In late November, a large Egyptian telecom and construction company published a quarterly report. Orascom, the company in question admitted, in this report that: "In the group's management view, the control over the Koryolink's activities was lost." Koryolink is the Orascom venture in North Korea, and this short statement is clearly a sign that the investment project in this small East Asian country had gone seriously wrong.

Long-time North Korea watchers, however, were not surprised by the news. As a matter of fact, the trouble was expected and, indeed, predicted in the narrow circle of the country's watchers.

Orascom and a North Korean government telecom company created Koryolink as a joint venture in 2008. Its task was to roll-out a mobile network. The project's success exceeded all expectations, with the number of subscribers probably about three million by now.

In a sense, Orascom got off lucky: Contrary to widespread perceptions, the North Korean economy has grown strongly in the last decade, largely due to nascent market forces still hidden behind the veneer of Stalinist rhetoric and sloganeering. A significant minority of locals can now afford a mobile phone.

As a result, Orascom has made a great deal of money, and the Egyptian management expected to get some of the earnings out of North Korea. However, this is not what their North Korean partners (read the government) wanted to happen. The investors were told that it would be much better if the earnings were reinvested back into North Korea. When they refused, things quickly soured.

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Bureaucratic failure

The major issue is the exchange rate. North Korea actually has two exchange rates. The official one, which is supposed to be used in bank transactions with foreign governments and companies, fluctuates 100-130 won to the dollar, and the unofficial one, which is around 7,000-8,000 won to the dollar.

Since nearly all of Koryolink's profits are in the local currency, this issue is divisive. Predictably, the Egyptian side insists upon the official rate, while the government says that market rates should be used, but even this is difficult since such a rate officially does not exist.

Once Orascom proved to be reluctant to accept North Korean demands, it found itself under pressure. Eventually, the North Korean government, in breach of prior agreements, established another mobile phone operator, and Orascom personnel working in-country began to face increasing difficulties.

It seems that the government don't quite realise one simple rule: foreign investors come to make money and they will normally want to get this money out of the country, with the amount being calculated against a realistic exchange rate.

 

This turn of events might have shocked Orascom's board, but this follows a familiar pattern of which every observer of North Korea is aware. The Orascom investment might be large, but similar events have occurred before. North Korean companies and the government have proven themselves to be remarkably unwilling to share profits with their overseas partners when foreign investments yield more than initially expected.

The story of the Xiyang Group, a mining company from the Chinese province of Liaoning is an instructive precedent. Once the company had finished constructing an iron ore mine in North Korea in 2012, its personnel were kicked out and its investments expropriated.

As a result, the Chinese company lost around $45m. At the time, it was the largest state confiscation of private foreign investment in North Korea.

The Xiyang Group published extensive documentation and publicised the issue, but soon discovered that even with the extensive support of the Chinese government, it could not recover its investment.

Actually, the list of the investments which went wrong is easy to continue. As a Chinese businessman recently told me: "I know that there is only one way to make money with the North Koreans: Ask them to pay upfront. Otherwise, you will be cheated."

There are good historical reasons for this. North Korea has never really had any experience of dealing with genuine, bona fide foreign commercial investment.

There were joint ventures, like Soviet companies that built ports and industrial facilities in North Korea between 1945 and 1990 using Soviet government money. There were some Chinese companies doing the same, too.

However, the implicit assumption by Moscow and Beijing at the time was that no profit could be expected from these investments. These investments were strategic aid in disguise.

Simple rule

The North Korean government has shown an unusually high level of interest in foreign investment in recent years. But it seems that it don't quite realise one simple rule: Foreign investors come to make money and they will normally want to get this money out of the country, with the amount being calculated against a realistic exchange rate.


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For the North Korean government, always hungry for hard currency, such ideas are anathema to its goals; and neither the central government nor North Korean companies can stand to see money flowing out of North Korea into the pockets of already "rich foreigners".

One should not forget to add in a lack of interest in international business reputation and constant rivalry between different branches of the North Korean government. This all creates a situation where North Korea is one of the worst places on earth to invest.

This is quite a sad state of affairs. North Korea is changing, its economy, once desperate, is getting better, but unless its decision-makers start to realise that it pays not to cheat on foreign investors, they are likely to struggle to find the capital and expertise vital for sustained growth.

Andrei Lankov is a professor of Korean Studies at Kookmin University in Seoul. He is the author of "The Real North Korea: Life and Politics in the Failed Stalinist Utopia".

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

Source: Al Jazeera