Archive for the ‘Debt’ Category

Explaining North Korea’s exchange rate stability: it’s all about the companies

Thursday, September 13th, 2018

By Benjamin Katzeff Silberstein and Peter Ward 

The stability of the market exchange rate for won-to-US dollars has been one of the most puzzling features of the economy over the past few years, and particularly so during the so-called period of “maximum pressure” and heavy sanctions by the international community. The market exchange has not once moved out of its ordinary – also remarkably stabile – territory over the past few years, as the following graph shows with clarity:

Won for USD-rates on the markets, 2009–September 2018. Data source: Daily NK. Graph: NK Econ Watch.

Thus far, to my knowledge, there have been two main, potential explanations:

(1) Maximum pressure is not having a meaningful impact on the North Korean economy as a whole. Even though it can’t export coal, minerals or textiles under current sanctions, its main sources for foreign currency revenue, the sanctions aren’t being enforced strictly enough to impact the economy as a whole, and foreign currency keeps flowing into the economy.

This explanation is pretty easy to dismiss offhand, since we know with more or less certainty that North Korea’s exports of these goods have plunged as Chinese sanctions enforcement has been fairly strict since the late summer/early fall of last year, even though it’s waxed and waned as it always does.

(2) The second explanation, most notably put forward by Bill Brown, is that Pyongyang is much better at monetary policy management than they’re given credit for. Chiefly (but not solely) through decreasing the amount of won in circulation, by giving state-owned enterprises (SOEs) smaller loans and credits in won, the government is able to keep the exchange rate stabile.

Speaking with my friend and colleague Peter Ward, a researcher of North Korean economic policy under Kim Jong-un and avid reader of North Korean economics journals, he explained a third possibility, partially in line with the latter hypothesis posed above. Ward visited North Korea twice in the past year, and was able to confirm many of the economic policy developments he had first detected in the literature from Pyongyang.

In short, Ward’s explanation is as follows: the main holders and users of foreign exchange in North Korea are not individual citizens, but state-owned enterprises, which legally (since 2013) use foreign exchange in transactions amongst themselves. The quantities of foreign exchange held by SOEs make them, and not the foreign currency markets that individual citizens access and use, the main determinant of the market exchange rate for foreign currency. Therefore, most of the foreign currency in circulation has been there for several years, not entering or exiting monetary circulation.

I asked Ward to share some of his thoughts with the readers of North Korean Economy Watch. Below is a brief Q&A of sorts.

Benjamin Katzeff Silberstein (BKS): first, when did this practice of SOEs trading in foreign currency become common and legally permissive?

Peter Ward (PW): probably around early 2013. This is when the “policy to make domestic production and exports one” came into force. The idea is to align domestic input prices for manufacturing, and consumer goods prices, with prevailing prices on international markets. This is literally what North Korean economics literature says that they aim to do, despite ostensibly being a socialist system in theory.

BKS: How is the FX-market price in North Korea determined? And where do the FX-market for SOEs and that for private citizens intersect?

PW: We don’t know, but one could imagine that there are major foreign exchange markets in North Korea – regional markets, both markets on the ground, so to speak, and between enterprises within regions. How does the center know the prevailing price? The regional price department of the regional People’s Committee price office and market management office (they may either be separate or the same) probably simply calls the local People’s Committee, who supposedly gathers this information from the local market management offices. At any rate, there’s reporting of the prevailing local exchange rate throughout the system.

Major enterprises will also know how much their inputs costs in foreign exchange, and a sense of how much their products would sell for on the world market. In that way, they’re able to assess the costs of their inputs in the world market (or at least China), and know how much they need to charge to make a profit or break even.

The market for individual citizens and SOEs intersect at several levels. SOEs likely source much of their inputs from wholesale markets, and from domestic private traders. They also obtain some of their foreign exchange from loans from private individuals. Private citizens can legally lend money to SOEs, but investments in SOEs by private citizens also happen, though they’re technically not legal, and both these investments and loans probably happen quite often in foreign exchange.

So the market price equilibrium happens through all these conduits, and as on any market, it is determined by countless instances of bargaining between traders, SOEs, and to a proportionally smaller extent, private citizens.

BKS: so where is the FX coming from, to begin with?

