Russia forgives DPRK debt – transact in rubles (2006-present)

UPDATE 10 (2014-10-20): According to RIA Novosti, the Russians and North Koreans have conducted their first transaction in rubles:

The first transactions in rubles between Russia and North Korea were carried out in October, Russia’s Far East Development Ministry said in a statement Monday.

“Russia and the DPRK [Democratic People’s Republic of Korea] have begun carrying out transactions in rubles in the framework of agreements, reached during the 6th meeting of the intergovernmental committee on commercial-economic relations between the Russian Federation and the DPRK, headed by the Minister for the Development of the Russian Far East Alexander Galushka,” the statement posted on ministry’s website reads.

In May, Russian President Vladimir Putin signed a law ratifying an agreement on settlement of the DPRK’s debt to Russia. Russia agreed to write off 90 percent of the North Korea’s debt to the former Soviet Union, which amounted to $10.94 billion as of September 17, 2012. The remaining 10 percent ($1.09 billion) is to be paid off in 40 installments over the next 20 years.

No word yet on what was purchased.

Here is coverage in Xinhua:

Russia has started interbank transactions with the Democratic People’s Republic of Korea (DPRK) in the Russian ruble, the Ministry for Far East Development said Monday.

The business went ahead according to an agreement the two sides reached earlier this year. The ministry’s press service said in a statement that the first transactions have already been completed.

The move is part of the efforts aimed at the ambitious goal of boosting annual bilateral trade to 1 billion U.S. dollars by 2020, the Itar-Tass news agency quoted the ministry as saying.

“Moscow and Pyongyang signed a deal on May 5 about writing off all DPRK debts to Russia, which has facilitated the launch of ruble-based accounting between the two countries,” Far East Development Minister Alexander Galushka said.

Under the deal, Russia has written off 90 percent of the DPRK’s debt and restructured the remaining 1.09 billion dollars to be paid off in the next 20 years.

Amid worsening ties with the West, Russia has turned to Asian countries for more economic and political cooperation.

Prime Minister Dmitry Medvedev said in July that Russia should push for a breakthrough in economic relations with the Asia-Pacific region.

UPDATE 9 (2014-6-5): RIA Novosti reports that Russia and the DPRK will begin negotiating bilateral trade contracts in rubles rather than dollars. According to the article:

Russia and North Korea are preparing to launch bilateral transactions in the Russian ruble this month to boost trade turnover between the two nations to $1 billion by 2020, Russia’s Far East Development Minister said Thursday.

In May 2014, Moscow agreed to write off 10.94 billion of Pyongyang’s Soviet debt with the remaining 1.09 billion to be paid in installments over the next 20 years.

“The decision to write off DPRK’s debt to Russia has opened up the way to resolve a wide range of issues that was previously blocked by this debt load. Ruble transactions between Russia and DPRK will begin as early as this month, with first bank accounts to be set up in Russian banks,” Far East’s Development Minister Alexander Galushko said.

North Korea currently uses euros as the official currency in settling overseas trade deals.

The announcement came on the heels of a meeting in Russia’s far eastern city of Vladivostok where Galushko took part in the sixth annual session of the Russian-Korean standing commission, an intergovernmental agency on trade, economic and scientific cooperation.

The minister added that Russia hoped to ramp up its trade turnover with Korea to $1 billion, up from the current $112 million. “It is not much,” he pointed out, saying that a greater degree of Korea’s commitment to the existing bilateral projects could whip up sales to $400-500 million.

UPDATE 8 (2014-4-19): Russia has reportedly [formally] written of the DPRK’s debt. According to Reuters:

The State Duma lower house on Friday ratified a 2012 agreement to write off the bulk of North Korea’s debt. It said the total debt stood at $10.96 billion as of Sept. 17, 2012.

The rest of the debt, $1.09 billion, would be redeemed during the next 20 years, to be paid in equal instalments every six months. The outstanding debt owed by North Korea will be managed by Russia’s state development bank, Vnesheconombank.

