North Korean Economy Watch

Institute for Far Eastern Studies (IFES)
2012-1-18

North Korea is continuing to put forward new laws for the special economic zones (SEZs) such as Rajin-Sonbong and Hwangumpyong Island. Recently, North Korea announced special guidelines for the tax investigations of foreign businesses in the zones.

North Korea’s Academy of Social Science Newsletter Volume 4 (published on November 2011) released an article titled, “Suggestions to Improve Tax Investigations in the Special Economic Zone,” which included detailed instructions for the policy improvement for tax investigation for SEZs. Here, particular emphasis was placed on the enhancement of the tax investigation system — to be accurate and rational — for the foreign investment companies.

The article explained, “Based on the principles of equality and reciprocity for the construction of powerful economic state, the tax investigation system in the SEZ must be improved especially at the present time when SEZs are being constructed and expanded to increase economic trade with other nations.”

It also stressed tax officials must be equipped with, “comprehensive knowledge and experience who accurately understand the entire process of business management. They must be capable of creating new tax investigation methods and be able to discern the various forms of tax evasions.”

For the qualifications of the tax officials, the article recommended that the officials be selected based on their knowledge and experience; ability to develop techniques for tax investigation; awareness of rules and regulations of tax laws and bylaws, and regulations of rights and responsibilities of taxpayers; and capability of conducting research on foreign tax investigation policies.

The Academy of Social Science is a government agency of the DPRK, and the recent article on the tax investigation reflects that the government has already begun the process of implementing the tax investigation guidelines and laws in the SEZs.

The article emphasized establishing a tax investigation system acceptable to foreign companies. One can construe this as North Korea’s effort to attract more businesses to the SEZ, which is currently suffering from poor performance.

In addition, North Korea is believed to be placing weight on the tax investigation based on its past experiences with the South Korean companies in the Kaesong Industrial Complex (KIC). In the past, the officials of the Central SpecialDirect General Bureau toured the industrial districts in China and showed keen interests in the tax management.

On December 8, 2011, the KCNA reported that the Standing Committee of the Supreme People’s Assembly (SPA) has adopted the Economic Zone Act for Hwanggumpyong and Wihwa Islands. The law was revised and supplemented to include the Free Economic and Trade Act of Rajin-Sonbong. However, the details of these laws were not disclosed and some experts are predicting that these laws are likely identical to the Chinese laws in China’s flourishing SEZs.

However, on January 11, 2012, Yonhap News Agency of South Korea reported that China rejected the new Special Economic Zone Act of the DPRK because it is “not business-friendly.” The news reported, “China said the law was not business-friendly, telling North Korea that the law had some problemsregarding taxes, accounting, remittance of profits and stability of investment.” It is reported that North Korea is working on the revision of these laws and likely for a new special zone act to be passed by the Standing Committee of the DPRK’s Supreme People’s Assembly (SPA).

UPDATE 2 (2012-1-20): The DPRK has released two Japanese men recently detained in Rason. According to the Associated Press:

Two Japanese men detained in North Korea 10 months ago have returned home, a minister said Friday, adding it could be a “positive” diplomatic sign from the reclusive state.

The two arrived back in Japan this week, said Jin Matsubara, head of the National Public Safety Commission.

“I think this could be taken as a positive message from North Korea,” he told reporters.

Police declined to comment on whether the two men paid any money or why they were released.

The men, reportedly in their 30s and 40s were detained in a special economic zone near the communist state’s border with Russia. They returned via China.

…

Three Japanese men had initially been taken into detention in March last year, but one of them, who was in his 80s, was freed and returned to Japan in April, Jiji Press news agency and public broadcaster NHK said.

Reports said the three men were employees of a machine maintenance firm in Tokyo who had visited Rason city near North Korea’s border with Russia in March to check machines at a food manufacturing factory.

They were reportedly detained on charges of hiding drugs in canned goods to be exported to China and currency counterfeiting.

The release of these men was also covered in Bloomberg.

UPDATE 1 (2011-5-4): According to KCNA:

Japanese Detained in DPRK for Their Crimes

Pyongyang, May 4 (KCNA) — The Korean Central News Agency Wednesday issued the following report:

Masaki Furuya, former representative managing director of JP Dairin Co. Ltd., Hidehiko Abe, representative managing director of Realise Co. Ltd, of Japan, and Takumi Hirooka, managing director of Sugita Industrial Co. Ltd, of Japan, were put in custody by a relevant body on charges of drug trafficking and counterfeit after entering Rason City of the DPRK on March 14.

They admitted their crimes and their gravity.

Masaki Furuya had already been expelled from the DPRK and the two Japanese are called to legal accounts.

What they did is a very grave violation of the law of the DPRK and international law and they will, therefore, face proper legal actions.

The Wall Street Journal also reports that the DPRK held a Japanese man for drug smuggling from 2003-2009.

ORIGINAL POST (2011-4-20): According to Yonhap:

North Korea detained three Japanese men on apparent drug smuggling charges in its special economic zone last month, but it later released one man, a news report said Wednesday.

The three Japanese employees of a machine maintenance firm in Tokyo visited the city of Rason, near North Korea’s border with Russia, in March to check machines at a food manufacturing factory, Japan’s Asahi Shimbun newspaper said, citing unidentified sources.

They were detained on charges that they hid drugs in canned goods to be exported to China, though the North later allowed one of them to return to Japan, the newspaper said.

The North has demanded a large bail for the two detainees, it said.

South Korea’s Unification Ministry, which handles inter-Korean affairs in Seoul, and the pro-North Korean association in Tokyo said they had no information.

The North’s state media have not reported on the case.

North Korea arrested a Japanese man on drug smuggling charges in 2003 before allowing him to return home on humanitarian grounds in 2009.

