This country is like Apple in 2007

By Kim Iskyan

Investing ahead of transformational events – in companies or countries – can be enormously profitable.

If you had bought shares of Apple as it launched the iPhone in June 2007, you’d have made five times your money in five years.

Or… if in the autumn of 1995, you’d bought a basket of shares in the newly launched Russian stock index – not long after the end of the Soviet Union – you’d have been up nearly 470 percent in less than two years.

If you had bought Amazon shares as the company moved into the cloud in August 2006, you’d be up more than 7,000 percent since then.

And if you had bought China’s Geely Automobile in November 2015 as it started to focus on electric vehicles, you’d have been up 600 percent over the next three years.

Of course, a flashing green “BUY NOW” light didn’t accompany these transformational events. “Transformational” is easy to define in hindsight. It’s never obvious at the time.

Where I was last week

I spent last week in a country that could be at the cusp of a similar kind of transformation. It’s far off the radar of most investors… but so was the iPhone in 2007.

Uzbekistan is a California-sized country in Central Asia with 33 million people and a gross domestic product (GDP) that’s 2 percent that of California. Few people outside the region have ever heard of it. Those who have would tend to refer to it as one of the “Stans” that used to be part of the Soviet Union.

Until recently, Uzbekistan – or rather, the authoritarian strongman who ran it until two years ago, Islam Karimov – liked it that way. The country wasn’t North Korea, but it was an aggressive loner, by choice, on the global stage.

For years it flirted with pariah status for being the government that was one of the worst human rights abusers in the world (joined by, among others, North Korea and Somalia). Until recently, it forced children to work in its cotton fields, a practice denounced as slavery by the UN.

The Financial Times called his regime “one of the world’s most repressive dictatorships, with… a gruesome record of torturing its opponents.”

Contact with the outside world was minimal – and foreign investment was virtually nonexistent. Uzbekistan got a free pass from much of the west, though, because it helped the U.S. and its allies with the war in Afghanistan.

(I first visited Uzbekistan in 1996. It was grey and felt like a big Intourist hotel – Soviet-style service and hospitality that was designed to make you feel unwelcome).

In September 2016, after 27 years as the country’s first (and only) post-Soviet leader, Karimov passed away (I wrote about it here).

Karimov’s prime minister, Shavkat Mirziyoyev, took over. It seemed likely that Mirziyoyev, who’d grown up under the Soviet Union and spent his career advancing Karimov’s agenda, would serve up more of the same: aggressive xenophobia, brutality, retrograde policies and ideas focused on keeping Uzbekistan as isolated as possible.

The iPhone moment?

Instead, Mirziyoyev has taken Uzbekistan in a completely different direction. He’s launched a comprehensive program to reform the economy, increase transparency in government, be friendlier with the neighbours, improve the business environment, reduce corruption and promote investment. He’s also improved labour regulations in the cotton fields.

One of the biggest changes so far has been currency regulation liberalisation. A bit more than a year ago, the government removed the official peg to the dollar – which meant that overnight the currency devalued by about 50 percent against the U.S. dollar.

That got rid of one of the biggest inefficiencies in the economy. It also removed a system of privileges that benefited some industries and businesses, at the expense of the rest of the population.

Every person I spoke with last week in Uzbekistan – from company directors to government ministers to businessmen to taxi drivers – was enthusiastic about the changes that Mirziyoyev has brought, and were hopeful that they’ll continue.

For example, the government implemented a web portal where citizens can lodge complaints about government services or other community issues that’s very popular. (The bar is so low in Uzbekistan that making it OK to criticise the government is a big deal.)

So maybe it’s not so surprising that the people I spoke with are upbeat about what’s going on. And the changes going on there are attracting attention. U.S. Commerce Secretary Wilbur Ross visited last month, to promote business and investment between the two countries.

The American Chamber of Commerce in Tashkent told me that they’ve had a steady flow of multinationals come through to explore what they can do in Uzbekistan. One of the bigger traded companies I visited said they’ve been receiving visits from a few investors and potential partners every week – up from a few every quarter just a year or so ago.

And literally the day after I posted a video to my International Capitalist subscribers from Registan Square – the extraordinary heart of the ancient city of Samarkand, two hours in a fast train from Tashkent – the Financial Times released a story touting the town.

A long way to go

Uzbekistan is at the far end of the adventuresome spectrum of frontier markets. And pre-frontier and frontier markets are littered with well-intentioned reformers that start strong… but give up in the face of pressure from entrenched interests, oligarchs, bureaucracy, inertia and their own personal interests.

Change is difficult in the best of times. It’s even more difficult when it entails a tectonic shift in mentality that will take at least a generation to work through the system.

What’s more, the impetus for change is from the top. If the president decides that he’s had enough, reform will stop. (In the first few years of his first term as Russian president in the early 2000s, Vladimir Putin was a blazing reformer. Then the spark went out… and Russia has muddled through 15 years of stagnation.)

But there is a momentum in Uzbekistan that is hard to ignore. And there are a lot of easy things the government can do to dramatically improve things. If we waited for the reform process to really get underway… if we waited for the iPhone to prove itself… then the opportunity would be a lot less interesting because it would have already played itself out. Uzbekistan is like a time warp into 25 years ago – and a lot of its assets are priced accordingly.

So if the country isn’t on your radar, it should be.

 

Kim Iskyan
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets. He's been quoted in the Economist, The New York Times, the Wall Street Journal, Barron's, and Bloomberg, and has appeared on Fox Business News, China Central Television, and Bloomberg TV, and has written commentary for the Wall Street Journal, Slate.com, Salon, TheStreet.com, breakingviews.com, and other publications. For more of his insights, Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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