Russia’s Deputy Finance Minister Sergei Storchak told Russian media that the money could be used to fund mutual projects in North Korea, including a proposed gas pipeline and a railway to South Korea.

More at the Voice of Russia.

UPDATE 7 (2014-3-20): Russian Duma committee recommends write off $10 b DPRK debt. According to Voice of Russia:

Committee of the State Duma for the budget and taxes has issued a recommendation to the MPs to ratify an agreement between the Russian government and the Democratic People’s Republic of Korea on settling the North Korea’s debt to Russia on the Soviet-era loans issued to that country.

The document that was submitted for ratification by the Russian government features the agreements reached at the negotiations that lasted almost twenty years and took account of the special features of financial, political and economic relations between Russia and North Korea.

Debt settlement embraces all the categories of reciprocal financial claims and obligations of the former USSR and the DPRK, with the precise parameters registered on the date when the agreement is signed.

Overall amount of the DPRK’s financial obligations to Russia stood at an equivalent of $ 10.96 billion as of September 17, 2012.

“This amount is rather conventional in many ways – not only because of the exchange rate but also due to the interest rates accumulated over a huge period or, in other words, a non-return of the loans because many of them were issued in the 1980’s,” Sergei Storchak, a deputy minister of finance said at the session.

“We applied a standard pattern in which we write off 90% of the debts amount and 10% is left over,” he said. “We agreed to utilize this 10% for financing the joint projects implemented on the North Korean territory.”

There projects are related to the energy sector, healthcare, and the country’s foodstuff security.

“Frankly speaking, we hope we’ll be able to attain agreement in the course of future joint work on allotting plots of land for construction of a gas pipeline on the DPRK territory,” Storchak said adding that Russia’s major producer and exporter of natural gas, OAO Gazprom, continues eyeing a possible integration in the Korean market of gas.

For this purpose, it will need some land acquisitions and “a part of the debt can be utilized for this purpose,” Storchak said.

Russian government officials say settlement of debts on the loans issued by the former USSR with the observance of conditions coordinated with Pyongyang pursues three objectives.

In the first place, it removes the problem of North Korea’s outstanding debt to the Russian Federation that was an irritating factor for bilateral relations for quite some time.

Secondly, the agreements that have been reached enable Russia to exert noticeable influence on the DPRK’s social and economic development through projects in healthcare, education, and the energy sector, since Russia will have a say in the decisions on their financing.

Thirdly, owing to the presence of big enough debt claims, Russia will have an opportunity to take part in multilateral talks on settling the North Korean debts in the format of the Paris Club of Sovereign Debtors and to influence the terms of debt repayments in Pyongyang’s interests.

You can read more about the gas pipeline here.

UPDATE 6 (2012-9-18): RIA Novosti reports that the DPRK and Russia have signed a debt deal.  According to the article:

Russia and North Korea have signed a deal on settlement of the DPRK’s $11 billion debts to Russia, Deputy Finance Minister Sergei Storchak told Prime news agency on Tuesday.

“It was signed yesterday,” Storchak said.

Russia and North Korea have been negotiating over the issue of Pyongyang’s debt to Russia, left over from the Soviet era, for the last four years without result. Russia did not rule out writing off part of the debt and either rescheduling the remainder or offsetting it against investment.

Storchak previously said it was understood a debt settlement would involve a conversion of the ruble debt into dollars, giving an initial discount of around 90 percent of the debt.

The remaining debt of over $1 billion would be used in a “debt for aid exchange” plan to assist with joint education, health and energy projects in North Korea.

Here is coverage of the deal in KCNA:

Agreement on Debt Settlement between DPRK, Russia Signed

Pyongyang, September 18 (KCNA) — An agreement on settling the debt incurred by the loan provided by the former Soviet Union which the DPRK owes to the Russian Federation was signed between the governments of the two countries in Moscow on Monday.

The agreement was inked by Vice-Minister of Finance Ki Kwang Ho from the DPRK side and Vice-Minister of Finance Sergey Storchak from the Russian side.