The news came days after North Korea confirmed the detention of a Korean-American man on a crime against the North.

The North said it will indict Jun Young-su, who was arrested in November, claiming he admitted his crime in the course of the investigation, the North’s official Korean Central News Agency reported Thursday.

According to the Korea Times the men were detained in Rason.

Read the Yonhap story here:
N. Korea detains two Japanese men: report
Yonhap
2011-4-20

Andray Abrahamin and John Kim worte a comprehensive summary of the current state of Rason. The article appears in The Diplomat:

In 1991, the North Korean government dubbed Rajin-Sonbong (Rason) a free trade zone to attract foreign capital. However, less than a decade later, the zone lost its free trade status. According to local businessmen, the party secretary of Rason, a relative of the late Kim Jong-il himself, was charged with corruption and eventually executed, a harbinger for the long period of isolation ahead. Since the end of 2009, signs of renewed commitment to Rason have sprouted. While it may be too early to say whether the region will succeed in drawing investment and reform, our recent trips to Rason lead us to believe that developments on the ground may eventually warrant a shift in foreign policy by governments around the globe.

China has long eyed Rason as a potential import/export center for the landlocked provinces of Jilin and Heilongjiang. However, from Rason’s inception, the Middle Kingdom held little influence or interest in the region’s success. In 2002, North Korea establishedanother special economic zone in Shinuiju and instated businessman Yang Bin, then China’s second richest man, as the SEZ’s Chief Executive. The Chinese authorities promptly placed Yang Bin under house arrest. Perhaps as a lesson learned from this episode, the North Koreans have made the Chinese government a major stakeholder in Rason’s development.

The Chinese have moved 80,000 metric tons of coal this year through a pier they leased at the Rajin port.They are also reportedly sending regular delegations of senior officials, including the Chairman of the China Development Bank, and they have invested $30 million to repave the road from the border town of Wonjong to the Rajin Port. This road was 60 percent paved during a visit in October, and recent reports from businessmen inside the region confirm that the road is now 95 percent paved, allowing for large trucks to pass through. The Chinese have also constructed a new road on their side of the border, part of the support this area has received after the Chinese central government designated it “The Changjitu Development Region” in November of 2009.Officials from the North explained that the Chinese will have a say in everything from zoning of real estate to port customs and investment policies.

Though Russia’s involvement doesn’t run as deep, it also maintains a keen interest in Rason’s ice-free port and has pledged an investment of $200 million to refurbish a railway from the border town of Khasan and to upgrade pier three at the Rajin port, which it has leased for 49 years. Rason’s third port at Oongsang was once a major exporter of lumber from the Soviet Union, and though Oongsang looks far from reviving the Soviet involvement of its heyday, Russia clearly has an interest in Rason’s success as well.

In addition to neighboring countries’ newfound interest in the zone’s success, the North Korean leadership has also shown a renewed desire in luring investment into the region. In December 2009, Kim Jong-il made a visit to the area, sent his former trade minister to run the region as party secretary, and reinstated Rason’s status as a special city, wresting it out of provincial control. Any potential investor who visits the SEZ would experience the thirst of the local government to develop the region, as reflected by the words of an official with the Rason Economic Cooperation Bureau, Rhee Sung Hye: “The future of my career depends on how much investment I can bring.”

At the national level there are also signs that the regime is increasing its focus on economic development as a source of legitimacy. In 2009, the Joint Venture Investment Commission was formed as a one stop shop for foreign investors, while the Taepung Group and State Development Bank were created to attract foreign investment. In the first half of 2011, Kim Jong-il made more appearances related to the economy and less related to defense than in prior years, and a focus on improving lives through focus on light industry and agriculture was emphasized in joint editorials that signaled policy direction at the beginning of 2010 and 2011.

The alignment of simultaneous commitment from North Korea, China, and Russia sets the scene for a North Korean special economic zone with higher chances of success than perhaps ever before. However, interest and desire may not necessarily translate into results without knowledge of markets and how to create a stable investment environment. After a recent tour of his 200MW fuel oil powered generation facility, the President of Songbong Power, Rhee Kang Chul, expressed that the reason for his plant’s inactivity and the subsequent blackouts in the region was the rise in feedstock costs. When asked about mechanisms for electricity pricing, Rhee responded that the government had set power prices at 6.5 euro cents/kwh, but he couldn’t provide further details on how the number was arrived at and when it might change again. Though Rhee was clearly an expert on the technical aspects of power generation, he hadn’t had the chance to consider that potential investors, after getting comfortable with country risk, would have little clarity on the revenue side of their equation. When this was expressed to the Vice Mayor of Rason, he replied, “We can change the price of electricity here. Rason is not under the same restrictions as the rest of the country.”

North Korea could theoretically piggyback off the market knowledge that their Chinese partners have gained over the last 30 years, but Rason’s neighbors are only likely to share when it suits their interests. In the case of Sonbong Power, Kang told us that every Chinese official who has visited stated that the most effective solution would be to pipe in power from the Chinese grid. “We plan to have a power line installed from the border by the end of 2013.” As power is as strategic asset like food or water, dependence on Chinese power clearly leaves the North Koreans in a vulnerable position.

China is clearly North Korea’s closest ally, but their relationship has a thorny history and Pyongyang is acutely aware of its reliance on big brother Beijing. With China’s rise, many other countries in the region are increasingly dependent on trade but increasingly cautious of dependence, welcoming a stronger presence from the United States, which is in the midst of a strategic pivot towards Asia.

In December 2009, the Asia Society and the Institute on Global Conflict and Cooperation published a report arguing that economic engagement of Pyongyang by the United States would result in creation of vested interests in continued reform, a changed perception of self-interest and a less confrontational foreign policy from North Korea. Against the backdrop of a more uncertain domestic environment after the death of Kim Jong-il, and the shifting dynamics in Asia generally, a North Korea that trades more and engages with the outside world may necessitate a change in foreign policy of governments around the world, most specifically the United States, South Korea, and Japan.

