Apr 15th 2015

The Impact of Energy of China/Myanmar Relations

by Daniel Wagner

Daniel Wagner is CEO of Country Risk Solutions, a Connecticut-based cross-border risk advisory firm and author of the book Managing Country Risk. CRS provides a range of services related to the management of cross-border risk. He is also Senior Advisor with Gnarus Advisors.

China and Myanmar have had a mixed post-war relationship, ranging from warm to hostile, with Burma being the first non-communist country to recognize the PRC in 1949, then expelling much of its Chinese population following anti-Chinese riots in the 1960s. Since the repression of pro-democracy riots in 1988, Myanmar has generally sought a closer relationship with China, as the government wished to strengthen itself in the process. Today, the relationship is characterized by strong bilateral trade and investment, but also a similar sensitivity as other Southeast Asian nations to China’s growing strength and influence in the region.


Myanmar’s Strategic Energy Play

The acquisition of energy has become a dominant influence in China’s foreign policy orientation generally, and has been a driving force in its relationship with Myanmar in recent years. While Myanmar is resource-rich, it does not have particularly noteworthy hydrocarbon reserves, but, because of its geostrategic position has punched above its weight in perceived significance to China. China views Myanmar as important to its own strategic objective of having access to more ports in the Andaman Sea and Indian Ocean.

The Shwe Gas Pipeline (otherwise known as the Myanmar-China Oil and Gas Pipeline), which commenced operation in 2013, certainly symbolizes China’s willingness to invest in Myanmar in order to achieve its energy acquisition objectives. Although built by a consortium that includes India and South Korea, the pipeline is an important component of China’s ability to deliver oil and gas to southwest China.

China has taken this a big step further with the inauguration last month of a 478-mile crude oil pipeline the runs the length of Myanmar and will transport oil from the Middle East and Africa to southwest China. China’s CNPC owns 50.9% of the venture, which included the construction of a new deep-water port and oil storage facilities on Myanmar’s Maday Island. The completion of the port was also a long-held strategic ambition of China in terms of its ability to project its military power in the region. So, it is fair to say that bilateral economic relations have never been better between the two countries, nor has Myanmar’s economic significance to China ever been higher.


You Can’t Always Get What You Want

It didn’t get that way without a few bumps in the road, however. The government of Myanmar halted the construction of the Myitsone Dam in the country’s north, a large hydroelectric project that was under construction along the Irawaddy River and was to be completed in 2017. It was to generate up to 6,000 megawatts of power for Yunnan Province in China. The project had been highly controversial, largely because of the environmental damage it would cause and the thousands of people who would have needed to be displaced to build the Dam.

A broad range of interests and organizations opposed construction of the Dam, which was being was being built by the China Power Investment Corporation – one of China’s largest power producers – and Sinohydro – one of the world’s largest hydropower contractors. In 2011, Myanmar’s then President, Thein Sein, succumbed to pressure and canceled the project, to the great consternation of the Chinese Government, and to the great delight of environmentalists.

Cancellation of the Dam raised a whole host of issues which China had never before had to address in public. It is extremely rare for a developing country government with a long history of friendly relations with China, and seeking its investment, to publicly challenge the Chinese government in such a manner. Even more interestingly, it was one of the first instances when major Chinese government-owned companies had been forced to deal with issues related to contract cancellation and de facto expropriation of Chinese assets related to Overseas Foreign Direct Investment (OFDI).

As a result, the Chinese government learned that it is ultimately as powerless as any other government when contracts are canceled in another country – even Myanmar. The Dam remains suspended. While China has sought to portray the project in a more favorable light, local environmental activists remain adamantly opposed to the project, and allegations of fraud, corruption and lack of transparency remain rife. A rather thought provoking dichotomy – the Dam and the Pipeline – since it may certainly be presumed that many of the objections Myanmar had to the Dam may surely also be said of the Pipeline, but are not.

The Myanmar people have raised, and continue to raise, objection to the manner in which a variety of Chinese-sponsored and funded projects have evolved. Although there are more than two dozen mega-dams either in place or planned in Myanmar, 90+ percent of the electricity generated by them end up being exported either to China or Thailand, meaning that the benefits for Myanmar’s citizens are ‘limited’. Power shortages are still common in Myanmar as a result. How will this simmering enmity manifest itself in terms of domestic politics?

