Back in 2019 I went on a trip to Uzbekistan to explore opportunities on-the-ground as the country’s macro picture was so appealing.

I went there hoping to buy real estate, but instead came back with a local brokerage account. There were companies on the local stock market that were incredibly cheap, had almost 0 debt, were paying double digit dividend yields, and were growing hundreds of percent per year.

2.5 years later, I am very happy with my investments, and I am still holding. I nearly tripled my money.

I had the pleasure to meet with Scott Osheroff, the Chief Investment Officer of the AFC Uzbekistan fund, when spending time in beautiful Istanbul. We used this opportunity to catch up and discuss the following topics:

01:00 Why invest in the stock market in Uzbekistan?
03:30 Comparative analysis of investing in Kazakhstan versus Uzbekistan
05:30 Fiscal position of Uzbekistan
06:55 Who is investing in Uzbekistan?
07:50 Which equities in Uzbekistan?
10:50 Capital controls in Uzbekistan
11:55 Investing in cement in Uzbekistan
13:15 Investing in Uzmetkombinat
15:40 Impact of Russia – Ukraine war on Uzbekistan
17:10 Real estate in Tashkent

You can watch the video here.

investing in uzbekistan
Click here to watch the Youtube video

If you want to get in touch with Scott: so@asiafrontiercapital.com

If you want to be added to the AFC Uzbekistan newsletter send an email to: info@asiafrontiercapital.com

If you want to get introduced to my broker in Uzbekistan, send me an email: info@thewanderinginvestor.com

To a World of Opportunities,

The Wandering Investor

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Full transcript of “Investing in Uzbekistan in 2022 – a unique frontier market”

LADISLAS MAURICE: Hello, everyone. So today, we’re in Istanbul, and we’re going to have an interesting discussion on investing in Uzbekistan. So I’m with Scott Osheroff, who is the Chief Investment Officer of the AFC Uzbekistan Fund. Scott, how are you?

SCOTT OSHEROFF: Doing well. Good to see you again.

Why invest in Uzbekistan

LADISLAS MAURICE: Good. So we’ll be discussing Uzbekistan in details. So if you don’t follow me already, I’m Ladislas Maurice, I’m a full-time investor and traveler. I run thewanderinginvestor.com. And you can follow me as I travel around the world looking at unique investments and immigration opportunities. So Scott, we did, we actually met approximately two and a half years ago, quite randomly, in Tashkent at the SPO, so second public offering of a local glassmaking company. And we’re there, we’re seeing all the all the presentations, etc., and then when the time came for the little buffet at the end, we started chatting, and that’s how we met.

And on that trip, about two and a half years ago, I had gone to Tashkent to look into buying real estate, because the story for Uzbekistan is so bullish, and we’ll go into details why, I ended up not buying real estate in Uzbekistan, but rather, I came back with a brokerage account. And I bought a number of local shares. So Scott, can you give us a bit of a recap in terms of the thesis for Uzbekistan, how it’s developed over the last two and a half years, and then the impact that the latest changes in the world have had on Uzbekistan? So the issue with the whole medical situation, the war between Ukraine and Russia, sanctions, energy crisis, food crisis, etc. So let’s, first, start with what’s the case for investing in Uzbekistan?

SCOTT OSHEROFF: Sure. So you effectively have a country which is the largest, population wise, in Central Asia, 35 million, diversified economy, largest manufacturing base in the region, it’s the horticultural breadbasket of the region. So what I like to say is, if the country gets it, you know, let’s say, 30% right, it could theoretically evolve into a Vietnam type situation for Central Asia as well into Russia and whatnot, from an export standpoint. And when you look at the agricultural products that they grow, they don’t grow grains and whatnot. So it’s not bulk commodities in that regard. But it’s sort of, well, it’s high value horticultural products. So similar is California is to the rest of the United States, Uzbekistan sort of is/could be to greater Asia.

And I went there in 2018, really, by accident. I was going to Kazakhstan for an investor tour, and tagged on Kyrgyzstan and Uzbekistan, and knew very little about the country, but said, after having lived in Asia for, I think, seven years at that point, mainly in Southeast Asia and seeing the growth stories of Cambodia, Vietnam, Myanmar, to a degree, I said, firstly, no one’s here. Secondly, the country has been completely forgotten, both by locals and foreigners from an investment standpoint. Everyone wanted to get money out of the country, if anything. And with the reforms that were happening in the country at the time, which have accelerated since, I said, things are going to have to change. People are going to take notice.

