Despite political change, tycoons still play major role
Myanmar’s elections show how rapidly the country is changing. Some aspects of the country will be less quick to transform, however. From a business perspective, powerful tycoons from the military era will continue to play an important role. Foreign investors should expect to enter into transactions with these individuals, but they must be careful; some tycoons present significant sanctions risk.
Myanmar’s political development over the last several years has been turbulent, although positive. Notwithstanding significant shortcomings, the recent elections represent an unprecedented level of civilian involvement in politics. This opening has come with economic gains: foreign investment has ballooned, and major companies like Coca-Cola and GE have entered this former pariah state.
Despite these advances, Myanmar remains a deeply troubled market. It is still, for instance, the lowest-ranked Asean member in terms of ease of doing business, according to the World Bank. In Asia overall, only Afghanistan, Bangladesh and Timor-Leste rank lower. Myanmar lacks adequate physical and financial infrastructure, which poses pragmatic hindrances. Security is also an issue, as swaths of the country remain off-limits to investors because of ethnic tensions. Corruption is a further concern.
Another major cause of unease is the presence of tycoons, or prominent businessmen who run large, multi-sector conglomerates. These individuals often rose to prosperity under Myanmar’s previous military-dominated government. Some have backgrounds in black market trading. These issues taint tycoons’ reputations and have resulted in some of them being sanctioned by Washington. This acts as a powerful disincentive for foreign investors, since working with sanctioned individuals damages reputations and severely hinders access to US financial markets.
Only one tycoon has so far been successful in removing himself from US blacklists: Aung Win, who has interests in timber, rubber, energy and construction. He also serves as chairman of the consortium developing the new Thilawa Special Economic Zone. After being delisted, Aung Win urged the US government to delist other prominent Myanmar businessmen. “If they can create more business, they can create more job opportunities,” he said.
Aung Win is right that tycoons play an important role in Myanmar’s economy. Despite the compliance risk they pose to foreign investors, tycoons are some of the most competent local counterparties. They are also experienced in vital sectors, such as construction, logistics, energy and financial services — all of which are logical points of entry for investors seeking to come to Myanmar.
Tycoons’ dominance will continue despite Nay Pyi Taw’s official preference for dispersing market power amongst new players. Although new market entrants may eventually serve as competitive local counterparties for foreign businessmen, as a general rule they currently lack the experience and knowhow to compete with tycoons. Also, in a country where personal ties significantly affect business prospects, the tycoons’ legacy of working with Myanmar’s elite lends them a significant advantage.
To adapt to Myanmar’s reform process, tycoons have already begun courting the National League for Democracy (NLD), the opposition party that recently made headlines by winning a landslide victory. Tycoons have furthermore framed themselves as advocates of the reform process and have engaged in philanthropy. For all of these reasons, the tycoons’ relevance seems set to last into the new era.
When working with tycoons, foreign investors should be careful to avoid sanctions and other types of compliance and reputational risk. As such, investors should scrutinise all local counterparties’ affiliations, not just individuals or companies publicly known to be connected to tycoons. Due to their ubiquitous business interests, tycoons can be tied to local counterparties in informal ways that do not show up when conducting standard due diligence.
As a cautionary tale, investors should look to Credit Agricole, the French banking giant that was fined $787 million (28.3 billion baht) for having made transactions on behalf of Myanmar and other countries and entities subject to sanctions. Investors must remember that even though Washington’s relationship with Nay Pyi Taw is thawing, US sanctions are in still in place and violating them is still a punishable offence.
That being said, sanctions affecting Myanmar are rapidly changing. Aung Win’s delisting earlier this year was shortly followed by the delisting of Tay Za’s wife. In 2013, the US issued a licence for some of Myanmar’s biggest banks — two of which were controlled by blacklisted tycoons. Washington said easing sanctions would help promote Myanmar’s social and economic growth. Investors should monitor these delisting developments. Tycoons are risky but useful partners, and they should be approached as such.
Washington’s relationship with Nay Pyi Taw is thawing, but US sanctions are still in place.