The conclusion of the agreement on the debt settlement would create fresh conditions for boosting the relations of economic cooperation between the two countries in the future.

The Wall Street Journal offers some additional details on the deal:

Deputy Finance Minister Sergei Storchak told Interfax that the “restructuring conditions are standard in connection with our membership in the Paris Club, with a conversion into U.S. dollars at an appropriate discounted rate with the balance of the debt to be used for a debt-for-aid program.”

The $11 billion figure was reached by using the Soviet conversion rate of 67 kopecks to the dollar, the ministry said, which at today’s exchange rate would make the debt just $238 million. Russia has reached similar agreements over the years with many former Soviet-clients in larger part because there was little chance the loans would ever be repaid.

Russian and North Korea had resumed negotiations over the decades-old debt in August 2011, following a meeting between former Russian President Dmitry Medvedev and the late-North Korean leader Kim Jong Il. During the meeting, the two sides agreed to pursue a pipeline project that would send Russian gas to South Korea via North Korea.

The following June, a preliminary agreement was reached and the finance ministry submitted a proposal to the Russian government for approval, Interfax reported.

Experts say the settlement of the long-stalled debt talks represented a change in political will on both sides and would help spur along the pipeline project as well as other railway and electricity deals.

“The decision on a settlement of debt is a significant step as it removes the obstacles for cooperation. Now credits can be granted,” said Alexander Vorontsov, an expert on North Korea at the Russian Academy of Sciences.

Read more below:

UPDATE 5 (2012-6-29):  Georgy Toloraya writes for the Nautilus Institute:

The Russian Ministry of Finance in June announced that the Russian-North Korean negotiations for the repayment of North Korean debts had resulted in the signing of a joint protocol in Pyongyang (to be approved by the government), which will finalize negotiations that have continued for many years. This is a major milestone for bilateral relations, but not for any possible breakthrough in economic reforms or political settlement. The North Korean debt, which stood at about 5 billion rubles by the time its servicing was stopped in 1990 when the bilateral payments were transferred to hard currency base, now totals (with accrued interest) about US$11 billion. This debt was accumulated as a result of loans the Soviet Union granted the DPRK for industrial projects and military supplies, as well as to finance the trade imbalance.

After the break-up of the USSR, North Koreans at first declined to recognize the debt, explaining that was a sort of Soviet investment into “protecting the Eastern flank of the Socialist system”. Only in the course of President Putin’s first meeting with Kim Jong Il in 2000 was the problem acknowledged. Later negotiations resulted in Russia proposing much of the same terms as was the case with other former socialist countries, which were required to make minimal payments. However, the DPRK’s position was not to pay a penny in cash. Russian negotiators were not insistent either, realizing that little to no money or meaningful resources could be gotten from the impoverished neighbor. Furthermore, the settlement of the debt would give the DPRK a formal right to ask for new credits (such as the construction of nuclear power plant in accordance with a still valid agreement, which was signed in 1985).The political effect of such a solution was not taken into much account in the Finance ministry ofthe Russian government.

The negotiations were given a new boost after Kim Jong Il and President Medvedev’s meeting in August 2011. It was a painfully slow process, but finally a solution was found. Likely, it has something to do with North Korea’s desire to establish an alternative to their increasing economic and political dependence on China, by making a welcome gesture to Russia. According to reports, 90% of the debt is to be written off (this is more favorable terms than in was the case with some other debtor countries), while the remainder will be transferred to the Russian Vnesheconom bank account, which is opened at the North Korean Bank of Foreign Trade, to be used for the projects that will promote the development of education, health care systems and the energy industry. It should be noted, that although such projects would be technically considered to be Russian direct investment, in fact, North Korea will play a decisive role in determining these projects and their sequence – while the actual financing would depend on availability of North Korean money in the bank.

