Diminishing Marginal Utility

Source: PINR Dispatch

Recent developments in the gas field projects of Myanmar have served to highlight the intense resource diplomacy that is ongoing in the region. The government of Myanmar withdrew India's (under the Gas Authority of India Limited or GAIL) status of "preferential buyer" on the A1 and A3 blocks of its offshore natural gas fields and instead declared their intent to sell the gas to PetroChina. The offshore gas fields of the Shwe project in the Bay of Bengal have estimates of 4.8 trillion cubic feet (TcF) for the current blocks with more exploration ongoing. The controlling interests in the two blocks are Daewoo International (60 percent), O.N.G.C. Videsh Ltd (20 percent), GAIL Ltd (10 percent) and Korea Gas Corporation (10 percent).

The most viable of the proposed pipeline routes for moving the gas to India would have proceeded through Myanmar's Arakan state before entering India's Mizoram and Assam provinces and finally terminating in West Bengal at the proposed Jagdishpur-Haldia distribution line.

Implications for India

First of all, India has clearly lost an important diplomatic initiative in the attempt to counter Chinese influence in Myanmar. Even after the deal was sweetened with US$20 million in "soft credit" and the proposed construction of a power plant in Myanmar, it would appear that Indian influence was quietly denied by the inevitability of China's international support for Myanmar. Beijing's use of its veto to keep Myanmar's human rights record off of the U.N. Security Council agenda turned out to be more important to the Myanmar junta than the economic incentives. Despite support from pro-India voices within the upper echelon, like that of Vice Senior General Maung Aye, the sharp turn in the sales decision serves to illustrate the depth of the relationship currently enjoyed by China and Myanmar. Maung Aye signaled as much as early as January 2007, when he refused to provide guarantees that India would gain access to the gas.

Secondly, the economic implications for India are significant. Recent reductions in the estimates of offshore gas in their own eastern blocks have increased demand to find sources outside of India's borders. The Myanmar fields offered a strong possibility to replace these sources. In particular, the pipeline was destined for the northeastern provinces of India, which are among the most power-starved provinces in the country. If the gas was destined for domestic use, the development-security nexus suggests that the power and resulting development, along with greater cooperation on cross-border counter-insurgency efforts, may have had a strong chance of success in defusing the secessionist movements in the northeastern Indian provinces.

Finally, the pipeline seemed set to heighten attempts for greater integration and further military and economic cooperation along the Myanmar-Indian border. Trade initiatives to date have failed to establish in the Indian northeastern border regions, while security initiatives have occurred in a stovepipe fashion with only communication between the two states rather than truly cooperative exercises. India will likely make more overt efforts in the future to establish a stronger presence in the face of Chinese diplomatic successes in Myanmar. It is likely that joint military initiatives in the border region will be initiated and more direct military aid like the proposed light attack helicopter sales from India to Myanmar will continue. Transfers of military equipment have increased significantly in the last two years between India and Myanmar, while joint counter-insurgency operations have been proposed, which would see an unprecedented level of cooperation, and therefore much higher counter-insurgency activity, between the two countries. These efforts would have had a far greater chance of success when combined with the development possibilities that the pipeline may have provided.

Implications for Myanmar

First of all, on the diplomatic front, the military junta has signaled where its strength lies. The military government has had a long history of a strong relationship with China which it would not risk in this scenario. It is likely that the junta recognizes the desire for India to play a stronger role in the region, thus giving it a stronger position in its dealings with New Delhi. The resources of Myanmar have allowed it to bypass international sanctions in the past and will now allow it to negotiate with its Asian neighbors in order to win necessary international support and recognition. The risk of angering India to the point of withdrawal of support was minimal; indeed, GAIL was criticized by India's External Affairs Ministry for not pursuing the agreement with a strong enough commitment to see it completed. However, the junta must continue to walk a fine line between alienating neighbors, already suspicious of China's growing influence in the region, undermining its own sovereignty and losing the support of its largest strategic partner, China, by playing it off against other regional interests.

