Sanctions Risk Casts Shadow Over Myanmar’s Opening to the West

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The prospect of new international sanctions against Myanmar’s military—accused by the U.S. and the United Nations of ethnic cleansing of Rohingya Muslims—is looming just 18 months after Washington lifted most longstanding economic restrictions against the country.

Myanmar officials and Western diplomats say the Rohingya crisis has already damped hopes for an influx of Western investment to spur economic development, bolster the country’s tentative transition to democracy and diminish China’s dominance.

A senior adviser to civilian leader Aung San Suu Kyi has made three trips to the U.S. and one to London since November in an effort to dissuade lawmakers and officials from imposing fresh sanctions on the military.

In discussions with U.S. lawmakers on Capitol Hill, the adviser acknowledged soldiers had committed atrocities, according to a person familiar with the discussions, but warned the military could destabilize Ms. Suu Kyi’s administration or even seize control if curbs are placed on it. The military didn’t respond to requests for comment.

The Senate Foreign Relations Committee in February approved a bill that seeks to target military officials, including Commander in Chief Min Aung Hlaing, with travel bans and financial restrictions.

That step “demonstrates to the world, and in particular to the Burmese military, that the U.S. will not ignore these atrocities,” said Sens. John McCain (R., Ariz.) and Ben Cardin (D., Md.), the bill’s authors. Myanmar was formerly known as Burma. A similar bill was introduced in the House of Representatives last year.

Western diplomats and experts said it was unclear what precise shape U.S. sanctions would take if the proposed U.S. law passes. The Trump administration could designate a few military leaders or also try to target military-controlled companies with interests and connections throughout the economy, said Peter Kucik, a lawyer at sanctions-focused law firm Ferrari & Associates PC in Washington.

The European Union said in February it had tasked a senior official with compiling a list of military officers to earmark for “restrictive measures.”

Amid the uncertainties, Western companies held three round table discussions with risk-advisory firms and a Washington-based think tank last month on whether sanctions are imminent and what compliance costs and reputational risks they might bring.

“The goal [of sanctions] is to hold the military accountable and not hurt economic development, but of course it affects investor sentiment,” said a participant in one of the events, Erin Murphy, the founder of Inle Advisory Group, which guides companies interested in Myanmar. “There’s a tension there.”

Human-rights groups have criticized the international community for not taking punitive steps despite the exodus from Myanmar of 700,000 Rohingya Muslims since August, when the military began a crackdown that has spurred allegations of murder, rape and arson. The military has denied soldiers committed atrocities and says its operations targeted terrorists.

Kyaw Win from the London-based Burma Human Rights Network said he has traveled to Brussels three times this year to press EU officials to impose sanctions, including measures that would hit the military’s coffers.

Western diplomats in Yangon said they face a dilemma: while they want to act, they are concerned any steps they take could hurt the potential for investment, which they see as a crucial catalyst for democratic change, and leave the field to China.

Aung Naing Oo, who leads Myanmar’s Directorate of Investment and Company Administration, said he had expected Western investment to climb in the fiscal year 2017-18 that ended in March.

Instead, total foreign direct investment, or FDI, approved by the government fell to $6.1 billion, compared with $6.6 billion the year before and $9.6 billion in 2015-16. Advanced-stage negotiations with the EU—a bigger investor than the U.S.—for an investment-protection agreement stalled, he said.

Officials had attributed the 2016-17 dip, which followed Ms. Suu Kyi’s historic election after decades of military dominance, to a wait-and-watch approach by companies unsure of her economic policies. Project approvals were also on hold for three months while a new investment body was being formed.

But Western business interest didn’t gather momentum in her second year either, while investment from Asian countries remained strong, Mr. Aung Naing Oo said. China, Japan and South Korea made big bets in Myanmar last year, official data show. Together they account for 40% of approved FDI.

“Eastern countries don’t give consideration to the Rakhine issue,” Mr. Aung Naing Oo said, referring to the state in which military operations occurred. “We need FDI to develop, and if EU and U.S. investors don’t come, others will.”

Company executives say they face a tough regulatory environment and fitful economic policy-making under Ms. Suu Kyi. “It is a government of symbolism rather than a government of reform,” a business executive for a U.S. company said. Mr. Aung Naing Oo said expectations of the government are high and that it is making steady progress.

A much-anticipated companies law, which opens the door to more foreign investment, was approved last year but won’t come into effect until August because the company registry isn’t ready.

Still, Ms. Suu Kyi’s advisers and Western diplomats say they hope more companies will enter this frontier market, bring better practices and help build a middle class. They point to the garment industry, which now employs thousands in part because of orders from Europe.

Filip Lauwerysen, executive director of the European Chamber of Commerce, said he envisions a business boom along a central corridor between the cities of Mandalay and Yangon that could eventually draw people from conflict-ridden border areas into productive jobs.

The Rohingya crisis, however, has presented tough questions for Western companies, in many cases from activists, shareholders and consumers.

French jeweler Cartier said last year it would no longer source gemstones from Myanmar. An online petition by a nonprofit called SumOfUs had gathered 75,000 signatures by December urging such action. Norwegian telecommunications company Telenor, which operates a mobile network in Myanmar, has expressed “grave concern” about the crisis in Rakhine.

U.K.-based activist Jamila Hanan steers an online campaign known as #WeAreAllRohingyaNow to mobilize tweets and petitions pressing Western corporations with a presence in Myanmar and their boards to speak out.

In December, trade groups, including the American Apparel and Footwear Association, called on the Myanmar government “to take all necessary steps, with the support of international agencies, to bring the crisis to an end.”

In private meetings, some Western business executives have warned that Ms. Suu Kyi’s muted response is hurting economic prospects, said two people familiar with the discussions. One executive said he has had dozens of meetings with diplomats to assess the situation and is trying to formulate a strategy.

“We’ve been asking ourselves, if we packed up and left, would it help the ordinary people of Myanmar or hurt them?” the executive said. “On the flip side, can it be business as usual? What’s the right thing to do?”