A new class of wealthy citizens are currently fueling changes within the North Korean economy, leading to the creation of unofficial financial services, an international panel of experts said today at a conference in Seoul.
Speaking at the “Doing Business in North Korea: Business and Finance in the DPRK” hosted by the Institute for Far Eastern Studies (IFES), the experts concluded that looser controls on private capital were creating a new class of rich North Koreans, called donju (money masters).
“There is a booming industry of private finance in North Korea,” Andrai Lankov of Seoul’s Kookmin University said at the conference.
Lankov said three unofficial financial services have been created from scratch within the DPRK in order to cater to the new wealthy class.
Distrust in North Korea’s official banks, which only offer the most rudimentary banking services, has led to unofficial currency exchange merchants and money lending and transfer services.
‘There is a booming industry of private finance in North Korea’
North Koreans can now send money both domestically and internationally, Lankov said. It is even possible for defectors in South Korea to send money to their relatives in the North, and occasionally vice-versa.
Using a system of brokers, North Koreans with Chinese bank accounts and mobile internet banking near the Chinese border it is possible for defectors to move between $10 and $20 million a year to the DPRK.
The growth of these services, however, has outpaced North Korea’s official financial institutions. While North Korea’s central bank performs some functions of a bank, North Korean citizens are generally unwilling to deposit any money there.
“If you put the money in the bank, you can never get it back: That’s a myth, it is possible, if you can find the person in charge, but this is very difficult,” said Mitsuhiro Mimura, director and senior research fellow at ERINA.
Two experts also cited the creation of electronic payments systems and cards which can be used by both foreigners and North Koreans to pay for items in stores.
The ‘Narae’ debit card can be charged with foreign currencies and used to purchase a wide variety of goods and services, two of the experts said.
The new privately owned capital has led to a groundswell of new stores and purchasable items, from delivery services to fast food restaurants, IFES Director Lim Eul-chul said.
To help the private financial interactions continue and expand, North Koreans need greater experience and support building commercial banking services and infrastructure, which is still currently lagging.
‘I think the collusion between private finance and the regime will continue’
“For private businesses to grow in a healthy and organic manner, they need some sort of financial support, but there is not such support,” Minura said.
Despite many of the new financial services being illegal, crossover with state institutions mean they are likely to be tolerated for the foreseeable future, Lankov said.
State-owned companies can also now borrow from private lenders, and pay back the debts with whatever goods the company produces.
“I think the collusion between private finance and the regime will continue … The regime cracking down … is highly unlikely. Private finance will continue to grow,” Lim added.
Although many of the changes were encouraging, Lim also warned that so far the benefits were only for a select few. Details on the number of donju, and how much capital they have amassed, are very scarce.
“The gap between have and have nots is also developing in North Korea. These services are available to a wealthy minority,” Lim said.
While conditions within the DPRK might be improving for those with private capital, this does not translate into easier inroads for potential foreign investors, according to Lankov and former UN Panel of Experts member William Newcomb.
“If I had money I would not invest in North Korea, because it is a very risky business,” said Lankov, who also laid out three rules that might result in a successful return on capital invested in the DPRK.
Potential investors should always have representatives in country, who are willing to keep a low political profile.
Generating a return on an investment is not a fast process, Lankov warned, with foreign businessmen having to spend many years building trust, without asking too many questions.
‘The DPRK is a threat to the international financial system’
As well as internal risk generated by the North Korean government, any potential investors will also have to be aware of the UN and unilaterally imposed sanctions.
“If you are going to be doing business in North Korea, you’re going to be doing business in a sanctions environment,” Newcomb said at the conference.
Although sanctions are targeted at North Korea’s weapons programs, moving money to and from the DPRK is complicated rules from the Financial Action Task Force (FATF), who added North Korea to their public list of states involved in money laundering in 2011.
The FATF rules mean any banks dealing with North Korea make face much higher costs, due to enhanced due diligence procedures. Any transactions will also be much slower than normal, and likely affect both NGOs and foreign embassies in the DPRK.
“This has nothing to do with testing nuclear weapons … The DPRK is a threat to the international financial system,” Newcomb said.
Inconsistent sanctions applications across UN member states also complicate the process. All in all only 50 percent of member states implemented UN resolutions, with patchwork reporting also making the implementation difficult to accurately gauge.
The result means that any foreign businesses looking to engage with the DPRK should not proceed without first conducting the proper due diligence.
Featured image: Leo Byrne
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