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Foreign exchange and smuggling again prevalnet in North Korea

Friday, March 26th, 2010

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-03-22-1
3/22/2010

Foreign currency swaps and illegal trade are again prevalent in North Korea, despite recent currency reforms and bans on money exchanges.

Following last November’s currency reform, there has been a significant crackdown on the use of foreign currency and cross-border trade by individuals. However, reports indicate that North Korean traders continue to conduct business with outside entities, despite new regulations requiring them to remit profits through the Korean ‘Kwangson’ Bank. There has been a crack-down on unauthorized transactions, but it appears to have been ineffective.

The Korean Central Bank and Chinese People’s Bank established the Kwangson Bank in 2004 in Dandung as part of the North’s efforts to earn foreign capital. Even today, North Korean authorities rely on the Kwangson Bank to handle trade accounts, but most North Korean traders despise using the bank, and conduct most of their transactions privately, avoiding authorities. This is because the bank has a reputation for seizing the profits of private traders. The official decision to funnel foreign funds through the Kwangson Bank was part of the effort to crack down on smuggling, and was in conjunction with other currency reform efforts.

Economic reform attempts included crackdowns on illegal activity for a short time, but black market currency trade and smuggling has again become commonplace. Reform efforts were aimed at reducing unregulated and illegal trade by requiring transactions to be carried out through a government bank, but the costs associated with such a transaction further encouraged black market activity.

It also appears that currency exchange, banned as part of last year’s currency reform, is now again being allowed in order to ease rising prices and other detrimental side effects of the measures.

In North Korea, not only traders, but also average citizens are earning foreign capital through smuggling and other means. The latest reversal of policy to again allow currency exchange is seen as an attempt by authorities to sooth rising discontent within the masses.

In November of last year, North Korea implemented currency reforms and issued new notes, devaluing the currency by 100:1 and banning private holdings of foreign currency. This led North Koreans to lose faith in the value of their currency and sparked a drive on foreign monies. Now, the government appears to be implementing measures to underscore the value of the Won and to stave off inflation. Foreign visitors are allowed to again spend foreign currency and it appears that other restrictions are slowly being lifted.

Posted in Banking, Black markets, Central Bank, Finance, Fiscal & monetary policy, Foreign Trade Bank, General markets (FMR: Farmers Market), Korea Kwangson Banking Corp. | Comments Closed

Orascom 3G wrap up

Friday, December 19th, 2008

UPDATE: Here is an older paper by Stacey Banks which I have not read: North Korean Telecommunication: On Hold.

ORIGINAL POST: On Monday the Orascom 3G mobile network launched in North Korea. Just about everyone covered this story…so here are the highlights:

Telecommunications in North Korea: Has Orascom Made the Connection?
Working Paper: Marcus Noland

The topicality of the second paper, on the Egyptian firm Orascom’s role in North Korea’s telecommunications modernization, received a boost this week with the announcement in Pyongyang that Orascom was finally rolling out its cell phone service and creating a joint venture bank with a North Korean partner. The planned Orascom investments are large: if actualized, they would be the largest non-Chinese or non-South Korean investments in North Korea, and would exceed total private investment in the Kaesong Industrial Complex to date

Financial Times

Orascom is confident North Korea is opening up its economy and says it has been assured by the government that everyone will be allowed to buy a mobile. However, experts think that such a volte-face is highly unlikely and reckon only senior military and government officials will be allowed access, and then only to a closed network.

When asked how many people would ultimately use the service, Orascom’s chairman Naguib Sawiris said: “We have a modest target of 5 to 10 per cent of the population.” The population is about 23m. Mr Sawiris expects 50,000 subscriptions in the first three-to-six months.

Jim Hoare, Britain’s former chargé d’affaires to Pyongyang, says the new network is bound to have severe restrictions.

“It’s unlikely that a country that doesn’t allow you to have a radio unless it’s set to the state frequency will suddenly allow everyone to have mobile phones. It’s more credible that there will be a limited network for officials in Pyongyang and Nampo.”

Dong Yong-sung, chief of the economic security team at the Samsung Economic Research Institute in Seoul, believes another obstacle to ordinary North Koreans owning phones will be the cost. “As far as I know, mobile phone registration costs about $1,000,” he said, a sum equivalent to the average annual income.

(NKeconWatch: Others put the price at $700…and there are many problems with asserting that the DPRK’s per capita income is $1,000 per year.)

Bloomberg

The inauguration of Koryolink took place today in North Korea, Orascom Telecom said in an e-mailed statement. Orascom Telecom Chief Executive Officer and Chairman Sawiris attended the event, a company official said, requesting anonymity. The Cairo- based company got a 25-year license and exclusive access for four years in January. It plans to spend as much as $400 million on a high-speed network and the license for the first three years.

The North Korean venture is “in line with our strategy to penetrate countries with high population and low penetration by providing the first mobile telephony services,” Sawiris said in a statement earlier this year.

CHEO Technology JV Company, the North Korean unit that will operate under the Koryolink name, is 75 percent owned by Orascom Telecom and 25 percent by the state-owned Korea Post and Telecommunications Corporation.

The unit will see average revenue per user of $12 to $15 this year as Orascom Telecom targets three of the country’s biggest cities, according to company forecasts.

Koryolink has rolled out its so-called third-generation grid to initially cover Pyongyang, with a population of 2 million.

Orascom is counting on four potential markets in the Stalinist nation, according to a study by Marcus Noland of the Peterson Institute for International Economics.

The military and government officials are the top targets, followed by foreigners working for UN organizations and diplomats. The others are customers from South Korea, which has several economic projects with its neighbor, and local demand from rich North Koreans.

To protect its investment, Orascom “hedged its bet, committing only half of its investment at the outset and making additional investment conditional on its assessment of conditions going forward,” Noland said.

If the deal is threatened, Orascom may withdraw specialized equipment or technicians, reducing the value of the network to Pyongyang, Noland said in his study.

“Orascom may have spread the wealth informally, creating beneficiaries within the decision-making apparatus who would stand to lose if the agreement failed,” according to the study.

Bloomberg

Orascom Telecom, the Middle East’s biggest wireless company, opened Ora Bank in Pyongyang in the presence of Chairman and Chief Executive Officer Naguib Sawiris, a company official said on condition of anonymity. Ezzeldine Heikal, who is also head of Koryolink, Orascom’s North Korean mobile-phone network, was appointed president of the bank, the official said without providing further details.

“This is a big deal, especially as far as North Korea is concerned, because the current banking system is virtually non- existent,” Marcus Noland of the Peterson Institute for International Economics said in a telephone interview from Washington, D.C. “It’s a ground that others have feared to tread and is perhaps an endorsement for North Korea that says ‘we’re open for business.’”

Ora Bank is a joint venture between Orascom Telecom and North Korea’s state-owned Foreign Trade Bank, North Korea’s official news agency reported today. The director of North Korea’s central bank Kim Chon Gyun and Egypt’s ambassador to Pyongyang Ismail Abdelrahman Ghoneim Hussein, were also present at the opening ceremony, the news agency said.