PW: if most inter-enterprise contracts and transactions are denominated in foreign currency, they’d be insulated from any sudden, exogenous trade shocks, such as sanctions. They’re still trading amongst themselves with whatever FX-holdings they have. For all intents and purposes, foreign currency inside North Korea is the principal legal tender – that’s what’s likely used for all major transactions inside the country, so exogenous shocks such as sanctions, from the outside, don’t necessarily impact the market price for foreign currency inside the country.

BKS: Is it likely, in your view and judging from your observations in North Korea, that the government maintains a price ceiling on the market exchange rate?

PW: Yes, it is. The government maintains price ceilings on a range of commodities, at least that’s what people inside the country say. They probably have an informal peg to the RMB, since China is their principal trade partner. It looks like it, but we don’t know for sure if they do. One possibility is that have significant cash reserves of RMB…

BKS: is it possible that China is simply helping North Korea keep the won stabile, by simply funneling RMB in?

PW: that’s certainly a possibility. The North Korean government keep a very close eye on the exchange rate, both in terms of physical cash in circulation and deposits in bank accounts, which SOEs have – both domestic and foreign currency bank accounts. They’ll keep a tight control over domestic currency-denominated loans to SOEs – that’s certainly one way of doing it. State banks will probably be encouraged to denominate such loans in foreign currency.

The government can also keep a pretty tight rope around money in circulation, since enterprises now have their own individual accounting system. The central government isn’t constantly borrowing money from the central bank to pump into SOEs, so the amount of money created by the central bank to lend to SOEs has gone down a lot.

That, at least partially, explains how the government manages to keep domestic currency circulation down. It doesn’t look like they’re printing much money overall, I saw bills from the pre-2009 currency re-denomination being used as late as July this year. And the highest denomination of North Korean won in circulation is the 5,000 won note, which has a market value of around 60 US cents, hardly appropriate for anything more groceries.

Share

DPRK resolves debt with Poland

Wednesday, October 25th, 2017

According to Yonhap:

North Korea cleared off its debt to Poland in 2012 after the European country signed a deal with the North to write off 61 percent of the debt the previous year, Voice of America reported Thursday.

The Polish Treasury Department told VOA’s Korean Service that Poland held talks with North Korea on a debt write-off in 2011 and the North implemented what it was required to do under the agreement the same year.

According to the contract obtained by VOA, the agreement, signed in Pyongyang on June 1, 2011, stipulates that the North’s debt amounted to roughly US$4.31 million as of the reported year, including the production and delivery costs of Mi-2 military helicopters for which the Polish communist regime struck a deal with the North in 1986.

The report also said Poland’s debt relief was linked to the North’s provision of US$1.5 million in cash to purchase a ship to a North Korea-Poland joint venture shipping firm established in 1967.

Under the debt write-off deal, the North was also required to foot the bill of $200,000 to repair the Polish Embassy in Pyongyang. The repair project was based on an agreement between representatives from the two countries’ foreign ministries and the North was obligated to transfer the money to the embassy’s account.

In case the obligations are fulfilled, the agreement says, Poland will write off 61 percent of the North’s debt that corresponds to around $2.61 million.

North Korea currently owes debts to Sweden, Switzerland and Finland. The countries earlier said they had no intention of writing off the North’s debts.

Read the full story here:
N. Korea settles bill with Poland in 2012 after 61 pct of its debt written off: report
Yonhap
2017-10-25

Share

Private finance in the DPRK

Tuesday, August 4th, 2015

According to the Wall Street Journal:

For decades after North Korea’s founding in the 1950s, financial security wasn’t a major concern for its citizens. A communist system provided most daily needs, and for many years living standards outstripped those of South Korea.

Then a devastating famine in the 1990s and a subsequent economic collapse crippled the public distribution system and forced citizens to fend for themselves.

The semimarket economy that emerged has expanded rapidly in recent years, providing a living for up to three-fourths of the country, according to observers, defectors and those with contacts in a state that is largely closed off from the rest of the world. As unauthorized private commerce has bolstered North Koreans’ incomes, an unregulated system of lending and currency exchange has also emerged, they said.

“People are investing and are making money,” says Kim Young-hui, a former North Korean banking official and an analyst on the North Korean economy at KDB Bank in Seoul. Observers such as Ms. Kim, who left North Korea in 2003, say refugees from all provinces have reported private lending activities in their respective hometowns.

