Geopolitical Report ISSN 2785-2598 Volume 39 Issue 2
Author: Giuliano Bifolchi

Despite Uzbekistan’s efforts to encourage local investments and provide fiscal incentives for economic development at the local and regional level, Karakalpakstan remains a significant area of concern for Tashkent’s domestic policy.

The goals of socio-economic development for Karakalpakstan present an opportunity for economic growth and modernisation, aiming to attract $2.1 billion in foreign investment. However, historical tensions, aspirations for autonomy, and potential external economic uncertainties pose challenges to the successful execution of these initiatives.

The way the government addresses regional concerns will be vital in shaping the stability of Karakalpakstan and its effects on Uzbekistan’s wider economic and political environment.

Uzbekistan’s Investment Strategy in Karakalpakstan

On January 10^th, 2024, Uzbekistan President Shavkat Mirziyoyev, in a meeting with other government representatives, discussed and deliberated the socio-economic development goals for Karakalpakstan in 2024.

The region aims to secure $2.1 billion in foreign investment this year, facilitated in part by a foreign grant earmarked for implementing water-saving technologies on 6,000 hectares of land. Noteworthy is the reduction of taxes on profit, turnover, land, and property by 50%, along with a 1% social tax rate, creating a conducive business environment.

The implementation of this strategic move has led to entrepreneurs experiencing a yearly surplus of 500 billion soums ($4 million), promoting economic growth. Over the past two years, the Uzbek government allocated significant financial funds to the development of industry, agriculture, entrepreneurship, and mahalla infrastructure.

During the meeting, the president underlined the positive momentum in Karakalpakstan’s production, agriculture, and tourism sectors. Plans for 2024 include a focus on industrial production, with a target of 23 trillion soums ($1,84 billion) and the launch of 24 major projects.

The region aspires to attract $2.1 billion in foreign investment, propelling 206 projects into industry, 240 in the service sector, 34 in agriculture, and the creation of approximately 13 thousand highly profitable jobs.

President Mirziyoyev highlighted untapped potential, envisioning industrial zones, land auctions, and non-metallic deposits as sources for job creation. Additionally, the Uzbek President underscored the importance of tourism, urging the development of a comprehensive program to exploit environmental, ethnographic, and pilgrimage destinations, coupled with infrastructure enhancements and collaboration with foreign experts to impart diverse skills to the youth.

The investment strategy and socioeconomic development projects in Karakalpakstan are in line with Uzbekistan’s domestic policy goals of modernisation and the attraction of foreign investments.

This strategy produced some benefits last year. Indeed, according to the World Bank, Uzbekistan’s economic growth in 2023 exceeded initial forecasts, registering at 5.5%, with a similar projection for the subsequent two years.

Projections suggest a modest decrease in the national poverty rate, reaching 13.9% in 2023. However, potential downside risks, such as the economic performance of Russia, external inflationary pressures, and global financial conditions, cast uncertainties on this outlook.

Conversely, optimistic factors, including the prospect of higher global prices for commodities like gold, natural gas, and copper, coupled with improved productivity stemming from ongoing structural reforms, present upside potentials for Uzbekistan’s economic landscape.

Geopolitics of the Republic of Karakalpakstan

Karakalpakstan, nestled in the north-western expanse of Uzbekistan, boasts a rich history influenced by its strategic location along the ancient Silk Road trade route. Covering 166,000 square kilometres, this nominally autonomous republic holds a population of 2 million, with Karakalpaks, Uzbeks, and Kazakhs forming its ethnically diverse demographic.

Historically, the region has been a crossroads of civilisations, shaped by the sway of empires such as the Persian, Russian, and Soviet, fostering cultural diversity and historical significance.

Geopolitically, Karakalpakstan’s borders with the Aral Sea underscore its significance and present environmental challenges because of historical water diversion.

Its location near Kazakhstan, Turkmenistan, and Uzbekistan makes it a significant hub in Central Asia, influencing regional collaboration, trade routes, and transportation networks.

Despite its historical context, Karakalpakstan’s geopolitical landscape has been subject to constitutional changes, notably regarding its right to secede, leading to tensions and protests among local activists.

Ethnically, the Karakalpaks, a Turkic-speaking Sunni Muslim group, are a central political entity with historical representation. The establishment of the Karakalpak Autonomous Oblast in the early Soviet years marked a unique political standing within the Uzbek SSR.

After the fall of the USSR, Uzbekistan officially reintegrated Karakalpakstan in 1993, with subsequent constitutional changes impacting its right to secede.

The region, despite its vast territory, holds a sparse population of approximately 5% of Uzbekistan’s total, with much of its expanse dominated by desert landscapes.

Rich in natural resources such as oil and natural gas, Karakalpakstan’s integration into Uzbekistan remains a priority for the government, aiming to mitigate the threat of secession.