Radio Free Asia

Chinese traders who regularly travel back and forth to North Korea said local residents showed little enthusiasm for the new service, which cost more than U.S. $900 to set up before the Ryongchun explosion.

North Korean defector Kim Kwang-jin, a senior researcher at the Institute for National Security Strategy in Seoul, said the fact that the government had once pulled the plug on North Korean cell phones meant that it could easily do so again.

“In the beginning, people will be hesitant, because a few years ago many of them made a big investment in cell phones. But service was suspended abruptly, so they are still very concerned that might happen again,” Kim said.

“People are also worried that the ability to pay such a high amount of money for a cell phone may raise a red flag and bring them under scrutiny by the North Korean authorities.”

Most foreigners are banned from using cell phones while in North Korea, although a network for government officials is believed to exist in the capital, Pyongyang.

(NKeconWatch: I personally saw elite North Koreans use mobile phones and even some western journalists in 2005.)

The Guardan

North Korea first experimented with mobile phones in 2002, but recalled the handsets 18 months later after a mysterious train explosion that killed an estimated 160 people. Some experts argue that officials feared the incident was an attempt to assassinate the regime’s “dear leader”, Kim Jong-il, and that mobile phones were involved.

BBC

Some reports suggest that handsets for the new network will cost around $700 each, putting them far beyond the reach of the vast majority of people in the impoverished country.

Choson Ilbo

Although the technology would enable users to send and receive text messages and video content, North Korean customers will only be allowed to speak over their phones.

BMI Political Risk Analysis, Dec 16, 2008 (h/t Oliver)

BMI View: North Korea has officially begun third-generation (3G) mobile phone services, thanks to Egypt’s Orascom Telecom (OT). However, the growth of the network could be limited by the regime’s fear that mobile phones will increase the scope for anti-regime activities.

North Korea has officially commenced third-generation (3G) mobile phone services, thanks to an investment by Egypt’s Orascom Telecom (OT). The firm’s initial target is 100,000 subscribers in three major cities, including Pyongyang, and it eventually hopes to develop a nation-wide network connecting North Korea’s 23mn citizens. OT has promised to invest US$400mn in network infrastructure over the next four years. It has signed a 25-year contract with the North Korean government, and owns 75% of their joint-venture (known as Korealink). OT’s exclusivity rights will last for four years. Orascom’s foray is something of a coup, given that North Korea’s communications network is so rudimentary (for further background see December 8 2008, Industry Trend Analysis – North Korea Prepares For Mobile Network Launch).

Why Pyongyang Fears Mobile Phones
North Korea launched a mobile phone service operated by a Thai subsidiary firm in 2002, but reversed course in 2004, apparently because of a devastating bomb blast on a train in Ryongchon in April of that year. Given that North Korean leader Kim Jong Il’s personal train had passed through the area only a few hours earlier, there was speculation that the explosion had been an assassination attempt, possibly triggered by mobile phone. Since then, only those living in areas close to the border with China have had access to mobile phones, thanks to the proximity of the Chinese network.

Aside from the notion of mobile phones as bomb triggers, they can also make it easier for citizens to communicate with one another. This would increase citizens’ ability to organise anti-government activities – such as protests or sabotage. For example, the popular uprising that led to the overthrow of Philippine president Joseph Estrada in 2001 was dubbed the ‘text message revolution’, because that is how the marches were announced and coordinated. Admittedly, the Philippines is a far more open society than North Korea, but the subversive aspect has not been lost on the regime.

Mobile phones would also make it easier for North Koreans to communicate with the outside world, and thus allow the real-time transmission of information or intelligence to foreign media or spy agencies, and vice versa. They would also allow the North Korean elite to communicate more efficiently, allowing dissident elements to plot against the regime.

Thus, even something as basic as mobile phones are seen as potentially regime threatening.

Mobile Service Difficult To Spread
Consequently, Orascom will surely find it difficult to spread its mobile service across the country. For a start, registration will be tightly watched. Secondly, the cost of the handsets, at several hundred dollars, will mean that only the political and moneyed elites will be able to afford mobiles. Of course, elements of the elite can ‘misuse’ their phones to arrange subversive actions if they deem it worthy, but it seems that the regime are counting on loyalty. Indeed, depending on the sophistication of their equipment, the regime will probably be able to snoop in on the elite’s conversations and movements, giving them an additional layer of security.

Read the full articles below:
Orascom eyes North Korean network
Financial Times
Christian Oliver
12/14/2008

Orascom Telecom’s Sawiris Signs North Korean Deal
Bloomberg
Tarek Al-Issawi
12/15/2008

Orascom Telecom of Egypt Opens Bank in North Korea
Bloomberg
Tarek Al-Issawi
12/16/2008

North Korea Brings Back Cell Phones
Radio Free Asia
Jung Young
12/16/2008

Secretive North Korea launches restricted mobile phone service
The Guardian
Tania Branigan
12/16/2008

N Korea launches 3G phone network
BBC
Steve Jackson
12/15/2008

N.Korea Restarts Cell Phone Service
Choson Ilbo
12/17/2008

Posted in Banking, Cell phones, Central Bank, Communications, Economic reform, Egypt, Finance, Foreign direct investment, Foreign Trade Bank, Joint Ventures, Ministry of Post and Telecommunications, Ora Bank, Orascom Telecom Holding, Uncategorized | 5 Comments »

Interview with Ken Frost, CFO, Phoenix Commerical Ventures

Monday, July 28th, 2008

Interview Blog, Germany
(click here for all their North Korea-related interviews)

“Phoenix Commercial Ventures Ltd is a venture capital company that offers investors business and investment opportunities in the DPRK” – Interview with Ken Frost (CFO of Phoenix)

Klaus-Martin Meyer: Mr. Frost, you are member of the Board of Phoenix Commercial Ventures Ltd, a company that offers investors business and investment opportunities in the Democratic People’s Republic of Korea (DPRK) otherwise known as North Korea. Would you mind introducing yourself and your company as well to our readers?

Ken Frost: Phoenix Commercial Ventures Ltd is a venture capital company that offers investors business and investment opportunities in the DPRK, enabling them to take advantage of the economic reforms that are taking place there.

Phoenix is owned and run by four experienced professionals, who are based in London, Paris and the DPRK. The Board has between them many years of international business experience, and an invaluable network of well placed contacts. Phoenix offers a unique service, by being able to offer direct access to the DPRK.

Phoenix Commercial Ventures Ltd specialises in project finance in the DPRK. As is well known, the business environment is difficult, and the company targets very specific investment projects; these are small enough to manage and have the capacity to generate foreign currency, either through export or import substitution.

