- By Thomas E. RicksThomas E. Ricks covered the U.S. military from 1991 to 2008 for the Wall Street Journal and then the Washington Post. He can be reached at firstname.lastname@example.org.
By Yonho Kim
Best Defense guest columnist
The new U.N. resolution contains the toughest sanctions so far on North Korea, which promise to put significant economic pressure on the regime, especially because of the prohibition on importing coal and iron ore from North Korea. Those account for nearly half the North’s exports to China.
But with the falling prices of coal and iron ore in recent years, North Korea has been developing other hard currency sources, including labor export, tourism, and its own population. Labor export and tourism, again, mostly relying on China, were not included in the new U.N. Security Council resolution, although Beijing would take administrative measures against them at least temporarily if it determines the time is right to send a stronger message to Pyongyang.
A new source of money for the cash-strapped Pyongyang government has been the cell phone market. It has around three million subscribers, more than 10 percent of the country’s population. The government’s annual profits are estimated $200 million to $400 million so far.
North Korea prohibits Orascom, the Egyptian telecom company with a 75 percent stake in the joint venture, from repatriating its dividends, which would resulted in a massive outflow of hard currency. Koryolink has cash deposits equivalent to as much as $653 million, at the official exchange rate, as of the end of June of last year, and the operating income in the first nine months of last year reached $170 million. However, the Pyongyang authorities have been demanding that Orascom reinvest its profits in the North, effectively confiscating Orascom’s share of profits. The regime cannot tolerate an outflow of more than $600 million when its exports to China plummeted by around $300 million in 2015 and the shutdown of the Kaesong Industrial Complex earlier this year cut off an annual inflow of $100 million.
Last year Orascom was offered the chance to convert its North Korean earnings at the unfavorable black market rate, which would have put the Egyptian company’s June cash deposit at around $30 million as opposed to $658 million. If accepted, the deal would have forced Orascom to repatriate only seven percent of its total investments of $400 million, including the funds spent in fixing up the 105-story Ryugyong hotel, in North Korea since 2008.
In addition, North Korea breached the agreement that granted Orascom the exclusive rights to operate the mobile network until the end of 2015. I am told that the rival carrier, Byol, wholly owned by the government, has secured around one million subscribers since it was introduced in October 2013. The government has indicated that it intends to merge Koryolink with Byol without giving Orascom any management control. Although there is a rumor that Orascom is considering filing suit against its North Korean partner, the Egyptians would have no choice but to give up their assets in North Korea at the end of the day.
The new U.N. sanctions have further increased the risk of investing in North Korea, an impoverished country that desperately needs foreign investments. However, as far as mobile telecommunication is concerned, Pyongyang seems not to be interested in foreign direct investment success stories, but in extortion of technology and investments. Whether that trick will continue to succeed remains to be seen.
Yonho Kim is Senior Researcher of the U.S.-Korea Institute at the Johns Hopkins School of Advanced International Studies (SAIS) and manages projects on the North Korean political economy. He is the author of Cell Phones in North Korea: Has North Korea Entered the Telecommunications Revolution? Prior to joining USKI, he was a Senior Reporter for Voice of America’s Korea Service, where he covered the North Korean economy, North Korea’s illicit activities, and economic sanctions against North Korea. He holds a B.A. and M.A. in International Relations from Seoul National University and an M.A. in International Relations and International Economics from Johns Hopkins SAIS.
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