Yesterday, we played the optimist, looking at some reasons why the regime’s push to revive export processing zones might yield some fruit. But we have also been following an investment dispute between North Korea and a large Chinese private firm that shows the ongoing credibility problems the country faces; our summary can be found here and Curtis Melvin has a useful dossier.
On September 5, the KCNA issued a quite remarkable rebuttal of Xiyang’s claims from the Joint Venture and Investment Commission, which we reproduce with some commentary. Three things are striking: North Korea has chosen to defend itself, including with claims that it is open for business and reforming; Xiyang has not backed down, and has even escalated the fight; while Beijing has let the whole issue roil, which we interpret as a not-so-veiled signal to both Chinese investors and North Korea that they are on their own.
The KCNA/JVIC statement:
“Media Should Maintain Impartiality in Report about DPRK
Pyongyang, September 5 (KCNA) — A spokesman for the DPRK Commission for Joint Venture and Investment on September 5 issued the following statement:
The Xiyang Group of the Haicheng City, Liaoning Province of China on August 2 posted on its Internet website an article criticizing the DPRK over the disputes that cropped up between the Group and the Korean Ryongbong Corporation in the course of implementing a joint venture contract for the development of magnetite concentrated ore.
After the article was published, some media echoed it before and after the report about the results of the third meeting of the DPRK-China Guidance Committee for developing two economic zones was made public.”
SH: The meetings of this joint guidance committee were the purported reason for Jang Song-Thaek’s visit to China and apparent point of pride for the government that investment projects in Rason and Hwanggumpyong and Wihwa Islands were back on track.
KCNA/JVIC. “They added their own analyses to the article posted by the Group. They even aired what the anti-DPRK hostile forces reported in the past to malignantly slander the inviolable social system and policy of the DPRK.
Generally, it is international usage and commercial ethics to settle disputes that occurred in the course of economic relations in line with the relevant arbitration item of the contract.
But the media have kicked off massive propaganda campaign, defying international usage and commercial order. This cannot be interpreted otherwise than an act of fanning up the dishonest forces in their moves to drive a wedge between the two countries in their economic cooperation and chill the atmosphere for investment.
As far as the procedures for the signing and implementation of the contract between the DPRK Ryongbong Corporation and the Steel Co. Ltd., of the Group and the bilateral disputes are concerned, the Group is also to blame for the abrogation of the contract. In the light of the process of implementing the obligations under the contract, the Group is chiefly to blame from the legal point of view.
It has carried out only 50 percent of its investment obligations though almost four years have past since the contract took effect. So the two contracting parties again sat together only in vain over the timeline for the completion of the first-phase investment and commissioning.
As for 16 provisions which the Group set forth as the major issue of the disputes, it is the legal obligation of the Group related to the contract to implement them according to the mutual contract in which both sides agreed on the article that “two sides sign it on the basis of the DPRK Law on Joint Venture”.
As regards the dealing of sales price of trial products, the Group insisted on its self-opinionated proposal for settling its debts within the boundary of China, in disregard of the procedures in price dealing pursuant to the relevant financial management norms.”
SH: It is impossible to gauge who is right in this dispute, but Xiyang poured substantial fixed capital investment and human resources into the effort, it is notoriously difficult to do business in North Korea, and thus to meet timetables, and the investment appears to have been more or less confiscated outright. The “relevant arbitration item” of the contract remains unclear, but it appears that the North Korean government acted unilaterally following unsuccessful negotiations, hardly a comforting means for resolving disputes.
KCNA/JVIC: “Media should comply with the standards for fairness and objectivity, create an atmosphere helpful to settling the disputes between the two contracting parties and refrain from an act that can be misused by the hostile forces for their vicious propaganda.
We will in the future, too, improve and round off the investment environment to further expand the international investment relations to meet the demand of the developing times and the lawful requirement of the international investment relations under the condition that the security of the country is guaranteed by dint of Songun. We will also ensure the legitimate rights and interests of all investors willing to develop international investment relations on the principles of mutual respects, equality, reciprocity and law-observance.”
Cynical as we are, this last paragraph is quite extraordinary. While defending itself, the JVIC also acknowledges the need to improve the business climate and to maintain its obligations.
Unfortunately for North Korea, Xiyang did not take this rebuttal lying down and has even escalated it. A piece by Reuters reports the comments of Xiyang spokesman that “this isn’t just about us ; it is about all companies investing in North Korea. They just don’t have the conditions for foreigners to invest. They say they welcome investment but they don’t have the legal or social foundations.”
Equally if not more interesting is that China’s Foreign Ministry spokesman Hong Lei suggested that Xiyang and North Korea will just have to duke it out. “Regarding some problems that occur in the process of China-North Korea cooperation,” he said, “we hope the two sides can appropriately handle and resolve them.” We interpret this to suggest that China will maintain its stance of “caveat emptor”: that Beijing encourages investment in North Korea but will not step in as a fixer. Chinese firms are on their own and North Korea is responsible for its own reputation.