North Korea – How to invest in North Korea – Part X

North Korea is attracting a lot of attention these days. What about the investment side of things? Can you in invest in North Korea? And if you could how would you do it? I started with an overview of the North Korean economy followed with the different ways you can invest in the country. Before we go any further, the content of this article is not to be considered for investment recommendation and not is linked to my work or Leopard Capital. I’m doing this for purely educational purposes.

Previous Posts:
1st Part: North Korea Vice Documentaries
2nd Part: North Korean Propaganda (Pictures & Videos)
3rd Part: North Korea – Funny Pictures, Memes and Celebrity Stop
4th Part: North Korea – Beautiful Pictures
5th Part: North Korea – How to invest in North Korea

North Korea’s Economy
North Korea is a very rigid central planned economy. Along with Cuba (slightly changing lately), they are the only two countries in the world with an almost entirely government planned, stated owned economy. The collapse of the Soviet Union and communist governments around the world, North Korea main source of support, throw North Korea on a steep decline. It’s hard to believe that North Korea had a higher GDP per capita than South Korea until the mid-70s. South Korea heavily invested in chaebol (business conglomerates) as their main source of economic growth and the rest is history. Today South Korea is a world leader in technology (LG, Samsung) and manufacturing (Hyundai) while North Korea’s industrial capital stock is beyond repair because of the lack of capital spending and maintenance. North Korea’s population is also extremely poor with reports of mass starvation. Two different kinds of choices, two different kind of path, two different kinds of results.

North Korean Stats

Economic collaboration with the South is most noticeable with the Kaesong Industrial Region, a special region 10 km north of the demilitarized zone. It allowed over a 100 South Korean companies to have access to cheap labor and provided the North Korea government with foreign currency. The zone opened in 2004 and an economist from the Bank of Korea predicted that it could create over 725,000 jobs and generate over $500 million in annual wages for the North Korea economy. After a few disagreements, wages have increase over time from $75 a month to $160 a month (North Korea demanded $300/month). At the moment of this writing the zone recently shut down because of the increase tension between the two countries. There is also the Rason Special Economic Zone, located in the North-East of the country on the border of Russia and China, whose purpose is to promote economic growth through foreign investment. Currently Chinese and Russian companies have invested in the zone and in August 2012 an international trade fair was held, offering foreign investors and journalists a look at the work-in-progress.

What are North Korea’s main sources of income?
According to the CIA factbook, it relies on military products, machine building, electrical power, chemicals, mining, metallurgy, textiles, food processing and tourism. Its main exports are minerals, metallurgical products, manufactures including armaments, textiles and agricultural and fishery products and its main imports petroleum, coking coal, machinery and equipment, textiles and grain. South Korea’s investments and trade with China amounts for the bulk of the foreign currency income. South Korea is also the main trading partner. Again, according to the CIA and various sources a large chuck of their income is from black market activities.

Investing in North Korea
North Korea has no stock exchange where you can buy and sell companies online. Don’t even bother to look for an ETF or for ADR listed companies. Therefore you will need to look for alternative strategies.

Direct Investing
It’s possible. Canadian and U.S. companies are not allowed but there are some European and Chinese companies that does it. France’s Lafarge owns 30% of a cement plant that employs 3000 workers. I have included the Compilation of Laws Foreign Investment North Korea

Coins and Stamps

These asset classes being push by famous successful investor Jim Rogers. According to Rogers:

“Coins and stamps are the only way I can invest in North Korea. At some point down the line, North Korea will cease existing as a country. Then the value of the coins will go up.” – in The WSJ

North Korea Stamps

North Korea Gold Coin

Publicly Traded Companies
You can invest indirectly in North Korea by investing directly in South Korean or Chinese companies. Some of them are publicly traded and does business directly in North Korea. You are strategically positioning yourself for improving business relations. Another way to play this angle is to bet on the fall of the North Korean regime and as a result they will require companies such as POSCO and Korea Electric Power (US ADR) for infrastructure development. Warren Buffett’s Berkshire Hathaway is a major investor in POSCO in case you were questioning its investment merit. Keep an eye out on KB Financials to fill the banking void. Orascom Telecom Media & Technology Holding, an Egyptian telecommunication company, provide cell phone service to 1 million plus North Korean subscribers. If you want to invest simply log in your brokerage account or call your broker.

Total accumulated foreign investment in North Korea reached $1.475 billion in 2010, up from $1.437 billion the previous year, according to the United Nations Conference on Trade and Development.

North Korean Bonds
They are still trading and are in default since the 1970s. However the typical deal size is about $US5 million. They trade for pennies on the dollar. Some of the debt certificates, including interest accrual amount to more than 500 percent of the principal in unpaid interest. Buy some bonds and sue them. Good luck.

North Korean 100 Won 1950 Bond
North Korean 100 Won 1950 Bond

Other Alternative Ways

Room 38
Very little is known about Office 38 (also known as Division 38, or Room 38). It’s rumored that it was established in the 1970s to manage the $5 billion dollar foreign currency slush fund of the North Korean leader. The funds are apparently are critical for the Kims to maintain power, fund is lifestyle and the nuclear program, It is widely speculated that its involved in drug production and smuggling, illicit weapon sales, currency counterfeit and insurance fraud and it’s managed by having banks accounts all over China and the Switzerland. Most of this information is provided by defectors and is pure speculation with a lot of various materials circulating out there. If this is interest to you, I suggest you read this article by The New International Focus.

How do you make money off that? You can find a way to get involved in their criminal activities but that would supper the regime that oppress its people. This is not really investing and I’m not encouraging you to take that path. Or you can write a book about it and get black listed by the regime.

The North Korean National Soccer Team
North Korea has a soccer team that participates in international competition. They managed to qualify for 2010 FIFA cup and are able to score the odd win here and there. How do you make money off the team? Open a bet365 account and bet for or against the team. This is gambling, not investing.

These are some of the way to invest in North Korea. It’s clearly not traditional and highly speculative. If anyone has any success feel free to share.

Brian

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