The demographic weight of Karakalpakstan within Uzbekistan becomes evident, considering its territorial extent compared to its relatively modest population.

Karakalpakstan Between State’s Control and Independence Movements

On July 1^st, 2022, Nukus, the capital of the Republic of Karakalpakstan, witnessed widespread protests against proposed changes to the country’s constitution. Thousands of people took to the streets, expressing opposition to alterations in the Constitution of Uzbekistan, particularly the perceived exclusion of the right of autonomy to secede from the country. Reports also mentioned demonstrations in Chimboy and Moʻynoq.

State official sources attributed the unrest to a misinterpretation of the constitutional reforms by the populace, leading to unscheduled marches in Nukus. Local authorities responded by deploying police and security forces to maintain public order and prevent illegal demonstrations. The Uzbek government reported that state military intervention resulted in the loss of lives for 21 people, injuries for 243 individuals, and the detention of 516 protestors.

The call for autonomy and the right to secede from Uzbekistan has historical roots, notably marked by the 2014 Alga Karakalpakstan movement advocating for a referendum on the independence of Karakalpakstan.

The region experienced renewed sentiments for independence in 2021, with protests in Khodjeili sparked by dissatisfaction over the abrupt transition of the Karakalpak writing to the Latin alphabet without consulting local citizens.

Despite expressions of desire for independence, practical considerations cast doubt on the feasibility of secession because of Karakalpakstan’s economic and institutional vulnerabilities.

Shavkat Mirziyoyev’s leadership, while consolidating power amidst constitutional reforms, faced criticism for perceived harsh countermeasures against the protests, underscoring the ongoing challenges in addressing regional concerns within Uzbekistan.

Karakalpakstan remains a significant challenge, highlighting the complexities of navigating political dynamics in the country.

Scenario Analysis

1. Optimistic Scenario – Economic Prosperity and Stability:
   • Achieving the foreign investment target of $2.1 billion and materialising the proposed projects in industry, services, and agriculture could strengthen economic growth and job creation in Karakalpakstan. This may contribute to the broader positive trajectory of Uzbekistan’s economic landscape, as seen in the 2023 growth of 5.5%. The region’s potential to tap into global commodity price increases and ongoing structural reforms may further enhance economic prosperity.
   • The successful execution of development projects could strengthen Uzbekistan’s position as an attractive destination for foreign investment, potentially mitigating challenges associated with historical tensions in Karakalpakstan. Economic stability and growth may also dampen sentiments favouring autonomy.
2. Moderate Scenario – Economic Progress with Persistent Regional Tensions:
   • Assessment. The realisation of economic goals may face challenges because of historical tensions and aspirations for autonomy in Karakalpakstan. Even with economic progress, protests and unrest may persist, reflecting the population’s desire for political autonomy. State responses to these tensions could impact the overall stability of the region, affecting investor confidence.
   • Implications. Despite economic advancements, the persistent tension in the region could necessitate a delicate balance between addressing regional concerns and maintaining national unity. Ongoing political complexities might partially offset the success of the investment strategy.
3. Pessimistic Scenario – Escalation of Regional Tensions and Instability:
   • Assessment. If the socio-economic initiatives fail to address the underlying regional grievances, tensions in Karakalpakstan may escalate. Continued protests and demands for autonomy might intensify, leading to increased instability.
   • Implications. A failure to address regional concerns may lead to increased international scrutiny and negatively impact Uzbekistan’s image. Economic setbacks and heightened regional instability may pose challenges to the government’s control, requiring careful management of political dynamics.

Recommendation for Investors and Companies

Investors and companies should prioritise a meticulous examination of the political climate, particularly how the government addresses historical tensions and aspirations for regional autonomy. Any signs of escalating unrest could pose challenges to the overall stability of the region.

It is important to monitor the successful execution of the $2.1 billion investment strategy and the associated socio-economic development projects with vigilance. The efficiency of these initiatives, as well as the government’s commitment to fostering a conducive business environment, will be critical indicators for potential challenges.

Stakeholders must stay attuned to geopolitical developments in Central Asia, assessing their impact on regional cooperation, trade routes, and economic stability. Keeping a keen eye on the economic performance of key partners, notably Russia, and external factors, such as inflationary pressures and global financial conditions, is paramount.

A thorough understanding of the regulatory environment and compliance requirements in Uzbekistan is essential, with a particular emphasis on changes in tax policies, land regulations, and business laws.

Additionally, monitoring public sentiment and potential civil unrest through local media and social channels is crucial. Furthermore, it is crucial to explore diversification strategies to mitigate risks associated with regional instability, ensuring a resilient and informed approach to investment decisions.

If you are interested in acquiring a deep understanding of the political and economic dynamics of Uzbekistan and the Republic of Karakalpakstan, we invite you to contact our team at info@specialeurasia.com. Our team is prepared to assist you in evaluating the possibility of acquiring a carefully designed and specialized report that caters to your specific intelligence needs.