The Rajin-Sonbong SEZ has a checkered past and it would be naïve to say that North Korea is embarking on late 1970’s style Chinese economic reforms. However, we believe that the unprecedented alignment of interests in the region make it a likely starting point for any lasting directional change, which is why the world should watch Rason.

Read the full story here:
Why World Should Watch Rason
The Diplomat
John Kim & Andray Abrahamian
2011-12-22

From the Choson Exchange web page (November 5):

In October 2011, John Kim, a board director of the Choson Exchange, visited the Rajin-Sonbong Special Economic Zone. The following is a summary of some of his findings based on site visits and talks with senior officials in the SEZ. An longer account of his travels and impressions will be available soon. This information helps elaborate on our report from August.

Rajin Port
The Rajin Port employs 1400 workers. The Chinese have conducted feasibility tests regarding two new piers, but currently the port houses three piers with 9-9.5 meters draft. A 30,000 metric ton coal storage warehouse was built at Pier 1 by the Chinese, who moved 80,000 metric tons through the facility in five shipments from January to September. Pier two, largely dedicated to container shipment, is currently dormant and a Swiss company is currently using Pier 3 to ship manganese and talc out of the region. The Russians also have a 49 year lease agreement signed in 2008.

Oongsang [Ungsang] Port
Oongsang Port exported Russian lumber until 1985, but remains largely quiet now except for the occasional fishing boat. The present draft of 7 meters constricts any major future activity, so the North Koreans hope to bring in over $100M to widen the draft to 9 meters. After Rajin Port activity surpasses capacity there, Oongsang Port will become the next regional hub for drybulk activity.

Sonbong Port
Originally opened in the early 70’s, the draft within the port is 7 meters, but a fully laden Very Large Crude Carrier containing 270,000 metric tons of oil can offload at an offshore facility further out at sea. Two pipes, 63 cm in diameter, run for 9km underground before reaching the storage facility at “Victory Petrochemical”, a simple refinery that was designed to refine crude and send oil products (gasoline, naphtha, jet fuel, diesel and fuel oil) back to the port for export. In addition to this two way flow, fuel oil also arrived sporadically at the port as part of aid packages from 1994 to 2008.

Sonbong Power
This power plant was originally designed to take fuel oil from Victory Petrochemical as feedstock and generate power to feed back to Victory. Since the refinery has been offline, Sonbong Power has at times provided electricity to the region, but with fuel oil prices close to $700/metric ton and current electricity prices at 6.5 eurocents/kwh, the economics of running the plant do not work leaving the 800 workers employed here largely idle.

Victory [Sungri] Oil Refinery
Literally translated as “Victory Chemical Plant”, this refinery was completed in 1973 with a 40,000bbl/day crude distillation unit that typically yields 40~50% residual fuel oil for an average crude feed. Investment into upgrading capacity in the international market has led to an eroding of margins for simple refineries like Victory. Currently the refinery is idle and would need over $500M in investment to become competitive.

Hye Song Trading Company
Mr Kim visited a Sewing Factory owned by Hye Song, which runs 8 such factories employing 2000 workers. Output is recorded for the entire year on a bulletin board at the front entrance of the company. All employees except the handyman were women.

Cell Phone use more prevalent
The number of cell phone users in the DPRK crossed 1 million earlier this year and one official commented that the overwhelming majority of urban households have at least one cell phone. This particular official had 4 phones for a household of 3. Foreigners are allowed to use cell phones on a different network, and users of the domestic and foreign network can not call each other. All usage is prepaid.

Handset Type: Local
Purchase Cost: 1570-2200 RMB
Usage Cost: 250 minutes and 20 text messages, while each additional minute is charged at 60 NKW (about .1 RMB/min)

Handset Type: Foreigner
Purchase Cost: 1800-2400 RMB
Usage Cost: Does not include any free minutes and are charged at 2RMB/min

Banking System has room for growth
There are two banks in Rason, the Central Bank, which is focused on domestic transactions, and the Golden Triangle Bank, which is focused on foreign currency transactions. Transactions for goods and services are conducted almost entirely in cash, usually in RMB or NKW. Mechanisms for savings are credit have room for development. As banks take a fee to deposit and withdraw cash, merchants prefer to hold money in cash (usually RMB). Credit is also available almost exclusively through friends or family.

Bottlenecks
A number of issues require solving if Rason is serious about attracting large scale foreign investment. Among these are reliable access to travel visas, reasonable communications costs with the outside world, a more mature banking system with savings and credit mechanisms and favorable tax treatment with a consistent legal framework. The mere fact that Rason is experimenting with market reform is encouraging, and Mr Kim is optimistic about economic development in the region and the nation as a whole.

UPDATE 6 (2011-10-19): I finally received a list of companies participating in the first Rason International Trade Fair. Below is a picture of the names of participating companies listed on a display at the show and a PDF of their names (in English). I apologize for any typos:

Here is a PDF of the company names in English.

Most are obviously Chinese companies, though there appears to be at least one American company listed in the mix, White Stone Corporation Co., Inc. USA!

UPDATE 5 (2011-8-22): KCTV produced video footage from the fair.

UPDATE 4 (2011-8-25): KCNA announces the closing of the first Rason International Trade Fair:

First Rason International Trade Fair in DPRK Closes

Rason, August 25 (KCNA) — The first Rason International Trade Fair was closed with due ceremony on Thursday.

Present there were Jo Jong Ho, chairman of the Rason City People’s Committee, officials concerned and exhibitors of different countries and regions.

In a speech a speaker referred to the fact that the fair was successfully progressed and an advance was made in conformity in favor of mutual interests in economy, exchange of science and technology and trade through wide-ranging contacts.

