Monday, October 26, 2015

Myanmar jade report hits foreign and local companies, economic data

GWEN ROBINSON, Chief editor, Nikkei Asian Review
A local expert examines the quality of a jade stone in the mining area of Hpakant in central​ Kachin state, northern Myanmar. ​ © AP
MANDALAY, Myanmar — A report into Myanmar's lucrative jade trade has thrown new light on the industry's vast size, with previously unpublished data that indicates the country's total revenue from the precious stone amounted to at least $31 billion last year -- equivalent to nearly half the country's 2014 gross domestic product and nearly three times earlier estimates.

     The findings -- including charges that senior government, military and business figures are heavily involved in an industry known for corruption and secrecy -- could put pressure on the government ahead of the country's Nov. 8 election, as well as on local and Western companies accused of links to the jade trade. More fundamentally, the staggering figure has implications for economic management and vital indicators in a country struggling with flawed statistics, exchange rate mechanisms and rapidly rising inflation.

     As the world's leading producer of jade, particularly the highest quality jadeite so prized by Chinese buyers, Myanmar has long been a target for environmental and human rights groups as well as Western governments that have accused key players in the country's jade industry of secrecy, corruption and labor abuses.

     Most U.S. restrictions on economic ties with the former military regime have been eased but Washington has maintained sanctions on the jade sector, imposed in 2003 and aimed at junta members with links to the trade.

     Previous estimates of the total value of the jade trade to Myanmar -- particularly widely cited figures from Harvard University's Ash Center for Democratic Governance -- have put Myanmar's total earnings from the jade industry at $8 billion in 2011, while more recent estimates based on those calculations have suggested $11 billion to $12 billion in 2013. Jade sales are transacted almost entirely in dollars.

     The newest figures, from the non-governmental organization Global Witness, are based on what appears to be unprecedented access to jade-related companies in Myanmar and official data from both Myanmar and China, the world's biggest jade importer.

     With its detailed list of individuals and entities involved in production and trade of the precious stone, including a Myanmar government minister and prominent business figures and politicians, the report, "Jade: Myanmar's big state secret'," throws doubt on the government's pledge to clean up the industry. It is also likely to fuel public pressure for action from the next government.

     President Thein Sein and his key ministers have tried to distance themselves from the previous military junta, launching sweeping political and economic reforms from mid-2011. But the report notes that some members of the quasi-civilian administration who were part of the previous junta maintain links to the jade trade.
Economic implications

On the economic front, the new figures -- if accurate -- boost Myanmar's 2014 GDP to a total of about $95 billion, up from the reported $64.33 billion, and deepen confusion over the country's key economic indicators, including per capita indices. At the same time, the new estimates also help to explain some anomalies in the country's inflation and exchange rates, among other indicators. The local currency, the kyat, has weakened by about 20% to 25% this year against the dollar, leading to government moves to curb so-called "dollarization" of the economy.

Myanmar has been struggling to reform its statistics with the help of organizations such as the International Monetary Fund. The IMF has warned of "overheating" in the economy and earlier estimated that inflation could rise to an annual 13% by year-end,  from 8% in May, while GDP growth would reach an annual 8.5% this year amid expansionary fiscal policies. The big question however is where the "hidden" proceeds of the jade trade are going. A Yangon-based economic analyst said that most of the revenue is "black" money: "You can bet it's not going through banks or government tax collectors, so in a sense it's an academic question -- at the same time, it is a very real factor in rising inflation, the weakening currency and other aspects of the economy," he told the Nikkei Asian Review.

Western companies accused

The report also accuses U.S. multinational corporations of links to the industry, naming Coca-Cola, which has established bottling plants and distribution networks in Myanmar, and Caterpillar, which sells earth-moving and mining equipment to some companies involved in jade-mining. Both companies have denied direct involvement in the jade trade but have acknowledged business dealings with individuals who have connections.

     Coca-Cola admitted in July that Shwe Cynn, a director of Coca-Cola Pinya Beverages Myanmar joint venture, is also a director and shareholder of Xie Family Co., which is active in the domestic jade business but is blocked from exporting to the U.S. due to sanctions.

     However, the report states that Coca-Cola, which reportedly spent more than $1 million on due diligence, "failed to identify its local partner's interests in the jade industry, including a long-running association with army company Myanmar Economic Holdings Limited."

     In response, Coca-Cola told the NGO: "The Coca-Cola Company has been transparent about our joint venture and operations in Myanmar and we continue to go above and beyond the [U.S.] Department of State's Reporting Requirements on Responsible Investment in Burma."

     The report alleges that Caterpillar "hosted in at least five countries the front man for a group of jade companies [that] Global Witness believes to be controlled by drug lord Wei Hsueh Kang." In a statement to the NGO, Caterpillar said that its due diligence "had not demonstrated that the companies named by Global Witness are owned or controlled by 'a sanctioned party'."

