US embassy cable - 03RANGOON950

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, Economy 
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