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, , 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.”