Phoenix Commercial Ventures Ltd maintains an office in Pyongyang, almost the only European company to do so, and operates with the following specific aims:

• Identify commercially viable investment projects in the DPRK, on a case by case basis
• Identify reliable local partners for all forms of business in the DPRK, either trade or investment
• Seek overseas investment sources for such projects
• Minimise the risk in such projects, by taking responsibility for supervision of the local set-up procedures and management of the projects

The Board of Phoenix Commercial Ventures Ltd consists of nationals of the UK, France and the DPRK. The European flavour is enhanced by the fact that most of the counterparties and suppliers in the various projects are also European, and the DPRK government views Phoenix Commercial Ventures as a prime conduit for European business and investment in the DPRK.

One of the directors of Phoenix Commercial Ventures is also General Manager and CEO of the Daedong Credit Bank, the only western-invested foreign bank in the DPRK. Based in Pyongyang, this is a 70-30 joint venture between a UK financial management company based in Hong Kong and the Korea Daesong Bank, one of the main DPRK banks.

Phoenix Commercial Ventures is unique in having this connection with a reliable, locally based financial institution. The synergy benefits include a wider exposure to local business contacts in differing fields; as well as an additional degree of control, made possible by the fact that the various joint venture projects have to maintain their accounts with the bank.

We have a number of projects within DPRK, including two 50/50 joint ventures:

– Hana Electronics JVC, a consumer electronics company now ranked as one of the top three best performing joint ventures in DPRK, as assessed by the Ministry of Finance.

– Sinji JVC, whose main areas of operations are retail, software and bonded processing.

Full details about our company can be found on our website www.pcvltd.com

I am the CFO of Phoenix and am a chartered accountant with over twenty years international experience of FMCG industries, consumer electronics, rough diamond distribution and the Internet. I have worked in KPMG, Philips Electronics, De Beers and run my own Internet company. I am also a Scholar on Gerson Lehrman Group Councils.

In November 2007 I reached the finals of Accountant of the Year held by the Association of International Accountants at the President’s Awards Dinner 2007. This award is designed to recognise organisations’ accountancy stars.

In January 2007 I was awarded, based on recommendations from fellow members of the ICAEW, a New Year’s Honour by AccountingWeb. The award was for my services to the accountancy profession in opposing the merger of the ICAEW with other accountancy bodies.

In November 2006 I was awarded an honorary fellowship of the Institute of Professional Financial Managers (IPFM), for my services to the accountancy profession.

In January 2006 Accountancy Age placed me on their Financial Power List for 2006. I was 11th on their list of the top 50 of “The Ones To Watch”. The list identified the “most influential names to look out for” in the world of finance for 2006.

Klaus-Martin Meyer: We read on your website “offers investors business and investment opportunities in the Democratic People’s Republic of Korea (DPRK), enabling them to take advantage of the economic reforms that are taking place there.” Can you tell us what kind of opportunities this could be?

Ken Frost:There are three main areas of investment opportunities open to investors, which we can facilitate within the DPRK:

1 Small scale investments ($500K or less) yielding good levels of return (20% or more).

These investment opportunities are in local production (consumer goods, bonded processing, software etc) for domestic market consumption and export. These utilise the advantages that DPRK has over all the other countries in the region namely:

– 99% literacy
– skilled/disciplined/hard working workforce
– well educated workforce, many speak a good level of English
– lowest wage rates in the region

Phoenix has a number of opportunities that it can offer investors in this area; eg bonded processing, consumer manufacturing, clothing manufacturing and software development.

2 Natural resources

DPRK has proven abundant natural resources worth several trillion dollars; eg coal, gold, copper, titanium, lead, zinc, nephelite, nickel, magnesia, graphite etc.

The investment required would be of a higher order than the small scale investments above, $1M plus. The money would be used to bring existing mines back to production, by pumping out flood water and renewing worn out capital equipment.

Phoenix has, via its working relationship with CPEEC, a number or opportunities in the natural resource sector that it can offer genuine investors.

3 Infrastructure development

Clearly investment in infrastructure is the costliest form of investment. However, given the dilapidated state of the roads, railways, ports, electricity grid etc it is necessary if the economy is to be revived.

DPRK also has a keen interest in infrastructure development focussed on green/renewable energy areas.

Phoenix has on it books a profitable renewable energy project that would suit a serious, well financed and experienced green energy investor.

The DPRK is the final economic frontier and is a “green field” site. Its primary advantages are:

– Location (physical position between Russia, South Korea, China and in AP)
– Location (historical, all the major players now want to move forward)
– Location (resources, it has abundant rich resources both mineral and human capital – high literacy, well educated etc)

Klaus-Martin Meyer: What are the main differences between your company and a conventional venture capital company that is investing for example in internet our biotech companies?

Ken Frost: Companies such as those you mention are industry-specific, whereas ours is location-specific. Our company is relevant to people who might want to invest in the DPRK. We work in the DPRK and have a physical presence in the DPRK, other “conventional” venture capital companies do not.

Klaus-Martin Meyer: Are there any differences to other investment companies?

Ken Frost: We apply the same principles to potential investments as any other professional investment company, we look at:

– the risk
– the returns
– the quality of the local management
– the quality of the business plan
– the size of investment
– the share offered for that investment etc

We also pay very close attention to corporate governance issues such as; financial reporting, management structure and ethics etc. We have a code of conduct which can be seen on our website.

Phoenix Commercial Ventures Ltd is committed to being a responsible corporate citizen and to the pursuit of a sustainable future, both economic and social.

Phoenix Commercial Ventures Ltd adheres to three fundamental ethical principles:

– Integrity
– Competence
– Courtesy

To this end Phoenix Commercial Ventures Ltd has developed a Code of Conduct, which sets out to ensure that these principles are followed in its operations. The Code of Conduct governs Phoenix’s business decisions and actions. The Code applies equally to corporate actions, and to the behaviour of individual employees when conducting business on behalf of Phoenix.

We work very hard with our local management teams and business partners to ensure that international standards re reporting, corporate governance and ethics are understood and followed.

Klaus-Martin Meyer: What are your plans for the company’s future? How do you see Phoenix Commercial Ventures in five years time?

We see the coming period for Phoenix as that of being continued growth.

In our view there will be a major upswing in economic relations between the DPRK and other countries over the coming months/years. Phoenix Commercial Ventures is uniquely placed to take advantage of, and to respond to, that upswing.

We are one of the very few organisations to have made successful joint ventures in the DPRK. We are also one of the very few organisations to have people with many years’ experience, and cultural sensitivity, actually on the ground in Pyongyang. You cannot run a business by email!

Posted in Automobiles, Banking, Central Bank, Copper, Daedong Credit Bank, Daesong Group, Economic reform, Electricity, Energy, Environmental protection, Finance, Foreign direct investment, Gold, Hana Electronics Company, Joint Ventures, Light Industry, Manufacturing, Mining/Minerals, Phoenix Commerical Ventures, Railways, Sea shipping, Sini JVC, Transportation | Comments Closed

N. Korea, Switzerland try new bank program to help N.K.’s farmers

Monday, April 30th, 2007

Yonhap
4/30/2007

Years of efforts to cultivate North Korea’s mountainous farmland is beginning to yield results, and Swiss and Korean officials are testing a bank credit program for the farmers in the Asian country, a Swiss aid office said on Sunday.

