Buzz Over Post-Sanctions Myanmar Fades for Many U.S. Investors

The Wall Street Journal | By SHIBANI MAHTANI

Initial rush for opportunities turns to disenchantment as political changes lag behind

YANGON, Myanmar—Many people thought this would become one of the hottest new markets for American capital a few years ago, when the country began opening to the West after decades of military rule.

Instead, Myanmar has been a letdown for many investors—especially Americans. Many have already pulled out after opportunities failed to materialize.

It was “not worth risking our reputation” in Myanmar, said Ryan Manicom, a head of business development for Holloman Corp., a Houston oil & gas services firm. His company shut its country office this year after it took longer than
expected for the government to open more natural gas to foreign players. Holloman also worried about local safety standards, he said.

Disenchantment with the business climate comes as concerns are spreading about Myanmar’s political future.

Although officials say a national election planned for early November will be free and fair, doubts have deepened since the main military-backed party this month purged a presidential hopeful who was linked to democracy icon Aung San Sim Kyi.

Ms. Suu Kyi is barred by Myanmar’s constitution from becoming president, even though she is widely regarded as the most popular politician.

Numerous construction projects for new hotels, offices and condominium buildings in Yangon have stalled, as investors wait for clearer investment rules and to see how the dust settles after the November election.

Officials in Myanmar, also known as Burma, say the government is learning how to implement market overhauls and that the investment climate will improve.

This “is the transition period from military government to democracy government,” and from a centrally planned economy to a market economy, said Soe Thane, minister in charge of economic affairs in the office of President
Thein Sein.

Still, disappointment with the way Myanmar has played out since its former military junta stepped down in 2010 is palpable among many U.S. business leaders.

The U.S. began easing sanctions—first imposed in the 1990s—in 2012. Then-Secretary of State Hillary Clinton called on U.S. companies to “invest in Burma and do it responsibly/’ adding, “let’s all work together to create jobs,
opportunity, and support reform.”

The economy has grown relatively rapidly since then and people have gained more civic freedoms, including the right to protest. A more robust media developed as harsh censorship laws were lifted.

Yet leaders dragged their feet on fully opening some sectors that Western investors wanted, including financial services and real estate. Officials say they’ve had to strike a balance between protecting domestic enterprises and
welcoming foreign companies.

Other challenges include Yangon rents that spiked to levels on par with Singapore, one of the world’s richest cities, because of a shortage of modern space. Lack of financial services like wire transfers forced companies to bring
cash in by truck or air.

Washington, meanwhile, has in many ways made it hard for U.S. firms to do business in Myanmar, even as it encouraged U.S. companies to go there.

The Obama administration added requirements that forced U.S. firms to make extensive public disclosures if they invested more than $500,000. It also kept some sanctions in place in case the government backtracked on its promised
overhauls.

The U.S. Treasury maintained its blacklist prohibiting Americans from doing business with an estimated 200 individuals and entities linked to the former military junta. Any U.S. firm needing a local partner had to make sure no one
involved was on the list.

Eric Rose, a U.S. lawyer who opened a branch of his firm, Herzfeld & Rubin, in Yangon, says about half of Myanmar’s economy is controlled by the military and another 20% is dominated by blacklisted cronies, effectively making 70% of
Myanmar off-limits.

Wary of Washington’s mixed signals, American banks kept blocking some transactions involving the country. Citibank Inc. and others made exploratory trips but decided not to do more there.

Six foreign banks have branches in Myanmar and dozens more have representative offices, but none are American.

A Citigroup spokesperson says it has assisted clients making payments into Myanmar “after ensuring full compliance” with U.S. rules and will keep monitoring the situation.

Europe, by contrast, lifted all its sanctions by 2013.

Carlsberg A/S and Heineken NV invested in breweries there, while Nestle SA and Unilever PLC set up manufacturing plants. Adidas AG and Hennes & Mauritz AB are sourcing garments from the country. Britain’s BG Group is
investing more than a billion dollars in oil exploration with an Australian partner.

A few big U.S. companies have entered, including Colgate-Palmolive Co. and Coca-Cola Co., which intends to spend up to $200 million here over the next few years. Gap Inc. has started sourcing garments from Myanmar and a two-story
KFC outlet opened in June.

These U.S. multinational brands have large compliance teams to guide them in extreme-frontier locations. As early movers some were able to lock up relationships with local partners who aren’t on U.S. blacklists.

But Rehan Khan, Coca-Cola’s country manager, said the company is still having trouble delivering its product in many places because of supply-chain problems.

Gap has kept its sourcing small in Myanmar, limiting it to two factories outside Yangon. It sources “more than 100 times” more clothing from Vietnam, a spokesperson said.

The U.S. has declined to lift import duties, meaning companies like Gap have to pay as much as 17% in tax when bringing goods home. The European Union in 2013 granted Myanmar products duty-free and quota-free access to Europe.

Officially, U.S. firms have invested just $2 million in Myanmar since 2011, according to Myanmar government statistics, though that doesn’t include an undetermined amount spent through regional offices in Singapore.

China has invested $5.2 billion since 2011. The U.K. has spent $1.3 billion and the Netherlands $312 million.

“It is almost like (Washington is) telling us to invest with a wink and a nod,” said Dave Peck, the American chief executive of Arrow Technologies, a Singapore-based company that sells laboratory equipment in Myanmar. He said
he has handled his business through a non-Western bank.

A U.S. Treasury Department spokesperson said remaining sanctions aren’t intended to hurt American business but to “put pressure on bad actors.”

It isn’t unusual for investors to overhype markets when they open to Western capital. Many foreigners abandoned Vietnam when it failed to live up to expectations in the 1980s and 1990s, though many global firms eventually
located there.

Myanmar has also proved frustrating for some.

Holloman of Houston set up shop in 2013 when Myanmar was signaling plans to open more natural gas to foreign players. But the government delayed. When authorities awarded exploration blocks in 2014, the global market was facing an energy glut. Many international firms Holloman hoped to team with lost interest, leaving little for Holloman to do.

Mr. Rose, the lawyer, said he’s struggling to keep his business afloat.

A balding 60-year-old who wears a pin of the Myanmar and American flags on his suit, he started planning the venture when he heard Ms. Suu Kyi was freed from house arrest in 2010.

Mr. Rose, who fled to the U.S. from Communist Romania in his youth, had worked for American Standard Brands when it introduced bathroom fixtures into Myanmar before U.S. sanctions in the 1990s.

He assembled a 65-page budget to start a law office in the country and convinced Herzfeld & Rubin partners to go in 50-50. He hired a former armed rebel who had a law degree from Indiana, and the chief legal counsel of Ms. Suu Kyi’s
political party.

He kicked off his venture with a party at a five-star hotel attended by ambassadors and a famous Myanmar singer.

Business was initially robust, he said. Clients included American firms exploring opportunities and a pair of New Yorkers injured in a Myanmar plane crash.

“There was just more and more good news every day,” Mr. Rose recalled. ” I felt like a guy who just bought a new car, and keeps seeing reviews of how amazing the car is in magazines.”

Several months later, business “literally fell off a cliff,” he said. American firms were losing interest. He laid off half his staff of 15 after sinking $200,000 of his own money into the venture.

In May, Mr. Rose said, he got a reprieve when he signed an American not-forprofit as a client.

Still, he’s recalibrating his expectations.

“U.S. companies are severely handicapped by our government’s unclear policy” in Myanmar, he said. “When even the banks stay away…our clients will stay away.”

—Richard C. Paddock contributed to this article.
Write to Shibani Mahtani at shibani.mahtani@wsj.com

Source: The Wall Street Journal