Diplomas were awarded to the exhibitors who presented excellent goods at the closing ceremony.

UPDATE 3 (2011-8-25)): KCNA publishes a short article advertising the economic advantages of Rason:

Rason Economic, Trade Zone with Bright Prospect of Development

Pyongyang, August 25 (KCNA) — Rason City, the DPRK, is situated in an important area which can link China’s three northeast provinces and Russia’s Far East region, both full of natural resources, and many Asia-Pacific nations with each other.

Rajin, Sonbong and Ungsang ports in Rason and Chongjin Port adjacent to the area provide good conditions for transit trade for Northeast Asia and other continents.

The sea off the ports does not freeze in winter, so they are not subject to seasonal restriction.

The reconstruction projects of the Rajin-Khasan railway and Rajin Port launched in Juche 97 (2008) will make it possible to reduce the transport distance from Asia to Europe, sharply cutting down the transport fee.

The Rajin-Khasan railway will serve as a transport route between the DPRK and Russia and between Asia-Pacific and European nations.

Rason City has seafood, agricultural product and wild vegetable processing bases operated by Korean trading companies. The city also boasts of many ponds, lakes and bays favorable for fresh-water fish culture and offshore farm.

Its natural and geographical environment is suitable to an international tourist resort. There are sea-bird, seal and other animal sanctuaries in the area with beautiful islets, like Pipha and Sol.

Some foreigners have already launched business in the area and an increasing number of investors are interested in the zone.

Rason City with amazing geographical and economic conditions is likely to greatly contribute to the development and prosperity of Northeast Asian nations.

UPDATE 2 (2011-8-21): The first Rason International Trade Fair opens Monday. Some interesting information below:

Pictured above (Google Earth): The Rason International Trade Fair Exhibition Hall (See in Google Maps here)

Also, a reader sent in this promotional flyer which is full of information on the trade fair:

See images of the flyer here: Part 1, Part 2, Part 3.

Video footage of the trade fair can be seen here.

UPDATE 1 (2011-8-17): The First “Rason International Product Exhibition” to be Held in Rajin-Sonbong Special Economic Zone
Institute for Far Eastern Studies (IFES)

Rajin-Sonbong or “Rason Special Economic Zone” is a co-development project developed by North Korea and China. The Rason SEZ International Product Exhibition is scheduled to take place from August 22nd to 25th — an exhibition targeted to attract foreign investors to the region.

According to the KCNA article released on August 14, “The exhibition will display a wide array of items from various countries including vehicles, pharmaceutical and clothing products.” It was said that the exhibition promises be an important event to encourage cooperation and exchange with various countries in trade, economic and science, and technology sectors.

This event is expected to not only bring Chinese but also European and other foreign companies into the economic zone, pushing investment into the area.

There is also talk of developing Rason into an international tourism zone to attract tourists from China, Russia, and Japan.

After the closing ceremony of the exhibition, visits to Rajin Harbor, Mangyongbong ferry, and the amusement park are scheduled in order to provide sightseeing tours for the participants to the exhibition.

Mangyongbong ferry, well-known in the past for transporting North Koreans living in Japan back to North Korea, is gaining special attention itself as a new tourist attraction. This cargo-passenger ferry is expected to be utilized further for tourism in the near future, including bringing Chinese tourists from Dairen and other harbors in China to Nampo Harbor close to Pyongyang.

In the late 1950s, Mangyongbong ferry began to shuttle North Koreans in Japan from Niigata Harbor to Wonsan Harbor near Pyongyang. From 1984, it was used to transport cargo into Japan, but this was halted in 2006 due to economic sanctions against North Korea which followed in response to North Korea’s missile and nuclear tests.

There are two ferries in North Korea with the name Mangyongbong. The Mangyongbong-92 will be introduced in Rajin Harbor to maximize the demonstration effect. The Mangyongbong, weighing 3,500 tons, is much smaller and older and inadequate to be used as a ferry.

The Mangyongbong-92 was built in 1992 to commemorate the 80th birthday of Kim Il Sung. The ship was built with funds collected from Chongryon (i.e., the General Association of Korean Residents in Japan). It was estimated to cost over 4 billion JPY at the time, weighing about 9,700 ton with a capacity to hold 350 passengers.

On another note, the fourteenth annual Pyongyang Spring International Product Exhibition held this May hosted over 280 companies from 10 countries. 100 Chinese companies participated in the exhibition. Since then, Chinese corporations from Liaoning and Dandong are reported to have placed contract orders worth 800,000 USD.

ORIGINAL POST (2011-8-15):

Pictured above (Google Earth): Rason geographic border (in red) and security perimeter fence (Yellow).

According to KCNA:

First Rason International Trade Fair to Be Held

Pyongyang, August 14 (KCNA) — The first Rason International Trade Fair will be held in the DPRK from August 22 to 25.

Vehicles, medicines, garments, etc. presented by companies of different countries and regions including the DPRK will be displayed at the fair.

The fair will contribute to boosting cooperation and exchange among countries and regions in fields of trade, economy, science and technology.

The DPRK is no stranger to trade fairs. By my calculations, the DPRK has hosted the Pyongyang Spring International Trade Fair since 1998 and the Pyongyang Autumn International Trade Fair since 2005. These events, which draw vendors from across the planet, are held at the Three Revolutions Exhibition in Pyongyang.

This is the first trade fair of which I am aware that is being held outside of Pyongyang. The Rajin-Sonbong area was the site of the DPRK’s first experiment with special economic zones. Although it did not generate the expected level of interest, North Korean authorities are hoping that this time around they will be able to capitalize on their proximity to the Chinese market (see here and here).

