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Washington lifts some Myanmar sanctions, but doubts remain

NAYPYITAW A milestone week in Myanmar's rapidly evolving relationship with the West brought mixed news for de facto leader Aung San Suu Kyi and deepened uncertainty for investors in the emerging Southeast Asian economy. Conflicting signals from the U.S. about its sanctions policy, and a pointed message to Suu Kyi from Secretary of State John Kerry expressing concern over Myanmar's stateless Rohingya Muslims, highlighted a growing disconnect in the new democracy.

Officials on both sides confirmed heated internal debate about appropriate policy responses -- toward and by -- senior officials of Myanmar's hybrid administration.

At the heart of the discomfort is the still-powerful military, or Tatmadaw, which holds a quarter of all parliamentary seats and several key cabinet positions under the country's 2008 constitution. In the past, U.S. sanctions were squarely targeted at Myanmar's military regimes. The accession in 2011 of a reformist, quasi-civilian administration under Thein Sein led to a softening of U.S. sanctions. But the rise of Suu Kyi, who led her National League for Democracy to a crushing victory in national elections last November, has greatly complicated the situation.

Essentially, it has left the U.S. in the awkward position of trying to pressure the military with restrictions while helping Suu Kyi consolidate control. After failing to persuade the military to support a change in the constitutional provision that prevents her from becoming president, Suu Kyi sidestepped the issue by creating a new position of state counselor -- similar to a prime minister -- that enables her to stand alongside her hand-picked president, Htin Kyaw. In reality, as a Western diplomat noted, "she runs the government -- and runs it with micro attention." She has also taken on the roles of foreign minister and minister of the president's office.

In public, Suu Kyi, once a strong advocate of sanctions against her country, has neither supported nor opposed maintaining the restrictions. But in recent discreet communications with the Obama administration, she indicated the country was "not yet ready" for removal of all curbs. To Washington's consternation, she also signaled publicly there would be no fast resolution of the plight of Myanmar's 1 million or so Rohingyas, many of whom suffer persecution. In an ironic moment at a joint news conference after her May 22 talks with Kerry in Naypyitaw, she asked for "more space" to deal with the issue, urging "well wishers" -- a clear reference to the U.S. -- to cooperate.

The question now is whether U.S. sanctions can maintain pressure for military reform -- and support for constitutional change -- while enabling other sectors to move ahead. Or whether ongoing sanctions will only hurt the administration and the entire country.

CARROTS AND STICKS Just days before trade and investment sanctions against Myanmar were set to expire, the U.S. on May 17 announced it would extend some curbs while easing others.

Among key moves, 10 state-owned businesses, including three banks and companies involved in timber, pearl and gemstone industries, were removed from the Specially Designated Nationals list of enterprises that are off-limits for U.S. business. Two other banks that are majority-owned by military entities remain on the blacklist but have received the green light to deal with U.S. companies -- effectively enabling U.S. companies to transact with most of Myanmar's financial system. More than 100 entities remain on the blacklist.

The U.S. decision also eased restrictions on personal transactions that have hampered Americans working in Myanmar. Separately, it paved the way for lifting the current $500,000 threshold for reporting U.S. investments in Myanmar to those worth $5 million or more.

But restrictions on trade and investment with military-linked entities and individuals remain. These sanctions, which carry harsh penalties, underpin a ban on military sales and U.S. imports of jade and rubies from Myanmar. Curbs have been widened to encompass six more companies majority-owned by Steven Law, head of one of the country's biggest conglomerates, Asia World group -- even though the group, which counts ports, airports and toll roads among its assets, benefited from a move to extend temporary permission for U.S. companies to use Myanmar's ports and transport facilities.

Other investors stand to benefit from the U.S. sanctions decision, noted a Yangon-based Western executive. "China is clearly overjoyed -- as are other big investors. ... We're facing at least another year where U.S. investors in Myanmar have one hand tied behind their back, watching rivals take advantage of any further economic opening."

Myanmar drew a record $8 billion of foreign direct investment in 2015, led by China, Singapore, Thailand, Hong Kong and the U.K., with Japan rapidly moving up the ranks.

To justify extending some sanctions, Obama was forced to again classify Myanmar as a threat to U.S. national security, a label many called absurd.

Suu Kyi recently insisted that remaining sanctions "would not hurt the country," and that the U.S. remained a "good friend" and would lift all curbs at an appropriate time. That timing was even more firmly linked to constitutional reform in Kerry's May 22 statement that the desired democratization could not occur under the current constitution.

Some U.S. business executives have expressed dismay. "Does an emergency still exist as it did in Burma five or 10 years ago?" John Goyer of the U.S. Chamber of Commerce said to U.S. media. The chamber argues that, as an alternative, the U.S. could blacklist companies and individuals under different sanctions programs, where necessary.

Among a handful of major U.S. companies operating in Myanmar are Coca-Cola, General Electric, Chevron and Caterpillar. Even so, U.S. investment amounts to just $248 million to date, according to the chamber, compared with billions from China, Thailand and now Japan.

Citigroup of the U.S. and Standard Chartered of the U.K. have maintained their roles agreed under the Thein Sein government as advisers on plans to secure a sovereign credit rating. But both remain wary of further involvement, as do most Western banks, until sanctions are lifted.

For Western companies, the fact that sanctions remain is a "huge deterrent," said a European lawyer in Yangon. "Our clients, many of them European, will not move ahead until sanctions are completely ended."

"The sanctions move seems intended to be a positive signal for U.S. companies, but for investments to really flow, it is still so tentative -- and uncertain -- that it doesn't really change much at all ... the rules are still too complicated," said Thiri Thant Mon, co-founder and managing director at Yangon-based investment advisory firm Sandanila.

A Myanmar-based adviser to U.S. investors agreed that the shift was a "modest improvement" on the earlier sanctions regime. But he voiced doubts that it would significantly encourage U.S. and other investors concerned about the practical difficulties of dealing with sanctions regimes. "Honestly speaking, it doesn't make much difference to us as investors. It might help a little with daily transactions, but we have to keep an eye on SDN lists." Even the move to ease U.S. corporate reporting requirements to the $5 million threshold "doesn't really help the kind of big investments that Myanmar really needs," he added.

Size does indeed matter for large Western companies seeking capable local partners. "The trouble is, most potential partners for us are on the U.S. blacklist, for example, Asia World companies. ... For big projects, it's hard to go alone in that market," said a U.S. manufacturing executive.

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