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US sanctions fears choke Burmese trade

A worker walks in front of shipping containers at Port of Yangon. (PHOTO: Reuters)

Western banks are cutting trade finance in Burma after learning that part of the country’s main port is controlled by a man blacklisted by Washington, threatening to stop nascent US economic ties with the Southeast Asian nation in their tracks.

US shipments to Burma have slowed to a crawl in recent months, after several banks including Citigroup Inc, Bank of America, HSBC and PNC Financial curtailed their financial backing of trade with the country, according to sanctions lawyers and other people familiar with the matter.

Studying trade documents, Citigroup noticed in June that the Port of Yangon’s main terminal is controlled by Steven Law, who is subject to US sanctions because of his alleged ties to Burma’s military, they said.

Citi then alerted other banks, and their compliance officers warned that further financing could violate remaining US sanctions, according to several sources, who asked not to be named because they were not authourised to speak publicly.

At stake are embryonic, but fast developing economic ties between the United States and Burma, which US diplomats see as crucial to maintaining Washington’s influence during a critical period in the country’s transition to democracy.

Burma holds a landmark election on Sunday, key for the future of political reforms that started with a formation of a civilian government in 2011 after decades of military rule.

Washington and the European Union started lifting economic sanctions the following year to encourage Burmese authorities to stay the reform course.

Since then, the total volume of trade between the United States and Burma, officially known as Myanmar has risen from less than US$10 million in 2010 to over $185 million last year, according to the US Commerce Department.

That is still a tiny fraction of the Southeast Asian country’s over $27 billion trade dominated by its Asian partners – Thailand, China, Singapore, Hong Kong, India and South Korea.

But the political importance of trade with the United States goes far beyond what the modest amounts would suggest, said Jose W. Fernandez, a former assistant secretary of state who was an architect of sanctions policy in Burma.

“It is a way for the leaders to prove to the world that they are no longer global pariahs,” Fernandez told Reuters.

Developing economic ties with Washington also helps Burma counterbalance the influence of Beijing, said Peter Harrell, a former deputy assistant secretary of state who played a key role in easing the sanctions. “Myanmar doesn’t want to be overly dependent on the Chinese.”

From that perspective, the slump in US exports to Burma to $5.5 million in September from over $50 million in June, is a source of concern.

 

Minefield

Fernandez said Burma offers a preview of challenges Washington will face in implementing an international deal that removes some sanctions on Iran in return for curbs on its nuclear program, and in its re-engagement with Cuba.

“I think some of these sanctions programs were created at a time when we didn’t think about the need to remove them,” Fernandez said.

Burma’s trade finance snag highlights how unwinding sanctions while some key economic players remain blacklisted creates a minefield for companies that could undermine Washington’s broader political objectives.

Law’s business conglomerate Asia World is a case in point.

Cutting off financing of shipments handled by Law’s firm “could amount to a de facto trade embargo” because half of all Burma’s trade flows through the Asia World terminal, two banking associations said in a letter to the US Treasury Department in July.

Foreign institutions could also be affected. About a dozen international banks that have US presence, mostly European, have been stung by more than $14 billion in US penalties since 2009 for various sanctions violations.

In the letter, the Clearing House Association and the Bankers Association of Finance and Trade asked the Treasury’s Office of Foreign Assets Control, which enforces US sanctions, for a legal workaround that would allow shipments to pass through Asia World.

The US State Department and OFAC is considering possible solutions, according to sources familiar with their deliberations. But in the meantime, OFAC warned banks to refrain from financing any shipments that Asia World might handle, according to the letter.

Asked about a possible solution, a Treasury spokeswoman said in an emailed statement that the agency was working with the US State Department to support Burma’s democratic transition, “while also ensuring that illicit actors do not benefit.”

More than a hundred individuals and businesses – many, like Law, key players in Myanmar – are still subject to US sanctions.

US diplomats have encouraged them to apply for the sanctions to be removed, but the process can take years. So far only nine Burma-related entities have been taken off the list – two of those were people who had already died.

While they wait for a legal fix, US banks are also freezing or delaying payments for shipments that have already arrived in Rangoon, according to those familiar with the matter.

Even when the goods get shipped, exporters faced long delays in payments from the banks, Moe Myint Kyaw, secretary general of Union of Myanmar Federation of Chambers of Commerce and Industry, told Reuters in an interview.

Peter Kucik, a former senior sanctions adviser at the US Treasury, said allowing trade finance to get squelched was “totally inconsistent with US policy” of bringing western financial institutions into Burma.

Banks, mindful of record fines for sanctions violations, will play it safe given the relatively little money they make in Myanmar, said Kucik, who is now a principal of Inle Advisory Group that advises US businesses on investments in the country.

“If you increase compliance costs it’s going to be easier for them to just say ‘screw it’.”

Read more business news from Burma/ Myanmar HERE