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North Korea: The Country That Never Pays You Back


"You don't get back to international credit markets by showing utter contempt for creditors," say experts.


Editor's Note: This is a companion piece to Risky Business: Investing in Cuba is More Than Just a Financial Gamble.

A few years back, Felix Abt, a Swiss entrepreneur doing business in North Korea, discovered one of the unintended consequences of investing in "frontier markets."

In an email to Curtis Melvin, a PhD candidate in economics at George Mason University and the man behind the highly regarded North Korean Economy Watch blog, Abt wrote:

A European life insurance company cancelled my life insurance because I am a dangerous person living in a dangerous country. Credit card organisations cancel credit cards for such persons in such countries, health insurance companies come up with other reservations and limitations and the latest organisation that has just expelled me is LinkedIn with a very curious explanation.

A message from LinkedIn (LNKD) sent to Abt explained that "per the terms of our User Agreement, use of LinkedIn services, including our software, is subject to export and re-export control laws and regulations. … As such, and as a matter of corporate policy, we do not allow member accounts or access to our site from Cuba, Iran, North Korea, Sudan, or Syria."

With a miniscule business community operating entirely under the auspices of the state (and Web access restricted to all but a handful of resident foreigners and the most trusted members of the party elite), one might wonder why a professional networking site would be of any use in North Korea. But the country's dilapidated command economy has created a situation so dire, it has even forced overseas diplomatic staff to fend for themselves financially (in Moscow, embassy staff were caught running a gambling casino to keep the lights on, and in Berlin, I was told by a North Korean diplomat that they had rented out two-thirds of the building to a bar and a youth hostel.)

Described as "an economic basket case if only it could afford the basket," North Korea has gotten rather creative in its quest for hard currency, as the country, Curtis Melvin tells me, "has a terrible reputation with its creditors," exemplified by missing a $5.83 million loan payment to South Korea just last Thursday.

From South Korea's Chosun Ilbo:

Deafening silence from North Korea greeted the first repayment date on Thursday for loans given by the Kim Dae-jung and Roh Moo-hyun administrations. The Export-Import Bank of Korea faxed a notice to North Korea's Foreign Trade Bank on behalf of the South Korean government on May 4 informing them of the date of maturity and amount, but Pyongyang ignored it.

Stephen Haggard and Marcus Noland of the Petersen Institute for International Economics, widely considered to be the among the world's foremost North Korea watchers, have referred to "the spectacle of a whole new round of debt follies," and wonder why anyone imagined things would be different this time.

"We have good friends -- who will remain unnamed -- who argued with a straight face this was not aid to North Korea but only a financial transaction," they write. "The North Koreans were presumably either laughing out loud or scratching their heads at the fiction."

They contend North Korea "has a real issue," pointing out that "you don't get back to international credit markets by showing utter contempt for creditors."

North Korea's access to world equity markets is currently restricted by UN resolutions, not to mention its appalling credit history. However, the country that simply refuses to honor its debts was once able to offload its worthless paper on unwitting buyers.

So How Does North Korea Pay the Bills?

Believe it or not, there is such thing as a North Korean government bond. No, really.

An in-depth analysis of North Korea's external debts by Professor Yang Moon-soo of the University of North Korean Studies and published in the March, 2012 KDI Review of the North Korean Economy, explains that North Korea got itself into money trouble in the 1970s.

What did it, Yang says, were "massive imports of machinery and plant facilities from advanced economies, including Japan, France, West Germany and Britain, beginning in 1972. What was surprising was that trade with these capitalist nations were made with loans."

He continues:

North Korea's foreign debt problem was exposed for the first time in 1974. In July that year, the North failed to make an initial down payment for steel products from Japan and the shipment was suspended. As the news was reported, North Korea's other trading partners in Japan and Western Europe pressed Pyongyang for payment for their exports and some banks dispatched their representatives to Pyongyang to demand early settlement of its liabilities. To raise capital, the North issued bonds and obtained new loans but failed to elicit any significant support from the international financial community. Thus, in June 1975, North Korea began negotiating payment deferments with major creditor nations.

After reaching debt rescheduling agreements with Sweden, West Germany, France, Switzerland and Austria, Pyongyang simply strung them along until 1987, when they were finally declared to be in default (three years after they stopped paying Japan altogether, under the guise of "political reasons"). Ten years later, French bank BNP (now BNP Paribas, Paris Exchange: BNP.PA) repackaged the loans and offered them to investors. They now trade at pennies on the dollar and attract fresh interest whenever there is potentially market-moving news from the Korean peninsula -- the death of Kim Jong Il being one example.

