(Photo by Lauren DeCicca)

Perhaps no country on the planet has Myanmar’s potential at this moment. Effectively cut off from the world for the last 50 years, the newly opened country of 60 million could have more natural gas than Canada or Australia and is in desperate need of modern power, transportation and communications infrastructure.

It’s the sort of thing that gets the attention of foreign investors—and their lawyers.

Over the past 18 months, roughly a dozen firms have opened offices in Yangon, Myanmar’s largest city, former capital and main business center, These include global giants Baker & McKenzie and Allen & Overy, as well as Duane Morris & Selvam, New York’s Herzfeld & Rubin, Japanese firms Nishimura & Asahi and Mori Hamada & Matsumoto, Korean firm Jipyong Jisung, Malaysia’s ZICOlaw and Singapore’s Rajah & Tann and Allen & Gledhill have also recently established presences in Myanmar. Several other firms have formed alliances with local lawyers and firms, while others are devoting resources to the market from Bangkok, Singapore and Hong Kong.

But the big opportunity comes with big challenges. Though Myanmar is more open now, the continued pace and direction of political and economic reforms are still uncertain. The military junta that brutally ruled—and impoverished—the country over the past five decades is still very much in control, with its cronies wielding disproportionate economic power. Myanmar ranks near the bottom—157 out of 177 countries—in Transparency International’s 2013 corruption perceptions index.

As a result, some investors’ enthusiasm for the market has faded completely, while others have had their optimism tempered with a healthy dose of skepticism.

Myanmar “has all the reasons to be successful, and probably no one would have guessed it would open as quickly as it has,” says David Zemans, the Singapore-based Asia managing partner of Milbank, Tweed, Hadley & McCloy, which hasn’t opened an office there. “But there’s still no way of knowing if it will be sustainable or if the government will continue to move in the right direction.”

A British colony from 1824 to 1948, the country previously known as Burma came under a military dictatorship in 1962 that imposed a policy of economic isolation. In the late 1980s, democracy activist Aung San Suu Kyi began calling global attention to the military regime’s horrendous record of human rights abuses and pushing for reform. The government responded by brutally suppressing demonstrations and other signs of political dissent, placing Suu Kyi under house arrest for most of the past two decades. Western governments, including the United States, countered with tough economic sanctions against the regime and companies doing business with it, further deepening Myanmar’s isolation.

Even during this time, there were a handful of international investors, primarily from mainland China, who were undeterred by sanctions from the West. Singaporean law firm Kelvin Chia and Southeast Asian regional firm DFDL both opened offices in Yangon in 1995 to cater to this business. Cheah Swee Gim, Kelvin Chia Yangon director, says the work was mainly on behalf of Chinese energy and mining companies and wasn’t particularly lucrative. “There was no sustained loss, but we didn’t make big profits either,” she says.

Those Chinese companies lacked the technology and exploration experience to really begin tapping Myanmar’s resource wealth, however, and the country’s leaders realized they needed Western investment. In 2010 Suu Kyi and other political prisoners were released, and the military junta was replaced by a civilian government, albeit one controlled by the military-backed Union Solidarity and Development Party. The new government began relaxing media censorship and actively seeking foreign investment. U.S. sanctions were suspended in 2012, and foreign companies began showing up.

The overwhelming focus to date has been on natural gas. While few exploratory wells have been drilled yet, many experts believe Myanmar could have as much as 100 billion cubic feet of gas, mostly in offshore blocks. According to the U.S. Energy Information Agency, that’s more than Canada’s proven reserves of 68 billion cubic feet or Australia’s 43 billion, and only slightly less than Indonesia’s 108 billion.

Little surprise then that the oil giants have beaten a path to Yangon. Royal Dutch Shell, Total S.A., Malaysia’s state-run Petroliam Nasional Bhd. and China National Offshore Oil Corp. have all been awarded licenses to begin looking for gas.

Herbert Smith Freehills advised Woodside Petroleum Ltd., one of Australia’s largest oil and gas producers, on its successful bid with Britain’s BG Group to explore four offshore blocks. Freshfields Bruckhaus Deringer’s Singapore-based Asia Pacific energy group advised several global energy companies on investing in Myanmar, including some bidding for offshore blocks, according to group head Gavin MacLaren, though he declined to name them.

“Myanmar represents a significant new frontier for energy and natural resources in Southeast Asia,” says MacLaren. “We are seeing significant activity in the sector and anticipate that will only increase.”

