By Joel Schectman and Yeganeh Torbati
WASHINGTON (Reuters) - The United States eased some sanctions on Myanmar on Tuesday to support ongoing political reforms, but maintained most of its economic restrictions in an effort to punish those Washington sees as hampering the country's newly elected government.
U.S. officials said they were easing sanctions to encourage the "historic" progress in Myanmar, including the formation of the country's first democratically elected government in more than 50 years.
The moves included removing Myanmar state-owned banks from a U.S. blacklist and the lifting of sanctions against seven key state-owned timber and mining companies.
Officials said they hope the actions will eliminate key obstacles to trade in Myanmar. Potential investors in Myanmar have long complained that the blacklisting of some of the country's biggest banks made business in the country too risky.
Major firms including General Electric <GE.N>, Western Union Co <WU.N>, Gap Inc <GPS.N>, and Coca-Cola <COKE.O> have made business forays into Myanmar, and the moves announced on Tuesday will ease their and other companies' ability to operate there.
The U.S. Treasury Department also extended indefinitely a sanctions exemption that allows banks to finance shipments coming in through Myanmar ports, even though key terminals are controlled by blacklisted businessman Steven Law. The issue had forced Western banks to cut financing of trade into the country until the U.S. Treasury granted a six-month exemption in December.
But the United States also strengthened measures targeting Law, who was blacklisted for alleged ties to Myanmar's military. Six companies owned 50 percent or more by Law or the company he controls, Asia World, were added to Treasury's blacklist.
The announcement highlighted a key challenge for Washington, as it seeks to both encourage political reform while maintaining pressure on those it sees as spoilers. More than 100 individuals and groups remain on Washington's sanctions blacklist for Myanmar, making them radioactive to the international community and barring U.S. banks or companies from making deals with them.
"There can be a tension here," a senior administration official said on condition of anonymity. "Some of these actors are key economic players."
Tuesday's announcement reflects what will be a stilted process of bringing back trade into Myanmar, said Peter Harrell, a former senior State Department official who was part of the first efforts to lift sanctions on Myanmar in 2012.
"I think this is a significant step. I don't think it's a massive step," said Harrell, now a senior adjunct fellow at the Center for a New American Security. "The practical reality is if you can't do business with military-owned companies, chunks of the economy are going to remain off limits."
The U.S. moves followed a landmark November election in which the party of Aung San Suu Kyi, the country's Nobel Peace Prize laureate, won a landslide victory. A constitution drafted by the country's former military rulers bars her from becoming president.
U.S. officials began lifting trade and financial sanctions against the country after military leaders launched reforms that led to a civilian government being formed in 2011, beginning its transformation from a half-century as an international pariah.
The sanctions decision, reported by Reuters on Friday, came before a visit to the Southeast Asian nation by Secretary of State John Kerry on May 22.
President Barack Obama, in a letter to Congress, said he was extending for one year the legal underpinnings for those sanctions that remain and provided his justification for doing so.
He said Myanmar had made significant progress on reforms since 2011, but that "concerns persist regarding continued obstacles to full civilian control of the government, the ongoing conflict and human rights abuses in the country, particularly in ethnic minority areas, and military trade with North Korea."
Despite the sanctions lifting, Washington has deep concerns about alleged human rights violations in predominantly Buddhist Myanmar, particularly violence against the minority Rohingya Muslims, the officials said.
RELUCTANT TO RE-ENGAGE
The U.S. actions on Tuesday removed three state-owned banks from the U.S. blacklist, and authorized transactions with two other banks that are still blacklisted. The changes mean that most transactions with all Myanmar financial institutions will be allowed as of May 18.
"The adjustments we are making today are to try and facilitate a broadening of the aperture so that the investment that's intended can take place," a senior U.S. official said.
Though the United States began unwinding sanctions on Myanmar years ago, U.S. banks have been reluctant to re-engage with the country because of concerns that key sectors of the economy are still controlled by businessmen linked to the military. No U.S. bank has yet opened a correspondent banking relationship with a Myanmar bank, considered an important step in accessing the global financial system.
While the moves on Tuesday help pave the way for basic transactions necessary for investment, U.S. citizens are still barred from striking deals with individuals and companies on the blacklist.
"Businesses are going to look for more," said Erin Murphy, a former State Department official who worked on Myanmar sanctions issues. "They still have to conduct extensive due diligence, not just on reputational concerns but also whether or not who they're dealing with is blocked."
The U.S. is also easing restrictions on Americans living in Myanmar, allowing them to conduct everyday transactions like renting apartments.
The State Department also loosened its requirement that U.S. companies investing in Myanmar disclose their dealings. Previously, companies had to make those disclosures if their total investment reached $500,000 or more. That cap has now been raised to $5 million.
The requirement was intended to promote greater transparency in Myanmar. But it had a chilling effect on companies wanting to avoid criticism from human-rights and other groups for dealing with the country, said Murphy, now a principal at Inle Advisory Group, which advises businesses investing in Myanmar.
The $5 million cap will likely mean major corporations will still have to disclose their business there, but will allow for modest investments without the disclosures.
(Additional reporting by Matt Spetalnick; Editing by Dan Grebler and James Dalgleish)