The murky universe of trade sanctions has taken a dramatic twist – one which could change everything… Finbarr Bermingham reports.
The line, which throughout the conversation had been crackling and popping like a herring on a griddle, went dead for the third time.
GTR had been talking, in fitful spurts, with the IFC’s country head in Myanmar Charles Schneider and unsurprisingly, a thread woven throughout the conversation had been the state of the country’s telecoms network. “Oh yeah, the telecoms system needs an upgrade,” says Schneider. “We need plenty more telecoms infrastructure here.”
No doubt, it’s a thought that’s crossed many minds over the years without any real hope that the situation would be addressed. Now, though, things might be about to change. On a recent trip to Doha, a spokesperson for Ooredoo (formerly known as Qatar Telecoms or QTel) told GTR that expanding into Myanmar is one of the company’s primary objectives for 2014 – a move that would’ve been unheard of a couple of years ago. But with the gradual repeal of economic and trade sanctions, companies from around the world have been circling the country, lured by the promise of a virtually untapped consumer market, bountiful natural resources and expensive infrastructure projects.
More than 60 international energy companies are jostling for the exploration and production rights to dozens of oilfields off the country’s Bengali and Andaman coasts. Through its Malaysian subsidiary, Nissan has invested US$500mn in a car production plant which will produce vehicles for local distribution. In June, Coca Cola opened a bottling plant in Yangon, marking the first time the company has had a Burmese presence for 60 years. Foreign direct investment in Myanmar rose to US$1.8bn from April to August of 2013 – an increase of US$400mn on the previous year.
Financiers have returned too. In August of last year, the World Bank agreed to lend US$140mn for the upgrade of an old power plant in Myanmar’s southeast. The Asian Development Bank has agreed to lead the lenders on the Dawei deep-sea port project, which would be accompanied by a Special Economic Zone and potential rail connections as far north as Kunming, China. And in a move which strengthens the country’s credit credentials, Myanmar was welcomed as a member of Miga, the political risk and credit insurance arm of the World Bank, in December.
Myanmar is almost a textbook example of the international sanctions system at work: the country held internationally-verified elections in 2012 and has made progress in the area of human rights (Human Rights Watch says the country has gone “even further than some of the government’s critics in the local Myanmar human rights community and international movement could have thought possible”), so the west gradually peeled-away its sanctions.
But few cases are so black and white (and it should be noted that critics argue that the country’s contemporary human rights record, particularly in relation to the Muslim majority, is far from unblemished). The softening of trade sanctions has been an emerging pattern in recent months and years and in many cases, the ‘dos and don’ts’ are much less clear-cut than in the case of Myanmar.
Some developments, such as the deadlock-breaking agreement between Iran and the UN Security Council, are complicated, but well-documented. Others,such as the lifting of US sanctions on South Sudan upon its emancipation in 2011, go pretty much unreported. Failing to keep on top of and comply with developments can result in both heavy fines and severe reputational risks.
Last December, RBS was fined US$100mn for breaching sanctions with Iran, Myanmar, Cuba and Sudan between 2002 and 2011. Regulators in the US found that RBS had completed more than 3,500 transactions with banks that had links to sanctioned customers. In 2012, Standard Chartered was forced to pay US$327mn for breaching US sanctions on Iran. In 2009, Lloyds was hit with a US$350mn fine for helping customers avoid US sanctions on doing business in Libya, Sudan and Iran, while HSBC’s US$1.9bn fine in 2012 for a host of felonies including facilitating the transactions of ‘rogue states’ was the largest of its kind in history.
It’s not only banks that have fallen foul of sanctions regimes. Fines for US companies in breach of Cuban sanctions are commonplace. Over the years, we’ve seen Walmart sanctioned for selling pyjamas made in Cuba, Playboy fined for publishing a report from the island and even the New York Yankees censored for signing a contract with Cuban pitcher Orlando Hernandez.
For US firms, the rules regarding Cuba are straightforward: you simply cannot trade there. For overseas companies, however, it can be a grey area. Oilfield services company Weatherford International was fined US$100mn in November of last year, after conducting business with Iran, Sudan and Cuba. Weatherford is listed in Switzerland, but since the company maintains a very strong presence in the US, it was subjected to the US legislative system.