Asia Frontier Capital started investing there in about June of 2018, through our main Asia Frontier Fund, and then we launched a specific Uzbekistan Focus Fund in March of 2019. So that’s sort of the brief overview of the opportunity. And I guess, on the equity stand, or on the equity front–

Investing in Uzbekistan vs investing in Kazakhstan

LADISLAS MAURICE: Before going into the equities, could you do a little comparative analysis of Kazakhstan versus Uzbekistan? Because for the region, Kazakhstan is known as essentially it’s the ogre, it’s the benchmark, so people have a better understanding of Kazakhstan. So can you help us?

SCOTT OSHEROFF: Sure. So population wise, Kazakhstan is roughly 17 million, Uzbekistan’s about 35 million and growing at an accelerating rate. So Uzbek population is growing by somewhere between 800,000 and a million per year. GDP per capita wise, Kazakhstan is, I believe, in the $4,000 or $5,000 range, if I’m not mistaken. Uzbekistan is about $1,600 $1,700. So as you mentioned rightly, that when you think Central Asia as an investor, you think Kazakhstan. Kazakhstan has the benefit of oil, and the benefit of having been closed for really the past twenty plus years. So it receives all the attention and the money.

And if you look at Kazakhstan’s GDP, look at it from 2000, 2001, up to 2008, the correlation was very tight with oil. So that’s helped them to emerge into the biggest economy in the region. But really, Kazakhstan is an exporter of unprocessed petroleum, so oil, gas, a little bit of coal, gold, copper. But really, that’s it. When you look at manufacturing, agriculture, that is all Uzbekistan. So I remember I used to tell my Kazakh friends that, look out 15, 20 years and Uzbekistan is going to be the biggest economy in the region. And of course, they laughed at me. But I still believe that if you look out the next 15 or 20 years, Uzbekistan is going to be the dominant economy in the region. It has the population, and it has all the ingredients for that to happen. It’ll just take some time.

Macro overview of Uzbekistan

LADISLAS MAURICE: And what’s also quite interesting about Uzbekistan is the country’s finances from a macro point of view. So low debt from a government point of view, there’s also very little leverage in the system overall, people don’t have any debt. The, what is 70% or 60% of the country’s reserves are actually gold, foreign exchange reserves are gold, or what are the numbers exactly?

SCOTT OSHEROFF: Well, I’ll say it this way. So GDP is roughly $55 billion. They have about $35 billion, $36 billion of foreign exchange reserves, which $22 billion – $23 billion of which is gold. And they have something like $33 billion – $35 billion dollars of external debt. So they could effectively pay off all of their external debt tomorrow. And with the world that we’re entering in, this was not really my initial thesis, but if the country needs money, they’ll just dig up more gold. So probably one of the healthiest balance sheets in the world for a country that most people don’t pay attention to especially.

LADISLAS MAURICE: And so your main pitch is that it’s an exporter of agricultural products, that it has a lot of local manufacturing, that it’s an export base, but it’s also a big commodities exporter with gold, copper, uranium, gas, to a certain extent as well. So there’s a lot going on for Uzbekistan, and everyone is investing in Uzbekistan. So Scott is not the only one to have noticed the opportunity in Uzbekistan, you have the Chinese are investing massively in Uzbekistan, the Russians as well–

SCOTT OSHEROFF: Turks, Koreans.

LADISLAS MAURICE: The Turks, Koreans, Indians–

SCOTT OSHEROFF: Indians, Pakistanis.

LADISLAS MAURICE: The Gulf Arabs as well.

SCOTT OSHEROFF: 100%.

LADISLAS MAURICE: And Westerners as well, quite a bit. So everyone is rushing into that area, especially as people start to realize that the world is gradually shifting, and it’s a messy shift, but that’s a conversation for another day, from the North Atlantic to Eurasia. So being able to invest in what was traditionally the Silk Road with all these fantastic macro indicators is quite a unique opportunity. You know, sometimes, I come across countries that have great macro opportunities, but when you go to the country, there’s actually nothing that’s investable. So two and a half years ago, equities were very investable, I bought a bunch. I did well. I’m very happy. I’m still holding on to them, I haven’t sold. But hasn’t the easy money been made already?

Investing in Uzbek equities

SCOTT OSHEROFF: No, I don’t think so. So firstly, in terms of buying local equities, when we first met, there were still plenty of Uzbeks back then, and to a degree still, but less so that say we have a stock market. So which is a good sign, being that there’s opportunity for future local capital to come into the market. When we met, effectively, I like to say that equities were sort of at prices that never should have been so. The country’s economy from an investment perspective, largely due to the inability to convert capital freely, which now is not an issue, made locals who value equities on different metrics phenomenally cheap, truly phenomenally cheap. They don’t use PE, or price to book, or dividend yield really, in the traditional sense.

