Kim Jong-un’s recent summit with President Trump has raised the prospect of North Korea opening up to foreign investment. Global Insight considers an emerging market like no other.

Ahead of the historic summit in Singapore on 12 June between North Korean leader Kim Jong-un and United States President Donald Trump, a leaked Central Intelligence Agency report considered possible concessions that the hermit nation might be willing to offer. One option was reportedly for a hamburger franchise to open in the capital, Pyongyang, as a gesture of goodwill.

An odd suggestion, perhaps, given the ongoing nuclear risk on the Korean Peninsula and the economic sanctions imposed on the country, but one that hints at the potential opportunities that some businesses are beginning to eye if relations continue to thaw.

Early investors are likely to come from neighbouring South Korea, where the government has already allocated $900m to fund economic projects that involve both countries and leading conglomerates such as automotive manufacturer Hyundai, which are cautiously preparing the ground.

‘North Korea may eventually present lucrative opportunities to prospective investors,’ says Eun Min Kwon, a partner with Kim & Chang’s North Korea practice group in Seoul. ‘For now, however, plans to invest should be viewed through a long-term lens and tempered with a clear understanding of [its] emerging market investment risks.’

Global investors could follow suit, drawn to North Korea’s strategic position in the middle of a major Asian supply chain that includes China, Japan, Russia and South Korea. The country could offer a large, well-educated, disciplined and comparatively cheap workforce. Its largely untapped natural resources might be a further attraction, with the North Korea Resources Institute estimating in 2013 that the country’s mineral reserves could be worth $6tn.

But investment in North Korea is only likely if the US lifts, or partially lifts, its sanctions, which could trigger a corresponding easing of the trading and financial restrictions imposed by the United Nations and other countries.

‘Investing in North Korea will be a no-go area for many companies due to economic sanctions that impose extensive legal constraints,’ says Rae Lindsay, a partner at Clifford Chance and Co-Chair of the IBA’s Corporate Social Responsibility Committee.

Foreign investors might also be put off by the significant political risk, corruption concerns, and the systematic and widespread human rights abuses highlighted by the UN and others. ‘Any organisation thinking about putting its money at risk by investing in North Korea would likely want to do careful due diligence covering areas such as political risk, corruption issues, as well as environmental and social issues,’ adds Lindsay.

Kim’s economic commitment

Following several years of escalating missile and nuclear tests, the outlook for peace on the Korean Peninsula appears more positive now than at any time since Kim Jong-un came to power in 2011.

The document signed at the conclusion of the Singapore Summit 2018 built on the progress made at the inter-Korea summit in April, with a promise to pursue peace and denuclearisation on the Korean Peninsula. But, although Trump has promised to lift economic sanctions in return for denuclearisation, there’s a lack of specifics in the signed document – no mention of timelines or even a definition of ‘denuclearisation’.

There are also concerns about the sustainability of any agreement. Sceptics refer back to 1994, when the Clinton administration and North Korea signed a framework to freeze Pyongyang’s early-stage nuclear programme and normalise relations between the two countries. By 2002, the deal had fallen apart.

Wook Yoo, a partner in Bae, Kim & Lee’s North Korea practice group in Seoul, thinks this time might be different. ‘Kim Jong-un realised that normalisation of relations with the US was inevitable and that he had to resolve the nuclear matter,’ he says. ‘We can be sceptical about his real intent, but there was no need for him to commit to the recent summits if he hadn’t made a decision to develop the country’s economy.’

Yoo says a final resolution will take a few years to achieve and that ‘fluctuations’ are to be expected, but he remains cautiously optimistic: ‘There’s still a long way to go, but the summits were a meaningful and significant start to a long process.’

That optimism extends to business opportunities, with the revival of North Korea’s special economic zones (SEZs) – one potential route in for investors in the South.

SEZs have been set up periodically by Pyongyang since the early 1990s to attract foreign investment, primarily from China, Russia and South Korea, but have been slow to develop. The zones include the Kaesong Industrial Complex, which is partially subsidised by South Korean taxpayers and is where 124 South Korean companies employed 54,000 workers from the North to produce everything from socks to wristwatches.

In February 2016, South Korea suspended operations at Kaesong following a nuclear test by Pyongyang, with the government providing an estimated $340m in initial compensation to the businesses involved.

South Korean conglomerates, including Hyundai, Lotte and KT Corporation, have established separate task forces to examine potential opportunities in the North and are reportedly making preparations for the reopening of Kaesong. In a recent survey by the Korea Federation of Small and Medium Business, virtually all of the 100 former resident companies in Kaesong that responded confirmed their intention to return.

A sanction-free North

If bilateral negotiations between Washington and Pyongyang result in a full or partial lifting of US sanctions, it could spark more significant foreign investment.

If that were to happen, several industry sectors would be likely to garner immediate attention from prospective investors. These include light industrial production sectors such as electronics and textile manufacturing, as well as telecommunications, mineral extraction, logistics and infrastructure (rail, road, power and pipeline) projects.

‘We’d expect that many of the first movers in a sanction-free North Korea would be light industry manufacturers,’ says Sun Yul Lee, a partner with Kim & Chang’s North Korea practice group in Seoul. ‘Investments in major infrastructure projects would presumably benefit from, and initially require, support from export credit agencies, political risk insurers, policy banks and multinational institutions based in China, Japan, the European Union, Russia, South Korea and the US.’

Chinese investments linked to its ambitious Belt and Road Initiative seem particularly well suited to North Korea’s situation. China has long sought to increase its influence in Pyongyang, which acts as an important buffer between US-allied Seoul, while the types of infrastructure projects representative of Belt and Road is precisely what North Korea’s economy needs the most.

Hong Kong-based Graham Wladimiroff, Vice President and Assistant General Counsel at manufacturer Avery Dennison, says: ‘China wants North Korea to remain in its sphere. Depending on what’s required to prop up the regime economically to ensure it behaves, it will to a great extent be up to China what it finds acceptable in terms of foreign, non-Chinese investment and whether it demands preference to be given to Chinese companies. However, considering the Chinese are already in a position today to make demands, it seems likely there will at least be a limited role for non-Chinese companies too.’

Kwon says North Korea’s long-standing strategy is to extract concessions from a rotating cast of friends and foes – China, Japan, Russia, South Korea and the US – in a manner that prevents any one nation from obtaining oversized influence. ‘We expect Pyongyang will do everything in its power to ensure Chinese investments are not of a scale or nature that will allow Beijing to disproportionately expand its influence in North Korea,’ he says.

‘Russia, the US, Japan and South Korea are also very interested in balancing China’s influence in Pyongyang for different reasons,’ adds Kwon. ‘We suspect Pyongyang is not only well aware of these competing interests, but that it will use them to multi-source future strategic investments in the event that sanctions were to so permit.’

Although North Korea enacted a suite of foreign investment laws in 1992, and has developed these regulations in an apparent bid to attract more investors, net inflows on foreign direct investment (FDI) remain very small. According to the World Bank, North Korea attracted just $93m in 2016, compared to the $12bn that made its way to South Korea.

Part of the problem has been Pyongyang’s failure to protect FDI within its borders and to guarantee investors the right to remit profits overseas. For example, Egyptian telecoms giant Orascom helped build North Korea’s communication networks in 2009. But the company lost control of its Koryolink business following Kim’s rise to power two years later, and found itself unable to repatriate its profits. A clear warning that caution and a clear understanding of this most closed and isolated market will be needed by potential investors.

Stephen Mulrenan is a freelance journalist. He can be contacted at stephen@prospect-media.net