US embassy cable - 03RANGOON1184

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, Economy 
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