And we had companies there that were growing 400% – 500% per year, trading at PEs of one or two times. Now they’re trading at three to five times rather than trading at a half a book value, or point-five book, they’re trading getting maybe one and a half times book, and they’re still growing, some of them several hundred percent year over year. So have we missed the opportunity? No, I think it’s still early days. What you’ve had is this initial rerating, and the catalyst going forward is going to be the privatization of state-owned enterprises, which includes everything from the big gold mining company, which is one of the biggest in the world, similar to a Barrick or and Newmont, the biggest copper mine in the country, which is one of the five biggest in the world, Almalyk, and then a slew of banks, insurance companies, and other businesses and transportation companies in the oil and gas industry.

So there’s new capital markets legislation, which, hopefully, is going to come out in the fourth quarter, third or fourth quarter of this year. And that will present some– well, that’ll make it easier to invest in the market, among other things. And I think that along with some of these state-owned privatizations, you’ll see sort of that next wave of capital come into the market, both from foreigners but also locals. I’ve spoke with a lot of people in Uzbekistan saying, you can’t just rely on foreigners. If it’s a stock market dominated by foreigners, then it’s never going to be a proper market with depth and liquidity. We need 100,000 brokerage accounts open of which 95,000, 98,000 of them are local and then, you know, maybe a few thousand foreign. And the government seems to understand that.

So I think that’s what propels us going forward, and takes us from companies that are still growing over 100% in some cases, and trading at price to earnings ratios of three to five times and takes them to, you know, hopefully, quite beyond that.

LADISLAS MAURICE: And what’s also interesting about Uzbekistan is they pretty much removed most capital controls. As a nonresident investor, there are no capital controls. So I invested there, I remember at some point, I wanted to repatriate some funds, and I just filled out a form and, five days later, my money was in US dollars offshore. And it wasn’t a problem. So the process was very smooth, which at first, I was a little bit worried about because many countries have no capital controls on paper, but in practice, just from a bureaucratic point of view, it’s very complicated. But in Uzbekistan, the whole process with the broker was very, very smooth.

SCOTT OSHEROFF: Well, I’ll say this for the sake of transparency, which I think is important, is that if you wire money into the country, and you convert it into Uzbek sum, and then you say, the next day, I want to convert it back into USD and repatriate it through your brokerage account, you cannot. You, first, need to buy shares, go to the central bank, or the MBU, and show them proof of proceeds, then you can repatriate no problem. So there are sort of a few soft capital controls, but nothing that really prevents you from taking money out of the country. There are no issues in that regard.

LADISLAS MAURICE: Okay.

SCOTT OSHEROFF: You just need to know how the system works.

LADISLAS MAURICE: Okay, cool. Thank you. When we discussed, we did a video on YouTube about two years ago, and you had mentioned a company, so it was a cement company, that ended up doing very well. I remember telling you that I would owe you a beer if it did 4x and it did 4x. (laughing) So I owe you a beer after this video. Can you give us an example of a company that your fund is invested in, some of the key metrics, a company that you find interesting and why?

SCOTT OSHEROFF: Sure. I guess outside of financial services, looking at a more traditional industry, right now cement is still very much interesting. You know, for example, I guess the whole materials sector is because I read, about a year or two ago, that there’s somewhere in the range of 15 to 17 square meters of residential real estate per capita in the entire country, so less than most countries in this part of the world. And the population is growing at, again, between 800,000 and a million.

So what I learned a very good lesson from in Southeast Asia is that when it looks like there’s a building boom, that’s actually a bubble. It might not be a bubble if there’s no leverage in the system, or very little leverage. And that’s where we are in Uzbekistan, where they need to keep building apartments, houses, malls, office buildings, and of course, the accompanying infrastructure for years to come. So cement is a wonderful sector. But what really excites me is the steel company, Uzmetkombinat. It’s the largest steel company in Uzbekistan. They have a de facto monopoly in the market. And that’s not going away anytime soon. So they, right now, produce about a million tons of steel per year. And they’re going through a $600-million-dollar capex program to a little more than double production.

And, for example, they’re in a great position because they have the monopoly on scrap collection in the country, for scrap steel, which they collect at about $200 – $250 per ton. They then can refine that, turn it into billet, or rebar, or pipes, or whatnot. And they can then sell that at actually above international steel prices, because the country has a 20% import duty on processed steel. So they’re able to undercut imported Russian and Kazakh steel but still charge a higher than international price, which means they absolutely printing money. And that company is growing at, off the top of my head, I don’t remember, but in the first quarter, year over year, it grew a few hundred percent. And last year, it grew, I think, 700% year over year. And it trades at less than 5 times and about 1.7 times book value.

LADISLAS MAURICE: Isn’t it risky to invest in a company that is essentially dependent on regulations?

