US embassy cable - 03RANGOON994

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