North Korean Economy Watch

This morning the International Herald Tribune published an interesting AP story on Air Koryo, North Korea’s state airline.

As has been mentioned before, Air Koryo recently began upgrading its fleet–but guess who will seemingly be on the first flight? 

The airline also has taken delivery of its first new jet in years. South Korea’s Yonhap news agency, quoting diplomatic sources in China, reported Thursday that North Korea’s reclusive leader Kim Jong Il was likely to fly to Vietnam and China on the new plane next week.

Kim is widely believed to shun air travel. His previous trips abroad by luxurious special train were shrouded in secrecy and reports speculating on his destinations beforehand were not always accurate.

And although the economy at large is not doing so well, Air Koryo business is brisk. 

“The golden days are now[.]  They’re busier than ever,” says Nick Bonner of Koryo Tours. (paragraph edited)

In 1998, his Koryo Tours — which despite being similarly named for an ancient Korean dynasty is unrelated to the airline — escorted just 98 tourists to North Korea. The number doubled to 200 in 2006 and last year jumped to a still minuscule 1,100. Some of his customers also get into the country by train, a much longer trip.

Bonner said a roundtrip ticket on Air Koryo between Beijing and Pyongyang costs 2,550 Chinese yuan (US$365; €230) for economy and 4,340 yuan (US$621; €390) for business class.

What are Air Koryo’s most recent routes:

Air Koryo now has just three regularly scheduled international routes. Domestic service is said to be virtually nonexistent.

It flies roundtrip three times a week between Pyongyang and Beijing and twice a week to the northeastern Chinese city of Shenyang, an important source of trade for North Korea.

The other is return service once a week to Vladivostok. A flight to Khabarovsk, another city in the Russian Far East, stopped in 2005. The airline also had flew to Bangkok and Macau in recent years.

About the fleet upgrade: 

Perhaps illustrative of Air Koryo’s improving fortunes, in December it acquired a twin-engine Tu-204-300 jet manufactured by Russia’s OAO Tupolev, adding to its fleet of other Tupolev, Antonov and Ilyushin jets and turboprops.

Tupolev mentions the deal on its Web site, though did not disclose financial terms when asked.

A non-North Korean with intimate knowledge of the airline, who refused to be identified, confirmed the deal, adding North Korean pilots were receiving training in Russia with the craft set to begin operations at the end of April.

Although the article insinuates that economics are largely behind the fleet upgrade, a little nudging by China certainly did not hurt.  China gave Air Koryo a deadline to meet Beijing safety standards.  But despite China’s concern for air safety, Air Koryo still has one of the best records in the business:

Though concerns about safety have been raised — Air Koryo is banned from flying in the European Union — the carrier has apparently had just one major accident, a crash in West Africa in 1983 when the airline was known under a different name.

The plane, an Ilyushin 62 carrying 23 people, was en route to Conakry, the capital of Guinea, on an “international non-scheduled passenger” flight, when it went down in the Fouta Djall mountains, according to the Aviation Safety Network Web site. All aboard perished.

Air Koryo made its first flight to South Korea in August of 2000 to ferry 100 separated family members for temporary reunions with long-lost relatives in the South. The airline has made occasional flights to South Korea for special purposes as relations have warmed in recent years.

The article does not mention the other (minor) mishap in 2006:

On August 15, 2006 aircraft from Air Koryo (Tupolev 154B-2) on an international scheduled passenger flight from Beijing, China (Beijing Capital Airport) to Pyongyang, North Korea (Sunan International Airport) experienced a runway mishap (exited runway) during landing rollout after landing in bad weather at Sunan International Airport. No injuries were reported and damage to plane was minor. (Wikipedia)

Read the full article here:
North Korea’s quirky Air Koryo survives and, increasingly, appears to thrive
International Herald Tribune (AP)
4/18/2008

From the Donga Ilbo:

A black Benz with the red license plate of “087” passed by quickly. 087 is a number used exclusively for the sedans of North Korean diplomats. It was easy to tell that the North Korean embassy located on this street recently purchased the luxurious sedan.