SCOTT OSHEROFF: No, I don’t think it’s much of an issue or risk. The government owns about 80% of the company right now. And they’re planning to privatize up to 5% in sort of the first proper privatization program where when we met, they were privatizing a few assets for the market. But this is the beginning of their robust sort of privatization program through the stock market, and Uzmetkombinat is going to be partially privatized further later this year.

So being that the government still is a majority owner, and they’ve done a significant amount to clean up the company, tighten the screws, if you will, and perhaps prepare them in due course for international corporate bond, interests are very much aligned. And you look at the cash flow that the company is going to generate once they complete this capex program in the middle of the decade, and I imagine it’s a company that the government’s going to want to maintain control of, but operate similar to some of the Kazakh companies which trade in London, the government will want to operate them, have majority control, but they’ll want them to be operated to a degree of international standard quality.

Impact of Russia – Ukraine conflict on Uzbekistan

LADISLAS MAURICE: Clear. What about the war between Russia and Ukraine, tensions between East and West, how’s that impacting Uzbekistan? Because it’s right there in the thick of things.

SCOTT OSHEROFF: So luckily, they don’t share a border with China or Russia.

LADISLAS MAURICE: But they do with Afghanistan.

SCOTT OSHEROFF: They do with Afghanistan, which actually that’s one of the most secure borders in the world. So it’s not really the Uzbek border that you have to worry about, it’s you have to worry more on the Tajik side and the Turkmen side. But the Uzbek border is very well fortified, if you will. So when the war started, I was actually expecting remittances, which are in the range of four or five billion dollars a year, to drop off precipitously, because there’s a lot of workers in Russia remitting money back, also sanctions of Sovcombank and–

LADISLAS MAURICE: You raise a point, it’s actually one of the key exports of Uzbekistan, is people. So you mentioned the population is growing 800,000 to 1 million a year. That’s pretty much Russia’s negative population growth. It balances out.

SCOTT OSHEROFF: And a lot of them are doing menial jobs, been remitting a few hundred dollars a month back. So I expected remittances to collapse, but what’s actually happening is that it appears Russia, while suffering, is not suffering to the degree that everyone thought. But likewise, you have Russians who you’re reading articles when sanctions sort of kicking in of Russians that were stuck in Thailand or Vietnam that couldn’t pay their hotel bill or whatnot, because their credit cards were from banks that were sanctioned. So you actually now have all of the hotels pretty much in Tashkent and the second-tier cities like Bukhara and Samarkand that are full of Russians, Belarussians, Ukrainians, both as tourists coming to live.

And then you also have tourist packages where Russians are coming to open up bank accounts and get Visa or MasterCards so they can use that bank account, or the credit card issued from that bank account to be able to travel abroad and whatnot. So it’s actually been a boon for the country. In the first four months of the year, remittances were actually up 27% rather than being down—

LADISLAS MAURICE: Wow.

SCOTT OSHEROFF: which was a shock to everyone. So Uzbekistan sort of has a potential chance to shine right now and, if it so desires, position itself to become a quasi-Central Asian financial hub. And then on the tech side, they work phenomenally quick, lightning quick to create a three-year multiple entry business visa program for technology companies that opened in the Uzbek IT Park, and they get special tax breaks and whatnot. And there’s an American company whose name escapes me but they had a back office in Belarus in Minsk. They relocated one thousand plus staff to Tashkent.

So you have a lot more discretionary spending power in the country. People with money that might not make it to the Emirates, or to Western Europe, or whatnot but, nonetheless, that have money to spend. And businesses are relocating over. So it’s really been a net positive for the country.

LADISLAS MAURICE: Interesting. So I should have not only bought Uzbek shares, but also an apartment. (laughing)

SCOTT OSHEROFF: Well, it’s funny you say that because I remember when I got back from a trip and all of the “for rent” and “for sale” signs, the for sale and for rent signs were gone throughout the entire city. They’ve all been taken up by either immigrants, if you will, or people coming to do business. So rental prices, in some cases, are up 300%. And property prices are beginning to creep higher. So yeah, real estate, if you own real estate, your rental yield is quite juicy right now.

LADISLAS MAURICE: Fantastic. Scott, thank you very much. So if you’re interested in getting more information on investing in Uzbekistan, there’s Scott’s email right below in the description. There’s also instructions on how to sign up to his fund’s newsletter to get regular updates on Uzbekistan. If you want to invest yourself directly, I can introduce you to a good broker (info@thewanderinginvestor). But again, none of this is investment advice. But you probably need to speak Russian to understand what’s happening in the market, etc., because it’s pretty complicated and the trading platform is also in Russian. So, Scott, thank you very much.

SCOTT OSHEROFF: Thank you.

LADISLAS MAURICE: Always a pleasure.

SCOTT OSHEROFF: Likewise.