I hate it when people put those little red exclamation marks on their emails indicating that it's urgent, and then when I open it up it’s just a routine email. One guy I know puts red exclamation marks on all of his messages. Which means he puts red exclamation marks on none of his messages.
So a few weeks ago my inbox lit up with red exclamation marks when NK News ran a couple of stories on a Chinese state-affiliated entity announcing that it was the major backer of a new investment fund in Hong Kong established to provide the exclusive opportunity for foreign investors to support twelve investment projects. These projects include:
"Rason Economic Zone and other Special Economic Zones; Rajin port; transport and associated logistics; East Coast High-speed rail and interconnecting services; Power generation; National oil and gas strategy – including refurbishment of two existing refineries and exploration and exploitation of local reserves; Gold mining and establishment of a gold bank; Rare earth mining, metal and mineral processing; Telecommunications and cable television; Internet services and electronic payment platforms; Financial services; and Agricultural development."
Now that I actually have gotten around to reading the articles (hey, it’s summer and the living is easy) it’s an interesting story with two recurring implicit themes: the need to reconstitute the Sino-DPRK links disrupted by the purge of Jang Sung-taek, and the chronic uncertainty over property rights in North Korea.
So first the story, then interpretation. The fund is the Heuimang Investments Group Limited, a joint venture of the China Railway Investment Group (which may or may not be related to the China Railway Group Limited (the two articles appear contradictory on this point) and Daegian Pte Limited of Singapore, a North Korean “window company” founded and led by Rudi Sirr and “owned by the North Korean government’s State-owned investment company.” Daegian was incorporated in March 2014, Heuimang in July 2014.
Despite the red exclamation marks exploding in my inbox, this development or something similar is really not all that surprising. As Steph Haggard and I have observed in various writings and blog posts, for years Pyongyang has been trying to channel economic integration with China through institutions tightly controlled by the central government. This stance could be driven both by policy preferences and more parochial motives of regime insiders who want to position themselves as gatekeepers for inward foreign investment presumably to capture the associated rents and opportunities for corruption. There have been competitions for this control of this function, such as the rumble between the Taepung Group and the Joint Venture Investment Committee, and Jang Sung-taek was central to this activity which reputedly contributed to his purge and execution.
As I wrote at the time and have subsequently elaborated on in the forthcoming book with Steph, regardless of whether or not Jang was a scoundrel, there is a commercial logic behind China-DPRK economic integration, and it was likely that after a pause the networks to promote these ties were likely to be reconstituted. The developments reported in the NK News article strikes me as essentially that: the mechanism through which the North Korean regime is going to channel Chinese (and possibly non-Chinese) investment in major projects.
A second theme—the uncertainty of property rights in North Korea—emerges repeatedly in the second article, an interview with Phill Hynes, media contact and risk management consultant for Daegian. One suspects that the frequent invocation of this theme reflects both the true lack of clarity of property rights in North Korea, and Mr. Hynes' determination to establish that his company is the one with the inside track. He seems to go out of his way to disparage Mongolia’s HBOil, partly owned by James Passin, “the American who bought Mongolia” (and bankrolled the first (and only) rap video shot in North Korea). But it’s not just all personal rivalry. Hynes is pretty open about the lack of clarity about who owns what in the Rajin port, “there must be ten claims out there.”
Maybe not so much frankness on sanctions: “We’ll have the responsibility for ensuring that any projects will not involve any sanctioned companies. That’s a given from the very beginning. There’s going to be compliance from the North Korean side on that as well. We’re not coming at it blind, like many companies do trying to get into these countries. They don’t necessarily know whom they are working with. We will know exactly whom we are working with. The sanctions issue is paramount, at the forefront of our minds, in terms of what we are doing.” In other words, trust us.
So, while the headlines managed to light up my inbox like a Christmas tree, is it all that surprising? A North Korean state agency through a front group is partnering with a state-affiliated entity in China to channel investment. They will have to deal with a lack of clarity with respect to property rights on the North Korean side, and the lack of conventional mechanisms for commercial dispute resolution is not so worrisome—as long as they maintain tight political connections. (And if those are supplanted or disappear—well, caveat emptor as the Romans used to say.) And they’ll have to negotiate the sanctions minefield.
And once they start making money? Past investors, everyone from Pyeonghwa Motors to Orascom Telecom, have had trouble remitting profits. Maybe this time, with some kind of strong Chinese state backing, it will be different. If Mr. Hynes is correct, we will soon see.