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The dangers of doing business in North Korea

A Chinese mining firm has discovered that doing business in North Korea comes with risks.  According to The New York Times (via Pittsburgh Post-Gazette -October 21, 2012).

Lured by cheap iron ore and low wages, the Xiyang Group, one of China’s  biggest mining conglomerates, took a significant risk, building a mine in  economically backward North Korea that was designed to feed China’s steel mills  and provide much-needed investment to China’s impoverished ally.

Now that deal is in tatters. Xiyang says that the North Korean government  sabotaged its $40 million investment, allowing the company to stay just long  enough to steal its knowledge, then seizing the iron ore mine and sending armed  guards to evict Chinese workers. And recent sniping over the failed venture has  exposed the often testy relationship between China and North Korea that, in  public, remains hidden beneath vows of friendship.

The business spat came into the open last month when Xiyang posted a gritty,  salacious blog item describing what the company called its “nightmare” in  running the mine. It included details of high living by the North Korean  managers when they visited China, where they were said to have demanded female  escorts, expensive alcohol and cars.

It is a fairly long article and I don’t want to copy and paste too much of it but if you have any interest in this subject it might be worth a read. Global Times (October 17, 2012) reported:

This is not the first time Chinese investors have been deterred when cooperating with North Korean companies, especially in the mining industry.

In 2011, Xiyang Group, a Chinese miner and steel manufacturer, shut down an iron ore processing factory in North Korea which just operated for two months, due to the unfavorable investment environment there, according to The New York Times on September 5.

“This isn’t just about us – it is about all companies investing in North Korea,” Wu Xisheng, Xiyang Group’s vice general manager, told Reuters. “They just don’t have the conditions for foreigners to invest.”

Yet, despite all of the dangers of doing business with the NORKS, China seems willing to take the chance (China Daily, September 27, 2012). Even Mr. Wu seems to suggest it is worth taking the chance – despite his huge loss (Global News, September 24, 2012):

Despite a recent dispute over “investment traps” with Pyongyang, another Chinese investment group inked an investment deal with the North Korean government Saturday in Beijing to help North Korea boost its economy.

According to the Beijing News Monday, China Overseas Investment and Investment & Development Group of DPRK signed an agreement to launch a fund worth 3 billion yuan ($476 million) for investment in North Korea. With an initial capital injection of 1 billion yuan, the fund will focus on areas such as mining, real estate development and port operation.

North Korean officials expressed their wish to see more Chinese investors investing in DPRK’s infrastructure and indicated that investors would enjoy tax and tariff cuts. Projects promoted by the North Korean officials include some 5-star hotels in Pyongyang and Haeju, and a 376-kilometer high-speed railroad.

Despite the enthusiasm from officials of both sides, investing in North Korea may not be as enticing in the eyes of many private investors as North Korean officials would like it be.

“There are great risks in investing in the country,” said Wu Xisheng, vice general manager of Xiyang Group, a Liaoning-based Chinese mining company which reportedly lost $55.3 million in a joint venture deal with North Korea.

Xiyang Group revealed early this month on its website that North Korea unilaterally canceled a contract for an iron ore project, confiscated their equipment, and expelled all their employees.