Additionally, the recent efforts of the Association of Southeast Asian Nations (A.S.E.A.N.) to condemn the slow progress of national reconciliation may have refocused efforts within the junta to place diplomatic pressure via China onto members of A.S.E.A.N. China has recently been increasing its influence within A.S.E.A.N. and stands as the more active (between India and China) peripheral player in the A.S.E.A.N. orbit. Thus, by using its resources as a bargaining chip, Myanmar may have gained promises from China to use its influence to dampen A.S.E.A.N. members' concerns over the reconciliation process.

Secondly, the strength of the Myanmar position lies in the strong economic demand for resources by all of its neighbors. Bids for the sale of the gas were competitive and Myanmar will not lose much in economic terms for the decision to sell to PetroChina. While the decision may be deemed short-sighted for its apparent slight to India's recent diplomatic advances, it does little to reduce the reality that India, Thailand and China are all in need of dependable energy in order to pursue economic development.

Another facet of this agreement is a proposed oil pipeline that would be built in conjunction with the necessary gas pipeline. This oil pipeline would be constructed by PetroChina as an alternate route to the Malacca Strait. Its origin would be at a deep water port at Ramree Island in Myanmar, built to accommodate large crude tanker ships, and would cross the country to an undisclosed point on the Chinese/Myanmar border (likely the Muse/Ruli border crossing point). The economic advantage for Myanmar would be an additional sale point for their onshore and offshore oil blocks along with the economic spin off of a major trans-shipment point. China's vulnerability inherent in the reliance on the Malacca Strait may well have driven the junta's decision to rescind India's preferential buyer status.

The recent price hikes in domestic fuel that sparked protest in Yangon and resulted in the arrest of a number of former student leaders from the 1988 uprising demonstrates the thin line of economic vulnerability upon which the junta balances. The 1988 uprising that resulted in the current suspended constitution was also sparked by a troubled economy. The junta will need to balance its need for foreign currency, gained through resource rents, with the demands of a population that has not accrued much benefit from the current junta's economic policy. Much of the gas being exported to date and in the future would, arguably, be better used in domestic power generation -- something that the Indian offer would have included.

Third, on the security front, agreements that have been developing alongside the gas sale agreement with India will likely not be disturbed by the decision to sell to China. The pipeline route from Shwe would have brought fewer security implications for Myanmar than for India. However, pipeline construction to the western region of Myanmar would have brought with it a larger military presence in an area of poor infrastructure on both sides of the border. In this sense, the military opportunity cost may have been a considerable chance to improve infrastructure and access to an area that has been historically inaccessible.

In addition, Myanmar military ties to the considerable narcotics and arms trade that utilizes the porous border between the two countries may have produced a conflict of interest between parties within the junta that forced the withdrawal of the pipeline project.

Conclusion

The junta is insisting that the rules of the gas fields have little to do with political decisions; rather, that it is the business as usual approach of offering the sale to the highest bidder. The decision to sell to PetroChina, however, emphasizes the complexity of resource diplomacy for all players within the region. India's current loss in the field of energy security will likely not lead to a decrease in its attempts to win greater cooperation from Myanmar over counter-insurgency efforts, but it does reveal the deep connections between China and Myanmar. This relationship will prove hard for India to compete with in the long run, especially as long as the decision-making process within the junta follows the familiar route of political considerations at the expense of sound domestic economic policy.

An important consideration, unexamined here, is that India will not likely rock the diplomatic boat as long as its companies continue to enjoy privileged access to a country that is closed to U.S. and European competition. Exploration, after all, is still ongoing in the offshore blocks while Myanmar's onshore basins remain largely untapped.

Report Drafted By:
Gideon Lundholm

Posted by Hugo Albert Orwell at 09:41 AM | Permalink | TrackBacks (0)

Source: PINR Dispatch

The first sign of the current protests currently underway in Myanmar occurred in a rare display of public outrage in February 2007 over the economic conditions within the country. A small group calling themselves the Myanmar Development Committee called on the military rulers to address consumer prices, lack of health care, education and the poor electricity infrastructure. Normally unseen in Myanmar, the protest was quickly broken up after only 30 minutes of activity. Likely in response to the protests, the ruling military junta appointed Brigadier-General Than Han of the Myanmar police to the responsibility of handling civil unrest in Rangoon.

