Tougher action is urgently needed to cut off foreign currency flows to the Myanmar military regime, suggested local and foreign financial experts, who argued that severing its financial lifeline would hasten the collapse of military rule.
“The largest inflows of foreign currency to the military are from the oil and gas and mining sectors. We need to totally shut off the flow of foreign currency that is keeping the junta alive,” a local economist who asked not to be named told The Irrawaddy.
“The international community must pressure all the parties that sustain military rule in Myanmar. It is critical to act before it is too late,” he said.
Last week, an anonymous group, Independent Economists for Myanmar (IEM), suggested that effective sanctions limiting the ability of the regime’s State Administrative Council (SAC) to collect revenue from natural gas, mining, forestry, shipping including port fees and airlines could change the military’s calculus.
It estimated that such measures would cut off roughly US$2 billion per year in financing for the military.
Earnings from natural gas, jade, metallic minerals, land rentals, telecommunications fees and businesses involved in trade such as port operators, transport and logistics companies, and Myanmar National Airlines provide the largest inflows of foreign currency to the military, totaling around $2.5 billion per year.
Cash in hand
IEM estimated that that military’s “access to foreign currency is significant but constrained,” saying it controls at least $4 billion, roughly two-thirds of Myanmar’s stock of foreign currency. However, it also controls about half of the inflows that remain following the collapse of several sectors that generated foreign currency, such as textiles and tourism.
Additionally, around $1 billion of foreign assets are held at the US Federal Reserve and were frozen by the US government in early February.
Foreign currency is important for the military since it not only pays for military equipment like tanks and guns, as well as supplies like fuel, but is also needed to service military-owned companies that rely on foreign inputs. Military-owned factories rely on foreign equipment to keep functioning, while military hospitals purchase medication from abroad.
IEM said that prior to the coup, Myanmar had enough foreign reserves to maintain imports for three months. However, since then, exports have shrunk, import demand has crashed, and the military has confiscated much of the country’s foreign reserves.
Myanmar imports roughly $28 billion worth of goods and services in an average year, including $3 billion in fuel, more than $500 million in medication, $1 billion in cooking oil, and $1.2 billion in meat and vegetables. Myanmar’s official exports have shrunk by more than 20 percent and imports by more than 35 percent since October 2020.
Before the coup, the textile and footwear industries generated a quarter of all foreign currency inflows for the country, but almost all of their operations have dried up since the Feb. 1 military takeover. Moreover, none of the military-owned companies are known to hold significant foreign assets.
The scarcity of foreign exchange is evident in the 20 percent depreciation of the kyat versus the US dollar between Feb. 1 and April 19, despite limits on kyat withdrawals and hoarding of cash, the economists said.
Subsidiaries of Myanmar Economic Corporation (MEC) and Myanma Economic Holdings Limited (MEHL)—two military owned conglomerates—normally earn roughly $200 million annually from domestic sales. These include Dagon Beverages Company, Myawaddy Bank, Mytel, Aung Thitsa Oo Insurance and Bandoola Transportation Company.
However, both MEHL and MEC are likely to suffer financially, with Myanmar Brewery, Myawaddy Bank and Mytel expected to see declines in revenue of 80 to 90 percent due to domestic consumer boycotts. The combined effect could be to reduce MEHL and MEC’s domestic revenue by between $100-150 million, the economists estimated.
Many of the Myanmar state’s most valuable assets were sold off in the 1990s and 2000s, meaning the SAC regime cannot raise much capital from asset sales. Further, widespread instability and insecurity are depressing asset prices and the National Unity Government—a shadow government formed by elected lawmakers ousted by the coup—considers void any investment agreements signed between domestic or foreign companies and the SAC, IEM said.
“In short, without new foreign currency inflows, the military will soon need to ration foreign currency. The SAC regime will need to choose between purchasing fuel, medication, equipment and food for itself and providing foreign exchange liquidity for the rest of the population,” it said.
Even without forceful targeted sanctions in place, the military is already being forced to choose between its own priorities and providing financing to import the fuel and equipment needed to generate the electricity and food, fertilizers and medications people need to survive, IME said.
The military has already starved public services and the private sector of foreign exchange, so further reductions in its access to foreign currency are likely to predominantly impact the military rather than civilians, the IME said.
“Such actions, and preventing military businesses from accessing foreign inputs, could help pressure the military to compromise on its own needs,” the economists suggested.
Bankrolling crimes
Foreign currency inflows from natural resources—oil, gas, minerals, gems and forestry products—represent more than a third of Myanmar’s export earnings, according to official records. The oil and gas sector, in which many international energy giants have invested, has become a target of rights groups, which are demanding an end to foreign firms’ financing of the military’s crimes. Since the military takeover, at least 769 civilians have been killed and 4,734 people arrested by the regime.
On Tuesday, Myanmar’s ambassador to the United Nations urged the US Congress to play a decisive leadership role in resolving the Myanmar crisis.
Ambassador U Kyaw Moe Tun, a representative of elected lawmakers from the National League for Democracy (NLD), urged the US to impose “targeted, coordinated and tougher sanctions” on the Myanmar military and its businesses such as Myawaddy and Innwa banks, the state-owned Myanmar Foreign Trade Bank (MFTB) and Myanmar Oil and Gas Enterprise (MOGE).