But Simon Makinson, an Allen & Overy Bangkok partner who oversees the firm’s Yangon office, contends that it may be some time before international lawyers see significant work in Myanmar’s gas sector, given that the oil majors tend to handle much early-stage work in-house, working directly with local lawyers when necessary. Work for the international firms will likely only increase when exploration and then production actually commence, and a large variety of international contractors get involved. “It will take at least five years before the sector reaches its full potential,” he says.

Apart from gas, the country is also believed to have sizable quantities of oil, copper and gold. Gemstones are already a big export for Myanmar, which supplies roughly 90 percent of the world’s rubies and a large percentage of its sapphires and jade as well. The country is also the world’s largest producer of teak, the water-resistant tropical hardwood most famously used for boat and ship decks.

To support further international investment in its economy, Myanmar desperately needs new roads, rails, airports, shipping terminals, power stations and telecommunications lines. Many foreign companies would like to build those too. Last June, the government awarded Norway’s Telenor Group and Qatar Telecom Myanmar’s first two telecom licenses. Plus, the government has put out a $1 billion tender for construction of a new airport outside Yangon.

The country’s banking sector is also attracting interest. The government will soon auction licenses for foreign banks to operate in the country. At press time, details of the bidding had yet to be released, but more than 30 foreign banks have already opened representative offices in Myanmar; they could all be competing for as few as five licenses.

Though law firms say they receive lots of inquiries about Myanmar, they acknowledge relatively few of these lead to actual deals. “There’s a lot more hype than reality,” says Makinson.

Christopher Hughes, Baker & McKenzie’s Yangon managing partner, estimates that about 85 percent of his time in the first quarter was spent talking to investors about possible deals, versus 15 percent on live transactions. He’s hoping it moves to more of a 60-40 split in the coming months.

What’s holding investors back? Finding reliable, reputable business partners isn’t easy. In the energy sector, the bidding process has been run by the state-owned Myanma Oil and Gas Enterprise (MOGE), whose nontransparent financials have long fueled suspicions that it serves as a slush fund for the regime, at the expense of the nation’s citizens. Suu Kyi and Western human rights activists urged multinationals not to do business with MOGE for those reasons. The bidding rounds were postponed from 2012 to 2013 after some global oil companies expressed concern about possible corruption in the process, and the government said it took extra steps to ensure transparency at each step.

Many potential partners in other sectors are on the U.S. Treasury Department’s blacklist of Specially Designated Nationals (SDN) with whom U.S. citizens are barred from doing business. These are individuals or organizations that have been involved in activities deemed illegal by the U.S., such as arms deals with North Korea or drug trafficking—Myanmar is the second-largest source of heroin in the world after Afghanistan. Some government officials formerly on the SDN list have been removed, but many of their cronies in the country’s business sector are still blacklisted. The potential penalties for working with them are stiff: up to $1 million in fines and 20 years in prison.

“The sanctions for U.S. investors in particular are still very much an issue and something [investors] need to be aware of and careful in how they approach things,” Hughes says. “That is very high on their list of concerns when they’re looking at Myanmar.”

Makinson says SDNs often hide behind relatives and front companies. Just the investigations necessary to ferret them out have provided a stream of work. “You have to know who works with who and who has relationships with who,” he says. “It’s quite complex.”

And just because a potential business partner isn’t on the SDN list doesn’t mean he or she won’t raise anticorruption compliance issues.

Robert Ashworth, Asia managing partner of Freshfields, which covers Myanmar out of its Hong Kong, Tokyo and Hanoi offices, says clients often have to educate their potential Myanmar partners about their responsibilities under the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act.

“It all turns on finding the right partner,” he says. “Whether there’s enough to satisfy investor appetite, time will tell.”

Takeshi Mukawa, a partner at Mori Hamada & Matsumoto in Singapore, says anticorruption compliance is a paramount concern for his clients, and they let their Myanmar business partners know that. “If they say no, we will not make investment,” he says. “But normally they say yes.”

After they find suitable partners, potential investors must still confront Myanmar’s antiquated legal system. British rule bequeathed the country with a common law legal system, but it fell out of use during the dictatorship. Most of the laws on the books are long outdated, such as the companies law from 1914 and the arbitration law from 1944. In an effort to accommodate foreign investors, Myanmar’s parliament has been racing to pass new legislation. A foreign investment law went into effect early last year, while a new telecommunications law was passed last October, three months after the country awarded licenses. “Change has to be made one step at a time,” says Hughes. “You don’t start with, ‘OK, how do we have a fully functioning, perfectly integrated legal system?’ It’s more like, ‘We need to get mobile phones in people’s hands, what kind of laws do we need to make around that?’”

