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Of fools and their money: Martyn Williams on Orascom’s North Korea fiasco

Martyn Williams of the North Korea Tech blog has a must-read story at IT World about how Orascom’s investment in North Korea’s Koryolink mobile phone service “went horribly wrong.” That such a headline can be written is, by itself, a stunning reversal. During the early years of Kim Jong-Un’s reign, Koryolink was the poster child for more sanguine North Korea watchers, who believed that once a Swiss-educated reformer had taken the throne, a Pyongyang Spring must surely follow.

For the first few years, Koryolink really did look like a grand success, touting millions of customers, and ostensibly breaking down some of North Korea’s internal isolation. Optimistic observers assumed away, or perhaps beyond, a system architecture that facilitated state control, censorship, and eavesdropping, and the fact that cost alone put Koryolink out of reach of everyone but the elites. They held their tongues when Koryolink poured millions of dollars into white elephant projects like the Ryugyong Hotel while millions of North Koreans went hungry. They ignored the security forces’ use of Koryolink to shut down the very cross-border movement of people, information, and goods that has been the greatest driver of change by North Korea’s poor and underprivileged.

In the end, however, the fatal blow to Koryolink is more likely to be Pyongyang’s own greed than the moral, ethical, or legal, hazards of dealing with His Corpulency:

Orascom’s efforts to get its profits out of North Korea have been unsuccessful, partially because of international sanctions imposed on the country but mainly by the government’s refusal to let the money go.

To transfer money out of North Korea, Orascom needs permission from the government and it hasn’t been granted, despite it being a partner in the joint venture.

The government hasn’t acted because it can’t afford to.

The profits are held in North Korean won, but the currency isn’t traded internationally and the government’s official rate is set artificially high, at 100 won to the U.S. dollar. At that rate, Orascon’s holding at the end of last year was worth $585 million.

But at the black market exchange rate, which is effectively the real value of the currency in North Korea, the cash is worth only $7.2 million. And therein lies the problem. The government can’t afford to pay the money at the official rate, and it can’t be seen to officially recognize the black market rate. [IT World, Martyn Williams]

After months of negotiations between Pyongyang and Orascom deadlocked, Pyongyang set up a rival carrier to compete with its now-captive partner. Eventually, it even forced Orascom into merger talks in which it would be the majority partner.

That led to a dramatic statement from Orascom when it reported its financial results Monday — “in the group management’s view, control over Koryolink’s activities was lost.”

What are we to take from all of this? First, that His Corupulency has not made the decision that Burma’s rulers have, to open and reform the society he rules, or to deal fairly with foreign investors. The careful observer will perceive a cooling in the ardor of even such pro-engagement stalwarts as Andray Abrahamian, who was, until last year, one of the most enthusiastic promoters of commerce with Pyongyang. Judging by his Twitter feed, Abrahamian appears to be spending more time in Rangoon than Pyongyang lately.

Second, despite all of this evidence, there will always be an endless parade of gullible foreign investors who will follow in the footsteps of Hyundai Asan, Volvo, Yang Bin, David Chang and Robert Torricelli, Chung Mong-HunNigel Cowie, and Orascom, which I predicted back in 2008 would “eventually meet the same fate.” All of them have, to one extent or another, abandoned their investments in the Central Bank of the DPRK. The oil and gas company GeoExPro seems like a strong candidate to be next. Pyongyang, like the smarmy barkers of carnival midways, is counting on a small, yet endless, supply of suckers who are too greedy and ill-informed to know better.

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Of fools and their money: Volvo sold North Korea 1,000 cars. On credit.

As a tool of economic isolation, North Korea’s business ethics have proven to be far more effective than U.N. sanctions.

See also Yang Bin, Senator Robert Torricelli and David Chang, Chung Mong Hun, Nigel Cowie, Roh Jeong-Ho, Albert Yeung Sau Shing and the Emperor Group, the Xiyang Group, and Lloyd’s of London. There’s actually a whole market in North Korea’s defaulted sovereign debt “involving more than 100 banks from 17 countries” dating back to the 1970s and 1980s.

And still, the lemmings keep coming.