North Korea is showing “many promising signs of changes in progress,” including the emergence of consumer markets that are now established as part of the country’s economic system, Adrian Schlapfer, assistant director-general of the Swiss Agency for Development and Cooperation (SDC), said on the agency’s Web site.

Schlapfer was comparing the current situation to that during his previous visit to Pyongyang four years ago.

“The farming land in which the starving people started to work back then is now recognized as providing scope for agricultural initiative,” he wrote.

“The SDC, together with North Korea’s Central Bank, is therefore in the process of testing a micro-credit program to encourage farmers to base their investment decisions on economic feasibility considerations — an innovation for North Korea,” he said.

But North Korea still suffers from food scarcity, and aid is still essential, he said.

The SDC, an agency of the Swiss Foreign Ministry, has maintained an office in Pyongyang since 1997, focusing on agricultural programs to improve food production and on supporting domestic reform. The Swiss government started providing humanitarian assistance to North Korea in 1995.

Schlapfer described North Korea as the most little-known and enigmatic partner of the SDC, and acknowledged there are constant doubts on whether Swiss engagement there will yield results.

“Are there any meaningful approaches for long-term development partnership in this country with its planned economy, backwardness and secretiveness? Given the context, is it at all possible to initiate change?” he asked.

Pyongyang is “not an easy partner,” he said. “The key values, priorities and methods of Switzerland’s development cooperation have to be repeatedly insisted upon.”

“However, the projects implemented over the past 12 years are encouraging,” Schlapfer added.

Posted in Agriculture, Banking, Central Bank, Finance, Switzerland | Comments Closed

Daedong fights U.S.-imposed sanctions on North Korea banks

Thursday, March 8th, 2007

International Herald Tribune
Donald Greenlees
3/8/2007

Last August, Colin McAskill, a British businessman, agreed to buy a small bank in North Korea. On the face of it, Daedong Credit Bank was not a brilliant investment.

The agreement that McAskill signed with the management of Daedong Credit at a hotel in Seoul came as the bank was caught in the grip of financial sanctions that had virtually cut off North Korea from the global financial system.

Financial institutions around the world were shunning any links to North Korean banks, making it almost impossible to transact business.

Daedong Credit was using couriers to carry cash in and out of the country in amounts as high as $2.6 million because it could not make electronic transfers to other banks.

Since September 2005, Daedong Credit had also been fighting to recover $7 million that had been frozen in a Macao bank as part of efforts by the United States to put a financial squeeze on North Korea over alleged illicit financial transactions. This was a big sum for Daedong Credit. When McAskill had examined the bank’s books, its total assets were just $10 million.

None of this has deterred him. He said during an interview in Hong Kong that he planned to execute the sale agreement within the next two weeks and take full control of the only foreign-managed bank in North Korea. The Hong Kong- based Koryo Asia, chaired by McAskill, will take control of the banking license and a 70 percent stake owned by British investors through a Virgin Islands company. The remaining 30 percent is held by the state-owned Daesong Bank. “I think it’s a magnificent deal,” McAskill said, although he would not disclose the purchase price. “The bank has been running for 12 years. It is trusted and it has been profitable since day one.”

Despite McAskill’s optimism, the future of Daedong Credit has been under a cloud since the imposition of the U.S.- orchestrated banking embargo on North Korea 18 months ago and the viability of the business remains precarious.

Even amid signs of a thaw in relations between Pyongyang and Washington, the start of a bilateral dialogue that began in New York on Monday and an agreement in six-nation talks in Beijing on Feb. 13 to start to denuclearize the Korean Peninsula, analysts say banks in North Korea will struggle to restore contacts with the global financial system.

The trigger for the financial embargo of North Korea was a declaration by the U.S. Treasury Department under section 311 of the Patriot Act that the Banco Delta Asia, based in Macao, was a “primary money laundering concern” because of its links to a number of North Korean banks, individuals and companies alleged to have engaged in product and currency counterfeiting, drug trafficking and weapons proliferation.

The U.S. and Macanese authorities began separate investigations into Banco Delta Asia and the bank was placed under Macao government supervision.

Along with about 50 North Korean banks, trading companies and individuals, Daedong Credit had its account frozen. The total amount put into “suspense accounts,” according to Banco Delta Asia, was about $25 million, with Daedong Credit accounting for the largest share. Since then, almost all foreign banks that had correspondent relations with Daedong Credit have severed contact for fear of being excluded from the U.S. financial system.

Jack Pritchard, president of the Korea Economic Institute in Washington, said it was unlikely that the United States would send an explicit signal to the financial community to resume trading with North Korea, regardless of whether Pyongyang starts to address concerns about its foreign financial transactions.

He said that although a portion of the frozen money was likely to be released soon, there would not be a “100 percent reversal” of the American stance on financial transactions with North Korea.

Daedong Credit is likely to be one of the first North Korean account holders in Banco Delta Asia to get its money back from the Macao Monetary Authority where it has been earning no interest.

In recent months, McAskill has circled the globe from his home in London acting under a mandate from Daedong Credit to persuade officials in Washington and Macao to release the account. At 66, McAskill has spent 28 years doing business with North Korea, including as a consultant to North Korean banks on debt negotiations and helping to operate North Korean foreign gold sales. He said that at no stage in his meetings with officials from either the U.S. or Macao governments had he seen any specific reason for freezing the Daedong Credit money or been told of any specific allegation about its origins.

McAskill has produced what he calls a “dossier of proof” to establish the identity of all the customers whose money is frozen and the sources of the money. Since it was founded by the failed Hong Kong finance group Peregrine in 1995, Daedong Credit has filled a valuable niche serving the foreign community in Pyongyang. It has about 200 customers among foreign-invested joint ventures, foreign relief organizations and foreign individuals, according to McAskill. The biggest single amount frozen in Macao is $2.6 million belonging to British American Tobacco, which owns a cigarette plant in North Korea.

“We irrefutably established that the money was legal,” McAskill said. “The U.S. Treasury have been going around the world saying to banks ‘close this account, close that account’ but not offering any proof of wrongdoing.” He said his due diligence of Daedong Credit had convinced him that it was a “fully legal, legitimate operation” that did not manage state accounts or had ever been connected to illicit practices.

One of the Treasury’s main allegations against Banco Delta Asia is that it facilitated the spread of counterfeit $100 bills. But McAskill said Daedong Credit had put $49 million into Banco Delta Asia in 2005 and all that money had been forwarded to HSBC for verification.

Only three of the $100 notes belonging to Daedong Credit were confiscated because they were “suspect,” he said.

McAskill has charged the Treasury with harassment after two correspondent banks — one in Vietnam and the other in Mongolia — informed Daedong Credit late last year that they would immediately close accounts because of pressure from the United States.

But it is likely to prove difficult to persuade banks, nervous about the effect on Banco Delta Asia of the long- running Treasury investigation, to take the risk of dealing with a North Korean counterpart, regardless of the pedigree of its shareholders and board.