Additional Information:

1. Previous posts on Rason here.

2. Previous Posts on the Pyongyang International Trade Fair here.

3. The Chinese have been upgrading the road that links the Rason port with the Chinese border.

4. A few days ago I posted a preliminary list of DPRK trade companies published in Foreign Trade magazine. I imagine that more than one of them will have a presence at the trade fair.

Pictured above (Google Earth): A map of the Khasan-Rajin Port rail service.

UPDATE 8 (2011-10-13): According to KCNA, the Rajin-Khasan trial train has been launched:

A ceremony of running a trial train between Rajin and Khasan section took place outside the DPRK-Russia Friendship Pavilion in the area of Tumangang Station in Rason City, North Hamgyong Province.

Present there from the DPRK side were Vice Minister of Railways Ju Jae Dok, Vice-Chairman of the Rason City People’s Committee Hwang Chol Nam, officials in the field of the railways and working people in Rason.

Present from the Russian side were Valery A. Reshetnikov, senior vice president of the “Russian Railways” Company, Igor A. Sagitov, minister-councilor of the Russian embassy here, Vyacheslav Tsupikov, Russian consul-general to Chongjin, those related to the railways and other guests.

Valery A. Reshetnikov, addressing the ceremony, said the bilateral cooperation in the railway transport now in progress amid the care of the top leaders of the two countries is a significant event in opening a new service line for freight transport.

The trial train service has greater significance as it is timed to coincide with the 63rd anniversary of the establishment of the DPRK-Russia diplomatic ties, he added.

Ju Jae Dok in his speech at the ceremony said that the train service will be recorded in the history of development of railway transport of the two countries.

The Rajin-Khasan freight transport will make contributions to the economic exchange not only between the DPRK and Russia but also Northeast Asia and Europe, he added.

Then followed congratulatory speeches.

The trial train departed for Khasan.

Video of the train ceremony can be seen here (KCNA).

UPDATE 7 (2011-9-15): Russia to send first train on reconstructed line. According to Reuters:

Russia will send its first train along a newly repaired railway line to North Korea next month [October 2011], Moscow’s railway monopoly said on Thursday, opening up a rare trade route with the secretive nation.

The link with Russia offers impoverished North Korea at least the prospect of increasing trade with its biggest neighbours after years of international sanctions.

Russian Railways has been renovating the 54km (34 mile) rail line from Russia’s eastern border town of Khasan to the North Korean port of Rajin as part of an agreement reached during North Korean leader Kim Jong-il’s 2001 visit to Russia.

“The first demonstration train will go along the line in October,” a spokesman for Russian Railways said.

Russian Railways has also been building a container terminal in Rajin, which is one of the main centres of North Korea’s Rason Special Economic Zone.

It said the railway and container terminal, built by a joint venture called Rasonkontrans, would be used to export Russian coal and to import goods from South Korea and other Asian countries.

The railway and container terminal will work at 35 percent capacity, or about 70,000 20-foot equivalent units (TEU), in 2011, rising to 140,000 TEU in 2012 and a full capacity of 200,000 TEU in 2013, Russian Railways said.

“There is the opportunity to increase the capacity of the container terminal and the railway,” a spokesman said.

Read the full story here:
Russia to open railway track to North Korea
Reuters
2011-9-15

UPDATE 6 (2010-5-23): Both China and Russia have secured a dock in the Rajin Port. Here is a map of Rajin’s docks.

UPDATE 5 (2008-10-6): Construction has begun!

The Russians have begun upgrading a 54km railway line that, when completed, will connect Khasan, on the Russian border, with the North Korean port cities (and special economic zone) Rajin and Songbon (aka Rason).  The railway line needs to be upgraded because the Russians use a different gauge than the North Koreans.

According to the Donga Ilbo (where the above picture originates as well):

The project will [...] cost [] 195 million U.S. dollars, 72 million dollars of which will be shouldered by Moscow.

The Defense-Technology Blog quotes the project’s price at US$207 million, the difference probably the result of exchange rate calculations.  Additionally:

Eurasia’s largest transcontinental railroad of over 10,000 km will be established as a result.  Cargo transshipment from Asia to Europe along the route will take 14 days, while sea freight shipping takes 45 days. The completion of just the first stage of the project will make it possible to attract up to 100,000 containers annually to the Trans-Siberian railroad, a spokesman for Far Eastern Railways said.

I believe this deal is strategically important to the Russians for numerous reasons:

1. The Russians are happy to have a Pacific port that does not freeze in the winter.  This will open up year-round trade opportunities for Russia’s far east.

2. Bringing the Rason port under Russian “administration” puts Russia in a position to profit from linking South Korea’s economy to Europe (the DPRK will also indirectly benefit no doubt).  This could be accomplished by putting South Korean cargo in Russian ships which could be unloaded in Rason and carted across Siberia into Europe, significantly reducing the time (and cost) required to put South Korean goods on European shelves.

3. As reported earlier (here, here, and here), South Korea is interested in Russian energy resources, specifically oil and natural gas.  Ideally, pipelines could be build from Russia to South Korea (via the DPRK).  Until this pipe dream (pun alert) is a reality, however, the Rajin port will serve as an effective transit hub between the two countries.

4.  Investment in significant economic assets within the DPRK will solidify Russia’s position (vis-a-vis China) as a permanent player in political and economic developments on the Korean peninsula.

As an interesting aside, Yonhap reports that the North Korea just replaced the Minister of Railways:

Jon Kil-su, a career transportation official, has been named North Korea’s new railways minister, according to the country’s official media seen here on Sunday.

Jon, who headed the transportation ministry’s transportation command bureau, has been promoted to replace Kim Yong-sam as the top railways official in the North’s government, the report said. The outgoing minister had served in the post since 1998.

