March 7, 2017 / 11:05 AM / 5 months ago

Exclusive: Uzbekistan's rulers at odds on reforms - sources

Uzbekistan's Prime Minister and interim President Shavkat Mirziyoyev leaves a voting booth at a polling station during a presidential election in Tashkent, Uzbekistan, December 4, 2016.Anvar Ilyasov/Pool

ALMATY (Reuters) - The EBRD's return to Uzbekistan would be a victory for reformist President Shavkat Mirziyoyev but some of his other plans, such as a currency float, have been held up by disagreements with the powerful security chief, diplomatic and business sources say.

The European Bank for Reconstruction and Development (EBRD) [EBRD.UL] is expected to signal this week that it is ready to resume operations in the Central Asian nation after last year's death of President Islam Karimov whose authoritarian leadership and poor human rights record effectively pushed the lender out.

But two diplomatic sources say the EBRD's return, which could help Mirziyoyev modernize the economy with new loans, comes despite opposition from security chief Rustam Inoyatov, with whom he shares powers. An EBRD source also confirmed the re-engagament had faced opposition from Inoyatov.

The sources say a push by Mirziyoyev to introduce a free floating exchange rate, abolish visas for tourists from 15 countries and resume passenger flights to neighboring Tajikistan have all been held up due to infighting.

The delays come as the major exporter of cotton and natural gas tries to modernize after the three-decade rule of Karimov, who was reluctant to impose potentially painful market reforms, and as the country tries to define its relationship with Russia, China and the West.

"Mirziyoyev is trying to show the West that he is a reformer, especially when it comes to the economy and the financial sector," one diplomatic source said.

"But the security chief, Inoyatov, has a different position - he is against swift reforms."

Former prime minister Mirziyoyev won a presidential election in December after Karimov's death but in a move aimed at avoiding a conflict over succession, he did not assume his predecessor's absolute powers. He shares them with Deputy Prime Minister Rustam Azimov and Inoyatov.

The predominantly Muslim nation's stability is seen abroad as important because it fought an Islamist insurgency in the 1990s, thousands of Uzbeks are believed to have joined Islamic State militants fighting in Syria and Iraq and because of its natural resources.

Mirziyoyev and Azimov are seen as reformers who pushed for a free float of the managed Uzbek currency, the sum UZS=, which trades at about half its official value on the black market.

The government published the draft order outlining the liberalization of the foreign exchange regime in November and it was due to be enacted on January 15.

But nothing has happened and the sources said Inoyatov is pushing against such a change, which could weaken the state and some of its powerful civil servants who control foreign currency flows through existing regulations.

Officials in Miriziyoyev's office did not respond to requests from Reuters for comment.

Azimov and Inoyatov deal with foreign press through the foreign ministry where officials did not respond to requests for comment.

FRACTIOUS DECISION-MAKING

The diplomatic and business sources told Reuters the trio often disagree and that decision-making has become fractious and unpredictable as a result.

"There are tensions in the decision-making process on all matters between the three key figures, Mirziyoyev, Inoyatov and Azimov," said the diplomatic source.

Tashkent pursued an isolationist foreign policy under the late Karimov and had strained ties with both its former Soviet overlord Russia and the West, as well as most of its neighbors.

Mirziyoyev has spoken of the need for economic reform as well as steps to improve foreign ties, raising hopes of a thaw.

Reform and greater openness could bring greater wealth for Uzbekistan's 32 million people.

It sits on transit routes for natural gas shipped to China and Russia yet its gross domestic product is roughly half of that of neighboring Kazakhstan whose economy is more open and has attracted significant foreign investment.

Disagreements within the ruling triumvirate threaten to stymie Mirziyoyev's ambitions however.

"No one knows how any particular issue will be resolved as a result of these discussions," the source said.

The second diplomatic source said the three men could not agree on the direction and pace of reforms.

"There is a common agreement to implement reforms but they still don't know which ones and they cannot agree on which ones," that source said.

VISA-FREE TRAVEL POSTPONED

On Dec. 2, just before the presidential elections, Mirziyoyev issued an executive order abolishing entry visas for tourists from 15 countries, mostly wealthy Western and Asian nations starting from April 2017, a move met with enthusiasm at home and abroad as it could boost tourism.

But less than three weeks later, Mirziyoyev amended his order, postponing the introduction of visa-free travel for those countries until 2021.

The sources said this and other delays were due to internal bickering.

Uzbekistan and its neighbor Tajikistan, long at odds over matters such as shared water resources, agreed in January to renew passenger flights for the first time in a quarter of a century, signaling a potential rapprochement.

Tajikistan's Somon Air performed one test flight from Dushanbe to Tashkent, but abruptly canceled the first regular flight on Feb. 20 just hours before its scheduled departure.

Both Somon Air and its Uzbek counterpart have since said in official statements that the Tajik company had failed to provide some required documents in advance.

But two Tajik industry sources involved in arranging the flight told Reuters the service had been canceled due to the intervention of Uzbekistan's state security service even though the cabinet had given its blessing.

Additional reporting by Margarita Antidze in Tbilisi, Lidia Kelly in Warsaw and Nazarali Pirnazarov in Dushanbe; Editing by Andrew Osborn and Anna Willard

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