North-South Relations Update

Stephan Haggard (PIIE) and Kent Boydston (PIIE)
May 26, 2015 7:00 AM

There have been a few developments recently in North-South relations; for the most part, they reflect the ongoing dilemmas of Trustpolitik and engagement more generally. On the discouraging side, UN Secretary General Ban Ki-moon announced earlier in the week that he would visit the Kaesong Industrial Complex (KIC). Less than 48 hours later, North Korea had pulled the plug.

Ban had spoken positively of the zone as a “win-win” and of expanding its operations. So why did the North balk? One possibility is that the Secretary General overplayed his hand. The invitation was only for a visit to Kaesong, where he promised to speak to firms and workers; that alone might have been seen as meddling in the ongoing conflicts in the zone catalogued by my colleague Marc Noland. Michael Bassett offered up a plausible interpretation to me: that the timing of Ban's visit and a request by the Federation of Korean Industries to establish an office in Pyongyang might have been seen as less than coincidental. Was Ban part of a "chaebol front"?

But Ban also talked vaguely about going on to Pyongyang, which might have been a bridge too far as well. As Secretary General of the UN, Ban would be obligated to come bearing--or at least defending--the official positions of the organization he heads. These positions include a raft of resolutions on the country’s nuclear and missile programs as well as a scathing human rights report approved by the UN General Assembly.

In any case, regardless of whether Ban overstepped, the North clearly missed an opportunity. The canceled visit constitutes still more evidence of the capriciousness of North Korean policymaking, and precisely on an issue where they have hoped to make progress: foreign investment.

A more adverse form of “internationalization” appears to be taking place quietly with respect to Mt. Kumgang. After Kumgang’s closing following the shooting death of a tourist in 2008, North Korea sought alternative investors. A handful of tour companies took the bait and visited, but no one took up the investment opportunity.  Last year in Dalian, North Korea apparently hosted an information event on the zone that was reportedly attended by 200 ethnic Koreans from all over the world , although we suspect mostly Korean Chinese. No offers that we can see. We now have a report that the North Korean government is trying again, hosting (in Korean) “overseas” Koreans and foreign entrepreneurs at the Mt. Kumgang Resort around an elaborate new development plan; NKNews (behind a paywall) got access to the documents.  We are skeptical that the North Koreans will have much success with this effort, which effectively consists of asking new investors if they want to put money into assets expropriated from Hyundai Asan. Hyundai’s legal team will be—and should be—ready to pounce on any investor taking the bait.

On the more hopeful side of the ledger, the Federation of Korean Industries (KFI), the organization representing the interests of South Korean chaebol groups, announced its interest in setting up an office in Pyongyang. The office would scout out potential deals—investments in tourism and a second Kaesong zone were mentioned—and provide advising services to South Korean companies. If Bassett is correct, the North is not likely to buy in. There is broader significance of the announcement in the South however: either the FKI is lobbying for a relaxation of the post-Cheonan May 24 sanctions  or it believes that the writing is on the wall and that they will ultimately be lifted.

Evidence of the latter, finally, comes in the complex dance going on over South Korean investment in Rason. Russian interests hold a 70-percent stake in a joint venture with North Korea called RasonConTrans, which has been responsible for upgrading the Khasan-Rason rail line and investing in transshipment facilities at the port. For some time, a consortium of South Korean firms (POSCO, Hyundai Merchant Marine and KORAIL) have been eying purchase of half the Russian stake. The project has political overtones as it is in line with Park Geun-hye's Eurasia Initiative, which aims to open trade routes with the mainland. To date, however, the consortium has been engaging only in pilot coal shipments, the first in November, the second taking place now. The project ships Russian coal by rail from Khasan to Rajin where it is picked up by a Chinese-flagged vessel for transshipment to Pohang.

The pilot shipments are hiding behind the fact that RasonConTrans is a majority-owned Russian venture, but make no mistake: the trade violates the spirit if not the letter of the May 24 sanctions. How is this not North-South trade? There is now discussion of one more pilot shipment and an expansion of the consortium to include Korea East-West Power Co. and Korea Midland Power Corp.

In a hope-springs-eternal moment, South Korea initiated another pilot in conjunction with the Eurasia initiative: a maiden voyage for two trains leaving from Beijing and Vladivostok for Europe, joining in Irkutsk. But the initiative reflected once again the barriers—both physical and of a policy nature—that North Korea poses to such grand projects. The dignitaries and citizens taking the trip on the new Siberian express had to fly from Seoul to Beijing and Vladivostok to get rolling.

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