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Of Fools and Their Money, Cont.

Will the North Korean money pit sink the Hyundai Group?

The financial health of the Hyundai Group began to deteriorate when it started pouring huge amounts of money into its North Korean business in 1998. Hyundai Merchant Marine, the core part of the Hyundai Group accounting for over 80 percent of the group’s total assets, had been supporting Hyundai Asan but was hit badly by the global recession. Last year, it saw sales fall by more than 20 percent from the previous year, posting a massive W837.6 billion (US$1=W1,110) deficit.

That would be quite an accomplishment to add to the legacy of the Sunshine Policy. In addition to which, it would serve Hyundai right.

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Of Fools and Their Money, Pt. 3: Thoughts on the End of Kumgang

North Korea has announced that it will make good on its threat to confiscate the South Korean property at the Kumgang tourist project.

In a statement on Thursday, the North’s Guidance Bureau for Comprehensive Development of Scenic Spots, which is in charge of the tourism, said it is seizing a meeting hall for separated families built by the South Korean government, and a cultural hall, a hot spring spa, and a duty-free shop owned by the Korea Tourism Organization, as well as deporting their management staff, according to the official [North] Korean Central News Agency.

North Korea also threatened a joint factory project at Kaesong, a project that has been dying since the North arbitrarily restricted access to the projects and demanded higher “wages” for the workers (payments that are made directly to the regime and which the workers themselves probably never see anyway).

The announcement comes as a shock to many South Koreans who, to my unending astonishment, really believed that Kumgang was the thin end of the wedge that would pry the DMZ open. Assuming North Korea goes through with this threat — and I really, really hope it does — history should instead remember that Kumgang delayed reunification and the liberation of 23 million wretched North Koreans by providing Kim Jong Il “tens of millions a year in hard cash” to sustain his misrule. The South Korean government forced the Hyundai Asan Corporation to continue with Kumgang long after it all hopes ended that the project would be profitable. Instead, South Korea’s leftist governments subsidized Hyundai Asan, which subsidized Kim Jong Il, even as U.S. taxpayers were subsidizing South Korea’s defense. Hardly anyone ever talked about how Kim Jong Il spent the money, except for the economist Marcus Noland and the investigative journalist Bertil Lintner:

In an October 2000 conference paper, Marcus Noland of the Washington-based Institute for International Economics asserted that money owed by South Korea’s Hyundai company to the North Korean government had gone “into the Macau bank account of ‘Bureau 39’.” The payments were for permission to operate tourist trips to Mt. Kumgang in the North. An official at Hyundai Asan, which organizes the tours, says only that royalties are paid to North Korea through Korea Exchange Bank’s branches in unspecified third countries.

The Congressional Research Service–which provides United States congressmen with background briefings–reported on March 5 last year that “the U.S. military command and the Central Intelligence Agency reportedly believe that North Korea is using for military purposes the large cash payments, over $400 million since 1998, that the Hyundai Corporation has to pay for the right to operate [the] tourist project.”

Noland, an expert on Korean affairs, asserted in his paper that this income was used for “regime maintenance,” or to strengthen the government and its armed forces. Bankers and Western security officials believe this is also the case with money earned from the operations in Europe and the Middle East.

I still remember when travel agencies sold overpriced Kumgang tours to gullible South Korean tourists with gauzy pictures of pretty scenery, yes, but also with politics. The novelty had mostly worn off by 2006, when it was evident that Kumgang had turned out to be something very unlike the gentle warming Sunshine of the fable on which Kim Dae Jung‘s gambled and lost Korea’s best chance at reunification. Tourists were kept within hermetically sealed boundaries that prevented any contact with the North Korean people. They were guided at watched at all times. Photography was tightly restricted. The rocks and cliffs were defiled and engraved with hymns to Kim Il Sung. The resort staff — aside from the waitresses in two restaurants, and plenty soldiers and “minders” — were ethnic Koreans from China, not North Koreans. Tourists who were “too noisy” were forced to write confessions. Those who committed thoughtcrimes were arrested, and the first one caught straying outside the permitted boundaries was shot dead. Kim Jong Il’s refusal to answer for the murder of South Korean housewife Park Wang-Ja that doomed Kumgang. Characteristically, North Korea simply cannot see what the big deal is. So they shot someone. So what? There could hardly be a better illustration of what really makes the North and South Korean systems irreconcilable, and Kumgang such a generous contribution to the propagation of evil … except for the obsence “reunions” at Kumgang that North Korea occasionally allowed between South Korean abductees and their families. If South Koreans expected Kumgang to change the North’s system, North Korea’s treatment of the South Korean press there suggested that the converse was closer to the truth.