There is no reliable study to measure precisely how much money is flowing in and out of the country, observers and defectors say, and North Koreans remain excluded from anything close to a modern financial system. There are no commercial banks and little trust in the state for economic security.

Defectors’ accounts depict a system in which private savings are being funneled into lending to generate a profit, but without any legal framework or guarantee on investments. Scams occurred in the early years but in the last three years, a culture of credit has settled in, says Lim Eul-chul, a professor at Kyungnam University’s Institute for Far Eastern Studies in Seoul who studies the North Korean economy.

“As businesses expand, the importance of credit goes up. Now you are doing business with more than just people you know,” said Mr. Lim, adding that friends or family often guarantee payment.

According to observers and defector accounts, some North Korean lenders and investors are funding seed and fertilizer purchases in return for a cut from the following year’s harvest, or lending money to merchants to import goods that range from apples to Italian luxury goods. They are borrowing and lending with interest, dodging North Korea’s ban on usury. Even state traders are borrowing money from them, some defectors say.

Pawn shops have opened up under official blessing and people leave anything of value for small loans, they say. Some private-property ownership, such as apartments, has been allowed since 1998, and some lenders independently appraise the value of real-estate properties to collateralize larger loans. A default on a loan can lead to confiscation of goods by the private lenders, they say.

It is impossible to independently verify accounts of private commerce and lending inside the reclusive country. But since taking power at the end of 2011, North Korean dictator Kim Jong Un has promised to improve living standards and appears to have taken a relatively laissez-faire approach to market activity.

Such activity—from selling toothpaste to buying 3G-enabled smartphones on the street—still isn’t officially allowed in North Korea, but the regime often turns a blind eye to the commerce, some observers say. The regime even appears to be collecting some money from the activity, in the forms of bribes to authorities or fees for securing a market stall, they said.

North Korea observers such as Andrei Lankov, a professor at Kookmin University in Seoul, say that between half and three-quarters of North Korea’s household income comes from the private sector. Those who have some money aren’t just lending, they are opening up restaurants, computer stores, karaoke shops or communal bathhouses. Private taxi and delivery services have emerged in recent years.

Those who engage in commerce are reaching consumers and intermediaries more than before, thanks to the recent proliferation of cellphones. Buyers and sellers no longer have to exchange cash in person, they can tell their financiers to settle the bill.

The regime has kept track of these developments and has tried to regulate private wealth, albeit with little success, some observers say.

Trust in the state took a heavy blow following a 2009 currency devaluation that caused a panic over the sudden loss of wealth. The policy damaged the flourishing black market and reinforced the public’s preference for foreign currency. Now, most private deals are in U.S. dollars and Chinese renminbi, observers say.

“In large cities like Chongjin [a port near the northeastern tip of North Korea where China and Russia meet], it’s 100% renminbi,” says one former North Korean farmer, who fled to South Korea in 2013.

A recent attempt by the regime to introduce a degree of personal finance came with the introduction of a card-payment system. Kim Chon Gyun, president of the central bank, told Japan-based newspaper Choson Sinbo in February that North Korea is working to fuel economic development by “smoothly circulating internal capital.”

Mr. Kim said the country was developing an unspecified “new financial product” and was encouraging the use of bank cards in ordinary people’s lives, in a rare public disclosure of economic policy.

Peoples’ accounts vary, but they say North Korea since 2011 has been issuing at least two kinds of chip-bearing plastic cards that allow users to load domestic or foreign currencies. The cards can be used for payment at some stores, and the salaries of some government officials appear to be wired to such accounts, they say. They are being used in provinces as well as in the capital.

But some observers say the system’s adoption among ordinary citizens appears low, and its success is contingent upon conditions such as a guarantee of deposit and the regime’s assurance that the origin of the money won’t face scrutiny.

Read the full story here:
North Korea’s Private Finance: No Banks but Lots of Loans
Jeyup S. Kwaak
Wall Street Journal
2015-8-4

Share

DPRK still owes Sweden for old Volvos

Friday, August 29th, 2014

According to Newsweek:

North Korea’s foremost trade debt to the western world is bizarre even by North Korean standards. Each time the administration misses a payment, as it has done every year for the past 40 years, we are reminded of one of the most unexpected political twists of the last century: Kim Il-sung scamming Sweden out of 1,000 Volvo 144 sedans.