"A lot of the domestic attention is going to be on the funeral, the transition, and securing the son's transition. That succession, which the regime has been planning for years, is likely (to be) completed in the next few months so nothing happens, but investors will be thinking what comes next," Stuart Culverhouse, chief economist at London's Exotix Ltd., told Reuters in December.

North Korean financial instruments, like all frontier assets, are not for everyone. First and foremost, Culverhouse said, they "tend to suffer from illiquidity."

"It is necessary to have quite a long investment horizon with something like this; sometimes the stories that are politically driven tend to be longer, event driven stories," he explains. "Trading can be thin and prices can vary; sometimes there might not even be a price. Offsetting that is the potential return, which can be, over time, quite significant."

In the meantime, North Korea is estimated to owe roughly $20 billion as of 2012, according to Seoul's Chosun Ilbo newspaper. And they're still bobbing and weaving with creditors. Russia has reportedly written off a portion of the $8 billion it is owed, Iran has been asked to accept a fleet of small submarines in exchange for debt forgiveness, and Pyongyang offered to ship about 40 tons of ginseng to the Czech government, which would have knocked 10% off the $10 million Communist-era loan still outstanding.

The Czechs didn't bite.

"We have been trying to convince them to send, for instance, a shipment of zinc, which is mined there. We would sell it ourselves," Tomas Zidek, deputy finance minister, told the MF Dnes newspaper.

With China tiring quickly of playing Pyongyang's rich uncle and a worn-out welcome with most of the rest of the world, North Korea will one day likely be forced to access the global capital markets again. But, in order to do that, it will have to make its existing creditors whole.

"Countries like North Korea tend to eventually reach an agreement with creditors, usually through institutions like the IMF, and they can finally resolve their debts," Culverhouse says.

Until then, the North Korean leadership has had to raise cash in a variety of other ways. And though North Korea's Civil Law Dictionary once called for the eradication of merchants because they "buy goods from producers at a low price and sell them to consumers at a high price by way of fraud, deceit and spoils," the state has had no choice but to sell themselves not necessarily to the highest bidder, but rather, to anyone simply willing to pay.


The state-run Mansudae Overseas Project Group of Companies "sends renowned artists abroad for the production of peculiar art objects," according to one Chinese source. "It has created a large number of monuments, panoramas and interior decorations of hotels and other service facilities, as well as decorative sculptures for parks in Zimbabwe, Togo, Benin, Egypt, Algeria, Ethiopia, Malaysia, and so on."

Mansudae has reportedly earned almost $200 million from its African projects since 2000, with the most well-known example being the African Renaissance Monument in Dakar.

"Only the North Koreans could build my statue," Senegalese President Abdoulaye Wade, told the Wall Street Journal in 2010.


Because they work cheap.

"I had no money," Wade said, pointing out that North Korea was willing to accept a parcel of government-owned land as payment -- which they immediately resold.

While the monument was roundly panned by art critics, the piece did have its fans -- former Libyan leader Moammar Gadhafi apparently sent Wade a letter asking where he could get one of his own.

Information Technology

"In an attempt to make a great leap forward, the government… seized upon the promotion of information technology as a strategic priority," wrote the Petersen Institute's Marcus Noland.

In fact, information technology has become a pillar of North Korea's attempt at joining the 21st century -- and the hermit kingdom's deep bench of programming talent has attracted outside investment.

"I understood that the North Korean IT industry had good potential because of their skilled software engineers, but due to the lack of communication it was almost impossible to work with them productively from outside," said Volker Eloesser, founder of Nosotek, a German firm which established a joint venture with Pyongyang's General Federation of Science and Technology. "So I took the next logical step and started a company here."

Difficult, to be sure, in a place where, according to one British citizen that has done business in the country, "(they) don't understand basic Western business concepts, like a contract or due diligence."

Managing a staff is also quite different in the DPRK. One guide says:

The working week in DPRK is slightly different than in other countries, mainly because office staff have to participate in several activities not related to their work. All workers and office staff have internal meetings on Mondays, collective work assignments on Fridays (in the fields or at construction sites), political study sessions on Saturdays, and a day off on Sunday. Business meetings should be planned on Tuesdays, Wednesdays, and Thursdays to get the best chances of effectively meeting the desired people.

