AUCTIONING OFF BURMA'S RICHES

UNCLAS SECTION 01 OF 02 RANGOON 000062 SIPDIS SIPDIS STATE FOR EAP/MLS; INR/EAP; OES FOR JMIOTKE AND ACOVINGTON; EAP FOR JYAMAMOTO; EEB FOR TSAEGER PACOM FOR FPA; TREASURY FOR OASIA:SCHUN E.O. 12958: N/A TAGS: SENV ECON ETRD PGOV EINV BM SUBJECT: AUCTIONING OFF BURMA'S RICHES REF: A. 07 RANGOON 339 ¶B. RANGOON 61 ¶C. RANGOON 46 RANGOON 00000062 001.2 OF 002 ¶1. (SBU) Summary. Myanmar Economic Holdings Ltd (MEHL),a state-owned enterprise owned by the Ministry of Defense, controls Burma's gem and jade industry. In addition to owning all of Burma's mines, MEHL also controls the sale of high-quality stones, putting them up for auction at its annual gem and jade emporiums. Auctions are open to both local and foreign companies and lots must be purchased with Euros. MEHL hosts four or five emporiums a year, earning an average of $300 million in sales. End Summary. How the Emporiums Work -------------- ¶2. (SBU) Each year between November and May, Burma's gem and jade mines are in full operation. Only companies that enter into joint ventures with MEHL are able to extract stones from the mines; individuals are no longer able to purchase mining permits. While most of the jade is sold at MEHL's emporiums, only high-quality gemstones are sent to the emporiums. Companies can keep and sell inferior and medium-quality stone on the local market (Ref B). MEHL holds two types of emporiums each year: government auctions with stones from MEHL mines and private auctions with stones from joint venture mines. The government auctions are held in March and September, while the private auctions are held in January and July. If MEHL has an overstock of gems and jade, it will also hold an additional mid-fiscal year auction in November. ¶3. (SBU) While the emporiums usually last two weeks, the GOB places more emphasis on the jade auction. Customers can view precious gem lots for three days, with the auction occurring on the fourth day. Viewing of jade lots lasts longer, approximately 13 days, with one day for auction. MEHL auctions both gem and jade lots in two ways, either through silent auction or open bidding. MEHL reserves silent auction for lower quality ruby and sapphire sales, as well as for larger jade lots. It uses open bidding, which draws more attention and customers, to sell high-quality gemstones and jade. MEHL officials believe they can draw a higher price for the best stones by pitting customers against each other, gem merchants explain. ¶4. (SBU) Each year, the gem and jade emporiums attract the interest of both local and foreign companies. In FY06/07, an average of 500 companies participated in each auction, 40 percent of which were foreign companies. In FY07/08, the number of foreign companies and businessmen attending the auctions has increased, now averaging around 50 percent. In order for a company to participate in the auction, it must be registered with the Ministry of Mines as a legitimate dealer and have a local bank account, either with the Myanmar Foreign Trade Bank or the Myanmar Investment Bank. Under Burmese law, foreigners are able to purchase gem lots, but the financial transaction must clear the bank before they are able to take possession of the lots. According to local gem dealers, MEHL often ships the gem lot to the foreigner several weeks after the financial transaction clears. Making a Profit -------------- ¶5. (SBU) The majority of the earnings from the jade and gem emporiums go to MEHL. MEHL collects all revenues from the government auctions and the mid-year auction. It also earns RANGOON 00000062 002.2 OF 002 a percentage of the profits from the private auctions, based upon MEHL's joint venture contract with each company. MEHL's revenues from the auctions are tax-free; private companies must pay a 7 percent tax to the Internal Revenue Department (Ref A). ¶6. (SBU) In FY06/07, MEHL reported earnings of more than $300 million in profits from the emporiums, up from $200 million in FY05/06. Profit estimates for FY07-08 are not yet available, although NGOs estimate that the GOB earned approximately $125 million from the 16th mid-year emporium in November alone. MEHL recently concluded another jade and gem auction on January 19; MEHL will not report the results (Ref B). Comment -------------- ¶7. (SBU) By ensuring that state-owned enterprises are entrenched in Burma's economy, the regime asserts its control over business ventures while reaping profits from all economic endeavors (Ref C). The sale of gems and jade is only one way that the regime earns its cash, and the GOB predicts that FY07/08 sales may overtake FY06/07 profits of $300 million. Despite all the negative attention that Burma has received in recent months, Burmese gems and jade remain popular with many foreigners. It appears that quality, not politics, defines interest in gemstones and jade. VILLAROSA