Last week, at a meeting in Macao, McAskill was finally told by the head of a government-appointed committee supervising Banco Delta Asia, Herculano de Sousa, that it was likely that the money in Daedong Credit would be returned by the end of March.

In the meeting, McAskill told de Sousa that once the funds were freed, Daedong Credit intended to leave the money in Banco Delta Asia and resume operating its old account.

But Banco Delta Asia has informed the U.S. Treasury that as part of its cleanup both the administrative committee and the shareholders were adamant that they no longer would do business with any North Korea entities. In doing so, the bank hopes to avoid the United States making good on a threat to ban Banco Delta Asia from having any correspondent relationships with U.S. banks.

Still, McAskill insisted that Daedong Credit has not broken any law in Macao or elsewhere and that there were no grounds for it to be forced to close its account.

“I am not going to take my money back and cut and run,” he said.

Posted in Banking, British American Tobacco (BAT), Daedong Credit Bank, Daesong Group, Finance, Gold, Korea Business Consultants, Tobacco | Comments Closed

North Korea bites a golden bullet

Wednesday, January 24th, 2007

Korea Times
Donald Kirk
1/24/2007

Gold fever is rampaging through the ruling elite of North Korea in the quest for relief from seemingly incurable economic malaise exacerbated by more than a year as a total outcast from the international financial community.

Word from Pyongyang is that trading companies and even individuals are offering payments in gold for imports from across the border with China and also in barter deals for products imported from elsewhere. Gold also has become a form of currency in the internal reward system of payoffs and bribes manipulated by Dear Leader Kim Jong-il to guarantee the loyalty of high-ranking officials.

The rush to sell gold – and, to a lesser extent, silver – has sharply escalated in the 16 months since the US Treasury Department blacklisted Banco Delta Asia (BDA) in Macau, banning all firms doing business with US firms from dealings with that bank. The Treasury Department charged that the BDA had been the principal conduit through which North Korea was shipping counterfeit US$100 “supernotes” printed on a highly sophisticated Swiss-made press in Pyongyang.

It’s well known that the US ban forced the BDA to impose a freeze on North Korean accounts totaling $24 million, but less well known that the bank also stopped purchasing gold produced by North Korea’s historic gold mines, in operation, sporadically, since the late 19th century.

Output of the mines, in mountains about 160 kilometers north of Pyongyang, fell sharply in the late 1990s as a result of flood and famine but, with foreign expertise, has begun to pick up in the past few years.

The impact of the ban, moreover, goes far beyond a single bank in Macau. Although North Korea last spring sold $38 million in gold and silver in Thailand, Pyongyang has been frustrated in reviving its presence on the London bullion market, the world’s largest marketplace for precious metals, amid increased US pressure on the large international banks that are the major buyers of gold.

It was in the aftermath of the ban on the BDA that North Korea’s Chosun Central Bank coughed up the information required by the London Bullion Markets Association (LBMA) for listing as a “good deliverer” of gold. North Korea from 1983 to 1993 had been in the LBMA’s good graces, averaging a ton a month in sales to London buyers that included some of the world’s leading banks, but had slipped off the list after failing to keep up deliveries.

The fact that the Chosun Central Bank again is listed with the LBMA, however, is no guarantee North Korea will be able to sell its gold. The US Treasury ban on dealings with the BDA – as well as sanctions unanimously imposed by the United Nations Security Council after North Korea conducted an underground nuclear test in October – has spooked buyers in London.

While the LBMA disavows “political criteria” in deciding on eligibility for its “good delivery list”, an LBMA memorandum leaves no doubt how buyers are likely to respond to overtures from a country or company on an international blacklist. None of them, according to Stewart Murray, the LBMA’s chief executive, is willing to take delivery from a company or country that is subject to sanctions.

Or, as the LBMA memorandum puts it, “If, for instance, a bullion custodian considered that it was bound by national or international sanctions that were in force against a particular country, it would have to refuse to accept bars from a refiner in that country.”

The memorandum, moreover, does not mince words when it comes to stating the importance of a “good deliverer” rating. “Given the status of London as the world’s leading center for bullion trading,” it says, “the LBMA List has become the de facto world list of quality refiners and Good Delivery accreditation is a highly sought-after accolade.”

In recent years, “the List” – capitalized in the memo – “has grown primarily due to the listing of refiners in China and Russia” and now totals 77 refiners in 31 countries.

Investors see North Korea as competing on a world stage once sanctions are lifted. “What we’re doing is normal business,” said Roger Barrett, whose firm, Korea Business Consultants, operates in North Korea from headquarters in Beijing. By reviving old minesand developing new ones, he argued, “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”

Barrett also believes North Korea may somehow get around the sanctions by finding new markets. “Why would you go to the trouble of going to London?” he asked. “They’re totally entitled to sell their gold.” The fact is, however, that London remains the place to sell gold in significant quantities on a regular basis.

Under the circumstances, Colin McAskill, chairman of Hong Kong’s Koryo Asia Ltd and the guiding light of the Chosun Development and Investment Fund, dedicated to investing in North Korea, accused top US Treasury officials of waging a campaign to make sure the ban on banks dealing with the BDA extends to gold and silver.

McAskill accused US officials, led by Treasury Secretary Henry Paulson and Stuart Levey, under secretary for terrorism and financial intelligence, of “using coercion, innuendo and sheer force to intimidate banks from dealing with North Korea”.

Among the victims of the US campaign is one of Koryo Asia’s projects, the Daedong Credit Bank, the only foreign bank based in North Korea, set up primarily to deal with accounts of foreign firms and embassies in Pyongyang. The freeze of North Korean accounts in the BDA, according to McAskill, includes about $7 million funds of Daedong Bank customers.

McAskill avidly supports North Korean demands for the US to lift the ban on the BDA – a move that would not only open up the frozen North Korean accounts but would provide the opening needed for Pyongyang to trade in a wide range of products around the world.

The financial issue is assumed to have ranked at the top of an agenda discussed in meetings in Berlin between the chief US envoy, Christopher Hill, and his North Korean counterpart, Kim Kye-gwan. Hill, reporting on the Berlin talks in stop-offs in Seoul, in Tokyo and Beijing, seemed hopeful about “progress” in the next round of six-party talks on North Korea’s nuclear weapons, expected to open in Beijing next month, after the failure of negotiators to get anywhere in the last round before Christmas.

South Korean media said North Korea had agreed to shut down its five-megawatt reactor at its nuclear complex Yongbyon in return for the US promise of massive aid, the crux of the 1994 Geneva Framework Agreement that blew up in 2002 amid US charges of a separate, secret North Korean program for developing warheads from enriched uranium.

There was no assurance, however, that the US is ready to relent on the BDA or that the UN Security Council will consider lifting its own sanction – enough to dissuade banks in London from buying North Korean gold regardless of the US ban on the BDA.