The Pyongyang Times (Link no longer available) reports on the ground-breaking ceremony:

A ground-breaking ceremony for the reconstruction of Rajin-Khasan railways and Rajin Port took place on October 4 in front of the DPRK-Russia Friendship House in the area of Tumangang Railway Station, Rason City.

It was attended by Minister of Railways Jon Kil Su, Deputy Foreign Minister Kung Sok Ung, Deputy Minister of Foreign Trade Ri Myong San, Deputy Minister of Railways Kim Chol, Chairman Kim Su Yol of the Rason City People’s Committee, railway officials and working people in Rason.

Also on hand were a delegation of the Russian Railways Company headed by President Vladimir Yakunin, Governor Sergei Darkin of the Administration of Maritime Territory of the Russian Federation, Deputy Foreign Minister Aleksei Borodavkin, railway officials and other Russians, Russian ambassador Valery Sukhinin and foreign diplomats.

The President of the Russian Railways Company made an opening address.

He said:

“The reconstruction project arranged as a result of the 2001 summit meeting between the two countries has finally entered a practical stage thanks to positive cooperation of railway officials.

“The world’s longest 10 000-kilometre railway route will come into being and 100 000 containers will be transported through it annually from 2013.

“The experimental stage of the large project for connecting the trans-Siberian railways with the trans-Koreans railway is drawing the attention of different countries.”

He hoped that the railway administrations of the two countries would steadily bolster up mutually beneficial cooperation to complete the project as early as possible.

The DPRK Minister of Railways delivered a speech.

He said it was of great significance to hold the ceremony on the threshold of the 60th anniversary of the establishment of diplomatic relations between the two countries, and continued:

“The ground-breaking for the reconstruction of Rajin-Khasan railways whose basis was provided by the DPRK-Russia Moscow Declaration signed by the leaders of the two countries in 2001 is the first step towards realizing a wide range of bilateral cooperation that conforms to the common development and interests of the peoples of the two countries.

“Rajin-Khasan railways will serve as an overland transit of friendship contributing to the development of the economy and transport of both countries and the improvement of people’s welfare and have a sure prospect of developing into an excellent international transport route that ensures transport between Asia and Europe.”

Noting the Rason area would become the region of friendship and cooperation that goes a long way towards travel and well-being of the peoples of the two countries and socio-economic cooperation, he was convinced that bilateral relations of friendship would grow in various fields, railway transport organs of the two countries would make positive cooperation and reconstruction project would be carried out successfully.

The Russian Deputy Foreign Minister made a congratulatory speech.

He said he was happy to take part in the ground-breaking ceremony, noting that it was an important occasion that gave a fresh impetus to the development of bilateral relations of friendship.

He hoped that the project would be completed as scheduled to contribute to the development of bilateral friendship.

He was followed by the Governor of the Administration of Maritime Territory. He said:

“The residents in the Russian Maritime Territory bordering on the DPRK have longed for this moment. The areas of the two countries bordering on the Tuman River have developed good-neighbourly relationship over the past decades.

“When the project is completed, their economic and cultural ties will become closer. The Russian Maritime Territory will make a positive contribution to the implementation of it.”

There were an explanation of the prospects of the project, the inaugural work of laying mixed railways and the unveiling of the monument to the ground-breaking ceremony.

The DPRK government hosted a reception that day.

Read more below:
North Korea-Russia Railway Reconnection
Donga Ilbo
10/7/2008

Russia, North Korea break ground on rail link project
(NSI News Source Info)
10/6/2008

N Korea has replaced its railways minister: report
Yonhap
10/5/2008

UPDATE 4 (2008-8-12): The DPRK and Russia have signed a Russia – Rajin railway agreement. According to the Moscow Times:

UPDATE 3 (2008-3-16): A recent report in NewKerala.com offers a broader description of the work that will need to go into the Russia – Rajin railway line:

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.

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

UPDATE 2 (2008-2-1): China and Russia seem to be competing for access to the DPRK’s Rajin (Rason) port. Rajin has ostensibly been open for business for years — with few results to show for it. The Russians and Chinese seem to believe that there is money to be made vis-a-vis Rajin and that the North Koreans are more than likely to cooperate this time around.

UPDATE 1 (2008-1-27): A Russian delegation is in the DPRK to discuss upgrading the 55km railway from the Raijin port to the Russian border. According to the report:

Russian officials have visited North Korea to discuss modernizing the 55-kilometer (34-mile) line between Rajin and Russia’s Khasan. Rajin is also referred to as Najin in South Korea.

A Russian railway spokesman told Agence France-Presse 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.

Russian President Vladimir Putin has expressed interest in connecting the Rajin-Khasan line to the Trans-Siberian Railway.

Last year, North Korea reportedly agreed to open Rajin further to foreign ships in an attempt to make it a regional transport hub.

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.

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

China has also expressed an interest in securing access to Rajin’s port. According to the Joong Ang Daily:

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.

ORIGINAL POST (2006-10-25): Russia announces plans to connect DPRK to Trans Siberian Railway.  According to Bloomberg (excerpt):

Institute for Far Eastern Studies (IFES)
2011-10-5

Dai Yulin, secretary of the Dandong Committee of the Communist Party of China, said in his interview with the China Daily on September 28 that concrete plans for the joint development projects between China and North Korea in the Hwanggumpyong and Rajin-Sonbong regions will be announced at the end of the year.

This past June, Dai stated both countries agreement to jointly develop Hwanggumpyong and Rajin-Sonbong as an economic development zone and reported smooth progress in its plans.

According to Secretary Dai, “The joint management committee between China and North Korea has already been formed to promote the Hamggumpyong development project. Both countries are getting up steam to advance the project.”

In addition Dai explained, “China has secured 10 square kilometers of national land to be used to support the joint development of Hamggumpyong.” He also added, “A think tank comprised of 72 experts was also established to advise and buttress the project.”