Nosotek's website notes a few additional regulations with which clients need to be familiar:

  • Communication between the engineers and the customer will only take place by email or Nosotek's bug tracking server. Phone calls are not possible.
  • Chatting is only possible with members of Online Programming teams.
  • Emails exchange will only take place once per day, answers to questions will be giving on the following day, sometimes two days later.
  • The customer accepts that it might happen that email communication is interrupted for one or two days for technical or administrative reasons.
  • In case the customer sends political propaganda or agitation, Nosotek has the right to cancel the project without returning the prepaid fees.

It seems that North Korean workers are paid much like North Korea's creditors -- very, very little, if at all. Like Abdoulaye Wade, those that outsource to Nosotek are likely attracted to the prices; the company notes on its corporate site that "the DPRK has the lowest rates worldwide."

Lo and behold, things have gone relatively smoothly for Eloesser in North Korea.

"We are quite successful," he told the German edition of the Financial Times. "One time, we were even in the top ten in the App Store. Our customers do not want us to mention the name of our company or our employees' names on the product."

Nosotek has actually produced at least two iPhone (AAPL) games with North Korean labor -- The Big Lebowski Bowling and Men in Black: Alien Assault.


Not familiar with Computer Numerical Control? You obviously haven't been to North Korea lately.

Andray Abrahamian, Executive Director of Choson Exchange, a non-profit organization that conducts economic and business training in Pyongyang, describes CNC as being "pervasive and invaluable to modern production lines, yes, but ultimately a technology that usually rouses little emotion."

He continues:

Not so in the DPRK, where pretty much every citizen knows what it is, knows it is good for their country, and knows that it is cutting edge stuff.

For almost two years, citizens of North Korea have been exposed to a lengthy campaign extolling the virtues of CNC. For example, there have been repeated hour long broadcasts on North Korea's lone TV channel, giving pretty dry and technical explanations of how the machines cut, drill, and whatnot. The program would not fare well on a multi-channel television system.

More exciting means of promoting the technology exist, however. The pivot of these pop culture promotions is a popular song which bubbled up sometime late in 2009.

The song, called "Attain the Cutting Edge," is "available on karaoke machines nationwide" and the lyrics "include reminders that CNC is 'an example of self- reliance and strength' and that 'the people's pride is high…let's build a science-technology great power.'"

What's Doing Business There Really Like?

Though North Korea legalized foreign investment in 1984, investors were "put off by the country's poor roads, railroads, power systems and phone networks and by official interference in joint ventures' recruitment, dismissal and compensation of workers," according to a 2000 thesis by Pilho Park, a postgraduate student at the University of Wisconsin Law School in Madison.

Today, nothing seems to have changed.

"At least when the Chinese say, 'This is going to be an investment zone,' they put in electricity and phone lines and sewers," Paul French, author of Korea, The Paranoid Peninsula, told the BBC in February. "The North Koreans just take some fields and say, 'This is going to be an investment zone' and expect it to look like Chicago in a few years."

But, what's it really like on the ground? What does one discuss over soju and gaejangguk with Pyongyangites?

In 2003, Thomas J. Payne, an American business consultant in Asia, posted a series of questions and answers aimed at potential investors in North Korea.

Payne explained that, the North Koreans "need just about everything," and "on a small scale, there are lots of micro-opportunities."

"For example, over the past few decades, they have imported used Japanese and even American automobiles from China," he continued. "They love Cadillacs. They are in great need of auto parts, and especially windshields for certain models. They want consumer goods in small packs like raisins, almonds, peanuts, cookies, crackers, and chocolates. All of the items which are sold in the hotel shops are, or will be, in demand in the future, especially when and if the political system changes.

As for daily life, Payne offered the following advice:

I have found a safe topic which everyone is interested and admirable: Professional Wrestling. Evidently when the Dear Leader is not hitting holes in one on the golf course or writing his voluminous books of wisdom, he keeping abreast of the World Wrestling Federation and World Championship Wrestling. I heard that they even had a world congress on professional wrestling at one time. It is a nice way to break the ice to ask about their feelings for the Undertaker, or Jake the Snake. But, really, you must be very careful to stay out of trouble. Know that you are always being watched or followed.

It's true. No, not the part about always being followed and watched, though that is certainly the case. The wrestling. North Koreans apparently love it. In 1995, a massive spectacle featuring American and Japanese pro wrestlers was mounted at Pyongyang's May Day stadium in front of 320,000 people.

One US attendee was less than impressed with his hosts.