“The North Korean embassy has been full of life since the latter half of 2006 because of the increased number of North Korean workers sent to Russia, diversified businesses and growing efforts to secure energy supplies,“ said North Korean defectors that the Dong-A Ilbo report team met in Moscow.

North Korean workers will construct the next APEC forum venue:

In order to prepare for the APEC, the Primorsky regional government (on the North Korean border) plans to issue work permits to 12,000 North Korean workers in 2008, four times higher than the number of those last year. A foreign national, who has hired North Korean workers, said, “North Korean senior officials are lobbying fiercely in order to increase the quota for laborers. They even arrange free tours of North Korea for Russian government officials.”

North Korea companies revived:

Recently, North Korean companies, such as Daedong River, Neungra, Baekdu and Goonpyo, have established their offices in many parts of Russia.

A 39-year-old North Korean defector who has stayed in Russia for 12 years said, “I believe, out of the 49 Russian provinces, North Korean firms have established their offices in about 30 provinces. Some 90 percent of them are responsible for overseeing North Korean workers.”

Joint ventures between Russia and North Korea, which went into hibernation after the United States froze North Korea’s account at Macau’s Banco Delta Asia in 2005, have recently resumed their activities. “Joint companies, which were active in the early 1990s, such as Dongbang Seafood and Far East Marine Transportation, have resumed their businesses,” said one Korean-Russian residing in Nakhodka.

Wages and Taxes:

“North Korean companies, which are spread across Russia, have been collecting about $400 to 500 from each North Korean worker every month. It is then used as high ranking officials’ business expenses,” said a 46-year-old North Korean defector.

“The discontent of workers is growing because high ranking officials dine out at fancy restaurants and their wives purchase expensive clothes with money earned by them,” added the defector.

(Uncle Sam is the only other government I know of that also taxes the income its citizens earn outside of its territory)

The story also makes a big deal out of the fact that the North Koreans pay huge bribes to do business in Russia, but who doesn’t?

Big players, who deliver a large sum of bribes to Russians, have also recently emerged. A captain of a North Korea freight ship was caught March 12 on site while shipping 100 tons of crude oil without reporting to customs at the Slavyanka shipyard, southern Vladivostok. It was found that the captain gave $45,000 to the president of the crude oil storage company as a kickback.

Read the full sotry here:
N.Korea’s Businesses Thriving in Russia
Donga Ilbo
4/4/2008

It appears that the DPRK and Russia have inked a deal on reconstruction of the Kashan-Raijin railway line.  It is not quite the “Great Game,” but it does involve the Russians getting access to a port they can use year-round.

Excerpts from the media piece:

A delegation from the Russian Railways Company held talks with the North Korean railway and commerce ministries as well as officials from other departments on renovating the 55-km Khasan-Rajin railway and the Rajin port, the report said.

The two sides reached agreement to start the renovation work at an early date, the report said.

The Khasan-Rajin railway links Russia’s Khasan border settlement to the North Korea’s Rajin port.

Due to different rail gauges of the two countries, the reconstruction requires the laying of new railway tracks, rebuilding of tunnels and bridges, and upgrading of the automatic signal systems.

The handling capacity of the Rajin port, a major harbour in the northeastern part of North Korea, will also be expanded after the reconstruction.

Discussion of the broader strategic concerns can be found here, here, and here. 

The full article can be found here (h/t DPRK Studies):
North Korea, Russia reach agreement on Khasan-Rajin railway
NewKerala.com
3/16/2008

Dr. Lankov publishes some great information on the relationship between the early DPRK state and the Soviet Union…

[F]rom the very start the land reform program in North Korea was planned by the Soviet military authorities, and Kim Il-sung simply signed the documents, which had been prepared for him by the Russian officers.

This fact is well-known, since Russian papers on the land reform issue were declassified and published in South Korea almost a decade ago.

and… 

[E]ven a cursory look through the available documents clearly indicates: in 1945-1950, the North Korean regime operated under the complete control of the Soviet supervisors. Who drafted the above-mentioned land reform law? The Soviet advisers. Who edited and, after some deliberation, confirmed the North Korean Constitution? Stalin himself. Who arrested all the major opponents of the emerging Communist regime? The Soviet military police. Where were they sent to do their time? To prison camps in Siberia, of course!