When DPRK Cabinet Premier Choe Yong Rim visited China last month, Dai commented, “Choe’s visit to China is underlined with North Korea’s strong interest in economic reform. All the high level officials in the economic sectors accompanied him on the trip.”

While visiting China for five days, Choe met with Premier Wen Jiabao and expressed strong motivation for strengthening trade and cooperation with China, especially to improve its infrastructure. He stated, “For those Chinese companies investing in North Korea, we will provide special accommodations to encourage more investments.” In response, Wen Jiabao commented, “China will do all it can to support North Korea, so that they may seek development method most appropriate for them.”

After the meeting between the two top officials, the two nations came to an agreement to cooperate in trade, investment, and infrastructure, resources and agriculture development.

Prior to meeting with Wen, Choe visited Lanxing Chemical Industrial Machine Co. After he paid his courtesy visit to President Hu Jintao of China in Beijing, he continued to make economic related visits to Baoshan Steel Group, Bailian Xijiao Goods Purchasing Center, and industrial facilities in Jiangsu Province.

After North Korea designated Hwanggumpyong Island as a free trade zone, China has signed a 50 year-lease agreement to develop the island. Despite being a “joint development” in name, in actuality, China has the exclusive development rights based on Chinese capital.

However, North Korea is requesting for revision of the name to “co-development between China and the DPRK,” a request that China is expressing some uneasiness over. The initial agreement was to “lease Hwanggumpyong Islands to China,” which gave exclusive and autonomous development and management rights to China in the zone.

China has articulated on many occasions the Hwanggumpyong project must be strictly based on market principles and expressed apprehension that Chinese businesses may be unwilling to invest in the area if North Korea continues to pursue to change it as a joint development.

Institute for Far Eastern Studies (IFES)
2011-9-21

The minimum monthly wage at the Rajin-Sonbong (Rason) Economic and Trade Zone has been set at 80 USD.

The Rason Economic and Trade Zone is a joint development project between China and the DPRK. Recently, a booklet on the “Tax Policy in the Rason Economic and Trade Zone” was published by Rason city’s tax bureau to introduce the zone’s tax policy to foreign investors. The booklet designates the monthly minimum wage for local employees at 80 USD.

The Rason Economic and Trade Zone Law was revised in January 2010, handing to local Rason authorities the jurisdiction to decide on the minimum wage for the North Korean workers working for foreign companies in the region.

With wages in China rising, Chinese firms are tending to look at Vietnam and Indonesia to build factories. The Rason Economic Zone is also becoming an attractive alternative, especially for those investors from companies situated in China’s northeastern provinces.

The monthly minimum wage at Rason will be 25.3 percent higher than the Kaesong Industrial Complex (KIC), which is set at 63.814 USD. However, the minimum wage at Rason still remains below half of the minimum wage of workers in China. According to the (South) Korea Trade-Investment Promotion Agency (KOTRA), the monthly minimum wage in China is 167 USD.

The booklet also provides detailed descriptions of tax related information in the Rason area.

For buildings obtained with one’s own funds, property tax will be exempted for five years. It will also be possible to make inheritance tax payments in installments, if it exceeds 20,000 Euros.

The corporate income tax rates range from 10 to 14 percent. Those companies that invest over 30 million Euros will be exempt from income tax for four years from the year they record a profit. Afterward for the next three years they will receive a 50 percent tax reduction. Other taxes such as sales and transaction taxes are set at 0.6 to 5 and 0.3 to 2.5 percent.

In addition, tax payments are permitted at banks and the tax bureau directly.

Kim Jong Il made a visit to Rason in 2009 where he announced to focus on three main sectors to revive the North Korean economy: manufacturing, transportation, and tourism.

According to a North Korean authority, “Investing in labor intensive industries will be profitable in many ways. Many Chinese and even Taiwanese textile companies are expressing interest in building factories in the Rason area.”

In addition, Rason authorities expressed future plans to attract businesses in the tools, shipbuilding, automobile, and high-tech industries, and are making great efforts to attract foreign investments to the area by promoting the zone’s geographical proximity to China and Russia, cheap labor, and tax benefits.

Additional Information:
1. Read more about the Rason tax and wage policies here.

2. Read previous posts on the Rason Zone here.

Institute for Far Eastern Studies (IFES)
2011-9-14

At the seventh China Jilin and Northeast Asia Investment and Trade Expo (NEASIAEXPO), the North Korean delegation actively promoted the Rajin-Sonbong (Rajin) Economic and Trade Zone to attract investment.

During the expo, the DPRK’s Ministry of Trade and China’s Ministry of Commerce and People’s Government of Jilin Province co-sponsored the “(North) Korean Business Day and China-DPRK Trade and Investment Session” at the Changchun International Conference and Exhibition Center on September 7. Hwang Chol-nam, the vice mayor of Rason City, briefed the attendees on the current situation, advantages, and special benefits of his city.

According to Hwang, “The spacious 470 square-kilometer Rason Economic and Trade Zone is one of the largest economic trade zones,” and advertised the geographic and economic advantages of Rason as the “transportation hub of Northeast Asia that connects China and Russia via Tumen River and with Japan across the East Sea.”

He also introduced the three ports in the region. “Rajin Port is equipped with the annual loading capacity of 3 million ton and Sonbong Harbor is able to transport 2 to 3 million ton of oil while Ungsang Harbor is able to handle up to 600,000 cubic-meter of lumber annually.” He also boasted the ports to be deep enough where it does not freeze during the winter.

Rason was also introduced to have received the “special city” designation in 2010 and will grow to have a population of one million. The recently amended “Law on the Rason Economic and Trade Zone” was revised and supplement with over 50 articles.