“I wish to stress that Myanmar is not just witnessing another major setback to democracy, but also the crisis is threatening the regional peace and security,” U Kyaw Moe Tun said.
Oil and gas revenues earned Myanmar $1.5 billion in annual income in fiscal 2019-20, with around 80 percent of that income derived from the offshore natural gas sector, according to official figures. Recently, US senators urged the Biden administration to impose sanctions on MOGE.
Natural gas joint ventures involving companies such as France’s Total, the US’s Chevron, South Korea’s POSCO, Thailand’s PTT, Malaysia’s Petronas and China’s CNPC are currently the most significant sources of foreign exchange revenue for Myanmar. MOGE collects income through its joint ventures and revenue sharing agreements with international corporations.
US giant Chevron has a longstanding partnership with MOGE. The two companies are joint investors in the Yadana offshore gas project, located off the southwest coast of Myanmar, which accounts for 42 percent of all oil and gas production from Myanmar’s offshore projects.
Chevron paid around $50 million to Myanmar between 2014 and 2018, according to the Myanmar Extractive Industries Transparency Initiative report (MEITI). Total reported that it paid $257 million in taxes and other payments to Myanmar in 2019.
Petronas’s Yetagun gas project paid $208 million to the government in 2018, while the Shwe project, run by South Korea’s POSCO, paid $194 million, according to MEITI. The Zawtika gas project, run by Thailand’s PTT, paid $41 million in 2018.
International and local pro-democracy supporters have repeatedly pressured oil and gas companies to cut ties with the military or pay revenue into a trust or protected account either to be held until such time as Myanmar has a legitimate and democratically elected government or to be used for humanitarian purposes.
Elected lawmakers from the NLD sent a final notice in March calling on foreign-owned oil and gas companies operating in Myanmar to suspend business ties with the military regime, warning that the money from sales of the oil and gas would be used to reinforce human rights violations in the country.
However, both Total and Chevron remain reluctant to follow those demands. A New York Times report revealed that Chevron has intensively lobbied the US State Department and key congressional offices against sanctions, warning that they could disrupt its joint ventures in Myanmar.
An investigation by France’s Le Monde newspaper published on Tuesday revealed that Total’s gas operation in Myanmar has been propping up the military junta by diverting funds from gas sales to offshore accounts instead of the government. According to documents accessed by the French newspaper and released after the military coup, the Yadana gas field, which supplies gas to local markets in Myanmar and Thailand, is diverting revenue to the MOGE, which is managed by army executives and retired officers.
Human rights group Justice for Myanmar (JFM) said on Wednesday that Total’s CEO claimed his company is continuing to do business as usual in Myanmar for humanitarian reasons. However, their business conduct in Myanmar and deep ties to the military suggest otherwise, JFM said.
“We demand Total to immediately suspend all payments to the military junta and place funds in a protected account until democracy is restored in Myanmar,” JFM said.
Another foreign currency earner is the mining sector, which generates about $470 million a year. The gems sector accounts for $300 million. Legally, the state should collect approximately 10 percent in royalties and taxes on jade, but 60 to 80 percent of gemstones produced in Myanmar bypass the formal trading and export system. The forestry industry officially generated between $350 million and $1.65 billion per year in exports over the last decade.
In a bid to deprive the military government of funds, the US Treasury Department in April imposed sanctions on a Myanmar state-owned gems enterprise, as well as Myanmar Timber Enterprise and Myanmar Pearl Enterprise. MEHL and MEC have also been sanctioned by the US and UK.
“In terms of blocking revenue from timber and gems, the US alone is not enough. We need collective action from the international community,” a local economist said.
The state also earns foreign currency through port fees, shipping and Myanmar National Airlines sales. However, each of these is controlled by an off-budget state-owned enterprise that retains 55 percent of profits and does not submit financial information to the Ministry of Finance, Planning and Industry. Net foreign earnings from these entities remain unknown.
Stepped-up sanctions
Another local financial expert who asked not to be named told The Irrawaddy that Myanmar’s largest trading partners in the region including Singapore, China, India, Indonesia, Japan and Thailand should consider imposing trade sanctions.
“It is a very unlikely scenario. Most of them have historically close ties with the military. But if they can do it, it would be very effective in reducing foreign currency inflows,” he said.
In March, the US imposed trade sanctions against Myanmar’s ministries of Defense and Home Affairs as well as MEC and MEHL.
“I would say that the steps taken against the regime by the international community are still modest. Myanmar needs more effective sanctions targeted at blocking foreign currency flows to the regime,” the local financial expert said.
“They should identify, target and freeze all foreign currency revenues and foreign exchange reserves held in accounts outside of Myanmar,” he said.
The independent economists from IEM said the popular Civil Disobedience Movement (CDM), in which civil servants and some private sector workers are refusing to work under the regime, is unlikely on its own to convince military leaders to negotiate or give up power.
“Cutting the SAC regime off from foreign credit could also be key, but would require substantial international agreement,” the economists said.
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