Identifier
Created
Classification
Origin
03RANGOON1184
2003-09-23 09:18:00
CONFIDENTIAL
Embassy Rangoon
Cable title:  

BURMA SANCTIONS: BUSINESSES ADAPTING IN A FROZEN

Tags:  EFIN ETRD ECON PGOV BM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 001184 

SIPDIS

STATE ALSO FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 09/22/2013
TAGS: EFIN ETRD ECON PGOV BM
SUBJECT: BURMA SANCTIONS: BUSINESSES ADAPTING IN A FROZEN
ECONOMY

REF: RANGOON 1118 AND PREVIOUS

Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D)

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 001184

SIPDIS

STATE ALSO FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 09/22/2013
TAGS: EFIN ETRD ECON PGOV BM
SUBJECT: BURMA SANCTIONS: BUSINESSES ADAPTING IN A FROZEN
ECONOMY

REF: RANGOON 1118 AND PREVIOUS

Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D)


1. (C) Summary: Many businesses have adapted fairly well to
the July economic sanctions on Burma, though overall economic
activity has dropped notably. Many have embraced trade in
euros, while some have sought to move their traditional
dollar-based business to the Thai and Chinese borders. Still
others are settling their transactions outside of Burma.
Despite these attempts to adapt, none of these alternatives
is perfect. Sanctions will have a long-term impact on the
economy; however, in the absence of economic reforms, the
Burmese government remains by far the largest enemy of the
Burmese economy. End summary.

Eur-OK With Me


2. (C) Nearly two months since the introduction of additional
wide-ranging Burma sanctions -- banning imports of Burmese
goods into the United States and forbidding provision of
financial services to Burma by U.S. persons -- most Burmese
traders have settled on one of three options for survival.
The first option is to try and shift all import and export
contracts from the U.S. dollar to a different currency,
predominately the euro. Prior to the new sanctions, the U.S.
dollar was the currency of choice for all international
transactions. However, the financial services ban, combined
with the skittishness of most foreign banks to do any U.S.
dollar business with a Burmese entity, have forced Burmese
banking authorities and import-export firms to scramble for
alternatives.


3. (C) The GOB has accommodated desperate traders to some
degree. As reported in reftel, in mid-August the Commerce
Ministry informally issued instructions to banks and
entrepreneurs to amend values of goods in existing U.S.
dollar export and import licenses, and all future licenses,
in Euro, Japanese Yen, or Singapore dollars "for opening L/Cs
and for payments." Government trade banks are also allowing
businesses to open accounts in these alternative currencies.

Though the government banks will still issue
dollar-denominated L/Cs, they are forcing the Burmese
customer to sign a letter assuming all risk of loss.


4. (C) After some confusion and chaos surrounding the sudden
shift, the situation has settled considerably as the majority
of companies that must use the banking system are reluctantly
opening euro accounts and negotiating with buyers and sellers
to alter their terms of business. Some large traders have
even applauded the move, citing the relative stability and
strength of the euro.


5. (C) There are at least three major flaws in this system,
which contributed to the initial sharp drop in trade volume
following the imposition of sanctions (though there has been
some rebound in recent weeks). First, some traders
unfamiliar with the euro, and suspicious of the government's
policies, have been reluctant to make the switch, instead
basically ceasing their legal trading operations. Second,
some foreign exporters -- particularly in Asia -- want
payment in U.S. dollars, and are charging a 6-7 percent
premium to amend contracts into euros to cover foreign
exchange risk. Interestingly, Burmese importers with whom we
spoke seemed totally unaware of the OFAC license allowing for
U.S. dollar financial transactions pursuant to exports to
Burma. Finally, the euro has little use on the street here.
No black market has evolved and the government banks are not
allowing euro account holders to withdraw their euros -- only
to convert to U.S. dollars and then withdraw them as normal
in Foreign Exchange Certificates. The euro only has value to
traders who can use their euro export earnings to get
euro-denominated import licenses from the government -- which
requires importers to have foreign exchange in the bank to
cover any imports.

Run For the Border


6. (C) The second option, for businesspeople trading with
China or Thailand, is an expansion of border trade operations
-- both licit and illicit -- which can be done in several
currencies without relying on L/Cs. This is an imperfect
solution. While it avoids the euro hassles, it entails
additional transportation and other "administrative" costs.
Traders are not able to move the same volume of product that
they had previously imported or exported via container. This
method is also not a good substitute for those dealing in
large capital goods. Though the GOB is easing settlement
procedures for legal border trade, permission to import
remains tightly controlled. Though rumors persist that the
government will liberalize import licenses for border
commerce, this has not yet occurred. Traders report that for
legal border transactions they still must contend with the
increasingly tight-fisted import license process administered
by the Ministry of Commerce, and directed by SPDC Vice
Chairman General Maung Aye.


7. (C) Because of these obstacles, legal border trade has not
increased much since sanctions -- though many traders are
setting up shop in border entrepots. However, we've heard
that there has already been an expansion of black market
importing. With diminishing legal trade, due both to the
sanctions and the government's continued tight control on
import licenses, shortages of consumer goods and some
commodities (such as rubber resin) have appeared in Rangoon.
When possible, traders have seized on these shortages to
expand their importing of the needed product, import license
or no, to fill the gap.

Keeping it at Arm's Length


8. (C) A final option for traders, particularly exporters, is
to conduct settlements in U.S. dollars outside of Burma --
primarily in Singapore and Hong Kong. Traders report that
two Singaporean banks in particular are being used to settle
L/Cs in U.S. dollars via intra-bank transfer between a
Myanmar Foreign Trade Bank (MFTB) account and the account of
a buyer/seller in the same bank. The offshore U.S. dollars
are either kept abroad or remitted to Burma using hundi.
Burmese entrepreneurs tell us that so far the GOB is
accepting this method of settlement, provided the proper
import licenses are held and export taxes are paid. However,
one well-connected trader opined that the government will
have to crack down on this soon, as it is reducing the amount
of hard currency coming into Burma.

Comment: Sanctions Can't Take the Whole Blame/Credit


9. (C) Despite the fact that Burma's wily business community
is adapting to the new economic realities, the sanctions will
have some long-term negative impact on the economy. Traders
are unanimous that without counterbalancing economic reforms,
sanctions will contribute to a significant decline in overall
trade volume (though an increase in border trade will make up
some of this decline) and a net outflow of foreign exchange.
Many export-focused manufacturers and small trading companies
may go under -- with possible benefits for larger, better
connected firms. Price increases are also a real possibility
with the shortages of imported goods, especially those not
easily replaceable via border trade. However, the chilly
business environment and persistent banking problems will
also keep money supply and velocity sluggish, which may
continue to hold down inflationary pressures.


10. (C) However, it is important to remember that sanctions
are not the only, or even the primary, cause of Burma's
economic troubles. Traders with whom we spoke blame the
government's ongoing tightfisted import license policy, where
approvals run at only 25-50 percent of requests, as much as
sanctions for the bleak trade picture. Also, businessmen
have confided in us that they, and many of their colleagues,
are leaving the country for "awhile" or easing back on their
business operations because they find operating in the
current business climate too treacherous. Their discontent
comes not only from the chaos caused by sanctions, but also
from the general mismanagement of the economy by the
government, and the GOB's increasingly aggressive policy of
pressuring businesses to take on unprofitable or risky deals
in the "national interest."
Martinez