What is not to like at the end of this folly? That South Korea’s most vapid, stupid, and morally retarded will weep for it? That its equally vapid admirers in the State Department and the think tanks will be discredited once more? That Kim Jong Il will lose a major source of funding for weapons, yachts, or luxury cars for his generals? That those who willfully financed the world’s most oppressive tyranny will now lose hundreds of millions of dollars? That other potential investors in North Korea — I mean those who have evolved intellectually beyond the use of eating utensils and a fascination with small, shiny objects; after all, stupidity is inexhaustible — might be deterred from sinking more money into a dying tyranny? That the American soldiers still anachronistically defending a country that long ago ceased to appreciate their sacrifices will face an enemy whose equipment might just be in a poorer state of maintenance? That the Götterdämmerung for which millions of North Koreans no doubt secretly long, or the unification that South Koreans increasingly fear, might come a few years sooner?

On the contrary, all of these are reasons to be delighted. And so it always ends for those who try to make deals with Kim Jong Il.

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Of Fools and Their Money, Part 2: Orascom Deal Starts to Sour

That Orascom’s big new investment in North Korea would fail has always been predictable, but it was always incomprehensible how Orascom’s business model centered around introducing the one thing with the most potential to destabilize the regime’s hold on power: a mobile phone network.

Not surprisingly, Orascom and the North Korean regime are already at odds over Orascom’s plan to pass out 100,000 free phones to generate a base of bill-paying subscribers. Instead, the regime is selling them for $235 apiece, a price very few North Koreans can afford. This is lethal for Orascom’s potential to make a profit on its phone venture, which was — again, incomprehensibly — the lynchpin of Orascom’s North Korea investment strategy. Orascom apparently made all its other investments in the North, including its reconstruction of the Ryugyong Hotel, conditional on the phone concession:

Although North Korea reluctantly launched the mobile phone services, it has devised mechanisms to still maintain the stability of the regime. For this reason, North Korea provided Orascom with a frequency different from what is now used in China and South Korea. This allows North Korean officials to ferret out illegal mobile phone usage in the border areas. In addition, North Korea charges high prices for registration for the service, and has announced that it cannot guarantee full service until it equips itself with complete and fully functioning wiretapping system. For this reason, Orascom’s telecommunication business in North Korea may face bleak future. [Open Radio for N. Korea]

Why did Orascom think it would be allowed to introduce a mobile phone network into the world’s most isolated society, where owning a mobile phone is punishable by a prison term? (Recall the rumors that the 2004 Ryongchon explosion was an assassination attempt on Kim Jong Il, triggered by a mobile phone.) Possibly because of its long-term relationship with North Korea in a series of joint ventures in construction and banking. Yet those investments were different in very important ways: they were carried out outside North Korea, and did not require a relaxation of the regime’s control over the movement of information between its subjects.

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Of Fools and Their Money

When North Korea first started ejecting South Koreans from Kaesong, I noted that the Kaesong project was already economically marginal and falling well short of its ambitious goals. I also predicted that the North Korean move would be fatal to the project’s efforts to coax cowardly capital into a potential war zone controlled by the world’s most opaque, least capital-friendly regime. That prediction has already come true. The leftist Hankyoreh is reporting that South Korean companies are fleeing for the exits:

According to a report, seven companies have canceled their contracts to build facilities at Gaeseong complex since October. Three of the seven bought space at a site reserved for machinery and metal cooperatives in June, and were in the process of constructing or designing factories. The report was submitted to Rep. Chun Jung-bae of the main opposition Democratic Party by the division supporting the Gaeseong Industrial Complex at the Ministry of Unification.