The available papers leave no doubt that even the relatively mundane actions of the North Korean government needed approval from Moscow. The Soviet Politburo, the supreme council of the state, approved the agenda of the North Korean rubber-stamping parliament and even “gave permission” to stage a parade in 1948. The much-trumpeted conference of the politicians from the North and South in the spring of 1948 was another Soviet idea, even if the leftist historians now love to depict it as yet another expression of Pyongyang’s will to negotiate based on its alleged national feelings. The most important speeches to be delivered by the North Korean leaders had to be pre-read and approved in the Soviet Embassy.

My favorite story in this regard happened in December 1946, when the first elections for the North were being prepared. On Dec. 16, the Soviet Colonel-General Terentii Shtykov discussed the composition of the North Korean proto-parliament with two other Soviet generals. The generals (no Koreans were present) decided that the Assembly would consist of 231 members. They did not forget to distribute the places among the various parties, decided how many women would become members, and the social composition of the legislature. If we have a look at the actual composition of the Assembly, we can see that these instructions were followed with only minor deviations.

Read the full story here:
Southern Biases About North Korea
Korea Times
Andrei Lankov
3/9/2008

A couple of days ago, we had an interesting exchange in the comments that I want to make sure readers have an opportiunity to see:
———————–

Werner Koidl Says: 
 
In that Asia Times report Dr. Petrov wrote:
“… Last year the Russian auto plant KamAZ opened its first assembly line in North Korea, specializing in the production of medium-size trucks named “Taebaeksan-96″. …”

I would be interested in more details about that KAMAZ truck assembly line in North Korea ! Where ?, joint venture ?, size ?
———————–

Leonid Petrov Says: 
 
Concerning the “Taebaeksan 96″ truck assembling plant, the KamAZ set it up last year (2007 or Juche 96) in the town of Pyeongseong. The terms of this deal with NK were really “friendly” and last year KamAZ was having no or very little profit. The production volume last year was very limited (45 or 48 trucks). However, it’s just the beginning of such cooperation.

There is one technician-representative from KamAZ who manages the assembling process. He stays in Pot’onggang HTL and commutes to Pyeongseong. Many North Korean drivers and technicians seem to be technically ignorant (i.e. not knowing how to change the engine oil, etc.), so they need a new technological culture to be introduced. Russians train them well and the North Koreans are grateful.
———————–

Gag Halfrunt Says:

Now that explains the brochure for the Taebaeksan 96 I’d noticed on the Korean Friendship Association’s exports page. I was wondering how anyone could be making money from sticking badges on KamAZes and trying to sell them on. In any case, the export potential for the Taebaeksan 96 must be close to zero, since anyone outside the DPRK who wants a KamAZ can buy one assembled by KamAZ itself.

Trying to drum up interest in the DPRK as an investment destination, the KFA say, “All business made directly with the government, state-owned companies. No middle agents.” This is amusing, because, on the Pyeonghwa car brochure on the KFA website, they’ve sneakily deleted Pyeonghwa’s own contact details and replaced them with the KFA’s email and web addresses. I think this qualifies them a “middle agent” standing between Pyeonghwa and any potential export customers…
———————–

Werner Koidl Says:
 
The link “brochure for the Taebaeksan 96″ given by Gag Halfrunt seems to indicate that the KamAZ Taebaeksan-96 is assembled in a joint venture with Ryongwang [Ryongbong] Trading Company of North Korea. Ryongwang Trading is also the joint venture partner of Pyeonghwa Motors (Unification Church) to assemble the “Whiparam” in Nampo. And Ryongwang Trading company is also business partner of “Kohas” company from Switzerland. And because of its connections to Ryongwang this Swiss company got in troubles with the US administration.

