….Investing in Burma

By Nick Slepko - July 9, 2012 | Tickers: CVX, KO, LUKOY.PK, PTR, TOT | 0 Comments

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[continued from “Investing in Myanmar…”]

General Electric’s (NYSE: GE) rhetorical question posed by the company’s regional head about who could take GE’s place in Myanmar is like asking who is going to extract oil in the Amazon now that Chevron (NYSE: CVX) has been hit with a series of multi-billion dollar judgments after almost twenty years of litigation in Ecuador.  Again the answer is China – as well as Russia’s Lukoil (NASDAQOTH: LUKOY.PK), which has been quietly expanding its operations in the Latin American OPECer since the new year began. 

But GE cannot say they haven't been warned.  The leader of Burma’s democracy movement Aung San Suu Kyi, whose recent freedom is so far more pomp than circumstance, has said clearly, “Would-be investors in Burma, please be warned…I would not like you to be over-optimistic.  These days, I’m coming across a lot of what I would call reckless optimism.”  When speaking specifically about an economic zone in operation along the border with Thailand, she stated, “We, the people of Burma, were kept completely in the dark about what was in the contracts, about what was going on,” and when speaking on the state’s arrangements with the Chinese state oil champion CNPC/PetroChina (NYSE: PTR), “Quite frankly none of us know what’s in those contracts, this is what I mean by lack of transparency in the country…”

Myanmar's economic development zones mostly serve as fronts for illicit activities, conduits for money laundering, and public boondoggles less sophisticated than the ones the two Koreas have created.  The overall message should be clear to American investors hoping to capitalize on too-good-to-be-true deals with the government:  They are too good to be true.

However, all is not lost.  Though Aung San Suu Kyi’s Nobel is for peace and not economics, she has shown no signs of being a corrupt “re-privatizer” like Ukraine’s Yulia Tymoshenko, and has keyed in on less conspiratorial problems with Burma when she says things like, “Even the best investment laws would be of no use whatsoever if there are no courts that are clean enough and independent enough to be able to administer those laws justly. This is our problem: So far we have not been aware of any reforms on the judicial front.” 

This should also give pause to those that tout Burma’s English traditions like common law as a selling point.  Burma’s neighbor India, the world’s most populous democracy (and literally the crown jewel of the British Empire), is currently ranked by the World Bank’s Ease of Doing Business Index as 132nd out of 183 – between former banana republic Ecuador and recovering basket case Nigeria.  Moreover, the Permit Raj’s legal system is the penultimate loser in the “Enforcing Contracts” category.  (Myanmar is not even ranked.)

Yet, Coca-Cola (NYSE: KO) has decided to buck the Washington Consensus with a strategy reminiscent of when the Irrawaddy drainage basin was administered as a colonial province from Calcutta.  Having attended school in Delhi and having led what is now the Turkish beverage conglomerate Anadolu Group (ISE:AEFES) to success in the Sub-Continent, Coke CEO Mukhtar Kent has decided to play Buffett and inject some confidence into the region’s markets.  Coming just days after announcements that IKEA will invest 1.5 million euros into India and GE's $200 million commitment to developing energy sector projects in India, Coke outlined plans to make India its fifth largest market (currently it is its seventh).  As part of a $30 billion 2020 global strategy, Coke is sinking $5 billion into the Indian economy (20% more than it has earmarked for expansion in China).  Meanwhile, Coke has also dedicated nearly 5% ($3 million) of the company’s international corporate giving to underwrite social programs in Myanmar as it enters the Burmese market (leaving only Cuba and North Korea Cokeless - though according to Wikileaks both regimes seem to know what to do with the secret ingredient).  Kent’s reasoning seems to be that both these markets have been growing rapidly, are capable of even more rapid growth in simple consumables, and as both are a shambles infrastructure-wise they can only get better.

So far it seems both sides of the Myanmar/Burma divide recognize the need to not ruin their fresh start and sit on the polarized spectacles of would be Western investors who are needed ultimately to balance the Chinese interests (which even the generals have found difficult at times).  Moreover, Aung San Suu Kyi has not been completely dour.  When queried about the offshore Yadana Gas Field which is led (31.2%) by France’s Total (NYSE: TOT) and includes Chevron (28.3%), the Thai government (25.5%) and the Burmese government (15%), she’s been positive:

I have to say that I find that Total is a responsible investor in the country, even though there was a time when we did not think they should be encouraging the military regime by investing in Burma.

They were sensitive to human rights and environmental issues and now that we've come to a point in time when we would like investors who are sensitive to such issues, I am certainly not going to persuade Chevron or Total to pull out.

Aung San Suu Kyi’s decision to ignore the corruption charges against Total for its role in the Iraqi Oil-for-Food scandal and recent battles with the US Department of Justice for alleged violations of the Foreign Corrupt Practices Act is a good sign for Westerners interested in investing in Burma.  Still, lawyers without borders know few bounds and Chevron’s recent problems may also impact Burma eventually.

Chevron thinks because it has no assets left to seize in Ecuador, the ruling of the original banana republic is immaterial.  However, the Ecuadoreans are already trying to put a lean on Chevron’s assets in neighboring Brazil where their suit follows a domestic $20 billion action brought against Chevron in March for an oil spill off the coast of Rio de Janeiro.  The Ecuadoreans have also filed suit in Canada – in part due to the sympathy and enforcement mechanisms developed there as a result of First Nations litigation.  (Investors might also contemplate what will happen when grandstanding Spanish judges eventually decide to take up the cause as a human rights issue, as they are wont to do.)  Fraudulent or not, the Ecuadorean suit is a historic class action on behalf of 30,000 indigenous minorities in the Amazon jungle, and the future parallels with similar issues likely to arise in Burma are worth considering. 

Indirect investments in commodities with which Myanmar has a major global impact has been the tact that long-time Burma bull Jim Rogers has advocated through vehicles such as his Rogers International Commodities Agriculture Index.  Agriculture in particular is a promising sector for a country that has the potential to surpass both Vietnam and Thailand (the top rice exporters in the world).  Investment activities in this sector are also more likely to avoid uneven deals with state-linked enterprises – or at least minimize the entanglements.  Even basic improvements in farming could generate the capital necessary for broad private investments through out Burmese society (be they Bamar or one of a dozen ethnic minorities). 

Over the next decade, whether the jungle junta under Thein Sein moderates its rampant theft, or a new government led by Aung San Suu Kyi repudiates previous contracts, the safest new investments in either old Myanmar or new Burma are likely to be those indirectly made in global commodities, or transactions conducted between private parties that can avoid paying protection to the military or evade onerous "responsibilities" required the do-gooders.

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