Orascom’s Big Turkey Drop: Why the SEC should require disclosure of investments in N. Korea

For years, Koryolink was the showpiece of economic engagement with the North Korean government. The service, a partnership between Pyongyang and the Egyptian conglomerate Orascom, provided cell phone service to North Korean officials, elites, security forces, and a few other customers with enough cash and connections to afford them. As a sweetener for Kim Jong-Un, Orascom also clothed the Ryugyong Hotel, the awkwardly naked (and still vacant) colossus of an embarrassment to Pyongyang’s economic system. According to the Daily NK, taxing Koryolink has become a significant source of hard currency for the regime.

For a few years, Koryolink looked like a solitary exception to the rule that Pyongyang always reneges on its bargains, but a few months ago, thanks to Martyn Williams, we first heard that Orascom and the North Korean government were at odds over exchange rates and the repatriation of Orascom’s earnings. Attempts to mediate the dispute turned sour after Pyongyang set up a competing cell service provider and demanded a majority interest in Koryolink.

Then, last Sunday, Orascom announced that it would remove Koryolink from its consolidated financial statements, and Yonhap has since reported that Orascom has lost control of Koryolink. Some reporters have even suggested that Pyongyang would nationalize Koryolink. Orascom may be facing the write-off of $585 million trapped in banks in Pyongyang. And so began Orascom’s Big Thanksgiving Turkey Drop.

The stock market ended trading with retreats across its main indices, its benchmark index dropping by 2.01 percent, continuing a dip that started on Monday. [….]

Ahmed Zakaria, the director of customer accounts at Okaz Securities Brokerage said that rumours of the nationalisation of OTMT’s North Korean operation Koryolink are “still dominating the market.”

“There are great fears because of this rumour,” he said.

Orascom Telecom, whose executive chairman is telecom magnate Naguib Sawiris, who denied the rumours, is listed in the Egyptian stock exchange. Its stock fell by 13.2 percent since the beggining (sic) of trading this week, after the company said on Sunday that it is excluding its North Korean investment from its financial statements. [Aswat Masriya]

On Monday alone, Orascom Telecom’s stock fell 7.6%, and “dragged down” the entire Egyptian market. Although ISIS’s bombing of a Russian airliner over Egypt contributed to the broader losses, the collapse of Orascom’s share prices was largely due to shareholder concerns (or panic) about Koryolink. By Tuesday, the losses had reached 13.2%; by week’s end, according to the Wall Street Journal, it had fallen more than 28%.

Even this is only part of the story; after all, there have been whispers about Orascom’s troubles for months now. For the year to date, the losses amount to a whopping 58%. Reuters shows a pessimistic “analysis consensus,” meaning that the stock may fall further this year. This leaves Orascom’s Executive Chairman, Naguib Sawaris looking foolish.

Orascom, understandably not wanting to aggravate the situation, denies that Koryolink has been nationalized, and blames sanctions instead of Pyongyang’s policy decisions. This excuse doesn’t withstand scrutiny. The sanctions, as currently enforced, would only be a problem if Orascom’s holdings are trapped inside the Foreign Trade Bank of North Korea or another sanctioned North Korean bank. There is no shortage of non-sanctioned banks in North Korea that Orascom could theoretically use, including the Central Bank of the DPRK.

Furthermore, Orascom has no one to blame but its own poor choice of partners, and of course, its North Korean partners themselves. Even if Orascom’s woes were a consequence of sanctions, Orascom fully assumed that risk. It obtained its license to set up Koryolink in 2008, two years after the U.N. Security Council imposed its first two rounds of sanctions, with UNSCR 1695 and 1718. It can hardly blame the U.N. and its member states for tightening the sanctions — modestly at that — in response to two additional nuclear tests.

Even if Naguib Sawaris and the Orascom management chose to overlook those risks, they still should have warned their shareholders about them. In the United States, the Securities and Exchange Commission requires issuers with investments in countries that are (or may be) subject to sanctions to disclose those investments in their public filings. That requirement applied to North Korea until 2008, when President Bush rescinded North Korea’s listing as a state sponsor of terrorism. Certainly Orascom’s ties to Pyongyang were no secret, but how many other companies are invested in North Korea more discreetly? How many Americans hold mutual funds that are invested in those companies? 

Although I’ve long argued here that North Korea sanctions today are far weaker than is widely assumed, it is also true that companies linked to North Korea face significant sanctions exposure. Pressure is growing in Congress to re-list North Korea as a terror sponsor. A far greater threat is that Pyongyang’s next provocation will cause Congress to pass more comprehensive sanctions legislation, now pending in both houses of Congress.

Surely these are risks that any ethical issuer should inform its investors about.