Working with clients in such conditions is “almost advising in the dark,” says Krishna Ramachandra, Yangon managing partner of Duane Morris & Selvam. He notes that drafts of the telecom law were circulated before its final passing, but many questions remained unanswered. “We had to sound out a few people we knew just to get a steer on how those licenses would be awarded and what the touch points would have been for the government,” says Ramachandra.

Implementation of the law also remains inconsistent. On its face, a new law may appear to permit an activity, explains Hughes. But actually getting authorization can prove difficult, or at least time-consuming. “It’s a much more dynamic discussion that you have with the regulators here than in other places,” he says.

The challenges have put off many investors. “Many people have realized over the past two years the difficulties in this system, whether it’s the legal system or foreign investment restrictions, and they’ve given up,” says Mori Hamada’s Mukawa.

The uncertainties ahead may be 
one reason why the Yangon offices launched by international firms are all fairly small, typically staffed by only one partner and a couple of associates. Some don’t even have a partner—Allen & Overy only has associates, with partners flying in on occasion from Bangkok or Singapore. Among those international firms that are targeting the market from other Asian offices are Freshfields; Milbank; Herbert Smith Freehills; Linklaters; Clifford Chance; and White & Case.

One obstacle for firms thinking about opening in the country is the dearth of Myanmar-qualified lawyers—there was little demand for them under military rule and the universities to train them were frequently shut down in the past two decades to quell student dissent. Those who managed to earn degrees and establish a working legal practice in spite of those obstacles are now highly sought by foreign firms. Both Rajah & Tann and ZICOlaw tapped Myanmar lawyers to lead their local offices. Other firms, including Baker & McKenzie and Duane Morris & Selvam, employ a small number of very junior local lawyers, who they are training themselves to bring them up to international practice standards.

Other firms prefer to work with a handful of local and regional firms such as Myanmar Legal Services Ltd. and Singapore’s Kelvin Chia, which has clearly benefited from the uptick in interest in the country. “For the last two years we have been kept very, very busy, and the work has gotten progressively intense and complicated and challenging,” says Kelvin Chia’s Cheah.

The big international firms disagree about the importance of being on the ground in Myanmar. Allen & Overy’s Makinson contends it’s imperative, as he believes that only firms working in Yangon can understand the nuances and complexities of doing business there.

“So much of what you do in Myanmar involves personal contact. You have to go meet ministers and director generals in person,” he says. “They haven’t interacted with foreigners for the last 60 years, and they’re a bit wary of foreigners coming in and dictating things. And you have to manage clients in how they work in the local environment.”

But Freshfields’ Ashworth says the ongoing challenges of doing business in Myanmar mean that the volume of foreign investment doesn’t yet justify having an office there. He says he first wants to see multinationals not just investing but establishing a presence in the country, as well as strong local companies emerging. Then, he says, “there may be more pressure to open an office.”

The country’s presidential election next year could have a major impact on multinationals’ plans. A major controversy at the moment is whether Suu Kyi, who has become the main opposition leader, will be able to run, given a provision in the most recent constitution barring candidates whose spouse or children are foreign nationals. (Suu Kyi’s late husband was British, and her two sons are also British nationals.) Her party, the National League for Democracy, and other groups are pushing for an amendment to allow her to run. If that effort fails, there will likely be a push for renewed sanctions from the U.S. and other nations.

Until that situation becomes clearer, investors are likely to remain wary. And even if Suu Kyi runs and wins, not everyone is convinced her election would lead to dramatic changes anytime soon, Her advocacy of democratic reforms and rule of law would be welcomed by foreign investors, but Duane Morris & Selvam’s Ramachandra says her lack of executive experience could prove a hindrance.

Still, most lawyers are optimistic that the progress Myanmar has made in the past few years will continue. “The sense from clients and potential clients I’ve been speaking to is that they are cautiously optimistic and they expect, having seen the reforms over the last three years, that the openness of the economy will continue,” says Minn Naing Oo, who heads Allen & Gledhill’s Yangon outpost. “They don’t think … the economic reforms that have taken place will be rolled back.”

Hughes agrees. “People are going to keep on rolling in to have a look at the place and understand it, and that keeps us fit.”

Email: tbrennan@alm.com.