"No wonder we hate these motherf**kers," he muttered, after they "started rambling on about the moral superiority of North Korea, and how they could take out the United States or Japan any time they wanted."

It was the first -- and last -- time former heavyweight champ Muhammad Ali would visit Pyongyang.

Will Things Actually Change?

In April, 2011, a delegation of North Korean economic envoys spent two weeks touring companies that "represent main strands of the US economy."

The group visited Google (GOOG), Home Depot (HD), Bloomberg LP, Citigroup (C), Qualcomm (QCOM), Sempra Energy (SRE), Union Bank, and Universal Studios, as well as a mushroom farm, a seafood wholesaler, and the Port of Los Angeles, where they leaned about trade infrastructure.

Henry Rowen, co-director of Stanford's Program on Regions of Innovation and Entrepreneurship, director emeritus of the Shorenstein Asia-Pacific Research Center, and a Senior Fellow at the Hoover Institution who gave a presentation to the North Koreans, told Minyanville that at the time that he knew "very little about the group and its mission," though he added a caveat that, "My hunch is that it was less significant than you suggest."

Others pointed out (off the record, of course) that the trip was merely the latest in a long line of empty gestures made prior to asking for international aid or political concessions. It has been the country's modus operandi for years; in 2007, political economist Nicholas Eberstadt described the "North Korean economic approach" as one that "has always been to extract resources from outsiders."

"It's like what they say about champagne," he said. "In success, you feel like you deserve it; in failure, you need it."

Leonid Petrov, PhD, a lecturer in Korean studies at the University of Sydney's School of Languages and Cultures, is anything but optimistic.

In an opinion piece carried in the June 22 Asia Times, Petrov wrote:

The North Korean leadership genuinely wants to modernize the economy but does not want to change its social and political life. Pyongyang is constantly searching for shortcuts that could boost its dysfunctional economy without having to conduct systemic reform. The new leader, despite of his young age, is surrounded by conservative older family members and elites who have no visionary plan for developing the country. Setting up tiny special economic zones ("SEZs"), which would generate foreign exchange without bringing about any change to the rest of the country, is a preferable way forward. As a result of this half-hearted policy, ordinary North Koreans will eat and dress better; they might even own personal computers and mobile phones. But they will continue to live in the same paranoid state of fear and dependency on the Great Leader's decisions.

Indeed, the Chinese partners who will primarily be ultilizing those SEZs have been getting stiffed by North Korea too.

"Most of the time, you couldn't get the money back," trader Wang Xuming told the Beijing Economic Observer in April. "They would only give you tens of thousands if they owed you millions."

Wang, incredibly, decided to take his protest to the streets. Here's reporter Chen Yong (translated from the Chinese by Song Chunling):

Unable to recover his debts, Wang tried join up with some other traders and petition at the government office, but they were surrounded by soldiers before they could hang up the banners. Later, when their requests were translated, they were taken to a small room, where an officer treated them to tea and said politely that they weren't allowed to hang a banner because it would have a bad influence. The official said he hoped that they wouldn't petition again and that their problem would be handled by the government.

Wang was sent to the hotel a few days later, given $15,000 and asked to leave the country.

"In North Korea, when they're using every means to avoid the debt, there's nothing you can do but leave," he said.

More hopeful, if only in a more macro sense, is Dr. Siegfried Hecker, former director of Los Alamos National Laboratory (1986-97) and current co-director of Stanford's Center for International Security and Cooperation.

Hecker, who has been granted access to North Korea's Yongbyon nuclear complex, told an audience about an experience he had during a visit to Pyongyang last year.

As Hecker entered a subway station in the capital city, he encountered a young man "wearing a backwards baseball cap with a Nike (NKE) swoosh."

"When he gets to be 21 years old, they're gonna have a hard time keeping him down on the farm," Hecker said.

"Where there is 'swoosh,' there is hope."

And where there is hope, there are investors. Of course, if those investors fail to materialize, the North Koreans do have other options -- such as manufacturing bogus US currency so flawlessly, they are said to be better than the real article and have been dubbed "Supernotes."

From the Congressional Research Service:

Although Pyongyang denies complicity in any counterfeiting operation, at least $45 million in such Supernotes thought to be of North Korean origin have been detected in circulation, and estimates are that the country has earned from $15 to $25 million per year over several years from counterfeiting.

Surely something for boy leader Kim Jong Un to consider. Because, after all -- who needs to go out peddling bonds when you've got cash?

No positions in stocks mentioned.
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