McAskill believes the rationale for the crackdown on the BDA is flawed. He questions the validity of the counterfeit charge and, in any case, says most of the frozen funds are not those of the North Korean government, even though they’re tired up in North Korean accounts. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely,” he said. “We’re at a very delicate stage.”

Whatever happens, McAskill sees North Korea as ripe for investment, with precious metals high on the list of potential exports. “North Korea wants to move back into legitimate business,” he said. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”

Posted in Central Bank, Copper, Gold, Graphite, Iron Ore, Korea Business Consultants, Koryo Asia Ltd., Lumber, Mining/Minerals, Thailand | Comments Closed

Under bank sanctions, North Korea looks to gold exports

Monday, January 22nd, 2007

Christian Science monitor
Donald Kirk
1/22/2007

More than a century after American mining engineers first opened up North Korea’s gold mines, a fortune in gold and other metals and minerals offers the prospect for North Korea to ease the pressures of financial sanctions.

The question, however, is whether North Korea can navigate around a US Treasury order that forbids institutions doing business in the United States from dealing with Banco Delta Asia in Macao, the main avenue for North Korean financial dealings.

The Treasury ban, first promulgated in 2002, has effectively frozen the North’s efforts to conduct international business. While it doesn’t extend to gold, market experts say that US officials have made it clear that banks should not buy North Korean gold.

“The US has been using coercion, innuendo, and sheer force to intimidate banks from dealing with North Korea,” says Colin McAskill, chairman of Koryo Asia Ltd., which invests in North Korea through the Chosun Development & Investment Fund. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely. We’re at a very delicate stage.”

North Korea, says Mr. McAskill, “wants to move back into legitimate business.” Selling gold on the London market – the world’s largest – “is one way they can prove that,” he adds. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”

One indication of North Korea’s need to sell gold was its decision to provide information needed by the London Bullion Market Association (LBMA) to list the North’s central bank as a “good deliverer” of gold and silver. Listing with the LBMA is essential for refiners who want to sell their products in London. The bank’s listing was suspended 2-1/2 years ago when it failed to respond to LBMA requests for “proactive monitoring.”

The LBMA said it does not “take into account any political criteria,” and will keep the bank on its rolls for another three years without monitoring.

Despite the listing, market experts say the big banks that are major buyers of gold – and form the LBMA’s core membership – are not likely to flout the spirit of the US Treasury order against Banco Delta Asia, through which North Korea exported gold prior to the ban.

“The fact that they’re on the list does not mean they can deliver to the London market,” says Stewart Murray, the LBMA’s chief executive. “When we have sanctions, none of the facilities will accept delivery from a company or a country that is subject to these sanctions,”

Trying to build momentum for talks

The reluctance of buyers in London to deal in North Korean gold, widely seen as the likeliest legal way to mitigate the impact of the banking ban, adds urgency to another effort at six-party talks on North Korea’s nuclear weapons.

The chief US negotiator, Christopher Hill, has been traveling through northeast Asia, stopping off here, in Tokyo, and in Beijing after talks in Berlin last week with his North Korean counterpart, Kim Kye-Gwan. The Chinese are expected to set a date for renewing the talks, which broke off before Christmas amid North Korean demands for the US to lift the ban on Banco Delta Asia.

North Korea raised hopes for renewed six-party talks, saying “a certain agreement” was reached in Berlin last week. Neither Mr. Kim nor Mr. Hill have provided details, but analysts suspect that the two discussed the financial issue and its relationship to the ultimate purpose of six-party talks: getting North Korea to give up its nuclear weapons.

North Korea has been renewing its drive to sell gold for the past year since submitting to the LBMA’s monitoring requirements. At the same time, the North has sold relatively small amounts of gold in Thailand, with which it has developed a strong trading relationship in recent years. Last spring, North Korea exported 1.3 tons of gold to Thailand for nearly $30 million while also looking for markets elsewhere in the region.

“Why would you go to the trouble of going to London,” asks Roger Barrett, whose firm, Korea Business Consultants in Beijing, is helping to develop gold mining in North Korea. “They’re totally entitled to sell their gold.”

No reports of exports since July

Yet there have been no reports that North Korea has exported any gold since testing seven long-range missiles in July. Since the North conducted an underground nuclear test in October, which resulted in deeper sanctions from the UN Security Council, dealers have reportedly been even more reluctant to buy North Korean gold.

Estimates of North Korea’s gold reserves range as high as 2,000 tons, but mining has been sporadic since British, American, and then Japanese interests mined for gold beginning in the 19th century. With foreign expertise, North Korean mining may return to the period between 1983 to 1993, when its central bank sold an average of one ton a month on the London market.

“What we’re doing is normal business,” says Mr. Barrett in Beijing, explaining the efforts at reviving the mining industry. “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”

Posted in Banking, Central Bank, Economic reform, Finance, Foreign direct investment, Gold, Korea Business Consultants, Koryo Asia Ltd., Mining/Minerals, Thailand, USA | Comments Closed

North Korea’s golden path to security

Thursday, January 18th, 2007

Asia Times
Bertil Lintner
1/18/2007

While the West and Japan have targeted North Korea’s overseas bank accounts to curtail its weapons program, Pyongyang has recently turned to more ingenious ways of maintaining its international businesses through substantial exports of gold, silver and other valuable metals.

Pyongyang has apparently found a willing conduit to global buyers through its many business connections in Thailand, which has recently emerged as the isolated state’s third-largest trading partner after China and South Korea. According to official Thai Customs Department statistics, North Korea shipped 500 kilograms of gold worth 398 million baht (US$11 million) to Thailand last April.

The following month, another 800kg of gold worth 635 million baht landed in Thailand courtesy of North Korea. Also, in June, 10 tons of silver worth 148 million baht was sent from North Korea to Thailand, followed by 12 tons worth 166 million baht last October.

In sum, North Korea exported 1.35 billion baht – or nearly $40 million – worth of precious metals to Thailand last year.

That is a substantial figure for North Korea, a country with an estimated gross domestic product of about $22 billion and whose total exports amounted to just over $1 billion, according to official statistics. Thailand is bound by the international sanctions imposed last October against North Korea by the United Nations in response to Pyongyang’s exploding an atomic bomb.

According to official Thai statistics, the gold and first consignment of silver were shipped to Thailand before the UN sanctions were imposed. But there is nothing illegal in North Korea exporting precious metals, unless, of course, the income from the sale can be tied directly to the country’s controversial weapons programs, which anyway would be extremely hard to prove.

Untapped riches
North Korea’s gold and silver mines remain largely untapped. According to Tse Pui-kwan, a Chinese-American chemist who joined the US Bureau of Mines in 1990, North Korea has significant deposits of copper, gold, graphite, iron, lead, magnesite, tungsten and zinc. When the Cold War ended and North Korea lost large amounts of foreign aid from both the Soviet Union and China, its mining industry fell into disrepair and extraction activities sharply declined.