On August 15, 2007, the government made significant cuts to national fuel subsidies, which had an immediate effect of increasing the price of diesel fuel by a reported 100 percent, causing a five-fold increase in the price of compressed natural gas, and placing additional inflationary pressure on an economy already facing estimated inflation levels of 17.7 percent in 2005 and 21.4 percent in 2006.

Once again, similar to the event in February, people took to the streets in a rare display of public anger. The current demonstrations have drawn a significant number of Buddhist monks into the streets and have led to national curfews. Violence finally broke out on September 26 as security forces and protesters clashed.

The end of fuel subsidies were likely part of a larger package of reforms that the junta has been planning in order to, among other things, reduce the pressure of global fuel prices in a country that is dependent on diesel imports for its entire economy. Myanmar has an insignificant domestic refinery capacity and a chronic need for foreign currency. The latest Indian proposal intended to regain access to the Shwe gas fields has reportedly included diesel fuel exports, while a deal with Petronas of Malaysia is seeking similar arrangements. [See: "Pipeline Politics: India and Myanmar"]

The International Monetary Fund (I.M.F.) and World Bank made recommendations as recently as last year along the lines of the subsidy cut as part of a larger package of reforms, critically citing the trend toward extraordinarily high budget deficits carried by the junta. The construction of a new capital, Naypyidaw, and the proposed construction of an information technology capital, Yadanabon, along with significant pay raises for civil servants and the military have placed serious pressure on government reserves. The government typically addresses such deficits by printing more money, producing the significant inflationary pressures seen today.

The involvement of private interests should not be overlooked. Leading businessman Tay Za and his holding company Htoo Trading Company may be set to profit from the privatization of the fuel distribution system within the country. In order for the move to be successful, the thriving black market in fuel needs to be eradicated, thus the necessary removal of fuel subsidies and the subsequent rise in prices throughout the country. While powerplays between junta leaders and private businessmen have been cited before as causal factors in economic policy changes, the international pattern of subsidy reduction in the face of rising global oil prices suggests that this was not the underlying motive in the move. However, it would be a fairly typical move for the junta to select reforms beneficial to its business partners rather than to the national interest.

The junta has successfully melded the Myanmar economy into one that is dependent and focused on the export of its resources. Arguably, it appears that the junta has little economic planning experience and its priorities lie in the promotion of military power. However, it has produced a situation in which little value is added to any resources, whether it is copper, timber, or energy, producing an economy dependent on imports and exposed to the volatility of resource prices. It has managed resource rents and foreign investment poorly; planned hydroelectric projects will likely be forced to export electricity due to the inability of domestic infrastructure to handle the increased load.

Similarly, the information technology project of Yadanabon, likely a response to a similar project in Malaysia, is typical of the economic oddity that the junta often embarks on with little thought to planning. Communication infrastructure within the country is archaic and will not support the proposed project. Likewise, the jatropha (physic nut tree) plantations currently being planted across the country, another junta project, will not result in any significant economic development. The fuel requires significant infrastructure to turn into bio-diesel, which likely means it will be exported in its raw form to neighboring countries while the land under plantation could arguably be better utilized to feed the population. Regardless, the aging diesel engines that are in use throughout Myanmar will not be able to burn the resulting fuel stock effectively even if the domestic infrastructure were available.

One of the factors that may exacerbate the situation is the state of Myanmar's banking sector. The junta has announced a restriction on withdrawals from banks, raising echoes of the banking crisis of 2003. These restrictions are typical for unstable times, but due to the shaky status of the private banks especially, it is likely to cause even further economic hardship for the people of Myanmar. Monks may represent the spiritual backbone of the protests, but it is the general populace who has been successfully cowed by the junta into an attitude of self-preservation, which will ultimately have to be driven to demand change.

The military has made a supreme effort to remove itself from contact with the population: barracks and bases are situated away from towns, and the new capital is a study in strategic withdrawal to the hinterland. It is the populace who has the most to lose from rampant inflation and evaporating savings, but faces an incredibly resilient and increasingly isolated military that has kept a stranglehold on power since 1962.