However, while this is an important measure to remove the roadblock impeding Russia-North Korean economic relations, I do not expect any significant moves soon afterwards, given the economic crisis in the DPRK and the reluctance of Russian investors to venture into a country sanctioned by international rules. Had this agreement been reached earlier while the 6-party talks were underway, Russia could have received considerable diplomatic benefits by demonstrating through example how to successfully engage North Korea. Now it is only a part of the efforts by Moscow to normalize relations with Pyongyang and to have more leverage in Korean affairs in the wake of the break-up of multilateral diplomatic process. The absence of the debt problem will of course make the financial arrangements for future projects, like gas pipeline construction, easier, but the fate of such projects now depends on Seoul’s position, not on Pyongyang’s credit rating.

Here is commentary from Stephan Haggard:

According to Toloraya “90% of the debt is to be written off (this is more favorable terms than in was the case with some other debtor countries), while the remainder will be transferred to the Russian Vnesheconom bank account, which is opened at the North Korean Bank of Foreign Trade, to be used for the projects that will promote the development of education, health care systems and the energy industry.”

But wait a second. We are highly doubtful that the North Koreans are going to put rubles into this account; that would imply a real resource transfer. That means that the scheme is going to depend on Pyongyang depositing North Korean won into this account, which it can simply print and which could well go to “finance” projects that the North Koreans planned to do anyway. This arrangement would make the entire transaction another fiction—like the debt to South Korea—and imply both a 100% as opposed to 90% write-off, virtually no substantive gains for North Korea—because it hasn’t been paying in any case–and no Russian leverage over projects.

However, it could be that some resolution of the issue is required for Russia to issue any new credits, which have been scant since 1990 when Soviet/Russian trade with North Korea collapsed. Even if the debt resolution provides a legal basis for a resumption of Russian lending, we would urge our colleagues in Moscow to watch their wallets. We see little that suggests that the North Koreans are in a position or mood to repay anything they borrow. Any deals that Russia strikes—on oil pipelines (see our posts here) or railroad lines—better be designed to reap a return even if the North Koreans contribute little and even demand costly rents, such as “transit fees” for the pipeline.

UPDATE 4 (2012-6-24): The AFP reports that a deal is set to be reached this month. According to the article:

The Russian government is this month set to agree a framework to settle North Korea’s $11 billion debt to Moscow dating back to Soviet times, a deputy minister said.

Russia’s Deputy Finance Minister Sergei Storchak made a rare visit by a top Russian official to Pyongyang from May 31 to June 2 to discuss the settling of the outstanding debt.

“There now needs to be an internal (Russian government) agreement and I think we will already submit a draft this month so that the government can confirm the results of the accords,” the finance ministry website quoted him as saying.

Storchak did not give precise details on the nature of the debt settlement.

The Izvestia newspaper reported last year that Russia would write off 90 percent of the debt and that the other 10 percent would be used on joint development projects in North Korea.

In a statement on the sidelines of the Saint Petersburg economic forum, Storchak did confirm that part of the settlement would involve investment in energy, health and education projects in the isolated Stalinist state.

North Korea’s poverty makes paying back the full sum unrealistic and analysts have expected Moscow to allow the most favourable terms so that the issue does not impede joint cooperation.

The debt was discussed in August last year at a rare summit in the Siberian city of Ulan-Ude between North Korea’s late leader Kim Jong-Il and Russia’s former president Dmitry Medvedev.

Until recently, the talks on the issue seemed deadlocked with Moscow insisting Pyongyang needed to acknowledge that its owes the money to Russia as the successor of the Soviet Union

But Moscow is keen to pursue several projects with its neighbour, including a trans-Korean railroad, the construction of an electricity line and a pipeline carrying Russian gas to South Korea via the North.

You can read more about the pipeline here.

Read the full story here:
Russia to agree N. Korea debt settlement: official
AFP
2012-6-24

UPDATE 3 (2011-9-15): Now the level of debt has risen from US$8 b to US$11 b. Russia again claims it will write it off once a mutually beneficial deal is reached with the DPRK. According to the Moscow Times:

Russia will write off North Korea’s $11 billion debt, Izvestia reported on Wednesday, citing a source close to the Finance Ministry.

Russia has proposed a scheme under which 90 percent of the debt — some of it Soviet-era — will be written off, and the remaining 10 percent will be invested in joint projects in North Korea. Pyongyang has given its preliminary consent to the proposal.

