BURMA SANCTIONS: GOVERNMENT STUMBLES FORWARD

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000994 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: 08/14/2013 TAGS: ETRD EFIN ECON PGOV BM SUBJECT: BURMA SANCTIONS: GOVERNMENT STUMBLES FORWARD REF: A. RANGOON 978 ¶B. RANGOON 966 AND PREVIOUS Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) ¶1. (C) Summary: Hints of two informal trade policy changes (an attempted shift from the dollar to the euro and unofficial liberalization of border trade) may steer the post-sanctions environment in a clearer direction. Border trade will boom, especially if the regime is serious about reforms on the frontier. However, "normal" trade will decline despite a GOB promise to accept euros as legal foreign exchange. In the meantime, businesses are still frozen, carefully weighing their options before committing money to any new trading mechanism. The SPDC leadership remains defiant, confident that dents to the state's coffers will not impact personal wealth and power. End summary. Policy of Winks and Nods ¶2. (C) On August 10, the SPDC Chairman's office and the Ministry of Commerce co-chaired a second meeting of entrepreneurs to discuss the impact of and responses to the new U.S. sanctions, especially the ban on financial services. Burma's dollarized economy and trading system absorbed a staggering blow, for which it was totally unprepared, when financial transactions could suddenly no longer be cleared through the United States. The blow was exacerbated when several Singapore banks, the nexus of Burma's commerce, refused to engage in any Burma-related transactions outside of Singapore. ¶3. (C) Typically no clear policy pronouncements emerged from this session; however, several attendees reported to us that they interpreted two potentially significant shifts in GOB trade policy from the circumlocution and vague "instructions" issued by the five ministers present. ¶4. (C) The first is that the government is apparently now accepting non-U.S. dollar foreign currencies for official remittances and Letters of Credit (L/Cs). The euro is the currency of choice, with euro accounts allegedly available for the first time in the state-owned foreign trade banks. The GOB is also apparently now requiring all overseas Burmese who remit their salaries to a state-owned bank to do so in euros, yen, or Singapore dollars -- though only euro accounts will be allowed. Likewise, state-owned enterprises must do remittances and L/Cs in euros. ¶5. (C) The second significant change hinted at is an unofficial liberalization of border trade. There were no details of this liberalization given by the ministers in their presentations. However, one businessman reported that during a coffee break one of the ministers implied that foreign exchange regulations would be unofficially loosened to allow individuals and companies to hold foreign exchange, especially "border" currencies (baht, yuan, rupee, etc.). Also, import license approval authority will be devolved to local Commerce Ministry Border Trade Division authorities, who are reportedly more lenient with import license requests. Currently, all import license requests, including those for border trade, must be cleared in Rangoon. Over the last several months importers report that central government authorities have been granting at most 25 percent of their requests. What Does It All Mean? ¶6. (C) Traders and economists from all quarters agree on three things. First, trade has ground to a halt as companies come out of their initial shock and seek alternatives to get their businesses rolling again. Second, whatever these alternatives may be, they will not, for the most part, rely on normal trade involving banks inside Burma. Finally, recovery will be very slow as no trader will want to be the first to dip a toe into the uncharted waters of the government's unpublished policy changes. ¶7. (C) Those who can most easily shift from formal trade using Burmese banks to other methods will survive most easily in the new reality. Border trade, legal and illegal, ought to boom, with legal trade prevailing if the regime is more transparent regarding policy changes. Traders agree that imports, especially consumer and intermediate goods but even some capital goods, will be most easily shiftable to the border. If the GOB is serious about liberalizing border trade, there will likely be an upsurge in imports due to unmet demand for consumer goods such as cooking oil. However, transportation difficulties and the greater expense of border trade may push up the prices of such imports. Exports are not as transferable, since much of the government's exports go to non-bordering countries. One trader estimated that 60 percent of the current total import volume could be done via border trade, while only 20 percent of exports could be carried out that way. ¶8. (C) Without a clearer GOB policy and more liquidity in the market, it is unlikely that formal trade in euros, or other non-U.S. dollar currency, will catch on. Some euro L/Cs may be opened in the short term to clear the pipeline of deals already signed and import licenses granted but not yet used. Also, euro L/Cs would be available for third country banks skittish of doing dollar transactions involving Burma. However, traders felt that most trade requiring an L/C would transpire in dollars outside of Burma (i.e., between a third country bank and Myanmar Foreign Trade Bank's account in Singapore),with the proceeds delivered to Burma via hondi (informal remittances),courier, or account balancing. Barter, counter, and "import first" trade are also likely to take hold, especially in the official sector, though the regime has not yet endorsed this method of trade for private firms. All of these methods, though, will involve extra expense and administrative effort, further muddying already murky business waters. ¶9. (C) The government's (as opposed to the SPDC leadership's) pocketbook is likely to suffer with the shifting trade situation. Without some commitment to the hinted trade policy reforms, most border trade will move into the "black" and "gray" sectors, which pay more bribes than customs duties. Fewer exports also mean reduced income from the 10 percent export tax. A trade deficit is likely for the next year, which will put upward pressure on kyat as will the steady demand for U.S. dollars by businesses, NGOs, and government officials. Though sanctions may reduce the country's official dollarization, the U.S. dollar will likely remain everyone's preferred liquid commodity. The government can only control the exchange rate by arresting money changers and restricting the official outflow of foreign exchange by manipulating import licenses. Neither of these is sustainable, especially if more and more trade moves out of the central government's domain. Government Reaction: Hurt Feelings, But Defiant ¶10. (C) Despite the obvious economic damage being done to the country by sanctions, none of our contacts believes members of the SPDC are being materially hurt. As one senior Burmese economist put it, "the country's leaders' riches and power are not linked at all to the prosperity of the country." Though there is certainly a psychological impact on the regime (see Ref A),our reports indicate that this angst is being channeled into defiance and spine stiffening. Among the regime's senior leadership is the reported prevailing sentiment that the SPDC will not be seen as "kneeling down" to the United States or Aung San Suu Kyi. Martinez