The last major uprising in Myanmar occurred in 1988. The underlying cause of the revolt was economic and resulted in violent repression by the military. The outcome of the current protest could be similar. Regardless, due to the decades of military involvement in the economy, dependency on resource exports and a high rate of corruption that pervades the country, the necessary economic improvements will not come easily. Even with peaceful political change, without significant international oversight, the overwhelming precedence of military intervention and control in the country will likely return Myanmar to state-sponsored economic mismanagement.

Posted by Hugo Albert Orwell at 09:39 AM | Permalink | TrackBacks (0)

Source: PINR Dispatch

The current civil and political situation in Myanmar presents an opportunity for several major powers, namely Russia, China, India and the United States. Of these, Moscow has been working in concert with China to maintain the status quo in the country in order to preserve Russian interests.

For Russia, Myanmar holds a special economic interest since, during the past few years, it has entered into various business dealings with the country. In May, for example, nuclear equipment export monopoly AtomStroyExport forged an agreement to construct a nuclear research center in Myanmar. Leading foreign energy trade company Zarubezhneft, natural gas producer Itera, and Silver Wave Sputnik Petroleum are currently producing Myanmar's off-shore oil deposits alongside the Chinese company PetroChina, after forming a link with the south Russian republic of Kalmykia.

Additionally, Myanmar purchased 15 Russian MiG-29 Fulcrum fighters for approximately US$150 million in 2001. Furthermore, it is negotiating with Russia's state-controlled arms exporter Rosoboronexport on the establishment of an air defense system using the Tor-M1 and Buk-M1-2 missile systems. These business dealings, with a special emphasis on the energy related deals, are especially important to Russia.

Russia, which is currently one of the leading exporters of natural gas, is on the path to achieving a monopoly on energy throughout Europe and is most likely utilizing Myanmar and its oil and natural gas deposits (which it has gained access to after having negotiating the placement of the aforementioned air defense systems) to further its goals of monopolizing Europe's energy industry and possibly expanding its economic and political interest into the East.

It is also important to note that the air defense systems will serve other purposes, such as establishing bases to counter growing Chinese power or U.S. influence.

Demonstrating Russia's position on Myanmar is a recent Foreign Ministry statement that warned that "urgent steps must be taken to prevent the escalation of tensions" in Myanmar. The statement demonstrates that Russia supports an urgent response to stop the escalation of hostilities; however, the purpose of an end to hostilities is simply to reestablish a measure of stability in Myanmar, for Russia does not support the implementation of sanctions against the country, which could work to cripple the ruling junta.

In essence, Russia's interests are the stabilization and continued unsanctioned existence of Myanmar's ruling government, so that Moscow can continue to acquire Burmese oil and retain a stable ally in the region.

Opposition to this policy has come from several sources, one being the United States, which has called for immediate action and sanctions against the military junta in Myanmar. One reason for the United States to push for a change of government in Myanmar is to undermine Russia. If the current regime in Myanmar is disposed, it will be possible that a democratic government will come to power and seek better relations with the United States and its allies. The possibility of a democratic government, and its possible disposition toward friendly relations with the United States, is also an important driving force behind Russia's and China's actions in Myanmar.

Another source of opposition has come from India. The reason for India's involvement is the veritable backstab by Myanmar concerning the removal of India from the status of "preferential buyer" in regard to the off-shore oilfields off the coast of Myanmar. After removing India from preferential buyer status, the junta entered into negotiations with Russian and Chinese oil companies. Possible Indian interests are limited at best since it has been pushed aside by China. It is most likely that the Indian government opposes Russia and China in an attempt to maintain some form of business relations with the small Asian country. [See: "Pipeline Politics: India and Myanmar"]

Currently, with the lack of harsh or committed rhetoric, it is difficult to tell what actions and strategies Russia will adopt when taking action around Myanmar. It is not clear whether or not its strategy will be an active intervention or a more passive campaign of rhetoric. It is also difficult to tell as to whether the involvement of India and the United States will play a significant role in the situation at hand. It is clear, however, that Russia has extended economic interests in Myanmar that it considers critical to its interests.

Posted by Hugo Albert Orwell at 09:37 AM | Permalink | TrackBacks (0)