Mizzima
Looming sanctions may pose complex dilemmas for foreign investors in Myanmar, although these concerns will be dwarfed by prohibitive financial and operational obstacles to business if the military junta remains in power.
Alex Dmitrenko, a sanctions expert with Freshfields Bruckhaus Deringer, cautioned last week ‘right now foreign investors have a small widow to respond’ while the fight over sovereignty continues domestically, and before further state sanctions are imposed.
Hosted by Nikkei Asia, Dmitrenko addressed viewers at a webinar titled Myanmar’s Coup: How should the world react. Dmitrenko was joined by Thiri Thant Mon, managing partner of Pegu Partners and Gwen Robinson, editor at large at Nikkei Asia; and Romain Caillaud, Principle at SIPA Partners and Associates.
Context for Myanmar’s Foreign Investors
Caillaud reminded viewers while it’s important to recognise that local actors will determine the outcome in Myanmar, international actors will be increasingly sidelined. While the military leaders had a careful plan, he explained, the strength, depth and ingenuity of resistance to its coup, has caught them off guard.
Robinson said that the protest movement has been accused of having no strategy or focus. She disagrees- ‘they have a huge strategy, to deny Min Aung Hlaing what he wants- which is
control of the country and economy. This is the most effective strategy they can have. The question is, how long can they hold out?’
The radical escalation of the crisis raises questions about how far the military regime is prepared to go. Engulfed in deep uncertainty, the international community must weigh their options and respond.
While options are limited, Caillaud said, ‘the longer the international community adopts a wait and see stance, the more difficult to will be to solve this crisis.’
US Sanctions and Export Controls Targeting Myanmar
So far, states have been slow to impose sanctions on Myanmar despite some cohesion with imposition of targeted sanctions by the UK, Canada and the EU.
The US has also taken a limited targeted approach. In what Dmitrenko described as ‘a warning shot’ the Biden administration placed 14 individuals and 9 companies on their Specially
Designated Nationals and Blocked Persons List (SDN) list. While targeted in their individual capacity, the military junta still remains affected.
These restrictions apply primarily to US persons and US currency. The reason for this targeted approach by the US, he argues, is to be sensitive to the interests of US companies already doing business in the country.
Impact on US Business
These sanctions have three main impacts for business. First, US financial institutions have moved Myanmar from a green flag category that facilitates trade. to a yellow flag category putting them in the cross-roads and requiring a careful approach to transactions and payments.
Second, all long-term projects now have question marks hanging over them. Third, any dealings with military business are now risky, with the Myanmar Economic Holdings Limited (MEHL) and Myanmar Economic Corporation (MEC) in particular.
Dmitrenko advised that to mitigate their risks, companies should prepare their sanctions responses now including reducing payments, moving US currency and doing careful due diligence, urging companies to ensure they are not working with business arms of the military and if they can, to reduce or suspend those transactions.
If sanctions escalate, he warned, there will only be a short window of time to secure outstanding payments as sanctions will force closures and banks will not transfer money.
‘The key point here,’ he said, ‘is that companies need to look into the agreements that they have with Myanmar and ensure those agreements have the capacity to exit or suspend obligations in the case of sanction escalations.’
In concluded saying that the US has been learning about sanctions over time and improving ability to apply them effectively, for example, they are using more of export controls which are more severe than sanctions.
The drafting of targeted sanctions by state policy makers deciding which sanctions to apply is a very complex task, noted Caillaud. They need to make a legal case to show that there is a connection between the people and the military who they are trying to target, he explained. It requires a ‘lot of digging and evidence gathering and it’s challenging – and may be why it takes so long for the EU to put on targeted sanctions.’
Long term projects at risk
To date, no sanctions have been placed on dealings with Myanmar’s military-controlled bread winners, Myanmar Oil and Gas Enterprise (MOGE) and or any company in the oil and gas industry. However, if sanctions escalate there is little doubt they will be affected, and questions will arise about what to do about long term projects.
When asked if US sanctions would likely push Myanmar further into the Chinese political orbit. Caillaud said that with the radical escalation of violence and killing an both sides being prepared to ‘go all the way’, all countries including China are wondering what kind of state the country will be in by the end and how to intervene bilaterally or in a coordinated manner. Nevertheless, this does remain a consideration.
Do Sanctions Work?
When asked if sanctions work, Dmitrenko overall response was yes, but not without unwanted costs.
As examples he points to Iran and the USSR where he said sanctions led to collapse of the economic system and the opening of the economy. ‘Sanctions are effective – they do work – but unfortunately society in general and the impact against business – will suffer.’
Recalling growing up under sanctions in Myanmar, Thiri Thant Mon argued strongly against a return of blanket state sanctions which she described as a blunt instrument that did not work and crippled the private sector. ‘The resistance movement is the people, and the people need to earn a living and feed themselves, she argued, ‘turning off all the taps and undermining people making a living and it will not help. There needs to be targeted sanctions because blanket sanctions won’t work.’
International banking challenges
Dealing with the banking industry is becoming increasingly complex and risky, especially cross-border transfers of money. International banks will be risk adverse and more restrictive than sanctions, Dmitrenko warns.
‘If they smell something fishy, they won’t touch it. Their risk appetite will be lower than other companies.’ Moreover, he predicts, companies will receive conflicting instructions between banks at home and in Myanmar, putting them in tough situations.
Brand and confidence issues
Thinking internationally, Thiri Thant Mon said foreign companies are worried more about brand boycotts in their home countries that will have an equivalent impact to sanctions. She noted that international groups have been identifying brands manufactured in Myanmar.
Companies themselves, noted Caillaud, are shocked by the coup and the crudeness of the military’s State Administration Council (SAC). First, companies had taken the risk to come into Myanmar as the momentum in the transition to democracy grew but confidence has now been crushed.
Second, there is no defined ‘off ramp’ that is workable and the prospect of this, he says, is beyond sanctions. ‘SAC are a blunt deterrent to foreign investors operating in Myanmar now,’ he continued, ‘the longer the military leaders stay and the more violence escalates, the less possible it will be for businesses to operate from a legal, compliance, reputational and operational perspective.’
For all these reasons, it will now be more difficult to operate in the future. The ability of foreign investors to conduct business and aid will be under question. As Caillaud summed up, ‘because of the actions of the SAC, all this will get worse and the environment will be vile. It will be beyond sanctions; simply not a workable environment.’