Each fiscal year, the Swedish Export Credits Guarantee Board calculates interest on a single debt that accounts for more than half of all its political claims. It’s been a tradition since 1974, when the government agency was advised to insure Volvo, Atlas Copco, Kockum, and other Swedish companies’ exports to an entirely new buyer: Supreme Leader Kim Il-sung. For nearly half a century, the Board has been in charge of the Sisyphean task of coaxing €300m from a nation that thinks international law is an elaborate gambit designed by capitalist pig-dogs.

“We semi-annually advise when payments fall due,” Stefan Karlsson, the board’s head of risk advisory, tells Newsweek. “However, as is well known, North Korea does not fulfil their part of the agreement.” Sweden being Sweden and North Korea being North Korea, that’s about as hardball as it gets.

Small wonder that a regime so impressed with itself soon developed expensive taste. “Inside the 144 GL you sit on leather,” reads the unambiguous 1970s marketing material that Volvo likely sent its North Korean buyers. Together with contemporary industry giants Atlas Copco and Kockums, Volvo was one of the first European companies to foray into the North Korean market, and promptly received an order for 1,000 vehicles, the first of which were delivered in 1974. But less than a year later, the venture blew up at a Swedish-Korean industrial trade fair in Pyongyang, where it suddenly became clear that the Kim regime wasn’t actually paying for the goods it was importing – not even the machines it ordered for the expo. The bills were simply piling up.

Exporters realised that the venture had gone horribly wrong. But for the past few years, Sweden had had North Korea fever, with countless hours and funds spent on diplomatic and industrial ties. Acquiescing in a massive failure was not easy. “Many had been blinded by North Korea’s impressive economic growth – people had raced to get there first,” Lamm Nordenskiöld says. “Sweden was supposed to be the first country to unlock this new market.”

While many companies pressed on with payment negotiations in an effort to save face, Swedish media was having a blast unraveling one of the most bizarre trade debacles in recent memory. In an indignant spread featuring a photo of the supreme leader with the caption “Kim Il-sung – Broke Communist,” Åge Ramsby of the newspaper Expressen in 1976 went all out listing reports of other debts the Kim regime shirked, including a cool €5m to Swiss Rolex, from whom it had allegedly ordered 2,000 wristwatches with the engraving “donated by Kim Il-sung”.

“North Korea had expected to pay their foreign debts with deliveries of copper and zinc,” the Swedish newspaper Dagens Nyheter wrote in 1976, referring to the reserves the imported mining equipment was supposed to unlock. “But the North Korean economists had been too optimistic in their calculations, and the international market price for these ores had also dropped ­catastrophically.”

Fair enough – but two things suggest that botched calculations and sheer lack of funds only partially explain North Korea’s failure to pay up. First, it is widely accepted among biographers and manufacturers that the Kim regime conducted extensive industrial espionage during the trade fair. Colluding to cop specs from technology you’re paying for would be weird even by Kim’s standards.

More importantly, Erik Cornell, a diplomat and former Swedish ambassador to North Korea, recalls in his book North Korea: Emissary to Paradise a widespread local belief that the Western world had finally “seen the light” in the global struggle against the American imperialist – that Europe had recognised its duty to assist the brave People’s Republic, and that quibbles regarding who owed whom money would soon dissolve in grand efforts to crush capitalism as a whole.

Adjusted for interest and inflation, the debt to the Swedish state now exceeds three billion Swedish kronor, or €300m. It is an astronomical claim, particularly on capital that has depreciated to a fraction of its original value.

If Kim Jong-un and his officers rounded up all 1,000 vehicles and sold each of them at the current book value of about €2,000, they would raise 0.6% of the debt.

Read the full story here:
North Korea Owes Sweden €300m for 1,000 Volvos It Stole 40 Years Ago – And Is Still Using
Newsweek
John Ericson
2014-8-29

Share

Austria claims it is owed $200m by DPRK

Wednesday, May 28th, 2014

According to the Korea Times:

North Korea currently is $200 million (2.5 billion won) in debt to Austria, Voice of America (VOA) reported Wednesday.

Austria’s annual financial report indicates unpaid debt from foreign countries had reached approximately $1.26 billion (1.2 trillion won). Among them, North Korea has not paid anything back for 20 years, said Die Presse, an Austrian daily.

