Cablegate: North Korea Economic Briefing - August 2009

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UNCLAS SECTION 01 OF 06 SEOUL 001389

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD KN
SUBJECT: NORTH KOREA ECONOMIC BRIEFING - AUGUST 2009

1. (U) This cable is sensitive but unclassified and not/not
intended for Internet distribution.

-------------
In This Issue
-------------

-- ROK Think Tank: DPRK Faces Worst Economic Crisis since 1994
-- DPRK Develops Wind Power Capacity
-- Number of DPRK Mobile Phone Users Increases to 48,000
-- DPRK Begins Mobile Telephone News Service
-- Pyongyang Opens First Fast Food Restaurant
-- DPRK Launches First TV Advertisements for Beer
-- DPRK Establishes Food Industry Ministry
-- New Resort Hotel Opens in South Hamgyong Province
-- China Bars Strategic Material Shipment to the DPRK
-- DPRK-China Trade Fell in May
-- DPRK Grain Imports from China Expected to Rise as China Scraps
Export Tariffs
-- Koryo Air Expands Service between Pyongyang and China But Faces
Safety Concerns
-- U.S. CRS Staffer: DPRK Earns USD 2 Billion a Year in Arms Trade
with Iran
-- DPRK Software Industry Explores Overseas Market
-- ROKG Tightens Restrictions on Luxury Goods to the DPRK
-- ROKG Imposes Financial Sanctions on DPRK Firms and Individuals
-- ROK Automaker in DPRK Makes First Profit
-- Number of KIC Workers Rises
-- Inter-Korean Trade Fell 19.7 Percent in June 2009
-- China Reportedly Sends 370 Military Vehicles to the DPRK
-- U.S. NGO Helps DPRK Agricultural Industry
-- French NGO Restores DPRK Reclaimed Land

Domestic Economy
----------------

2. (SBU) ROK Think Tank: DPRK Faces Worst Economic Crisis Since
1994: According to the Review of the North Korean Economy, a
monthly report released by the ROKG-run Korea Development Institute
(KDI), North Korea is now facing the worst economic crisis since Kim
Il-sung died in 1994. North Korea will likely go into a deeper
slump and become unable to feed its people by the end of 2009 unless
it quickly resolves a long-standing nuclear stalemate with the
international community. Succession issues, United Nations
sanctions and frozen inter-Korean relations weighed heavily on the
DPRK economy in the first half of this year. (Inter-Korean trade in
the first half of this year fell 26 percent from the same period of
2008 to USD 653 million.) According to KDI, anecdotal evidence
varies. On the one hand, foreigners who have recently visited
Pyongyang say there are no visible signs of an economic downturn as
large scale construction works continue and mobile phone
subscriptions rise. In contrast, according to representatives of
the World Food Program and international NGOs who have visited
remote areas of the DPRK, a majority of ordinary North Koreans face
a serious food crisis.

3. (SBU) DPRK Develops Wind Power Capacity: The Ministry of
Unification (MOU) reported July 15 that North Korea has recently
completed a wind power electricity generation and distribution
system in South Hwanghae Province. The MOU quoted the Korea Central
News Agency (KCNA) as saying that Unchon County in South Hwanghae
Province has set up thousands of wind power generators in houses and
public buildings. The generators, which have been installed in
Haeju city, Gangryong, Ongjin, Yonan, Jangyon, Anak and Chongdam
counties, are used for household electricity.

4. (SBU) Number of DPRK Mobile Phone Users Increases to 48,000:
Chosun Ilbo reported July 30 that the number of mobile phone users
in the DPRK reached 48,000 persons as of the end of June this year.
Orascom, an Egyptian service provider, began the mobile service in
December 2008 and plans to expand the service area from Pyongyang to
the entire country by the end of 2009. The newspaper quoted Naguib
Sawaris, chairman of Orascom, who visited Seoul on July 14-15 for a
Global System for Mobile Communications (GSM) Association
conference, as saying his company plans to begin 3G mobile service
in major cities such as Kaesong within the year and to expand the

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number of mobile phone subscribers to 100,000. The company plans to
invest USD 500 million over the next five years. Officials of the
North Korean Workers' Party and the DPRK government are reportedly
banned from using mobile phones for security reasons. Ordinary
North Koreans, whose monthly income is about 4,000 North Korean won
(USD 30), cannot afford the service due to the high price of
handsets, which cost at around USD 300-500, and the subscription
fee. The company said that it will soon begin the High Speed Packet
Access service at the request of foreigners who want to use wireless
Internet in the DPRK. Orascom currently operates 114 base stations
and one mobile phone exchange office.

