North Korean Economy Watch

I did a rough translation of the German article:

Pyeongyang to extend liberties of the Rason Free Trade Zone

(Companies to be able to get permits locally /visa-free entry)

North Korea wants to revive the Rason Free Trade Zone, located next to the borders with China and Russia. Early this year the status of Rason has been elevated and more competencies have been granted. Before that some installations have been rented out to Russia and China. Mongolia has also shown interest in the area. While a bridge to China is being renovated, the agreed repair of the train link to Russia is stagnating. Besides political issues the lack of infrastructure remains a main concern.

Already in 1991 North Korea established the Rason Free Trade Zone at the border with Russia and China, the amount of investment so far, however, has been small. Nowadays, almost 20 years later, the North Korean regime is again placing its focus on the area. Earlier this year Rason was declared a “special city”. This strengthens the city’s autonomy and there is hope that it will increase foreign investments.
Chae Song Hak, the vice-mayor of Rason, emphasizes that investors can now obtain the necessary permits directly from the local administration. Before that step larger companies had to apply for permits with the central government. Rason now has the authorization to specify tariffs, prices and even the exchange rate to be used in the free trade area.

Rajin can support vessels of up to 30.000 tons of freight
Especially tourism, processing trade and trade shall be increased utilizing the harbor. An advantage is the visa-free entry, it is not necessary to apply for a visa 4 weeks in advance as it is the case with the rest of North Korea. The harbor in Rajin, which was constructed during the Japanese colonial period in the 1930s, is a major asset for Rajin, which could serve as a transportation hub. According to Kim Chun Il, the director for external affairs at the Rajin harbor, the depth of the harbor is 9,5m and can be used by ships with a freight capacity of up to 30.000 tons. Currently there are three piers, plans for an expansion of up to 12 piers have already been made. For such an investment to be profitable, the freight volume has to be increased. Last year the amount of cargo handles was 200.000 tons, well short of the maximum capacity of about 3 million tons. There are also two other ports in Rason, Sonbong harbor is used for oil transport and until the 1980s has been used to supply a petrochemical plant. More recently the harbor has been used to receive oil shipments sent by the US. The small harbor at Ungsang can be used for the transportation of timber. It is not clear whether Rason will be able to attract many foreign investors. Besides the political risks the infrastructure is a major problem. Interruptions of power and water supplies happen almost daily, the railway lines lack reliable supply of electricity and need to be modernized. Roads are usually unpaved, only some streets in the city center are in a better shape. People within the free trade zone usually walk, we could see only a limited number of bikes and even less cars, buses and trucks. The bridge over the Tumen river, linking the area with China, has been reopened following a renovation in June but is limited to two lanes. One of the operating businesses with foreign investments is the East-North Telecommunications Company with a 50% investment from Thailand (Loxley). The company operates the mobile phone network that should be operational sometime in 2010. Another company backed by Chinese investors is producing cigarettes mainly for the export. Outside of the commercial undertakings the Rason International Catholic Hospital, an initiative backed by the Order of Saint Benedict, has come into existence. The German Hans-Seidel-Foundation is planning a number of small agricultural aid projects in Rason.
According to the business office foreign companies can use e-mail, but cannot receive access to the internet. The corporate tax is set at 14%, a reduced rate of 10% is applied to “priority sectors” (so far no definition has been made public). According to vice-mayor Chae export industries and investments that contribute to technological development will fall into this category.

Looking for investors for road and railway construction
Right now the business office is looking for investments for a number of infrastructure projects including a 50km long piece of road up to the border bridge with China, the modernization of the 159km long railway line linking Rajin and Namyang (located on the Chinese border), a fourth pier at Rajin harbor and water and sewage systems in Rajin. They are further interested in constructing wind turbines, a petrochemical plant and the modernization of the Songbong thermal power plant. All of those are investments, that are hard to sell to commercial investors. For this reason the office is considering linking these investments with fishery licenses or the right to mine natural resources like iron ore, magnesium or aluminum in other parts of the country. But also this kind of business deals can be quite risky. North Korean companies could be targets of UN sanctions, contact persons change and investments could be lost. The case of Gaeseong, where North Korea suddenly wanted South Korea to pay more for rent and wages, shows clearly that contracts are no protection for additional North Korean demands at a later point. projects related to tourism as well as those involving fishery and agriculture (corn, rice and beans or fruits) seem to be more realistic. Rason has a number of clean sand beaches and hotels. Also here, the not very reliable supply with electricity and water can pose additional problems.