After a debt settlement between two countries in 1987, in which Austria received $7.6 million from the North, all payments stopped in 1992, the VOA said.

Die Presse added it is uncertain if the rest will be redeemed after inactive efforts for 20 years. It also explained the North took out loans from 30 western European countries in the late 1960s and inefficient management resulted in the indebted situation.

A source familiar with the issue speculated North Korea owes $18 billion (18.4 trillion won) in external debt.

Russia waived 90 percent of a $10.1 billion debt owed by the North, while the rest could be repaid over 20 years and be reinvested in North Korea.

Read the full story here:
NK owes Austria $200 million
Korea Times
2014-5-28

Share

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

Thursday, March 20th, 2014

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

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

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

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

No word yet on what was purchased.

Here is coverage in Xinhua:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More at the Voice of Russia.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You can read more about the gas pipeline here.

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

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

“It was signed yesterday,” Storchak said.

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

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

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

Here is coverage of the deal in KCNA:

Agreement on Debt Settlement between DPRK, Russia Signed

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

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

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

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

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

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

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

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

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

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

Read more below:

(more…)

Share

Babson on post-Jang economic management

Monday, February 24th, 2014

Writing in 38 North, Bradley Babson comments on the effect Jang Song-thaek purge will have on North Korea’s economic management moving forward:

With Jang’s demise there is now a potential opportunity to make fundamental changes in the North Korean economic management and financial systems. Removing his influence over major foreign exchange earning enterprises operating outside any institutionalized supervision means that some other mechanisms must be put in place to manage these important national resources. Whether this will lead to a more rational system of cabinet-managed financial institutions serving an economic development strategy endorsed by Kim Jong Un is a basic question. Early indications are that the cabinet will be empowered to exercise more centralized control over the economy,[2] but how far this will extend into the fragmented financial system remains to be seen.

One indicator of possible significant change is whether the KPA will regain its former economic independence or become more closely integrated with national economic and financial management. This is important for improving efficiency in allocation of resources for economic development and having more control in balancing security expenditures with investments in the general economy.

Another indicator will be whether the existing system that provides funds for sustaining luxury goods patronage for the Pyongyang elite and for showcase projects like equipping the new Masik Pass ski resort, will be handed over to new more loyal technocrats to manage. Or will the Cabinet be given more latitude to shape the future political economy and distribution of wealth, given the reality that access to market power is becoming more valuable for the Pyongyang elite than receiving patronage? This would be a major change that could lead to new incentives for more rational economic management. Acknowledgment that markets are here to stay would open the possibility of addressing the need to build new financial institutional capabilities required for mobilizing and regulating private savings and economic activity. This would also help focus attention on ways to improve macroeconomic management of the mixed state-directed and market economy system.

Read the full story here:
The Demise of Jang Song Thaek and the Future of North Korea’s Financial System
38 North
Bradley Babson
2014-2-24

Share

Noland on DPRK sovereign debt

Wednesday, December 11th, 2013

Marcus Noland posted some interesting information on North Korean debt that should be helpful for future researchers:

Back in the 1970s, North Korea borrowed heavily from Western banks and then defaulted. (To be clear, this does not refer to borrowing from the Soviet Union or other Eastern Bloc countries—these are commercial bank loans extended by syndicates involving more than 100 banks from 17 countries.) The loans were rescheduled in 1977, 1980, and 1984, but each time North Korea fell into default. In 1988, the London Club, representing the banks, took North Korea to court and obtained a judgment by the International Court of Arbitration, but even this did not prompt North Korea to settle. The principal and accumulated interest now stands at roughly $3 billion.

BNP subsequently issued three series of certificates which securitize the debt into transferable securities in the name of the NK Debt Corporation (Bloomberg ticker: NKDEBT). These securities trade at a large discount (currently around 5 cents on the dollar) though at the height of the famine, the price of the debt reached more than 50 cents (see Avoiding the Apocalypse Figure 3.5), as it was interpreted as an inverse indicator of regime survivability assuming that in case of a North Korean collapse, South Korea will pay off the debt. There might be challenges to this scenario on the basis of “odious debt” but that is not what the market seems to believe.

You can read previous posts on the DPRK’s debts here.

