Foreign investment in NK

By Andrei Lankov

In late November, a large Egyptian telecom and construction company published a quarterly report. Orascom, the company in question, admitted in this document that "in the group's management view, the control over the Koryolink's activities was lost." Koryolink is the Orascom venture in North Korea, and this short statement is clearly a sign that the investment project in this small East Asian country had gone seriously wrong.

However, experienced observers of North Korea were not surprised by this news. As a matter of fact, it was expected and, indeed, predicted in the narrow circle of NK watchers.

Orascom and a North Korean government telecom company created Koryolink as a joint venture in 2008. Its task was to rollout a mobile network. The project success exceeded all expectations, with the number of subscribers reaching three million.

In a sense, Orascom got off lucky: contrary to widespread perceptions to, the North Korean economy has grown significantly in the last decade, largely due to nascent market forces that remain hidden behind the veneer of Stalinist rhetoric and sloganeering. A significant minority of locals can now afford to buy cell phones.

As a result, Orascom made a great deal of money, and the Egyptian management expected to get some of the profits out of North Korea. However, this is not what their North Korean partners (read: the government) wanted to happen. The investors were told that it would be much better if the earnings were reinvested into the repressive state. When they refused, things quickly soured.

The major issue is the exchange rate. North Korea actually has two exchange rates: an official one, which fluctuates at around 100-130 won to the dollar, and the unofficial one, which is around 7-8,000 won to the dollar. Since nearly all of Koryolink's profits are held in the local currency, this issue is decisive. Predictably, the Egyptian side insists upon the official rate, while the government says that market rates should be used, but even this is difficult since such a rate does not officially exist.

Once Orascom proved to be reluctant to accept North Korean demands, it found itself under pressure. Eventually, the North Korean government, in breach of prior agreements, established another mobile phone operator. As a consequence, Orascom personnel working in the country began to face increasing difficulties.

This turn of events might have shocked Orascom's board, but it follows a familiar pattern that every student of North Korea is aware of. The Orascom investment might be large, but similar events have occurred before. North Korean companies and the government have proven themselves to be remarkably unwilling to share profits with their overseas partners when foreign investments yield more than initially expected.

The story of the Xiyang Group, a mining company based in the Chinese province of Liaoning is an instructive precedent. Once the company had finished constructing an iron ore mine in the North in 2012, its personnel were kicked out and their investments expropriated. As a result, the Chinese company lost some $45 million. At the time, it was the largest state confiscation of private foreign investment in North Korea.

The Xiyang group published extensive documentation and publicized the issue, but soon discovered, that even with the extensive support of the Chinese government, they could not recover their investment.

Actually, a list of investments which went wrong is easy to add to. As a Chinese businessman recently told the present author: "I know that there is only one way to make money with the North Koreans: ask them to pay upfront. Otherwise, you will be cheated".

There are good historical reasons for this. North Korea has never really had any experience of dealing with genuine, bona fide foreign commercial investments. There have been joint ventures, such as Soviet companies that built ports and industrial facilities in the North in 1945-1990 using Soviet government money. There were Chinese doing the same, too. However, the implicit assumption by Moscow and Beijing at the time was that no profit could be expected from these investments. These investments were strategic aid in disguise.

The North Korean government has shown an unusually high level of interest in foreign investment in recent years. But it seems that they don't quite realize one simple rule: foreign investors come to make money and they will normally want to get this money out of the country, with the amount being calculated against a realistic exchange rate. For the North Korean government, always hungry for hard currency, such ideas are anathema, and neither the central government nor North Korean companies can stand to see money flowing out of North Korea into the pockets of foreigners that are already filthy rich.

One should not forget to add a lack of interest in international business reputation and constant rivalry between different branches of the North Korean government. This all creates a situation in which North Korea is one of the worst places on Earth in which to invest.

This is quite a sad state of affairs. North Korea is changing, its economy, once desperate, is getting better, but unless its decision makers start to realize that it pays not to cheat on foreign investors, they are likely to struggle to find the capital and expertise essential for sustained growth.

Professor Andrei Lankov was born in St. Petersburg, Russia, and teaches at Kookmin University in Seoul. Reach him at anlankov@yahoo.com.