5. (SBU) DPRK Begins Mobile Phone News Service: Yonhap News Agency
reported July 6 that Ryomyong (www.ryomyong.com), a website run by
the North Korean Council for Reconciliation and Cooperation, has
recently begun a mobile news service. The service provides news
reports by North Korea's state-run Rodong Shinmun and the Korea
Central News Agency. In addition, the service includes a collection
of North Korean music, images and video clips of North Korean books,
art, regional specialties, trademarks, Mount Baekdu, the Daedong
River and historical relics in the DPRK. Accessible mobile phone
sets include Motorola, Samsung, Phillips and all WAP-applicable
mobile phone sets, the Website specified.

6. (SBU) Pyongyang Opens First Fast Food Restaurant: Chosun Sinbo,
a pro-North Korea newspaper based in Japan, reported July 25 that
North Korea has recently opened its first "fast food" restaurant in
Pyongyang. The restaurant, named Samtaeseong, sells hamburgers,
French fries, waffles and draft beer for prices ranging from USD
0.60 to USD 1.70. It was set up by a Singaporean firm which
provided training and equipment, while the DPRK provided employees
and food. Croissants and hot dogs will be added to the menu soon.
Ko Jong-ok, manager of the restaurant was quoted by APTN on July 30
as saying, "Our restaurant specializes in serving popular food that
is well-known throughout the world. It is not so long since its
opening, but our restaurant has become popular among North Koreans
and foreigners." She also said the restaurant plans to open
branches in many places within Pyongyang in the near future. It
opens from 11 am through 9 pm everyday with 15 female staff who are
in their 20s. According to a 2008 report by Radio Free Asia (RFA),
the DPRK had unsuccessfully attempted to entice McDonald's into
opening a franchise in North Korea.

7. (SBU) DPRK Launches First TV Ads for Beer: North Korea's
Central Television Broadcasting launched a television advertising
campaign for locally brewed Taedonggang beer. The ad features a
young woman in traditional Korean dress serving trays of beer to a
man in a Western suit. The two-and-a-half minute advertisement
says, "It represents the new look of Pyongyang... It will be a
familiar part of our lives." Observing it is rare for the DPRK to
make television commercials, some ROK experts on North Korea believe
the commercial was intended as propaganda to demonstrate improvement
in the DPRK economy. Taedonggang Beer factory bought Britain-based
Ushers Beer Brewery and shipped it in its entirety from the United
Kingdom in 2002. Yonhap News Agency reported August 9 that sales of
the beer have significantly jumped since the advertisement was
launched.

8. (SBU) DPRK Establishes Food Industry Ministry: Korea Central
News Agency reported July 22 that the Presidium of the DPRK Supreme
People's Assembly issued a decree setting up a "Ministry of Food and
Daily Necessities Industry." Local media outlets analyze this could
be related to a 2009 New Year's editorial published by the KCNA, in
which North Korea vowed to "solve food problems by our own efforts"
and rebuild North Korea's ailing economy by 2012. KCNA gave no
further details on the new Ministry.

9. (SBU) New Resort Hotel Opens in South Hamgyong Province: KCNA
reported July 28 that North Korea has built a "world-class" hotel
with various modern facilities on the Majon Amusement Complex on the
east coast, South Hamgyong Province, North Korea. It said that the
Majon Hotel is equipped with first-class accommodation and
recreation facilities such as an indoor swimming pool, a steam
sauna, a public bath and a beach resort. It did not specify size of
the hotel but the Majon Amusement Complex is reportedly situated on
nearly 3 million square meters.

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Foreign Trade and Investment
----------------------------

10. (SBU) China Bars Strategic Material Shipment to the DPRK: A
Chinese customs official in Dandong, a border city between China and
the DPRK, said Chinese authorities discovered a shipment of
vanadium, a strategic metal with missile and nuclear applications,
in fruit boxes on a truck traveling to the DPRK, according to a July
29 Associated Press report. The authorities found USD 29,300 worth
of the vanadium during a routine check. Vanadium alloys are used
for missile castings or jet engines, but it was not immediately
clear whether the intercepted metal was designed for such
applications.

11. (SBU) DPRK-China Trade Fell in May: The Ministry of
Unification (MOU) reported that the Chinese Customs Office on July
22 announced bilateral trade between the DPRK and China in May fell
6.5 percent from the same month a year ago to USD 192 million. DPRK
exports to China in May dropped 2.9 percent to USD 63.6 million and
imports were also down 8.2 percent to USD 128 million. However,
DPRK exports to China of anthracite and zinc increased by 160
percent and 2,370 percent, respectively from a year earlier. DPRK
imports of soy beans for seedlings and dried fish also jumped by
3,017 percent and 161 percent, respectively, in May from a year
earlier. Bilateral trade between the DPRK and China from January to
May this year fell 5.7 percent to USD 833 million. DPRK exports to
China from January to May this year rose 9.1 percent to USD 270
million, while imports dropped 11.6 percent to USD 564 million.