“The Cuban sanctions aren’t agreed at UN level,” says Aline Doussin, a lawyer at DLA Piper who works across international trade and sanctions. “It’s a US-only embargo. The EU has blocked the US statute, meaning European companies are prevented from complying with the embargo as the EU has condemned it. But companies are confused – they don’t want to be hauled in front of the US courts.”
In other words: there’s a balance to be struck. If you do business in the US, the chances are you don’t want to be seen to be trading openly with Cuba for fear of putting the American nose out of joint.
But it would be wrong to say that the imposition of sanctions spells an end for trade in the country in question. In 2010, China overtook the EU as Iran’s biggest trading partner and with the EU’s ban on Iranian oil imports and freezing of Iranian banking assets and visa issuances between 2011 and 2012, Sino-Iranian trade has accelerated further still. The Central Bank in Tehran estimates that bilateral trade will reach US$38bn by March 2014. In 2012, bilateral trade between Iran and Turkey amounted to around US$22bn.
Myanmar’s neighbours have kept on buying energy and agricultural produce, since they’re not bound by sanctions placed by the EU and US. Even before the sanctions were eased in 2012, the US machinery manufacturer Caterpillar sold bulldozers and excavators into Myanmar through an independent dealer. And in Zimbabwe, restrictions have been primarily placed on certain sectors (such as diamonds) or individuals (regime officials), meaning that those looking to do business in other areas are free to do so.
“Banks see Zimbabwe as a risky country,” explains Gary Isbister, COO of Barak Fund Management, an asset manager that has substantial business in the country. “The sanctions that were imposed created an immediate mental impression about what’s happening there. Whereas when you go there, you see it’s not quite the case. We’ve taken a few investors there recently and they’ve been pleasantly surprised by the actual state of affairs. It’s not Europe and they’re probably not going to be building an underground railway there anytime soon. But business goes on as usual.”
The level of manoeuvring regarding sanctions raises a legitimate debate around whether they actually work. Late last year, GTR sat down with Thomas Pickering, a retired diplomat and former US ambassador to Jordan, Nigeria, Israel, the UN, India and Russia. When we put the question to him, he was philosophical.
“I remember when Yevgeny Primakov was Russian foreign minister and he argued that sanctions never work, clearly out of some concern that our [US] sanctions against the Soviet Union were not things he could find any reason to praise. My own view is that sanctions worked in South Africa to a degree. They worked in Iran, to a degree. They may have worked in Iraq.
“But the truth is always somewhere in the middle. I was in the UN at the time of Iraq’s invasion of Kuwait and I used to say then that the last chicken sandwich in Iraq belongs to Saddam Hussein, which is meant to convey the view that the decision-maker is the least likely to be affected by sanctions.”
High-ranking Iranian officials have told Pickering that the sanctions they wished to have lifted first were those on the banking sector. “They felt they were having a big effect essentially on imports and maybe some exports,” he says. This suggests that if you can cut off the supply of finance into a country, you may have some success.
The disinvestment from South Africa in the 1980s helped pave the way for an end to apartheid. It’s estimated that currency worth around US$9bn in today’s value left South Africa over four years from 1985, resulting in a huge fall in the value of the rand and inflation of between 12% and 15% a year. “There will always be sanctions,” says Doussin. “They’re a major diplomatic tool and the most immediate form of international public law you can get.”
Nobody, however, is claiming that sanctions are perfect. It’s hard to escape the idea that they are the ultimate manifestation of realpolitik. Despite slapping extensive sanctions on Iran for harvesting nuclear ambitions, the west has turned a blind eye to Israel’s stockpiling of nuclear weapons.
When India and Pakistan tested nuclear weapons in 1998, the US imposed sanctions including a ban on US Exim trade credits, but exempted the import of agricultural sanctions because the sales ban “hurt American farmers”. George W. Bush lifted the sanctions less than a fortnight after 9/11 because they were “not in the national security interests of the United States”.
You can understand, then, the surprise in trade circles at the speed with which negotiations with Iran progressed at the tail-end of last year. The Geneva talks in November saw Iran agree to curb uranium enrichment by 5%. In return, it will be granted sanctions relief worth US$7bn to its economy, with the situation set to be revisited in six months. Should there have been no progress, the agreement will be declared invalid, but should both parties keep their side of the bargain, the trade implications could be huge.
