More Debt Follies: DPRK Debt to Russia

July 9, 2012 7:00 AM

No sooner had we posted on North Korea’s debt to the South than our friends at Nautilus published a short piece by long-time North Korea watcher Georgy Toloraya on the resolution of the DPRK's Russian debt.

North Korea suspended payments on Soviet debt in 1990. The ruble-denominated debt supposedly financed industrial projects and military hardware, but is best thought of as accumulated arrears. The North Koreans simply didn’t pay the Soviets for what they received—except in largely unwanted countertrade--which is one of the reasons that the new Russian government quickly shifted to hard currency payment following the transition.

These debts are usually valued at $11-14 billion, with the number including compound interest on arrears; Taloraya uses the lower number. But these estimates are really a fiction because the ruble was not convertible. Given the absence of a meaningful exchange rate, it is hard to price these debts in a hard currency.

The issue has been under negotiation for years; Curtis Melvin at North Korea Economy Watch has a brief archive going back to 2006 and reviewing a number of repayment schemes. The big push to a final resolution followed the Kim-Medvedev summit last August, but obviously with a fair amount of to-and-fro. AFP reports that the North Koreans were apparently unwilling to admit that they owed the debt to Russia as the successor of the Soviet Union.

But the resolution is curious and hard to follow. According to Toloraya “90% of the debt is to be written off (this is more favorable terms than in was the case with some other debtor countries), while the remainder will be transferred to the Russian Vnesheconom bank account, which is opened at the North Korean Bank of Foreign Trade, to be used for the projects that will promote the development of education, health care systems and the energy industry.”

But wait a second. We are highly doubtful that the North Koreans are going to put rubles into this account; that would imply a real resource transfer. That means that the scheme is going to depend on Pyongyang depositing North Korean won into this account, which it can simply print and which could well go to “finance” projects that the North Koreans planned to do anyway. This arrangement would make the entire transaction another fiction—like the debt to South Korea—and imply both a 100% as opposed to 90% write-off, virtually no substantive gains for North Korea—because it hasn’t been paying in any case--and no Russian leverage over projects.

However, it could be that some resolution of the issue is required for Russia to issue any new credits, which have been scant since 1990 when Soviet/Russian trade with North Korea collapsed. Even if the debt resolution provides a legal basis for a resumption of Russian lending, we would urge our colleagues in Moscow to watch their wallets. We see little that suggests that the North Koreans are in a position or mood to repay anything they borrow. Any deals that Russia strikes—on oil pipelines (see our posts here) or railroad lines—better be designed to reap a return even if the North Koreans contribute little and even demand costly rents, such as “transit fees” for the pipeline.



After this post was drafted, Global Asia released a new special issue on Russia's involvement in Asia. See SH

Adam Cathcart

Great point: Actual gains to DPRK are not so great; they haven't been paying anyway! Along vaguely related lines, you probably saw that KCNA released the following two items yesterday. These are hardly earth-shattering but they connect to your essay and I hope they merit inclusion in full for friends in the ROK. July 7. 2012 Juch 101
DPRK, Russia Sign Treaty on Order in Border
Moscow, July 6 (KCNA) -- An inter-governmental treaty on order in DPRK-Russia border was signed between the DPRK and the Russian Federation in Moscow on Thursday.
Present there were Kim Yong Jae, DPRK ambassador to Russia, and members of the embassy from the DPRK side and Igor Morgulov, vice-minister of Foreign Affairs, and officials concerned from the Russian side.
Kim Yong Jae and Igor Morgulov signed the treaty. Apparently there is a Russian Consulate in Chongjin; another node to keep an eye out for. July 8. 2012 Juch 101
Staff Members of Chinese, Russian Consulates-general Pay Homage to Kim Il Sung
Pyongyang, July 8 (KCNA) -- Staff members of the Chinese Consulate-general in Chongjin visited the statue of President Kim Il Sung in Phohang District of Chongjin City, North Hamgyong Province on Sunday to pay tribute to him on the 18th anniversary of his demise.
They laid a floral basket before the statue and made a bow to him.
Earlier, staff members of the Russian Consulate-general in Chongjin visited the statue of the President in Ranam District of the city to pay homage to him.
On the same day various Chinese delegations staying in the city placed bouquets before his statue.

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