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The Risk of Investing in North Korea

Sigma Investment Counselors

June 3, 2016

An article appeared in The Wall Street Journal yesterday discussing the Obama Administration’s plan to impose sanctions or fines on foreign banks who conduct business with North Korea.  After finishing the article I had to wonder why any company would wish to do business with North Korea after a very recent disastrous event for one company.  The article reminded me of an Egyptian telecommunication company, Orascom, whose investment in North Korean went sour.

The firm thrived operating in politically unstable environments and enjoyed huge profits.  Since 1997, Orascom has built and maintained lucrative mobile networks in frontier markets such as Yemen, Bangladesh and Iraq.  In 2008, the firm signed a deal with the North Korean government to build the country’s first and only mobile network.  Orascom took a 75% stake in Koryolink, a joint venture with the North Korean government, hoping to gain access to the country’s millions of potential customers.

At first, everything went according to plan.  While mobile devices remained very expensive for most North Koreans, the Koryolink subscribers reached 2 million in 4 years.  The hitch came when Orascom wanted to take some of its profits out of North Korea.  The firm intended to convert its North Korean funds at the official exchange rate, approximately $540 million.  Ironically the North Korean authority instructed the firm to use the black market rate of conversion, which translated into $8 million.  The company’s board decided to remove the North Korean operations from its consolidated income statement in 2015 and Orascom’s share price fell sharply on the Egyptian stock exchange after the announcement.

This is a perfect example of the risk of doing business with authoritarian states such as North Korea: you can make money here, but the money has to stay with us.

All comments and suggestions are welcome.

Wenny Gorman, CFA®

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