New President Hassan Rouhani was elected on a reformist ticket, with many Iranians growing frustrated at the hawkish rhetoric and economic mismanagement of Mahmoud Ahmadinejad. Perhaps fearful of the rebellions that befell other leaders in the Middle East, the suggestion is that Rouhani’s conciliatory tone is a move to appease the country’s middle and business classes, which have been hit particularly hard by economic sanctions.
On the side of the Security Council (read US), the situation is more nuanced. Some speculate that the Obama administration, which has had little constructive impact on situations in Syria, the West Bank and Egypt, is keen to ‘achieve’ something in the Middle East. Another school of thought is that with the US striving for energy independence, the deflationary effect the repeal of Iranian sanctions may have on oil prices is less of a consideration in the Capitol.
“Certainly, if we had reason to believe that continued sanctions on Iran would have a very significant effect on oil and gas prices, some of that was relieved by the capacity to use shale gas in the US,” says Pickering. “American gas prices have gone down a lot since they haven’t been tied to oil.”
Whatever the rationale, the main point is that both sides have reached a juncture at which they’re willing to play ball. Trade is at a crossroads at which the economies of Iran, Iraq, Libya, Myanmar and Zimbabwe are all coming back online within a year or two of each other. The opportunities are great; but so too are the risks.
The Iranian economy is the world’s 17th-largest and has the second and fourth-largest known oil and gas reserves in the world, respectively. It’s thought that its energy infrastructure has lacked investment and is in need of upgrade. “It goes much further than nuclear,” says DLA Piper’s Doussin on Iran’s economy. “There’s the potential for massive business in oil and gas, telecoms, software, insurance, reinsurance, shipping… everywhere really.”
But the fact that the agreement has a relatively short shelf-life will ensure banks and companies are vigilant when planning business with Iran. On the eve of the agreement, a lawyer well-versed in sanctions (who, just to highlight how much of a landmark the agreement was, thought that there was “no chance of anything being agreed for months”) said that the most important fallout would be the renewal of international banking licenses for Iranian banks.
Most, he speculated, will have maintained properties in major banking centres and will be ready to start up again when banking licenses become available. Furthermore, the return of international finance to the country will galvanise the flow of capital throughout the economy, from the National Iranian Oil Company, right through its supply chain. But for foreign banks hoping to do business in Iran, it is essential to know what you can and cannot do both in terms of trade and fund transfer.
In Myanmar, the banking sector is nascent. Schneider and his IFC team have been hosting training events in an attempt to familiarise the local banks with international trading products. He explains: “International banks only have representative offices in Myanmar, since they’ve yet to be granted licenses. We’re looking for opportunities to use our global trade finance programme (GTFP), which would see us guaranteeing letters of credit issued by local banks so that they can be confirmed abroad.”
However, it’s almost a given that overseas companies doing business in Myanmar have been doing so using internationally-obtained credit lines. GTR’s legal source says that “you can be certain that the big commercial banks are financing the trade and projects going on in Myanmar”.
One of the major points of attraction is the US$9bn mega-project at Dawei on the southern coast. The site will include a deep-sea port, a 1,800MW power plant and a highway to Bangkok and was initially awarded to Italian Thai Development (ITD), a construction joint venture. However, the Thai and Burmese governments seized hold of the project in November, amid fears that the JV wasn’t up to the task and that it was unable to attract foreign investors. It’s thought that the side-lining of ITD will result in the arrival of Japanese construction firms and, on their coattails, Japanese banks.
The situation demonstrates the relative volatility of the country and, despite the removal of sanctions, the wariness with which it’s viewed by investors. On a trip to the country in December, the IMF’s managing director Christine Lagarde urged the Burmese government to take its time when opening the banking sector to foreign investment. In its current state of underdevelopment, currency and financial speculation could easily threaten its stability.
The concern for many around removing sanctions is that it leaves the door open to capital flight. With Libya and Iraq, you could practically hear the licking of lips as energy companies awaited the sectors’ reopening. Despite the IFC Schneider’s insistence that small Burmese companies will now get access to the US and EU garment and agriculture markets, it’s hard to escape the fact that contractors and energy giants will be the immediate and primary beneficiaries of opening the country up (even as the widespread persecution of the country’s Muslims continues).
Sanctions, then, can be fickle, self-satisfying and convenient. But more often than not, they’re the only diplomatic tool available and as such, they’re here to stay.