Share

DPRK debt will hamper development of Economic Development Zones

Wednesday, October 30th, 2013

According to the Daily NK:

North Korea’s unserviced external debt will make it difficult for the country and its partners to implement plans for special economic zones, it has been pointed out. North Korea, which defaulted on its external debt decades ago, needs to recover its sovereign credit rating through repayment or rescheduling, but has not shown any intention of doing so.

“North Korea’s outstanding foreign debt is between $120 billion and $150 billion; if the state cannot repay this, they cannot get access to international financial institutions,” Yoon Deok Ryong, a senior researcher with the Korea Institute for International Economic Policy explained to Daily NK. “The North Korean regime must take steps to restore trust. One of the ways this could be done would be to join the Paris Club of debtors, a structure within which developing nations can borrow money without incurring interest.”

“For a number of years, the Chinese government has been distributing investment guides to Chinese businessmen that outline the risks of investing in North Korea. These guides were previously shared privately, but have now been made public by the Chinese Ministry of Commerce,” Yoon went on. “We can see in this that China, too, is wary of investing in North Korea; it is therefore imperative for the North Korean government to adopt trustworthy measures such as servicing its debts. This is the only way that their development plans can work out.”

“North Korea has been pushing for foreign capital via investment symposiums and talks, as well as the enactment of appropriate trade legislation. But the truly vital concern they should deal with is the building of trust to improve their battered image, one that is often associated with massive outstanding sovereign debt,” a second economic expert, speaking on condition of anonymity, agreed.

All joint ventures require a North Korean business partner. However, many previous JV agreements have seen the North Korean side not service its financial obligations properly. This makes it harder every time Pyongyang makes a new attempt to attract foreign capital.

“During the peak of joint ventures with China in the mid-2000s, there was this hotel in Pyongyang designated solely for Chinese visitors, Kim Seong Ryong, a recent defector who worked on trade issues for a provincial people’s committee in Hwanghae Province, revealed to Daily NK. “Of the 1000 Chinese staying there, most had come to collect their debts. Eventually, however, most could not get their money back and had to close down their businesses.”

Kim went on, “No matter how the Chinese government goes about spurring investment in North Korea, it remains uncertain how much money Chinese businessmen will willingly give in light of the calculations involved. In particular, Chinese traders are fully aware that North Korea does not service its debts properly; thus, the likelihood that Chinese traders will refrain from participating in the development zones is very high.”

Read the full story here:
Debt Burden Set to Trip Up SEZ Plans
Daily NK
Oh Se Hyeok
2013-10-30

Share

DPRK in default on ROK food loans

Friday, May 24th, 2013

UPDATE 2 (2013-5-24): South Korea has again requested that the DPRK repay past food loans. According to Yonhap:

South Korea again called on North Korea Friday to repay millions of dollars in loans provided in the form of food since 2000, the Unification Ministry said.

The impoverished North missed the June 7, 2012 deadline to repay South Korea US$5.83 million in the first installment of the $724 million food loan extended to the North in rice and corn. The latest call is the South’s fifth demand made on the North to repay its debt.

Seoul’s state-run Export-Import Bank (Eximbank) sent a message on Thursday to Pyongyang’s Foreign Trade Bank, calling for the repayment, Unification Ministry spokesman Kim Hyung-suk said in a briefing.

The South Korean bank also sent another message the same day, notifying the North of its forthcoming June 7th deadline to repay the second installment of $5.78 million, the spokesman said.

“North Korea should faithfully abide by what they previously agreed to with the South,” Kim said, calling for the repayment of food loans.

Amid a conciliatory mode under the liberal-minded late President Kim Dae-jung, Seoul started to provide food loans to the famine-ridden country, providing a total of 2.4 million tons of rice and 200,000 tons of corn from 2000-2007.

Under the deal, the North is required to pay back a total of $875.32 million by 2037.

Read the full story here:
S. Korea again asks North to repay food loans
Yonhap
2013-5-24

UPDATE 1 (2012-7-15):  South Korea claims the DPRK missed a deadline for explaining how it intended to repay South Korean “loans”. According to Yonhap:

North Korea missed the deadline Sunday for notifying South Korea of how it will repay millions of dollars in loans provided in the form of food in 2000, resulting in Seoul having the right to declare Pyongyang has defaulted on its debt, an official said.