     Global Witness also identified "a group of shadowy firms controlled by individuals closely connected to Burma's previous military regime, including the families of [former junta leader] Sen-Gen Than Shwe, former northern commander Ohn Myint and other key figures from the military era."

     Ohn Myint, the current minister for livestock, fisheries and rural development, has maintained connections to the jade trade through a family-related company Myanmar Win Gate Gems and Jewellery Mining Co. Ltd., according to Global Witness. The company reported pre-tax sales of $80 million of jade in 2014 - "half of which came from one piece of jade that weighed 24kg."

     While stressing that a small elite has reaped vast wealth from Kachin's jade resources at the expense of a population mired in poverty, the report notes that some leaders of the key rebel Kachin groups are also making large profits from the trade.

     With both sides profiting from the trade, it says, "the rapacity and industrial scale of the effort to extract jade is fueling a separatist conflict in Kachin state."

Unpublished data

The report has drawn extensive media attention since its Oct. 23 release, primarily for its detailed data which includes both Myanmar and Chinese government figures; industry estimates of production and of smuggled and officially exported jade; valuation data from official emporiums; and the Ash Center's estimates of sales in the three major grades of jade.

     In gathering data, the NGO said it had received cooperation from leading jade-producing companies, some which are on the U.S. "blacklist," or the so-called "specially designated nationals" list of individuals and entities with alleged connections to money laundering, human rights abuses and other illicit practices.

     Companies that cooperated with Global Witness included the Htoo Group, headed by businessman Tay Za, and Max Myanmar headed by Zaw Zaw, both on the U.S. blacklist.

     The remote, jade-rich areas of Myanmar's northern Kachin state, close to the border of China's southern Yunnan province, have long been shrouded in secrecy, with the main jade mining town Hpakant strictly off limits to foreigners.

     "Jade" is a generic term for two distinct gemstones: jadeite and nephrite. Jadeite is rarer and more valuable than nephrite. Myanmar, specifically Kachin state, is the world's dominant supplier of jadeite and produces the highest quality stones.

     The area's proximity to China has spawned a flourishing cross-border trade as well as numerous jade auctions and sales throughout Myanmar that draw masses of buyers from China and elsewhere, mainly in Asia.

     Global Witness notes that its calculations of jade production and exports in 2014, based on detailed analysis of sales figures from auctions and  Chinese import data, was at least $31 billion and could exceed $38 billion. The $31 billion figure "equates to 48% of Myanmar's official GDP and 46 times government expenditure on health," it says.

     Official Chinese import data for 2014 far exceeds the Myanmar government's counterpart figures for jade exports. Even so, the Chinese figures are also significantly smaller than the real volume of trade, says the report, adding that the official Chinese category of gemstone imports from Myanmar that mostly consists of jade was worth $12.3 billion.

     The report adds: "this accounts for less than one-third of [Myanmar's] total jade production in 2014; the remainder is not reflected in official jade imports to China, despite China being the place where almost all Myanmar's jade ends up. If one calculates an average price per kilogram of jade imports as indicated by Chinese 2014 import data and combines it with Myanmar government production figures for the same year, this produces an estimate of almost $38 billion; again suggesting that the value of the jade sector was above $30 billion in 2014."

     Over decades, extraction of the precious stone has spawned a vast industry centered on Hpakant, which has drawn itinerant laborers from around the country and tens of thousands of migrant workers, mainly from China. The area -- flooded with abundant, cheap heroin due to its proximity to opium producing areas -- has long been notorious for problems such as drug addiction, prostitution and HIV/AIDS.

     Global Witness is among many environmental and human rights groups urging more accountability in Myanmar's jade sector and calling on the government to act on promises to join the Extractive Industries Transparency Initiative, an international standard for transparency in the resources sector.

     The Myanmar government however has said it recently completed the requisite four steps to become a full EITI member and has been accepted as a candidate. "We remain enthusiastic and supportive [of EITI] and worked hard to fulfill membership criteria -- but it is now up to the organization and it is a matter of time," Soe Thane, the government's leading economic minister, told the NAR.

     Global Witness says that jade is also a "key test" of U.S. foreign policy in Myanmar. It recommended that  the U.S. and Myanmar's other partners should "benchmark the lifting of sanctions and future aid disbursements to reforms of the jade industry -- including more equitable sharing of profits and greater accountability."

     "With a range of sanctions on individuals named ... and a leading role in the fledgling extractive industries reforms, the U.S. is uniquely placed to help take the jade out of the hands of the military, cronies and drug lords," said Juman Kubba, an analyst at Global Witness. "It must make this a priority for its partnership with the new government that emerges from November's elections."