Red Rubies, Black Economy

Red Rubies, Black Economy

Robert Horn: Fortune International

17th May 04

Carat for carat, the blood-red rubies of Myanmar fetch a higher price than diamonds. The prospect of purchasing some of these exceedingly rare stones, fabled for their rich fluorescence, lured hundreds of dealers to Yangon earlier this spring for a semiannual auction organized by Myanmar's ever watchful and cash-strapped military government. But as buyers weaved past barbed-wire barricades to enter a teak and jade-tiled exhibition hall, their anticipation turned to grumbling. Not a single stone from Mogok--a remote mining town north of Mandalay that has been the world's best source of rubies for centuries- - was on the block. Instead most of the rubies came from Mong Hsu, a mine whose stones require heat treatment to enhance their color.

"Mogok is mined out," says Hla Win, a Burmese trader hawking Mong Hsu rubies. But dig a little deeper, and a different tale emerges. Dealers say miners are still unearthing rubies at Mogok's limestone karsts. The stones just aren't coming to the nation's capital. "Yes, there is smuggling, although it's going down," says auction chairman Myint Thein. That's surprisingly frank talk for a Myanmar government official, but there's no denying that gem smuggling exploded after the mines were nationalized by the generals 30 years ago.

Since 1989, the government has been attempting to build and profit from a legal, privatized gem trade by handing out mining concessions to trusted business allies and to ethnic insurgents as enticements to end decades of civil war. "The government has been trying hard to get it right," says Jayesh Patel, a Bangkok ruby dealer born in Mogok. Still, according to those in the know, gem smuggling thrives.

Officially, minerals and gems are Myanmar's fifth-largest export, at $ 30 million a year, but government statistics are notoriously unreliable. Patel and other dealers say as much as 90% of the business lurks within the shadow economy. Mismanagement and U.S. economic sanctions over human rights abuses have swelled the country's black economy to five times the size of its legal economy, say Western diplomats. The government reeled in $ 2.2 million, or 10% of the gross, from this auction, but hundreds of millions of dollars' worth of gems are leaking across borders to China, Thailand, and India every year, selling at prices that turn Yangon's generals greener than their uniforms.

Gen. Nay Win Tun hasn't worn a uniform since 1991, when his Pa-O Liberation Army signed a cease-fire. His corporation, Ruby Dragon Jade, a joint venture between the government and the Pa-O leadership, has interests in construction, hotels, and tourism as well as gems and jade. It is now one of Myanmar's top gem producers. "Peace has been good," Nay Win Tun says, waving a wrist weighed down by a diamond-dappled Rolex at his Yangon office. Of the 882 pounds of Mong Hsu rubies his company put up for sale, only 196 found buyers. But the general is unperturbed. In his vaults in Mandalay, he says, he still has rubies from Mogok

About a quarter of the thousand or so mining companies are run by former rebels, some of them linked to opium and heroin smuggling, according to the U.S. State Department. Other mining companies are owned by Chinese nationals using Burmese as frontmen. Although they are chiefly interested in jade, they too have well-established smuggling networks.

Many smugglers are women. After buying stones from miners or corrupt company officials, they trek for days to the border, dodging brigands and paying cash or gems at checkpoints run by the army or guerrillas. To conceal the gems, they often swallow them. Bodies of suspected smugglers have been found sliced open. Says Bangkok dealer David Glickman, who used to buy rubies at the border: "We'd wait for the smugglers to shoot it out, then buy from whoever was left standing."

If smuggling remains rife, blame greed and mismanagement. The regime takes a large stake in all mining ventures, then slaps a 20% tax on excavated gems. Another 10% tax is taken if the gems are exported. Nonetheless, to get their mining permits renewed, companies must bring some booty to Yangon.

To counter smuggling, the government wants to develop an indigenous finishing industry. But because of the sanctions few Western buyers visit Myanmar, and neighboring countries place 80% to 200% tariffs on jewelry imports. "The government has failed the industry by not getting those reduced," says Win Kyaw Oo, a former reporter for the Myanmar Times. Until Myanmar's generals can negotiate trade agreements as skillfully as cease-fire deals, their country will remain merely a gem mine for its voracious and economically mightier neighbors.