DPRK revises Rason investment law

According to Yonhap:

North Korea has recently revised a law governing its Rason free trade zone in a bid to speed up its development and attract more foreign investment, including from South Korea, officials in Seoul said Sunday.

According to the South Korean officials, a clause allowing “Korean compatriots living outside the Democratic People’s Republic of Korea (North Korea)” to engage in economic and trade activities in Rason has been newly included in the legal code.

The Korea Times has some more information:

The North had banned South Korean investors from Rason in a 1999 revision.

Under the latest revision, the reclusive state will lower tax rates and simplify administrative procedures for foreign investors who want to establish branch and agent offices there, the official said.

The revision took effect Jan. 22 when Pyongyang upgraded the status of Rason to a special city, he said.

The official anticipated that South Korean firms would do business in the zone, saying the latest revision is a positive sign of North Korea opening its doors to outside world.

The North designated Rason and nearby Sonbong, located on the country’s northernmost coast close to both China and Russia, as an economic free trade zone in 1991. The zone was renamed Rason later.

But efforts to attract foreign investment and capital have failed. North Korea aimed to attract $7 billion worth of foreign investment into Rason, but actual investment amounted to only $140 million.

There are an estimated 400 foreign businesses operating in North Korea, but most of them are small businesses run by Chinese or North Korean residents of Japan.

The Choson Ilbo adds more:

Article 8 of the revised law makes it possible for “Koreans” living outside North Korea to do business in the special zone, apparently with a view to attracting South Korean investors.

It also removes a clause requiring foreign companies to obtain government approval when they open sales offices or branches in the zone, making it easier to enter the North Korean market.

Instead, approval is with a new agency overseeing the Rajin-Sonbong zone.

But foreign firms and their staff are explicitly under North Korean jurisdiction, including all the draconian laws that apply to North Koreans.

The previous law permitted foreign investors unconditional no-visa entry and stay in North Korea, but under the new rules they are restricted to the zone.

Corporate income tax is reduced from 14 percent to 10 percent “in sectors particularly promoted by the state.” But other terms related to customs, land lease and bank loans remain unchanged.

One former investor is shouting caveat emptor.  According to the Choson Ilbo:

“I blew $500,000 on Rajin-Sonbong 15 years ago,” recalls Roh Jeong-ho, who headed the first South Korean business to set up operations in North Korea’s Rajin-Sonbong Economic Special Zone in 1995.

Roh (46) is scathing about North Korea’s latest attempts to woo investment to the impoverished Stalinist nation. “It’ll be a repeat of the 1990s, which ended in a belly-flop,” he said. “Nothing has changed in North Korea.”

Roh was once touted by the South Korean media as one of the young leaders in his early 30s who were expected to lead the post-unification era when he exported 44 km of barbed-wire fences to Rajin-Sonbong in 1995. North Korea had asked Roh to supply the fences to isolate the area from ordinary North Koreans. In return, the North offered him the use of 33,000 sq. m of land in the free zone for 50 years.

But there was a catch. The problem was a clause in the contract stipulating that the groundwork on facilities to be built within the leased land must be completed within two years. North Korea continued to make unreasonable demands regarding construction when the area was devoid of crucial infrastructure like roads, running water and electricity, and construction had to be delayed.

At first, the North threatened to scrap the barbed-wire order, complaining that the deal was revealed to South Korean media. Roh managed to calm the North Koreans, but then they started making new demands. They even told Roh to supply equipment to guards who were posted along the fence, including tazers and high-voltage current generators.

“North Korean government workers operate under a bizarre, performance-based system,” Roh said. “Their performance is gauged based on how much they are able to extort from South Korean businesses.”

Roh said his North Korean business partners often changed as they were either promoted or demoted based on their performance, requiring negotiations to start from scratch every time. After two years passed without Roh being able to complete groundwork on his allotted land, the right was revoked. He ended up wasting close to US$1 million, including expenses on top of the $500,000 cost of producing the barbed wire.

“If you’re not careful, you could end up losing everything,” he warned. He added that the business prospects are riddled with traps. “We tend to believe that the North Koreans would be accommodating since we are ‘compatriots,’ but that’s a big mistake,” Roh said. “North Korea extends its invitation to South Korean businesses in order to use them as window dressing to attract Chinese and Russian investors.”

Additional information:

1. At least one South Korean company is making the move to Rason.

2. China now has a 10-year lease in Rason.

3. I mapped out the fence built with Mr. Roh’s wire.


Comments are closed.