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We have expressed some skepticism about the byungjin line: the ability of the North Korean regime to pursue nuclear weapons and economic development at the same time. But the problems are not limited to political risk associated with the country's nuclear program; they are also associated with, well, outright political risk. In a case of tremendous significance, Orascom has apparently frozen further investment in its North Korean joint venture, CHEO Technology (Koryolink). The reason: inability to repatriate profits from North Korea.
Koryolink was initially a joint venture between Orascom Telecom Holding (now Global Telecom Holding) and North Korea's Korea Post & Telecoms Corporation (KPTC, 25%). In a 2011 merger between Orascom and Russian telecoms group Vimpelcom, certain Orascom assets including Koryolink were excluded and spun off into a new company Orascom Telecom Media and Technology Holding (OTMT). OTMT is basically a holding company with telecomm, internet and cable investments in Egypt, Lebanon and other North African and Middle-Eastern countries as well as the Koryolink investment in North Korea.
We took a look at some financial analysis of OTMT, and the firm appeared like it was on fire. Financial statements for the first nine months of 2013 showed total revenues of US$107.26 million in the third quarter this year versus $77.13 million in the third quarter of 2012, with soaring revenues in North Korea as the cause. Consolidated revenues for the first nine months totaled US$315 million.
But the report noted one minor detail: the company was holding $420 million in cash in Korea, while "standalone" cash held by the group at the end of September 2013 was only $33.5 million.
So what is this $420 million in cash, anyway? Our guess is that it reflects receivables in the form of handset sales and/or service fees that are not exactly receivable but have rather been stolen by the government. We are not in the business of dispensing investment advice, but a company with consolidated revenues of $315 million and $420 million in "cash" in North Korea sounds like a pretty risky proposition to us; let's hope those investors bidding up Orascom's share price know what they are doing.
This would not be the first time a foreign investor got profits stuck in North Korea. A former manager at Pyeongwha Motors once told us how it took months and the direct intervention of Kim Jong-il to get their money out. If Orascom is lucky, Kim Jong-un has just been too busy lately with other business and can now turn his attention back to mundane things like dealing with the country's largest investor.
Let's say that the North Korean regime got religion and decided that its bid for foreign investment was a serious one and that it had to make good on the promise to repatriate $420 million in cash that it holds. The first question that arises is "what's the exchange rate?" The guys from Orascom have plenty of experience in handling challenging business environment, so presumably they got those details nailed down at the outset.
But here's the rub: regardless of the exchange rate, if that hard currency has been spent on nuclear technology, missile components, and bronze statues of the dear leaders, then the regime is going to have to wade into the market for foreign exchange to scrounge up those dollars or euros or whatever it owes the Egyptians. Intervention on that scale could have a noticeable effect on the exchange value of the North Korean won. Do you think Orascom might accept reminbi?