DPRK - China Trade in 2009 (Monthly)

DPRK DPRK
Exports Imports
To Growth From Growth Overall Growth
Month China Percent China Percent Trade Percent
----- ----- ------- ----- ------- ------ -------
Jan. 41,460 -13.0 84,758 -37.4 126,218 -31.0
Feb. 40,558 26.9 91,042 49.1 131,600 41.4
Mar. 57,339 25.8 129,057 -23.8 186,396 -13.2
Apr. 66,560 18.1 130,547 -1.0 197,107 4.7
May 63,593 -2.9 128,155 -8.2 191,748 -6.5
TOTAL 269,510 9.1 563,559 -11.6 833,069 -5.7

Source: The Chinese Customs Office

12. (SBU) DPRK Grain Imports from China Expected to Rise as China
Scraps Export Tariffs: RFA reported July 7 that the Chinese
government abolished export tariffs on grains beginning from July 1
this year. The change is intended to encourage Chinese farmers to
improve grain productivity in addition to preventing oversupply.
(Last December, the Chinese government raised export tariffs on
grains to secure domestic supply and restricted all grain exports
except for exports to Hong Kong and Macau because grain prices
skyrocketed.) RFA analyzes that China's exports of grains to the
DPRK are expected to grow.

13. (SBU) Koryo Air Expands Service between Pyongyang and China But
Faces Safety Concerns: RFA reported July 15 that North Korea's Air
Koryo plans to expand air routes with China with a new
Pyongyang-Shanghai flight. The air carrier also plans to start
operating a chartered flight between Pyongyang and Qingdao. Air
Koryo currently operates direct air routes only to Beijing and
Shenyang. Air China, which also operates flights between Beijing
and Pyongyang, has recently reduced flight service to once a week
from three times a week. JoongAng Daily on July 20 reported that
Air Koryo is increasingly losing favor among world aviation
officials due to safety problems. Dubai and Qatar rejected requests
from Air Koryo to launch non-regular flights in May, citing safety
problems. International organizations such as World Health
Organization and UNICEF advise their workers to refrain from flying
Air Koryo. Moreover, the European Union banned Air Koryo flights in
the region and the International Air Transport Association failed
the air carrier during a safety inspection in December 2007. Air
Koryo currently owns 20 aircraft (mainly old Russian models) and
only 10 are currently in operation. It purchased a new aircraft
(TU-204) from Russia in December 2007 (see photo).

14. (SBU) U.S. CRS Staffer: DPRK Earns USD 2 Billion a Year in

SEOUL 00001389 004 OF 006

Arms Trade with Iran: Chosun Ilbo reported that Larry Niksch, a
specialist on the DPRK with the Congressional Research Service, said
on July 15 that North Korea earns over USD 2 billion annually in
arms deals with Iran. Niksch said at a conference held by the Cato
Institute on July 14 that Iran, Syria and Burma have recently become
major customers of North Korea. He claimed that North Korean
scientists and engineers as well as missiles, missile parts and
technical drawings for missiles are being transferred by air between
the DPRK and Iran. Niksch said flights between Pyongyang and Tehran
should be a key target for sanctions against the DPRK. He called on
China to block such deals by banning overflights. He also claimed
all food aid from China to North Korea has been diverted to
soldiers, therefore reduction of Chinese food aid to the DPRK would
exert substantial pressure.

15. (SBU) DPRK Software Industry Explores Overseas Market: Yonhap
News Agency cited a July 13 DPRK Internet portal, Naenara
(www.kcckp.net), report that North Korea had recently published a
list of leading software companies in the DPRK, hoping to win
increased orders from overseas. The DPRK state-run software
developers were established almost two decades ago to meet domestic
demand in the DPRK as well as aiming at exports to China, Japan and
Europe. North Korean leader Kim Jong-il began to place increased
focus on the DPRK's computer industry in 1990, setting the
industry's development as one of the state's prime goals. The DPRK
has since set up the Chosun Computer Center in Pyongyang as a base
for North Korea's computer industry and a special after-school
program for talented students. DPRK elementary schools have adopted
computer and English classes as regular curriculum since September
2008.

