increasingly focussing minds on the need to find new sources of supply”.

 

ECAs and mining

European export credit agencies (ECAs) are increasingly looking to capitalise on opportunities in Uzbekistan’s mining industry, having previously been shut out of the Central Asian country.

Almalyk, which runs one of the largest copper mines in Central Asia, leant heavily on Russian banks, notably Gazprombank, for long-term financing of its US$4.6bn Yoshlik I project. The development consists of a mine, which is nearing completion in early 2025, as well as a processing plant. Altogether, the facility promises to double Uzbekistan’s entire copper output.

Almalyk tapped Gazprombank for a US$1bn debt prior to beginning construction four years ago, and as shown in a January update report, used US$678mn of this total for the Yoshlik project.

But the firm has since indicated it is taking a risk-averse approach to Russian lenders due to US and EU sanctions imposed over Russia’s war in Ukraine.

“It should be noted that at the moment there are no banks and financial institutions subject to western sanctions among the partners of AMMC,” the firm said in a December 21 statement.

“[The company] actively keeps track of global agenda and consults with leading international law firms”.

In the announcement, Almalyk flagged its growing activity with European institutions such as Euler Hermes, which backed a US$67mn facility from German bank Helaba to update an existing zinc plant in late 2022.

It also highlighted a loan from Santander with cover from UK Export Finance (UKEF), signed in October last year.

The deal saw UKEF enter the Uzbekistan market with a €12.6mn guarantee that helped refinance a “major order” for specialist machinery that was placed with Scottish firm Weir in 2022, the agency said.

Following the transaction, UKEF says it is eyeing growing activity in Uzbekistan’s mining sector.

The ECA appointed Sevara Madgazieva as its first country head in Uzbekistan in late 2023, and says it will back the former local bank executive with £4bn in local financing capacity.

Madgazieva is the agency’s “eyes and ears on the ground” and is also tasked with building a “pipeline of opportunities” in Kazakhstan, says Emma Thomas, co-head of global business origination at the UK’s export credit agency.

Thomas notes that the agency has “seen a lot of interest” in the market from different stakeholders.

This includes “financial institutions or contractors that we work with around the world, particularly the Turkish, who we see as really important partners in the Central Asia region from a construction perspective”, she adds.

She tells GTR that critical minerals and the mining sector more broadly will likely be a key focus area in the coming years.

In October, UKEF launched a special guarantee product that will help foreign suppliers of critical minerals access financing from commercial banks – so long as they supply UK exporters.

“That is an opportunity that we could take advantage of through our existing buyer credit product, but we have now also enhanced our capacity to support critical minerals,” Thomas notes.

The German Economic Team, a state-funded consultancy firm which offers trade and investment advice to policymakers in Eastern Europe and Asia, said in a September 2024 research note that Germany could also deploy state financing tools to secure supply from Uzbekistan.

“The German government has instruments to support supply contracts and investments. These include guarantees for untied financial loans, which secure long-term supply contracts and investments against economic and political credit default risks. Additionally, the state can now even participate in projects with equity capital through the German Raw Materials Fund which is currently being set up.”

Multilateral development banks are also eyeing opportunities in Uzbekistan’s critical minerals sector, in both mining and processing.

“Natural resources is one of the sectors where we have signed a few projects…. And we are probably going to see more of these types of deals,” says Özhan, in reference to the EBRD’s activity in Central Asia.

He notes the bank is bolstering its financing in all sectors and signed 121 projects in Central Asia in 2024.

“The total amount of EBRD financing from our own resources stands at €2.2bn. This is a record for the bank in Central Asia, representing the highest numbers of projects and overall annual investment size in a single year.”

The EBRD has also helped mobilise funds of €750mn from other investors in 2024, he tells GTR.

 

Logistical challenges

There are potential challenges that may slow the development of Uzbekistan’s minerals industry, officials say.

Kuhinur Shukurjonov, head of division within Uzbekistan’s Ministry of Mining Industry and Geology, said in a June 2024 research note that poor infrastructure could hinder its critical minerals strategy.

“Upgrading roads, railways, and power grids will be crucial but can be capital-intensive and time-consuming,” Shukurjonov said.

Such views are backed by the World Bank, which noted in a late 2023 report that Uzbekistan faces “large infrastructure capacity constraints” and that nearly 40% of existing power generation infrastructure has exceeded its expected lifespan, “leading to frequent power outages”.

“While the country has the potential to become a main regional transit node, poor quality of transport services, logistical bottlenecks, and under-investment affects its extensive road and rail networks and undermines connectivity between China and Europe,” it said.

Dentons’ Shamsiev flags there will be other obstacles. A skilled workforce will also be required and a lack of technical expertise in “advanced mining techniques” may slow progress, he says.

Nonetheless, there are plans to funnel investment to Uzbekistan’s roads and railways in the coming years.

In February 2024, the EBRD published a study that argued for greater investment in the Trans-Caspian Corridor, which promises to better link Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

“Regional trade within Central Asia will benefit greatly from the upgrading and expansion of this transport corridor,” the EBRD said.

The bank pledged to invest €1.5bn in Trans-Caspian Corridor-related infrastructure and associated transport solutions over the next three years, helping boost cargo transport in the region.

Özhan argues the corridor could ease logistical bottlenecks and help Uzbekistan sell metals and minerals to buyers in Europe and Asia.

“Do not forget there will also be a big demand in China,” he tells GTR.

Beijing’s interest in the market is also growing.

In November, China Export-Import Bank opened its first regional office in Tashkent and said it would help the state bank serve countries across Central Asia and the Caucasus.

Özhan says that “Central Asian countries are not only looking at mining, but also processing”.

“There will be a lot of investment opportunities for processing plants,” he says, expressing optimism that the region will become a major critical minerals producer in the medium term. “This shift is not going to happen overnight,” Özhan says. “I have been travelling intensely this past year, particularly to Kazakhstan, Uzbekistan and Mongolia, and can see this is not something that started yesterday…. We are talking about five-plus years. It’s a gradual process, but [production] is going to increase.”