Two companies are in situations unrelated to the breakdown in inter-Korean relations, one had a fire last summer and another is suffering from losses incurred as a result of investment in KIKO, “knock-in knock-out” currency options trading.

The remaining five companies were believed to have abandoned their plans because of the deterioration in inter-Korean relations. An official at one of the five companies, which canceled its investment contract in December, said, “Although the economic crisis was one of the reasons why we canceled the contract, the main reason was that business prospects have darkened due to strained inter-Korean ties. Other companies that moved to (the Gaeseong complex) at the same time also decided to cancel their contracts for the same reason. [The Hankyoreh]

The companies canceling their contracts have forfeited substantial initial investments to cut their losses. The Hanky also reports that seven more companies canceled their Kaesong contracts last year, before the North’s most recent tantrum.

Lesson learned? Not exactly. Foreign investment in North Korea is an endlessly revolving door of suckers and scoundrels, each of whom eventually leaves a fortune behind in the Worker’s Paradise: Yang Bin, David Chang and Robert Torricelli, Chung Mong-Hun, Nigel Cowie, the Emperor Casino, and Kumgang/Hyundai Asan. An even more significant example, if confirmed, would be China’s massive investment in the Rajin port. Small businesses, like tour companies, can persist as long as they serve the regime’s interests and have little impact on society, but big investments seem to have almost a perfect failure rate.

That’s why I’m confident that Egypt’s Orascom will eventually meet the same fate. Consider, after all, the ostensible reasons why Orascom is investing in North Korea — to build a hotel that can’t be filled and with a rumored erectile dysfunction problem, and a cell phone network that hardly anyone will be allowed to use. To put it mildly, there are some serious limitations on both potential markets, and it’s reasonable to assume that tensions between North Korea and Earth are unlikely to ease soon, meaning that policymakers may start to rethink financial sanctions. More troubling, however, is the news that Orascom will open up a bank in North Korea, whose cash flow has been restricted ever since that unpleasantness with Banco Delta Asia. It’s hard to imagine how one can run a bank in North Korea with enough transparency to stay out of the way of U.S. money laundering laws, chiefly 18 U.S.C. 1956 and 1957, and U.N. Resolutions 1695 and 1718, but there seems to be a limitless supply of people willing to gamble on tepid enforcement of those provisions.

My advice to Orascom would be to invest in some state-of-the-art counterfeit detection machines and get some good advice about “due diligence.”

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Kaesong Death Watch

Alternate title: Of fools and their money.

North Korea has led a delegation of Chinese investors on a tour of the Kaesong Industrial Complex. Would the North Koreans really confiscate Kaesong as they did Kumgang and hand it over to the Chinese? I sure as hell wish they would. Nothing would please me more than such an ineradicable deterrent to foreign investment, such a thorough repudiation of the Sunshine Policy, and the closure of Kaesong’s money pipe to Pyongyang.

Alas, we can dream, but this is a completely empty threat. First, given Kaesong’s geography and North Korea’s horrible infrastructure, Kaesong only makes business sense with the full cooperation of both Koreas. South Korea had to invest millions in building roads, railroads, and power lines across the short distance from their side of the DMZ to Kaesong. Does anyone think the Chinese will (a) rebuild the infrastructure links from Kaesong all the way to Dandong, or (b) rely on North Korea’s existing infrastructure? My banner tells you about all you need to know about the North Korean electricity grid. If any Chinese investment project in North Korea makes any sense at all, it’s Rajin, and for all its potential promise and favorable geography, Rajin has gone no where. Furthermore, without the illogical gravity of ethnic appeal, the Chinese will apply simple logic to the Kaesong model, and the wisest among them will conclude that it will never work without a fundamental change in the North Korean government’s view of foreign investment. Finally, at a time when China’s real growth rates have flattened out, its economy is running on stimulus money, and unemployment is uncomfortably high, does China really have to go abroad in search of cheap foreign labor?

You can surround a tar pit with tea candles and incense and tell the customers it’s really a spa, but how many countries are really going to dip more than one toe into a tar pit like North Korea these days?

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