North Korea’s renewed push for foreign investment at Rajin-Sonbong

Author: Scott A. Snyder, CFR

I’ve been watching North Korea ramp up efforts to attract foreign investment since Jack Pritchard and I heard last November in Pyongyang from the chairman of Pyongyang’s Foreign Investment Advisory Board a presentation of new laws that provide for repatriation of investments, tax benefits, and wages of 30 Euros/month that undercut the $57/month wage rate at the Kaesong Industrial Zone.

Although catastrophic failure of currency revaluation implemented from late November of last year has severely eroded the credibility of the government’s economic policies, there are serious efforts underway to realise new foreign investment at Rajin-Sonbong port at the northeastern tip of North Korea. The location is significant because Rajin-Sonbong has been the focus of similar past failed efforts in 1991 (when the area was first announced as a free trade zone at the time of the launch of the UN-sponsored Tumen River Area Development Project) and 1996 (when North Korea held an international investment forum that was subsequently eclipsed by the famine).

Following a rare visit by Kim Jong Il to Rajin-Sonbong in January, the local leadership has been replaced with cadres who have prior international experience at the central government level, led by former minister of foreign trade Rim Kyung-man. Reported investments include a 50-year lease of one pier to the Russians and a 10-year lease of a second pier to the Chinese. The pro-North Korean Chosun Sinbo reports that a new company, Taepung International Investment Group, has been set up with initial capital of $10 billion to finance investments in sectors including food supply, railways, roads, harbors, electricity, and other energy supplies. North Korea has also set up a new State Development Bank to support this effort. Given the strategic importance of Rajin port as a year-round ice-free port with the capacity to service both the landlocked Jilin province and the Russian Far East, the North Koreans are offering opportunities at Rajin that the Chinese and Russians have long coveted.

Although there were false reports in late 2005 that the dirt road inside North Korea between Quanhe-Wonjong border crossing and Rajin might be paved in a deal with the Hunchun local government, preparations to improve the road are now underway and the North Koreans have built a large customs facility at Wonjong designed to handle goods coming to and from Rajin port to China.

All these activities beg the question of why now? North Korea’s internal economic policies in recent years have focused on reassertion of state control over economic activities. Marcus Noland and Stephan Haggard describe the November 2009 currency revaluation as a confiscatory measure designed to attack the markets. North Korea faces stricter international economic sanctions on suspected shipments of fissile materials under UN Security Council Resolution 1874.

Is the effort to attract new foreign investment a measure designed to circumvent the pressure from international economic sanctions? Could the promise of new investment by the Chinese be part of a deal whereby China provides cash necessary for the stability and survival of North Korea’s leadership in exchange for a return to the Six Party Talks and to denuclearisation? Was North Korea’s currency revaluation such a big failure that Kim Jong Il has finally realised he has no choice but to follow the Chinese model? Is the push for foreign investment just another phase following previous phases of apparent economic opening in the 1970s and 1980s through which the North induces foreign investment, but international investors are left holding the bag? Or is the Kim regime selling off rights to a part of the family estate in order to earn the cash flow necessary to survive?

This article was first published here by the Council on Foreign Relations’ Asia Unbound blog.

Scott A. Snyder is Adjunct Senior Fellow for Korea Studies at the Council on Foreign Relations (CFR), as well as Director of the Center for U.S.-Korea Policy at the Asia Foundation and a Senior Associate at Pacific Forum CSIS.

1 Comment

Leave a Reply

  • Ian Davies

    When I worked with UNIDO and UNDP in Beijing 1992-1998, I was also a regular visitor on UNIDO and UNDP development business to the DPRK. I visited Rajin-Sonbong and North Hamgyong Province on many occasions under the auspices of the UNDP-funded inter-regional and inter-governmental Tumen Secretariat in Beijing, and under the UNDP Tumen River Area Development Program. I have since closely followed the zone’s operations and international relations through other related projects and connections in Pyongyang and in China’s Yanbian Korean Autonomous Prefecture (Jilin Province)

    The answer to Scott Snyder’s queries at the bottom is that this new resurgence in foreign investment ‘interest’ in Rajin-Sonbong has nothing to do with the currency debacle, but is largely Chinese driven. It is, as was the case before, transit transport service-oriented linked to NE Chinese trade with ROK/Busan, with the driving force being higher costs for Heilongjiang and Jilin businesses if containers are sent via Dalian, and problems of congestion at Dalian. Furthermore, it takes place in an economic and trade zone whose policy go-ahead in 1900-1991 and subsequent legislation was initiated and finalised by Kim Jong-Il’s father, Kim Il-Sung (who died in July 1994).

    Therefore, Rajin as a special place in the DPRK, and cannot be challenged politically (fundamentally). The appointment of an ex-FT Minister to run the Zone and municipality is a return to the situation of the 1990s (when I was there many times), when DPRK FT bureaucrats and officials with experience in international business and affairs and overseas residence ran the place.

    This time, however, the guy in charge is the most senior they have ever had, which is encouraging. Further, the good news is that 15 years after they started talking about it, they are finally replacing the gravel ‘highway’ with a paved highway Hunchun-Wonjong-Sonbong-Rajin. The interesting question is who is paying for it? I think Chinese private capital linked to the new investment interests in that area.