But with new foreign cooperation, production has resumed, which the recent exports to Thailand clearly demonstrate. North Korea’s main gold mine is in Unsan county in North Pyongan province, about 150 kilometers north of Pyongyang. It was originally opened by a US firm in 1896, when Korea was still an independent and unified kingdom, and was later taken over by a Japanese company when the peninsula became a colony ruled by Tokyo in 1910.

Nearly a century later, consultants from Clough Engineering of Australia in 2001 inspected the same mine under the sponsorship of the United Nations Office for Project Services. They estimated that Unsan held 1,000 tons of gold reserves, which if true would make it one of the world’s major gold mines. Silver is also mined in the same area, while iron ore and magnesite are found in North and South Hamgyong provinces in the northeast.

North Korea’s extraction techniques are sometimes controversial. According to witnesses interviewed by the US Committee for Human Rights in North Korea for its 2003 report “The Hidden Gulag: Exposing North Korea’s Prison Camps”, there is a gold-mining labor camp near Danchun in South Hamgyong province, where thousands of prisoners are being held and forced to work under abysmal conditions.

In that same report, several witnesses claimed that “some of the mine shafts dated back to the early days of the Japanese occupation of Korea in the early 1900s. Accessing the veins of minable gold required descending and, later, ascending a wooden staircase 500 meters in length, using gas lanterns for light. Deaths from mining accidents were a daily occurrence, including multiple deaths from the partial collapse of mine shafts.”

The first attempt to modernize North Korea’s gold-mining industry was made by an Italian financier and former Foreign Ministry official, Carlo Baeli, who traveled to the country in the early 1990s and claims to be the first Westerner to do business with Pyongyang since the Korean War. He later wrote a book called Kim Jong-il and the People’s Democratic Republic of Korea, which was published in Pyongyang in 1990, obviously with official permission as it was printed by the state-owned Foreign Languages Publishing House.

Apart from painting a flattering portrait of the North Korean leader, the book describes Baeli’s first trip to Pyongyang in 1990, of which he wrote, “We were interested in investing in the mining industry, mainly in the extraction of gold and granite.” Baeli later signed a contract for a loan of $118 million to purchase mining equipment, and the goal was to resurrect no fewer than six gold mines across North Korea. The money was to be provided by international banks such as Midland Bank and the Naples International Bank. He also arranged for the mining equipment to be shipped from Italy.

But heavy flooding in the mid-1990s damaged both the equipment and the mines and, according to a 2006 report in Forbes magazine, Baeli today works as an adviser to the Pyongyang government at a tire-recycling plant. The car and truck tires are imported from Japan, get ground into granulate in North Korea, and are sold to China for road resurfacing, car mats and shoe soles. A lucrative business, perhaps, but not quite the golden dream Baeli had when he first arrived in Pyongyang nearly 17 years ago.

Another unusual partner in North Korea’s gold trade may have been the late Philippine dictator Ferdinand Marcos. In August 2001, the right-wing South Korean newspaper Munhwa Ilbo published a story claiming that Marcos in September 1970 had deposited 940 tons of gold bars at a Swiss bank in the name of the late North Korean dictator, Kim Il-sung. The report came from a former Marcos aide, and Munhwa Ilbo carried a copy of the bank-account certificate on its front page. The alleged gold bars were part of what a Japanese army general had looted from Asia during World War II, Munhwa Ilbo claimed.

That report was never independently confirmed, but it nevertheless reflects the mystique and speculation that still surround North Korea’s gold industry – and how little the outside world actually knows about it.

Financial pressures
When the US took action against Banco Delta Asia in Macau in September 2005, labeling it a “primary money-laundering concern” for North Korean funds, very little evidence to substantiate the charges was ever produced. North Korea lost $24 million when the accounts it held with the bank in the name of a front company, Zokwang Trading, were frozen. Zokwang, which had been operating in Macau for decades, also closed its office and relocated to Zhuhai province across the border in China proper.

The action against Banco Delta Asia, a privately owned bank that the Macau government later had to prop up to prevent it from collapsing, was the second move against North Korea’s assets abroad. In a much less publicized action, North Korea’s only bank located in a foreign country – the Golden Star Bank in Vienna – was forced to suspend its operations in June 2004. The Golden Star was 100% owned by the Korea Daesong Bank, a state enterprise headquartered in Pyongyang, and was allowed to set up a branch in the Austrian capital in 1982.

For more than two decades, Austrian police kept a close eye on the bank, but there was no law that forbade the North Koreans from operating a bank in the country. Nevertheless, Austria’s police intelligence department stated in a 1997 report: “This bank [Golden Star] has been mentioned repeatedly in connection with everything from money-laundering and distribution of fake currency notes to involvement in the illegal trade in radioactive material.”

Eventually the international pressure to close the bank became too strong. Sources in Vienna believe the US played an important behind-the-scenes role in finally shuttering Golden Star’s modest office on 12 Kaiserstrasse in the Austrian capital. Until then, Vienna had been North Korea’s center for financial transactions in Europe and the Middle East. Visitors to North Korea have noted that euro coins in circulation in the country – the US dollar is not welcome in Pyongyang – invariably came from Austria. (Euro notes are the same in all European Union countries, but coins designate individual member countries.)

Last October, in response to Pyongyang’s nuclear tests, Japan froze a dollar-denominated account that North Korea’s Tanchon Commercial Bank held with an unnamed Japanese bank. The account had a balance of $1,000 and had not been active for nearly a decade, so the move was mainly symbolic: to demonstrate to North Korea that it cannot use banks in Japan for any deposits, big or small.

So it is hardly surprising that North Korea is looking for new ways to manage and maintain its international business interests and for new partners when it is increasingly locked out of most foreign countries. That is where Thailand apparently comes into the picture.

In 2004, trade between Thailand and North Korea for the first time overtook trade between Japan and North Korea. Previously, a string of North Korean-controlled front companies, managed by the Chosen Soren, or the Pyongyang General Association of Korean Residents in Japan, had supplied North Korea with computers, electronic goods and other vital items.

In 2003, North Korea’s total trade volume to Japan was just over $265 million and fell even lower in 2004. At the same time, trade between Thailand and North Korea rose to more than $331 million in 2004. Two-way trade between Thailand and North Korea totaled $328 million in 2005, with Thai exports to North Korea amounting to $207 million and North Korean imports to Thailand totaling $121 million.

During January-November 2006 – the latest statistics available from the Thai Customs Department – trade totaled about $345 million, with Thai exports accounting for $200 million and North Korean imports $145 million. Thai imports of gold and silver have pushed those trade figures higher.

North Korea’s trade with Thailand grew mainly under the previous government of Thaksin Shinawatra, who at one point proposed signing a free-trade agreement between the two countries. In August 2005, Thaksin was formally invited by Kim Jong-il to visit Pyongyang. The visit never materialized, and since Thaksin was ousted last year in a military coup, the future of Thai-North Korean relations is very much in doubt.

But gold and silver are highly fungible and North Korea apparently has lots of the commodities. It appears Kim Jong-il has for now found at least one golden path around the international sanctions imposed against his regime’s nuclear tests.