 

The Lady and the Dragon

Myanmar’s growing economic interdependence with China would appear to be consistent with its backtracking on ‘democratization’. Opposition leader Aung Sung Suu Kyi has distanced herself from the ongoing love-fest with China, which has saved her from inevitable domestic criticism given the anti-Chinese sentiment. The Lady (as she is known) has in the past experienced a backlash when she has appeared to be too close to Chinese interests. How she plays her China card may ultimately prove to be important in how her evolving political power unfolds.

In 2012 a violent crackdown was initiated by police on peaceful protestors at the Letpadaung Copper mine in northwestern Myanmar. The mine was at the time a joint-venture between the military-owned Myanmar Economic Holdings and Wanabo Mining, an affiliate of China North Industries Corporation. The project was marred by accusations of land expropriation and environmental damage, and was temporarily shut down.

Suu Kyi was appointed to head a parliamentary commission tasked by President Thein Sein to investigate the crackdown and whether the project should continue to operate. In March 2013 the commission issued a report recommending that the government permit the mine to resume operations. The backlash was swift, in part because the entire incident was seen as a test of Myanmar's will to stand up against China, but also because of allegations it had failed to meet requirements for transparency vis-à-vis its compliance with environment and health standards. Anger among opponents of the mine continues to simmer, fueling the notion that Myanmar has served as a pawn for Beijing, taking a back seat to its economic interests.

So Suu Kyi has a dilemma -- whether to embrace Beijing or continue to distance herself from it -- and contemplating the political implications of doing either. The international community has called for amendments to be made to Myanmar's 2008 Constitution prior to the 2015 elections; in particular, section 59(f), which bars anyone whose spouse or children are foreign nationals from holding the position of president. Through her marriage to the late British academic Michael Aris, they had two sons, which makes her ineligible to become President under the law. Should an amendment be made, and Suu Kyi were to become president, it remains to be seen whether closer engagement with China would be the result. Many of her constituents have already lost faith in The Lady as a result of her failure to more forcefully speak out against human rights abuses occurring in Myanmar.

Regardless of who becomes president later this year, the National League for Democracy is likely to remain a dominant party in parliament, making the question of when, rather than whether, Suu Kyi visits Beijing somewhat academic, given that she will remain the party leader. Establishing stronger ties now would probably be beneficial for the NLD's post-2015 future, but could put Suu Kyi at risk of appearing too close to Beijing. The last thing she would want is to end up being compared to the political establishment she fought so hard to unseat.

Suu Kyi has learned that the seemingly limitless praise she has received in the past can no longer be taken for granted -- either by her constituents or the international community. The price of becoming an international human rights icon is that there she has little room to maneuver outside of the personae she has established. The Lady is learning that with political power comes the need for compromise in order to get to the finish line. Her embrace of Beijing would therefore appear to be inevitable.

 

Beating the West at its Own Game

That said, China has gotten used to getting its way, one way or another. If it weren't for the West's preoccupation with achieving a higher moral standard and adherence to international standards of acceptable behavior, China would not have been as successful as it has been in securing OFDI in the developing and emerging world to the degree that it has. China is in the process of beating the West at its own game - identifying what is sees as the West's 'weakness' on the grand chess board and filling in the gaps left behind.

If the West played the game the same way, China's investment ambitions would be restricted, least more expensive, and would presumably be achieved with more difficulty. But the West is not going to change its stripes any more than China will be changing its own. In some respects, China is outmaneuvering the west in the "great game" that the West invented. But as the Myanmar example has shown, China is quickly learning about the potential benefits of establishing more equitable and genuinely mutually beneficial bilateral economic relationships, as well as being more sensitive to environmental issues and the concerns of host country inhabitants. Perhaps that will be one enduring legacy of Myanmar’s growing importance to the economy of China.

 

Daniel Wagner is CEO of Country Risk Solutions and author of "Managing Country Risk", please see below for link to Amazon. For Country Risk Solutions' web site, please click here.

You can follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt



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