SANCTIONS CATCH BUSINESSES, GOVERNMENT FLAT-FOOTED

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000950

SIPDIS

STATE FOR EAP/BCLTV, EB/ESC/ESP
BEIJING PASS CHENGDU
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OFAC, OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 08/07/2013
TAGS: ETRD ECON PGOV BM
SUBJECT: SANCTIONS CATCH BUSINESSES, GOVERNMENT FLAT-FOOTED

REF: A. RANGOON 921


B. RANGOON 889

C. WOHLAUER-GLAZEROFF 7/24 EMAIL

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


1. (C) Summary: Businesses have faced more trouble than they
expected from the new U.S. sanctions on Burma. While local
traders are scurrying to find a creative solution to their
financial problems, the Burmese government has refused to
take any action other than attempt to reassure the business
community with empty promises that "all will be well." We
see a number of likely economic consequences coming in the
short term, though the X-Factor remains any possible policy
response by the regime. End summary.

Businesses: Why Me?


2. (C) Those in the business community who rely on banks and
official trade channels are in a panic over the impact of the
new Burma sanctions. Because of the pre-sanctions focus on
minimizing exposure to the ban on imports of Burmese products
into the United States, few took the time to understand how
seriously their operations would be curtailed by the ban on
financial services. Because legal, non-border, foreign trade
in Burma is almost exclusively in U.S. dollars, importers and
exporters have found themselves unable to open new letters of
credit and unable to easily get payment on letters of credit
that weren't settled before the sanctions took effect at
12:01 am EST on July 29.


3. (C) Burmese traders report that their exports and imports
have ground to a halt as the foreign banks with whom they
normally do business, mostly in Singapore, have stopped
honoring letters of credit involving the Burmese state-owned
foreign trade banks: Myanmar Foreign Trade Bank (MFTB),
Myanmar Investment and Commercial Bank (MICB),and the
Myanmar Economic Bank (MEB). These banks hold the monopoly
on foreign exchange and official foreign trade transactions.


4. (C) A number of European and Asian investors told us that
the new obstacles caused by the financial sanctions, combined
with the dismal pre-existing investment climate, will make it
impossible to stay in Burma. A Korean diplomat told the DCM
that Korean investors in the garment sector (30-40
individuals or firms) are beginning to seriously explore
options for decamping to Sri Lanka, Vietnam, or just across
the border into Thailand. Those foreign investors that
choose to remain will likely fall into three categories:
those who are able to make their money on illegal border
trade or border trade in Chinese yuan or Thai baht, those who
can arrange barter trade, and those who foolishly believe the
sanctions will be lifted as soon as Aung San Suu Kyi is
released. This latter bit of wishful thinking is widespread,
despite our repeated public assurances to the contrary.


5. (C) However, despite their agitation, most local traders
with whom we spoke were sanguine that they would find a
creative solution to what is merely the latest obstacle to
their doing business. Said one, "our government has been
imposing their sanctions on us for 40 years, so we'll have no
trouble adapting to yours." Indeed, some of our more wily
business contacts report that they've already established new
modus vivendi to continue their trading businesses without
problem.

Government: Who Us?


6. (C) According to several business sources, the Ministry of
Commerce and the Office of the SPDC Chairman co-hosted an
emergency session on the new sanctions on August 4 for
Burmese traders. The well-attended meeting went about one
hour with presentations by the Minister of Commerce, the
Minister of Economic Development and National Planning, a
minister from the SPDC Chairman's office, and the Deputy
Finance Minister. Despite the augustness of the presenters,
all reports indicate that the GOB had no advice for the
panicky businesspeople other than to continue on as best they
can in the new environment, and to resolve any specific
concerns with their bankers. The policymakers offered no
hint of any pending regime reaction to the new sanctions, and
only mentioned in passing the wisdom of expanding barter
trade or conducting commerce in a currency other than the
U.S. dollar.


7. (C) Businesspeople close to government economic officials
tell us that the regime is still in a state of denial, poorly
understanding the full impact of the sanctions on the
country's official trade sector. Apparently these officials,
and likely those above them, are still clinging to the
expectation that China and/or India will come to Burma's
financial assistance -- an expectation that may have some
merit (see Ref B and C).

8. (C) Aside from a virulent July 31st attack on U.S.
sanctions policy by SPDC Secretary One General Khin Nyunt,
there has been little public GOB response since the sanctions
were imposed. A report written for SPDC Secretary Two Lt.
General Soe Win on the Embassy's sanctions briefing on July
31st (Ref A) was very factual, accurately summarizing the
briefing's contents with no editorial commentary. Likewise,
the Minister of Commerce's session for traders reportedly
contained no anti-U.S. rhetoric or finger pointing.

The Future: Who Knows?


9. (C) Over the next few weeks and months, we see the
following as some of the possible specific consequences of
the sanctions: unemployment as garment factories and other
employers shutter for lack of business; a sharp reduction in
the GOB's official reserves as the inflow of legal U.S.
dollars stops; an increase in the already large,
predominately U.S. dollar-denominated informal economy
(especially border trade); a resulting boost for neighboring
economies and for the ethnic groups that control key border
trade areas; an increase in the kyat value of the U.S. dollar
as supplies dwindle and importers must buy cash from the
marketplace; and, a steady decrease in the kyat value of the
U.S. dollar denominated Foreign Exchange Certificate. Though
the economic problems will ripple through the middle class,
and then into the working class as unemployment results from
the expected shuttering of factories and other employers, it
is far too early to predict any social unrest.


10. (C) The X-Factor is the reaction of the Burmese
government. It could ease the woes of local traders by
publicly encouraging trade in another foreign currency or
loosening import restrictions (which currently require
importers to hold offsetting accounts of U.S. dollar export
proceeds in a government bank account). It could also go the
other direction, conserving precious foreign exchange by
enforcing more strictly existing foreign exchange control
laws that forbid Burmese citizens from holding foreign
currency, or tightening import restrictions.
Martinez