STTB: Russian Invasion Edition

November 3, 2014 7:00 AM

Last week, Marc Noland asked whether we were witnessing a Sino-Russian rivalry over North Korea. It is hard to see North Korea as a huge prize, but Russia has undoubtedly stolen the spotlight with a flurry of investment activity this year. We summarize a few interesting developments below.

We recently argued that the days of break-neck growth in the China-North Korea coal trade were over. Which begs the question: where else can the North Koreans possibly sell it?

It turns out Russia. Interfax reports that come 2015 the DPRK may begin to export metallurgical coal to Russia, who will then sell it into secondary markets. The plan is to start at tens of millions of tons according to Mostovik, one of the major Russian construction companies involved. Ten million metric tons of coal is roughly 660 – 680 million dollars at current market prices which, we’re guessing, is not nearly what the North Koreans will get. The arrangement seems to be that Russia will develop North Korea's transport infrastructure in exchange for the right to develop and process the country's natural resources, which may also include metal ores and North Korea’s supposedly huge trove of rare earth minerals. If these projects materialize—a big if—they could put DPRK-Russia bilateral trade on the way towards the ambitious goal of $1 billion in two-way trade by 2020.

It is not immediately clear where Russia ultimately plans to sell North Korea’s coal. But besides China and Japan, South Korea was one of the largest coal importers in 2013, largely because it is a major steel producer. Accessing the larger and more dynamic economy of South Korea via the North actually appears to be a key component of Russian strategy. Russia has been talking up the prospect of running a natural gas pipeline to the South for years, as well as connecting the entire Korean peninsula with the trans-Siberian railway. (The Rason links is finished and a pilot project to ship Russian coal to South Korea via the Rason port is currently underway.)

The ambitious joint project – dubbed Pobeda (Victory) -- is predicated on the ability of the Russians to physically get coal and other minerals out of the country in the first place. The deal includes the multi-decade Russian refurbishment of the North’s dilapidated rail system. North Korea estimates the refurbishment will only take seven years; the Russians are estimating twenty, with a total price tag of about $25 billion. Other Russian investments in the country are targeted at improving mining productivity, which is currently very limited.

Could all of these and the other projects Russia has talked about materialize? The Rason project certainly shows that these joint projects can be done. But China’s recent experience, including with the Hwanggumphyong and Wihwado economic zones and the now “indefinitely” delayed $360 million Sinuiju-Dandong bridge project, highlights the obvious pitfalls that could await Russian investors. Investments of this magnitude require large-scale financing and raise tremendous hold-up risks: a multi-decade infrastructure project could turn into a well of wasted money if the geopolitical tides roll back. Things get weirder when you consider the Russian companies involved. One of the most visible investors in Project Victory, Mostovik, just filed for bankruptcy in April after its involvement as a contractor for the Sochi Olympics bled it dry. What is it doing spearheading another enormously expensive, risky capital project? Is the Russian government going to backstop these projects, and if so, how does it protect itself? Stay tuned.

Comments

Roland

Kevin, you caught not quite half of the story. You missed:
North Korean high quality coal will be shipped through Nampo port - that´s the reason, why the rail track Pyongyang-Nampo will be modernized first. Coal deposits nearby that track will be connected. Revenue will be received by a financial joint-venture, which will pay investments and expenses and distribute profit. Contractor Mostovik is very strong as after filing bankruptcy, its lender -state owned Sberbank-got a 20 % share in the company. (It´s reported, that NPO Mostovik, will eventually build the giant bridge connecting Russia with Crimea)
Further you missed: RusGrido will connect Russian and North Korean power lines. And the sensation: North Korean investors will lease big amounts of agricultural land in the southern plains of Amur-oblast to produce grain and animals for their homeland.
More to say about the business trip of Russian investors to Chongjin; but enough for the moment.

kstahler

Thank you for the additional details, Roland. It will be interesting to see how the project develops and, if things do work out, who ultimately buys this coal (and other minerals).

However, its hard to believe that Mostovik could be "very strong" after filing for bankruptcy 6 months ago.

Roland

Kevin, General Motors emerged as a strong company after filing for bankrupcy. It needed some time.
NPO Mostovic is easier to handle: Sberbank (state owned) converted a bulk of its exposure in shares. And don´t underestimate: Private company NPO Mostovik has a sharholder now, which indirectlely is the Russian government. Therefore the ship "NPO Mostovik" now can´t sink no longer, and especially also because its new role, beeing a tool for the Russians for their geopolitical ambitions.

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