Hwang also elaborated on the eight preferential policies providing special tax benefits to foreign investors. He asserted, “The government of North Korea will guarantee the investment of the foreign investors by not nationalizing or demanding requisitions. For inevitable cases where such demands occur, proper compensation will be provided.”

The income tax is also at 14 percent, which is 11 percent lower than other areas in North Korea. For companies with business plans over ten years, foreign capital companies will receive three years of tax-free benefit starting from the profit earning year and two years thereon after will receive 50 percent tax-free benefits. According to Hwang, over 100 foreign companies and offices are operating businesses currently in the special economic zone.

He also announced that the current highway construction project connecting Rajin with Wonjung is expected to be completed in October, and that the Tumen-Rajin port railway system is to be upgraded to a broad gauge railway next month.

Specifically, Russian Railways reached an agreement with North Korea to repair the Hasan-Rajin Railway and improve the Rajin port facilities, especially focusing on Pier 3. The plans include upgrading Rajin as a container harbor to be capable of transporting twenty-foot equivalent units annually. Russia and the DPRK have already conducted measurement and geological surveys and reached the process design phase.

However, Seo Gil-bok, the DPRK’s vice minister of commerce, stated in a speech that North Korea would “actively work hard to make the Rason region a successful collaboration between the DPRK and China,” saying further that they would “pull out all the stops to realize the goals agreed by the best leaders from both nations.”

Many foreign media and correspondents were present at the event to cover the “Korean Business Day.” At the event, North Korea actively promoted the Rason Economic and Trade Zone by also presenting a promotional video of the zone.

Pictured above: (L) satellite image of the Rajin Market, (R) a ground-level photo taken in 1999

Among the the flurry of activities that comprised the DPRK’s recent public relations campaign in Rason (Rajin-Sonbong), the Rajin Market appeared on the itineraries of a few visiting delegates. Alexa Olsen writes about the market for the Associated Press:

Chinese travel agents, potential investors and foreign journalists recently traveled into the North to get a look at the special economic zone Pyongyang is promoting in Rason. It lies in the far northeastern tip of North Korea, 600 miles (1,000 kilometers) from Pyongyang, but will be about an hour’s drive from China once the road is completed.

Rumbling Chinese cargo trucks already ply the route, churning up plumes of choking dust and ferrying containers of Chinese-made shoes, plastic toys, computer speakers, T-shirts and DVDs to the Rason Free Trade Market.

The market, a 13-year-old experiment in small-scale capitalism, has been so successful that the Chinese managing company, the Tianyu Group, is planning to expand the jam-packed 54,000-square-foot (5,000-square-meter) market to 320,000 square feet (30,000 square meters), Tianyu vice director Zheng Zhexi said.

“As I see it, this is the way of economic development, and it’s something that the people want,” Zheng said. “I think it’s reached a point where it cannot be reversed.”

North Korea declared the area a special economic zone 20 years ago. But after a brief flurry of activity and funding from the U.N. Development Program, the project languished without backing from Pyongyang’s leadership.

…

Rason has benefited from the shift in Pyongyang’s priorities. When Zheng arrived in 1997 to set up the market, people were hesitant to get involved. Now Tianyu doesn’t have the space to approve even a fraction of the applications from prospective vendors, he said.

“Ordinary people’s sense and the awareness of the market, and their views on the economy — all these have changed a lot,” Zheng said.

Foreign journalists, who typically are barred from local markets, were taken on a strictly controlled, 15-minute tour. No photos, no notes, the guide instructed: “Just use your eyes.”

Vendors, mostly women, stood behind stands loaded with freshly skinned rabbit and live chickens, as well as goods mostly imported from China: blouses, speakers, refrigerators, sofas, shampoo, playing cards, binoculars.

High heels went for 25 yuan (US$4), a Kim Jong Il-style beige suit for 85 yuan ($13) and a container of sea salt for 3 yuan ($0.47).

North Korean tour guide Mun Ho Yong, 25, said his family shops at the market several times a week to supplement state rations of rice, oil and fish.

Everything Mun wore — striped dress shirt, belt, polyester trousers and black dress shoes — was bought at the market except his pin of late President Kim Il Sung attached to his shirt, over his heart.

One major challenge will be to successfully leap from the market’s small-scale commerce to full-fledged manufacturing and trade.

(UPDATE) In an article published later in the New York Times (2011-10-12):

A Chinese company critical to Rason’s development, the Yanbian Tianyu International Trade Company, got involved here 13 years ago. It began by erecting the bazaar, then built the casino, a hospital, a bread factory and a telecommunications building. It is now working on a cement factory, and operates two iron mines.

“The policy environment has been improving continuously,” said Zheng Zhexi, 58, the company’s vice president. “It’s moving towards a market economy.”

He pointed to the official tolerance for the bazaar, where merchants rent stalls from the government to sell goods that they buy from Chinese traders. Prices fluctuate and shoppers haggle. The bazaar has proved so successful that it is expanding to six times the current size.

These kinds of markets have sprung up all over the country to supplement the government’s weak food distribution system. Still, the government is sensitive to their capitalist nature, and some top officials have tried to set limits on them. Foreign journalists were permitted a 15-minute tour of the Rason market on the condition that they not photograph it or take notes.

The market, open just a few hours each day, was bustling, with goods like skinned rabbits, sofas, Sony headphones and Dell computer mice. A soldier with a Kalashnikov slung over his back walked among the aisles, looking to buy, and women running stalls wore red vests, the uniform of officially registered merchants.

In one corner was an office with the English words “Foreign Exchange” above the door. In Rason, currency is exchanged at the market rate — one Chinese renminbi to 350 North Korea won — rather than at the official rate, which values one renminbi at 15 won.

Additional Information:

1. Previous posts on Rason can be found here.

2. Additional information can be found here.

3. Source:
Tending a Small Patch of Capitalism
New York Times
Edward Wong
2011-10-12