ORIGINAL POST (2015-11-20): Martyn Williams broke the story here.
The first problem is that Orascom could not repatriate its profits:
Orascom’s efforts to get its profits out of North Korea have been unsuccessful, partially because of international sanctions imposed on the country but mainly by the government’s refusal to let the money go.
To transfer money out of North Korea, Orascom needs permission from the government and it hasn’t been granted, despite it being a partner in the joint venture.
The government hasn’t acted because it can’t afford to.
The profits are held in North Korean won, but the currency isn’t traded internationally and the government’s official rate is set artificially high, at 100 won to the U.S. dollar. At that rate, Orascon’s holding at the end of last year was worth $585 million.
But at the black market exchange rate, which is effectively the real value of the currency in North Korea, the cash is worth only $7.2 million. And therein lies the problem. The government can’t afford to pay the money at the official rate, and it can’t be seen to officially recognize the black market rate. So the two sides have spent months locked in talks about what to do.
Secondly, the DPRK government launched a second cell phone network to compete with KoryoLink, and efforts to merge the companies have been successful:
The issue came to light in an auditor’s report in June, and a month later Orascom dropped a bombshell: It said the North Korean government — supposedly its close partner — had set up a second carrier to compete with Koryolink.
With its options limited, Orascom entered merger talks to combine Koryolink with the new carrier. The North Korean government has agreed to the move in principle, but so far nothing has happened.
What’s more, the North Korean government has apparently proposed that it be the majority partner in any new venture that’s formed.
That led to a dramatic statement from Orascom when it reported its financial results Monday — “in the group management’s view, control over Koryolink’s activities was lost.”
Sawiris appears to hold out hope, but he might be out of moves.
“We are very proud of the success of our operation ‘Koryolink’,” he said in a statement. “We have around 3 million people today carrying our phones in the DPRK. We are still hopeful that we will be able to resolve all pending issues to continue this successful journey.”
Anna Fifield also followed up in the Washington Post and reported on the name of the new KoryoLink competitor:
This comes after Orascom discovered that North Korea was starting a competitor to Koryolink called Byol, and then began discussions about merging it with Koryolink, thus presumably extracting even more money from Orascom.
Byol (별) translates to English as “Star”.
Here are screen shots of the relevant sections in the report:
A small correction needs to be added to the OTMT report, the Central Bank does not set the official exchange rate. That is set by the Foreign Trade Bank.
As Marcus Noland and I have pointed out, North Korea needs a big FDI win to inspire more large-scale foreign investment and modernize its investment regulatory framework, but debacles like this, Xiyang, and the KIC (referring here to the fact that it was too entangled in political risk to be a reliable investment without official subsidies and guarantees) reinforce the view that the DPRK is still too risky to become an attractive investment hub–and this excludes additional problems owing to the country’s weapons programs and human rights abuses.