The source gave two reasons for the move: First, nothing can be recovered from North Korea because it is insolvent. Second, the debt is obstructing efforts to establish economic ties.

“The same problem has been resolved with almost all debtors. We have written off part of Vietnam’s debt, converted part of it into investment, and the remaining part is being repaid in goods and services,” said Alexander Fedorovsky, executive secretary of the Institute of World Economy’s Center for Asia Pacific Studies.

The Finance Ministry has not confirmed the report.

UPDATE 2 (2010-12-2): It has been nearly four years since talk of a Russia debt forgiveness plan was floated. No deal, however, appears to have been reached. Whats worse (for the DPRK), the US$8 billion debt appears to have swollen to US$10 billion.  According to the Moscow Times:

Cuba and North Korea owe Russia a combined $37 billion, more than half of all foreign assets claimed by the government, according to the preliminary prospectus for the country’s first sale of ruble eurobonds.

Cuba’s debt to Russia is $27 billion, while North Korea’s is $10 billion, the document shows.

Russia’s “external financial assets,” including other countries’ liabilities, stood at $62.8 billion on June 30, according to the marketing materials.

Read the full story here:
Cuba, N. Korea Owe $37Bln
Moscow Times
2010-12-1

UPDATE 1 (2007-1-5): An agreement is close, but has not been finalized. According to the AFP:

Russia has agreed in principle to write off up to 80 percent of some eight billion dollars owed by North Korea, a South Korean newspaper report has said.

The Chosun [Ilbo] quoted diplomatic sources in Moscow as saying Russian Deputy Finance Minister Sergei Storchak and his North Korean counterpart Kim Yong-Gil reached the agreement in December.

“They have agreed to finish negotiations on this issue before March,” the source said.

Finance officials from the two countries met last month for talks on the debt. Storchak had previously said he expected Russia to write off much of the debt but that the final amount would depend on Pyongyang’s ability to pay.

A South Korean foreign ministry official said he believes no agreement has yet been reached in the talks.

North Korea borrowed 3.8 billion roubles from its ally the Soviet Union since the 1960s to build power plants.

Russia’s Vneshtorgbank and North Korea’s Trade Bank agreed to re-estimate the debt at eight billion dollars including interest, the daily said.

“Russia backed down from its earlier position that it won’t continue eocnomic cooperation unless the North repays all its debt, in order to persaude it to take part in trilateral economic cooperation involving Russia and South Korea and return to the six-party nuclear talks,” it quoted a diplomat as saying.

The three-year-long negotiations aimed at scrapping North Korea’s nuclear programmes resumed in December for the first time in 13 months but they ended without setting a date for the next round.

Read the full story here:
Russia to write off 80% of North Korea’s debts: report
AFP
2007-1-5

ORIGINAL POST (2006-11-30): The Russian Foreign Ministry is preparing to forgive a large fraction of its US$8 billion claim on the DPRK. According to RIA Novosti:

Russia’s Finance Ministry said Wednesday it plans to launch talks in a few weeks on writing off a major portion of North Korea’s debt.

Deputy Finance Minister Sergei Storchak said the country’s debt to Russia was estimated at $8 billion.

“I believe it will be a large write-off,” Storchak said, responding to a question on whether Russia will forgive 80-90% of North Korea’s debt.

Russia is not doing this out of a Bono/Sachs inspired DPRK economic development plan.  They are clearly getting something for it.  Only last month, Russia announced it was renovating rail lines between itself and the DPRK:

The idea was to connect the South Korean port of Pusan with western Europe, by way of North Korea and then on to the 10,000- kilometer (6,200-mile) breadth of Russia. The route may become a major transportation line, challenging maritime routes through the Suez Canal by cutting the travel time in half and trimming costs by up to 75 percent.

What better way to pay for the railway line than with money the seller already owes you–particularly if you never planned on collecting that money in the first place? It is pretty close to getting something for nothing!

Share

An affiliate of 38 North