The European Bank for Reconstruction and Development (EBRD) and Uzbekistan have entered a US$ 20 million cross-currency swap. This is the EBRD’s first swap transaction with Central Asia’s most populous economy, and it will help Uzbekistan to hedge currency risk arising from foreign currency borrowing.
Swap transactions are a financial instrument used to manage financial risks. A currency swap is a type of swap that is used to protect debt in various currencies from currency risk.
This pilot transaction, combined with technical assistance on derivatives legal reform recently started by the EBRD, will support the Ministry of Finance of Uzbekistan’s efforts to develop the derivatives market and highlight the importance of managing currency risk.
EBRD Head of Uzbekistan Alkis Drakinos said: “This transaction is an important milestone in the development of local currency markets in Uzbekistan. The first currency swap with a domestic counterpart combined with necessary legal changes will further the development of Uzbek sum derivatives. It will facilitate both currency risk management and local currency lending to the real sector of the country. This is particularly important during the period of volatility in Central Asia and beyond.”
The transaction was hedged with The Currency Exchange Fund (TCX), an offshore currency fund founded by a group of development finance institutions specialising in microfinance investment and offering medium-to long-term cross-currency swaps and foreign exchange forwards in more than 80 countries, where such products are not available or they are limited. TCX has been offering hedges in Uzbek sum since 2018. To date, the EBRD has invested more than €2.85 billion through 106 projects in Uzbekistan.
By implementing this resolution, the Ministry of Finance received a positive legal opinion from an international law firm under the General Agreement of the International Swaps and Derivatives Association (ISDA).