Writing in today’s Asia Times, Dr. Leonid Petrov analyses the complexity of Russia, Rok, DPRK, and Chinese relations:

Russia and North Korea:

Territorial claims, in one form or another, involve almost all countries adjacent in this region with the exception of Russia and Korea. The Joint Russian Federation-DPRK Commission for the Demarcation of State Borders has recently completed its work by documenting and marking the 17-kilometer frontier. This strip of uninhabited and swampy land in the mouth of the Tumannaya (Tuman-gang) River plays an exceptionally important geopolitical role. It not only provides the two countries with land access to each other, but also prevents Chinese access to the East Sea (Sea of Japan).

China and North Korea: 

Here, some 50km north of the small port that forms the core of North’s Rajin-Seonbong Special Economic Zone, the interests of Russia and China are now at stake. Russia is rapidly repairing the railroad track, and China (in a similarly speedy manner) is constructing a new automobile highway, both leading from their respective borders to the port of Rajin. Russia, investing at least 1.75 billion rubles (US$72 million) into this project, seeks to strongly connect Rajin (and the rest of northern Korea) to its Trans-Siberian Railroad. China, in turn, hopes to divert the growing cargo traffic to its own territory, offering the efficient network of railroads for delivery of South Korean and Japanese goods to Central Asian and European markets. What position will the government of North Korea take in this clash of ambitions?

Russia and South Korea (energy and trade):

In 2007, the volume of the export of “black gold” from Russia to South Korea reached 38.13 million barrels (2.7 times more than in the previous year). The relative proximity of the Russian oil and gas fields is an attractive factor for Korean companies who actively search for alternatives to Middle East oil suppliers. This year South Korea will for the first time start importing natural gas from Russia. The expected volume of delivery during 2008 is 1.5 million tons (or 5.1% of South Korea’s annual demand).

and

Trade relations between Russia and Korea are steadily growing. According to customs statistics, last year Russia recorded the sharpest increase of South Korean imports (56.2% more than in 2006). Due to the inflow of “petro-dollars” the new class of nouveaux riches in Russia began actively buying Korean automobiles, cell phones, television sets and LCD monitors. South Korea exported to Russia goods worth US$8.1 billion (including $3.296 billion of automobiles, $859 million of mobile phone equipment, motor vehicles and spare parts worth $659 million). As for trade with North Korea, in 2006 Russia occupied third place after China and South Korea and absorbed 9% of the total $3.18 billion spent by the North on imports.

More on Russia/South Korea energy talk here. 

The whole article deserves reading here:
Russia lays new tracks in Korean ties
Asia Times
Leonid Petrov
3/5/2008

UPDATE: Dr. Petrov made some interesting comments that deserve highlighting:

The BBC report is full of mistakes. The name of the ship was “Lidia Demesh”. On board were 23 members of crew and 1 passenger. After being arrested the ship was escorted to the port of Kimchaek.

The situation was resolved quickly thanks to the Russian Consular General, E.Val’kovich, who personally went to Kimchaek and sorted things out. Most Russian diplomats posted to DPRK are fluent in Korean and exempt from travel restrictions. So, no traditional Hawaiian symbol of respect is needed. 

ORIGINAL POST: The BBC reported last week that the North Koreans pulled a surprise ’Pueblo’ on the Russians.

The Lida Demesh, carrying a consignment of cars from Japan, was heading for the Russian port of Vladivostok when it was stopped by patrol near Cape Musudan.

An armed group boarded the ship and ordered the captain to change course and go to a North Korean port [Chongjin],” he told the Russian NTV network.

Mr Yeroshkin said the centre had been told the ship’s 25 crew-members were fine and that there had been no threat to their lives. (BBC)

Strangely, this was not the first time this has happened… 

A similar incident in 2005 took 15 days to resolve through diplomatic channels. (BBC)

Fortunately for the crew, the situation did not last that long.

A Russian cargo ship released by North Korean authorities on Wednesday has arrived in the Far East port of Vladivostok.

Captain Yury Buzanov said on returning to Russia that he was forced to enter North Korean waters to avoid a shipwreck due to a heavy storm.

“To save the crew I decided to enter North Korean waters because the waves in the Sea of Japan were three to four meters high with winds of 25 meters per second. In such stormy conditions, the cargo could have shifted in an instant causing the ship to lurch and sink,” the captain said. (Novosti)

No word if they ever used the traditional Hawaiian symbol of respect.

