Burma Opening No Gold Rush for US Firms

By Erika Kinetz 22 November 2012

RANGOON—Signs of a boom abound in Burma. Flights to Rangoon are full, hotel rooms booked solid. Foreign bars are packed with well-fed Westerners in khakis and jeans, 21st century prospectors drawn to this golden frontier.

Burma got a further boost this week from President Barack Obama, who became the first serving US president to visit the long-isolated state, an endorsement that has not gone unnoticed by global investors. But despite America’s political leadership welcoming Burma back into the international community, US companies have so far not signed any big deals—a situation few expect to change soon.

Washington is unwinding its web of sanctions against Burma, but the suspension of most legal barriers to business in this nation of 60 million is unlikely to be a gold rush for American firms. Rolling back sanctions will take time, and concerns about corruption and political blowback at home complicate efforts by US companies to move in big and fast. There is confusion about what is permitted, as well as onerous new reporting requirements, and lingering doubt about whether the changes, both in Burma and in US policy, will stick.

What’s at stake is one of the last big untapped consumer markets, as well as access to significant natural resources, including oil and gas, hydropower, timber, gems and some of the most fertile land on earth. Sandwiched between India and China—he world’s fastest growing major economies—Burma today has some of the world’s lowest levels of internet and cellphone use, as well as a dearth of good roads, ports, hotels, hospitals, schools and electricity.

Underlying the debate about sanctions, which many companies would like to see lifted more decisively, are questions about what role American business should play in Southeast Asia’s poorest country. Speaking on Monday at the University of Rangoon, Obama said American companies must “lead by example.”

His administration has sought to reinforce good business practices, encouraging transparency by requiring companies that invest more than US $500,000 in Burma to report details to the State Department, which will make some of the information public. And Washington is banning US firms from doing business with the country’s biggest, and most corrupt, businessmen.

Whether those strictures—which put American firms at a competitive disadvantage—will achieve their desired aim is a matter of debate, but the ideas they enshrine may prove valuable in the long run.

Thant Myint-U, a historian, author and adviser to Burma’s reformist President Thein Sein, said that the biggest challenge facing the country is finding a new economic model to support reform momentum.

“No one knows how to fix the economy after a half-century of misrule in a way that’s going to raise incomes and create jobs in the way we have to keep the reform process on track,” he said.

Neither of the two dominant business models in Burma today—alliances between crony businessmen and largely Chinese investors or leftist isolationism—offers a good path forward for the country, he said. He hopes American businesses will help forge a third way.

The United States has taken a calibrated approach to easing sanctions, renewing or expanding some strictures even as it unwinds others. While this gives the administration leverage should Burma’s political reform lose momentum, it creates confusion for investors.

The United States first sanctioned Burma in September 1988, the month after the military junta brutally cracked down on popular protests. Over the next two decades, congress and the president responded to human rights violations and the suppression of Burma’s democratic opposition by expanding the network of sanctions.

All told, Burma-specific sanctions are enshrined in six federal laws and a series of executive orders, often with overlapping provisions, according to a detailed study by Asian affairs specialist Michael Martin for the Congressional Research Service. In addition, there are so-called functional bans—laws that, for example, prohibit the US from providing military training and selling arms to any country deemed, like Burma, to use child soldiers.

Washington has been quick to respond to reform efforts in Burma. As Naypyidaw released political prisoners and held elections which saw opposition leader Aung San Suu Kyi take a seat in Parliament, Washington suspended restrictions on new investment, financial services, multilateral assistance, and most recently, imports from Burma.

Now, the biggest remaining legal block for US companies is a list of “specially designated nationals” and companies that US firms are barred from doing business with because of their alleged links to violence, oppression and corrupt practices. US companies complain that it is difficult to comply with this list, given the challenges of due diligence in Burma and the habit of cronies to pick up aliases and create complex subsidiaries.

“We’re encouraging reform in the government, we can’t encourage reform in individuals?” said Richard Vuylsteke, president of the American Chamber of Commerce in Hong Kong. He urges Washington to pare down the list as fast as possible and “give these guys an incentive to integrate into the system.”

Rather than revoke sanctions—which in some cases would require an act of Congress—the administration has suspended them, meaning they could be reinstated if Burma’s reform momentum is broken. In addition, with each step forward, Washington has taken one small step back.

Three days before Obama landed in Rangoon, Washington suspended its ban on most imports, a move that’s expected to revitalize Burma’s garment industry. At the same time, the administration added seven companies to the list of entities US firms can’t do business with.

In July, when Washington suspended the ban on new investment and the provision of financial services, it also installed reporting requirements and expanded sanctions to include individuals who undermine reform, engage in human rights abuses or engage in military trade with North Korea. The White House said it was offering a clear message: “Individuals who continue to engage in abusive, corrupt or destabilizing behavior going forward will not reap the rewards of reform.”

Aside from sanctions, US companies are subject to strict anti-corruption laws and reputational risk at home, should they choose the wrong business partner in Burma.

“The country is rife with corrupt business practices which would be illegal here,” said Priscilla Clapp, who served as charge d ‘affairs at the US Embassy in Rangoon from 1999 to 2002. “US businesses are held to those rules. They have to condition their Burmese business partners to our rules. That’s not easy because you’re changing centuries of bad behavior.”

In the meantime, companies from other countries are sweeping into Burma.

“It’s been a vacuum for US companies for a couple of decades,” said John Goyer, senior director for Southeast Asia at the U.S. Chamber of Commerce in Washington. “They have a lot to learn about the market and the operating environment, whereas companies from China, Thailand, Malaysia know the players, they know the environment. It’s home field advantage.”

The US is also at a disadvantage when trying to compete with companies from, for example, Japan, which can offer package deals of investment, aid and debt forgiveness padded with government money.

“Companies from Asia can come in with financing packages all wrapped up as part of the deal,” Goyer said. In America, he added, “there’s not unlimited government backing for private companies to go in and provide ports or railways or infrastructure.”

Anthony Nelson, associate director for Burma at the U.S-Asean Business Council, said that for many US companies, Burma is the largest country in the world where they don’t have a presence. “That kind of thing doesn’t come along very often,” he said. “It’s never going to come again.”

But even Nelson is not talking of a gold rush.

“Take a look at Vietnam,” he said. “When we normalized relations with Vietnam, companies came in and looked around. They maybe opened representative offices, but it was 10 or 15 years before the big boom of investment from US companies. When US companies move, they move in a big way, but there’s time that people need to look at what they’re doing.”