Posted in Chongryun, Copper, Daesong Group, Domestic publication, Gold, Graphite, International trade, Iron Ore, Mining/Minerals, Statistics, Tanchon Commercial Bank, Thailand, Trade Statistics, Zokwang Trading Company | Comments Closed

DPRK scores last place in economic freedom (again)

Tuesday, January 16th, 2007

Heritage 2007 Index of Economic Freedom

North Korea’s economy is 3% free, according to our 2007 assessment, which makes it the world’s least free economy, or 157th out of 157 countries. North Korea is ranked 30th out of 30 countries in the Asia–Pacific region, and its overall score is the lowest in the world.

North Korea does not score well in a single area of economic freedom, although it does score 10 percent in investment freedom and property rights. The opening of the Kaesong industrial venture in cooperation with South Korea has been a start in foreign investment.

Business freedom, investment freedom, trade freedom, financial freedom, freedom from corruption, and labor freedom are nonexistent. All aspects of business operations are totally controlled and dominated by the government. Normal foreign trade is almost zero. No courts are independent of political interference, and private property (particularly land) is strictly regulated by the state. Corruption is virtually immeasurable and, in the case of North Korea, hard to distinguish from necessity. Much of North Korea’s economy cannot be measured, and world bodies like the International Monetary Fund and World Bank are not permitted to gather information. Our policy is to give countries low marks for specific freedoms when it is country policy to restrict measurement of those freedoms.

Background:
The Democratic People’s Republic of Korea has maintained its Communist system since its founding in 1948. A serious economic decline began in the early 1990s with the end of economic support from the Soviet Union and other Communist-bloc countries, including China. Floods and droughts all but destroyed the agricultural infrastructure and led to severe famine and dislocation of the population during the 1990s. South Korean and Chinese investments in the economy have alleviated dire conditions. The government continues to rely on counterfeiting foreign currency and sales of missiles for money. That and the nuclear ambitions and isolationism of Kim Jong Il reinforce North Korea’s status as the hermit kingdom.

Business Freedom – 0.0%
The state regulates the economy heavily through central planning. The economic reforms implemented in 2002 allegedly brought some changes at the enterprise and industrial level, but government regulations make the creation of any entrepreneurial activities virtually impossible. The overall freedom to start, operate, and close a business is extremely restricted by the national regulatory environment.

Trade Freedom – 0.0%
The government controls all imports and exports, and formal trade is minimal. Data on North Korean trade are limited and compiled from trading partners’ statistics. Most North Korean trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Non-tariff barriers are significant. Inter-Korean trade remains constrained in scope by North Korea’s difficulties with implementing needed reform. Given the lack of necessary tariff data, a score of zero is assigned.

Fiscal Freedom – 0.0%
No data on income or corporate tax rates are available. Given the absence of published official macroeconomic data, such figures as are available with respect to North Korea’s government expenditures are highly suspect and outdated.

Freedom from Government – 0.0%
The government owns all property and sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. The government implemented limited economic reforms, such as changes in foreign investment codes and restructuring in industry and management, in 2002.

Monetary Freedom – 0.0%
In July 2002, North Korea introduced price and wage reforms that consisted of reducing government subsidies and telling producers to charge prices that more closely reflect costs. However, without matching supply-side measures to boost output, the result of these measures has been rampant inflation for many staple goods. With the ongoing crisis in agriculture, the government has banned sales of grain at markets and returned to a rationing system. Given the lack of necessary inflation data, a score of zero is assigned.

Investment Freedom – 10.0%
North Korea does not welcome foreign investment. One attempt to open the economy to foreigners was its first special economic zone, located at Rajin-Sonbong in the northeast. However, Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates in the special zone are unrealistically high, as the state controls the labor supply and insists on taking its share. More recent special zones at Mt. Kumgang and Kaesong are more enticing. Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

Financial Freedom – 0.0%
North Korea is a Communist command economy and lacks a private financial sector. The central bank also serves as a commercial bank with a network of local branches. The government provides most funding for industries and takes a percentage from enterprises. There is an increasing preference for foreign currency. Foreign aid agencies have set up microcredit schemes to lend to farmers and small businesses. A rumored overhaul of the financial system to permit firms to borrow from banks has not materialized. Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. A South Korean bank has opened a branch in the Kaesong zone. The state holds a monopoly on insurance, and there are no equity markets.

Property Rights – 10.0%
Property rights are not guaranteed in North Korea. Almost all property belongs to the state, and the judiciary is not independent.

Freedom from Corruption – 10.0%
North Korea’s informal market is immense, especially in agricultural goods, as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.

Labor Freedom – 0.0%
The government controls and determines all wages. Since the 2002 economic reforms, factory managers have had more autonomy to set wages and offer incentives, but the labor market still operates under highly restrictive employment regulations that seriously hinder employment and productivity growth.

Posted in 2002 Economic reforms, Agriculture, Arms shipment, Banking, Central Bank, Counterfeiting, Economic reform, Finance, Fiscal & monetary policy, Foreign direct investment, Illicit activities, Insurance, International trade, Kaesong Industrial Complex (KIC), Mt. Kumgang Tourist Special Zone, Price liberalization, Private property, Rason Economic and Trade Zone (Rajin-Sonbong) | Comments Closed

North Korea selling off gold reserves

Wednesday, December 27th, 2006

Korea Herald
12/27/2006

North Korea, desperate for foreign currency under U.S.-imposed sanctions, has started to sell its gold reserves on international markets, a Japanese newspaper said Tuesday.

The United States last year blacklisted a Pyongyang-linked bank in Macau, infuriating the communist regime which walked out of disarmament talks for 13 months during which it tested an atom bomb.

Since the US crackdown on the bank, North Korea has earned 28 million dollars in foreign cash by exporting gold to Thailand, which had not imported gold from Pyongyang for the previous five years, the Yomiuri Shimbun said.

North Korea exported 500 kilograms of bullion to Thailand in April and another 800 kilograms a month later, the conservative Japanese daily said without identifying its sources.

North Korea’s central bank, Choson Central Bank was also re-listed on May 12 for trading on the London Bullion Market, said the newspaper, quoting a spokesman for the London market.

The North Korean central bank, which can issue currency, joined the London gold market in 1976 but was de-listed in June 2004 due to inactive trading, the newspaper said.

The Yomiuri, citing South Korean data, said North Korea was estimated to have between 1,000 and 2,000 tons of gold reserves.

The United States blacklisted Macau’s Banco Delta Asia in September 2005, saying it suspected that 24 million dollars in North Korean accounts were linked to counterfeiting or money-laundering.

The accounts have been frozen and other Asian banks have taken similar moves.

The financial sanctions were a main topic during six-nation talks, aimed at persuading North Korea to end its nuclear program, which ended in deadlock last week in Beijing.

Posted in Banking, Central Bank, Finance, Fiscal & monetary policy, Gold, Mining/Minerals, Thailand | 1 Comment »

North Korean Economy Watch