South Korea sent the North a message on June 15 that the communist nation was supposed to have paid back US$5.83 million in the first installment of a 2000 food loan worth $88.36 million by June 7. The North was required to respond to the message in 30 days.

That deadline passed on Sunday with the North remaining silent, giving South Korea the right to declare the North has defaulted on the debt, according to a government official in Seoul.

But South Korea is unlikely to go ahead with the declaration any time soon as it would have little effect on the North. The communist nation remains largely outside of the international financial system and the prospect of national default is unlikely to force it to repay its debt.

Officials said they are considering sending Pyongyang a message again calling for debt repayment.

Widespread views are that it won’t be easy for the North, which is still struggling with food shortages, to pay back its debt, but officials said the country could repay the debt in kind as it did before. In 2007 and 2008, the North repaid some debt with $2.4 million worth of zinc ores.

After the two Koreas held their first-ever summit in 2000, South Korea provided the North with a total of US$720 million in loans of rice and corn until 2007. Including interest accrued on the loans, the North is required to repay some US$875 million by 2037.

Such aid has been cut off after the South’s President Lee Myung-bak took office with a pledge to link any assistance to the North to progress in international efforts to end Pyongyang’s nuclear weapons programs.

The Daily NK also covered the story.

ORIGINAL POST (2012-6-8): According to Yonhap:

North Korea has not shown any signs of repaying the loans South Korea extended in food grains since 2000 although the initial day of the scheduled repayment passed as of Thursday. The South Korean government provided North Korea grain loans worth US$725 million for seven years until 2007, including 2.4 million tons of rice and 200,000 tons of corn. The total principal and interest North Korea should repay for the next 20 years is estimated at $875.32 million.

North Korea was scheduled to pay South Korea $5.83 million by Thursday for the loans extended to it in 2000. Korea Eximbank, which is in charge of trade finance with the North, notified its counterpart the Chosun Trade Bank of North Korea of the repayment obligation Monday but North Korea had not responded of Friday.

The former South Korean governments led by President Kim Dae-jung and Roh Moo-hyun provided an estimated 1 trillion won (US$850 million) to North Korea from 2000 to 2007 under the sunshine policy. South Korea provided an additional 1.37 trillion won to North Korea to finance the construction of a light water reactor in order to suspend North Korea’s nuclear development. All the loans to the North were taxpayer’s money.

North Korea should show sincerity in the repayment of these loans for the sake of its future. If it fails to do so, the North will encounter substantial difficulties in accessing further loans from the international community. North Korea also has failed to repay loans it borrowed from the old Soviet Union. Russia reportedly had to reduce 90 percent of the Norths loans, worth $11 billion.

If North Korea has difficulties repaying its debts to South Korea in cash, it should sincerely discuss alternative measures to repay the loans with the South Korean government.

The South Korean government should positively consider measures to get the money back in kind, such as in mineral resources. North Korea should understand that if it fails to show the minimum sincerity on the repayment of its debts, it will experience much more difficulty in attracting economic assistance from the outside world.

The Choson Ilbo reports this additional information:

In 2007 and 2008, South Korea also gave the North $80 million worth of raw materials to produce textiles, shoes and soap. At the time, North Korea repaid 3 percent of the loan with $2.4 million worth of zinc ingots. Repayments of the remaining $77.6 million become due after a five-year grace period, so North Korea must start repaying $8.6 million a year every year for 10 years starting in 2014.

Seoul also loaned Pyongyang W585.2 billion (US$1=W1,172) from the Inter-Korean Cooperation Fund so it could re-connect railways and roads with the South that were severed in the 1950-53 Korean War. And it provided W149.4 billion worth of equipment to the North. The North must repay that loan in 20 years with a 10-year grace period at an annual interest of 1 percent.

It also seems unlikely that South Korea will be able to recoup W1.37 trillion plus around W900 billion in interest it provided North Korea through an abortive project by the Korean Energy Development Organization to build a light-water reactor.

The loans amount to a total of around W3.5 trillion, which the South will probably have to write off.

The Daily NK also reported on this story.

Read the full story here:
North Korea should show sincerity in repaying South Korea loans
Yonhap
2012-6-8

N.Korea Misses 1st Loan Repayment Deadline
Choson Ilbo
2012-6-8

Share