The full stories can be found here:
North Korea Detains Russian Ships
BBC
2/23/2008

Russian ship arrives home after seizure by North Korea
Novosti
2/28/2008

Speculation time…

As mentioned before China and Russia seem to be competing for access to the DPRK’s Raijin port.  I do not know why this is suddenly a story since Raijin has ostensibly been open for business for years.  However, it appears now that the Russians and Chinese seem to think that the North Koreans are finally ready to make some money. 

What the Chinese and Russians are offering, and what exaclty each wants vis-a-vis the other, is not readily known.  Is it exclusive control of Raijin Port, just a controlling interest, or even just guaranteed access, or something as innocuous as discounted taxes?

The South Koreans see Raijin as a cheap alternative to rebuilding North Korea’s aging railway system along its east coast.  South Korea could ship goods to Raijin and hand them over to the Russians for prompt transportation to European markets. 

The World Tribune today offered a bit more information of what the Russians are offering:

Farther north along the North Korean border, the port city of Rajin will soon start receiving electricity it badly needs from the Inter RAO UES Company of Russia.

“We have no idea what is going on higher up there,” said a Korean-Chinese businessman from Yenben, “but it certainly looks like China and Russia are trying to win Pyongyang to their sides, like the old days.”

But don’t count China out too quickly-not only do they have a larger border with the DPRK, and greater numbers, they also have ethnic Koreans with family still inside the DPRK:

“Judging from the fact that the two-way tourism traffic is heavily in favor of Chinese travelers, it is expected more Chinese people will have a chance to peek into ordinary people’s lives at the other side of the bridge,” said a Yenben government official.

The two sides will designate travel companies to handle pedestrian tourists in their respective countries and visas will be granted within 24 hours, according to the announcement. Officials in Tumen said the city would help build reception facilities in Namyang for the tourists.

The full article can be found here:
China and Russia competing for North Korean favor along borders
World Tribune (H/T DPRK Studies)
2/1/2008

In October, the Korea Economic Institute published a presentation of North Korean economic data assembled by the Bank of Korea.  Basic stats below:

• GDP: -1.1% in 2006 (+3.8% in 2005)-Due to decrease in agriculture output. 
• Services are the largest component of the economy (34%)
• Trade volume (exports + imports) approximately US$3 billion
• 2005 trading partners in order: China, South Korea, Thailand, Russia, Japan, Singapore

See the full report here: northkorea.ppt

The AFP reports today that the Russians are in North Korea to discuss upgrading the 55km railway from Raijin to the Russian border. What goes unmentioned in the story is that the Russians have been seeking access to a port that does not freeze up in the winter for as long as anyone can remember. How are the Russians seeking to solidify their interest in Raijin:

Russian delegation in NKorea to discuss rail project
AFP
1/27/2008

A Russian railway spokesman told AFP last week a preliminary agreement had been reached with North Korea on renovating the railway section, while North Korea had yet to respond to Russia’s proposal to build a cargo terminal in Rajin.

Reconstruction of North Korea’s railways would cost about 2.5 billion dollars, according to Russian estimates.

South Korea also wants the railways upgraded, but the article does not mention if they are offering contributions:

South Korea sees the port project as an efficient alternative to renovating dilapidated rail networks running the length of North Korea and linking them to the Russian railway.

Also unmentioned in the story is China’s interest in securing access to Raijin:

Beijing also has its eye on the North Korean port, which it envisions as part of its grand design to build a transport network that stretches from the Indian Ocean to the North Pacific.

“Najin Port is near the Jilin area and China’s own ports in the area have already reached their full capacity,” a government official said yesterday.

Beijing has recently notified Pyongyang that it is willing to spend $1 billion to develop port facilities, build railroads connecting the port to China and improve existing infrastructure such as highways, the official said.

In a report published earlier this year, Cho Myung-chul, a researcher at the Korea Institute for International Economic Policy, predicted that China would use investments in the North’s ports and railroads to extend its own infrastructure for export and import purposes. China has made similar investments in Burma and Bangladesh, among others.