Sanctions Will Not Bankrupt Myanmar’s Military But New Approaches to Trade and Finance Might

Since the Myanmar military regime’s 2021 coup, sanctions designed to cut the military’s access to foreign exchange (forex) have been a key strategic objective for Myanmar’s resistance and the countries supportive of it. The Special Advisory Council on Myanmar has called for efforts to “cut the cash”. The US has explicitly applied some sanctions targeting the regime’s revenues. Sanctions have targeted individuals in the Myanmar military, military-connected businesses, and regime-controlled state institutions such as the Myanmar Oil and Gas Enterprise.

Despite this, the State Administration Council (SAC) military regime continues to have access to forex to fund its resource-intensive military actions, especially airstrikes. This raises a key question: could more sanctions stop the flow of forex or are sanctions fundamentally unable to achieve this goal? The answer is almost certainly the latter. This calls for new thinking about other tools to achieve this goal.  

The SAC accesses forex in many ways, some of which are like that of a normal state. Myanmar has trade and investment relations with many countries that do not impose sanctions on it. Natural gas exports are a major revenue source and have continued despite sanctions affecting some companies and banks in this trade. The regime also accesses forex through the business interests of the Myanmar military and connected individuals, especially the two military-linked conglomerates, Myanma Economic Holdings Ltd and Myanmar Economic Corporation.

The regime’s access to forex is more complex than just budget lines and profit statements, however. The SAC also uses state institutions, most notably the Central Bank of Myanmar (CBM), to access forex. The CBM administratively sets multiple exchange rates, including the official rate of 2,100 kyat/US Dollar (USD), which is far below the black market rate, which hit 5,020 kyat/USD in late May. The CBM requires most exporters to convert 35 per cent of their earnings at the official rate. The beneficiary of this system is the party that gets to buy discounted USD at the official rate. Ultimately, that is the SAC, even if private banks execute the transactions. This steady stream of discounted USD provides an extraordinary benefit worth trillions of kyat (hundreds of millions of USD) annually. The costs are borne by Myanmar’s people and businesses, who receive fewer kyats for exports, thereby depressing incomes. It is a policy framework that is perhaps best described as regime-sanctioned theft.

The regime also uses other state institutions, like the Foreign Ministry, to extract forex from Myanmar citizens abroad. For example, it now requires overseas migrants to pay income tax at a minimum rate of 2 per cent to renew their passports, despite double taxation agreements with several receiving countries. Separately, migrant workers must remit 25 per cent of their salaries via an approved bank, to be converted at the undervalued migrant worker remittance rate. These sources of forex could each yield hundreds of millions of dollars annually if these measures are fully implemented on Myanmar’s millions of overseas migrants.

The means of extracting forex outlined above are complemented by other military revenue-raising tactics, including involvement in and indirect benefit from illicit activities, and use of military units to raise, extort and confiscate valuable goods, including forex.

…the State Administration Council (SAC) military regime continues to have access to forex to fund its resource-intensive military actions, especially airstrikes.

These avenues of accessing forex limit the ability of external sanctions to completely cut the regime’s funding. Other countries cannot prevent the Myanmar military from forcing exporters and migrants to convert kyat at undervalued rates, nor can they influence how forex is used once it gets into Myanmar. Money is fungible; forex used for importing guns is interchangeable with that used for importing medicines.

Sanctions do have some benefits, however. They send a clear message that the Myanmar military’s actions violate international law and are morally reprehensible. Sanctions also have practical benefits such as restricting the military’s access to some offshore accounts and temporarily disrupting forex inflows. While the SAC can find workarounds for some disruptions, it requires attention from a stretched regime with few competent operators.

Sanctioning countries need to reassess their approaches given these limits. They can still use sanctions to disrupt the regime and express outrage. However, these need to be balanced against potential collateral damage from sanctions on unintended parties. For example, some international banks have stopped serving all Myanmar clients because the extensive due diligence requirements and risks of accidental sanctions violations far outweigh any revenues earned. This hurts everyone, including legitimate local businesses with no regime connection. Sanctioning countries also need to weigh how the regime might respond, which generally involves it seeking forex elsewhere. While sanctioning countries often claim that their sanctions are targeted, the SAC’s response to them never is, often causing widespread damage.

Last, countries need to seek new tools to reduce the SAC’s benefits from trade and finance. This does not mean a trade embargo or blanket financial sanctions, which will be ineffective without cooperation from regional partners. Instead, it means helping Myanmar’s democratic resistance to facilitate trade and finance outside the SAC-controlled system. This is no small challenge, given the dominance of the state-based system and the many illicit actors in Myanmar. However, it aligns with the key interests of regional countries, allowing continued economic engagement and providing new avenues to address Myanmar’s economic crisis. Regional countries should realise that the SAC cannot address this crisis because the very economic tools they rely on for their survival – printing money, extracting forex, et cetera – are the same tools that drive it. It is time for Myanmar’s regional neighbours to explore these alternatives.

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