Inter-Korean Economic Cooperation
---------------------------------

16. (SBU) ROKG Tightens Restrictions on Luxury Goods to the DPRK:
The MOU reported July 10 that it will tighten controls of South
Korean goods shipped to the DPRK, banning most luxury items in
accordance with the United Nations Security Council Resolution 1874
which was adopted following North Korea's second nuclear test in May
this year. The MOU said that prior authorization will be required
for South Koreans to bring the following items to the DPRK:

-- Wine and distilled liquor
-- Cosmetics: Perfume, skin care and make-up cosmetics
-- Leather Goods: Handbags, trunks and suitcases
-- Fur
-- Carpets and Rugs
-- Pearls and Jewelry
-- Electric Equipment: Televisions, cameras, video cameras and
projectors
-- Automobiles: Passenger vehicles, motorcycles and sidecars
-- Ships: Yachts, leisure boats and canoes
-- Optical Equipment: Professional cameras and film projectors
-- Watches: Wrist and pocket watches
-- Musical Instruments: Pianos, harpsichords and strings
-- Art collections and Antiques

17. (SBU) The ROKG will allow exceptions for the ROKG and business
officials who bring the listed items during travel between the two
Koreas on official duty or for personal use during their stay in the
DPRK.

18. (SBU) ROKG Imposes Financial Sanctions on DPRK Firms and
Individuals: South Korea's Ministry of Strategy and Finance (MOSF)
said July 27 that the ROKG will impose financial sanctions on five
North Korean officials and five institutions for their alleged
activities in proliferation of weapons of mass destruction. It is
the first time the ROKG has imposed sanctions on North Korean
individuals. The measures were at the request from the United
Nations Security Council. The five designated North Korean
officials include Ri Je-son, director of the General Bureau of
Atomic Energy, Yun Ho-jin, director of Namchongang Trading
Corporation, Ri Hong-sop, and former director of the Yongbyon
Nuclear Research Center, Hwang Sok-hwa, a senior official of the
General Bureau of Atomic Energy, and Han Ru-ro, director of Korea
Ryongakan General Trading Corporation. The five entities are the
General Bureau of Atomic Energy, Hong Kong Electronics, Namchongang
Trading Corporation, Korea Kyoksin Trading Corporation and Korean

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Tangun Trading Corporation. In June this year, the ROKG had
imposed economic sanctions on (North) Korea Mining Development
Trading Corporation, Tanchon Commercial Bank and Korea Ryongbong
General Corporation.

19. (SBU) ROK Automaker in DPRK Makes First Profit: Local media
outlets reported July 15 that Pyeonghwa Motors, a ROK firm operating
an automobile production joint-venture in Nampo, North Korea, has
posted its first net profit (USD 700,000) since it began production
in 2002. The company's spokesman was quoted as saying that
Pyeonghwa Motors has sent USD 500,000 of the total net profit to its
headquarter in Seoul via South Korea's Woori Bank branch in Hong
Kong. The company said that it sold a total of 652 units in 2008.
It also said that the company's profits are picking up, with this
year's sales already surpassing 740 cars. Park Sang-kwon, President
and CEO of Pyeonghwa Motors said that the company runs on a strictly
cash basis, with no credit sales or discounts. A sedan costs about
USD 18,000, and the company accepts only U.S. dollars or Euros.
Customers are mostly trade agencies who have easy access to foreign
currency. Auto insurance is also available, for about 300 Euros
(USD 428) a year. Park also said that the company is benefitting
from the DPRK's efforts to fulfill its campaign to make the country
more prosperous by the one hundredth anniversary of Kim Il-sung's
birth in 2012. Production is in full swing as 340 North Korean
employees work extra hours, some doing the night shift in accordance
with North Korea's so-called "150-day Battle" a labor productivity
campaign that continues until September this year. Pyeonghwa Motors
had imported partially built cars (semi-knockdown kits) at first,
and completed them with spare parts in partnership with Italy's Fiat
and China's Brilliance Automotive Holdings. The company shifted to
a kit process with advanced technology, locally assembling entire
parts with the oversight of South Korean, Japanese and Chinese
engineers.

20. (SBU) Meanwhile, Chosun Sinbo reported July 14 that Sungri
Motor Complex, North Korea's sole home-grown automaker, aims to
expand its annual production to 10,000 units by 2012, a level not
reached since its peak in the 1970s. It said that the production
decreased after the 1970s, the workforce of the company fell to 75
percent of the peak years due to the economic hardships in the late
1990s. The automaker began production of trucks named "Sungri
58-type," "Sungri 61-type," and "Jaju (independence) 64-type" in
April this year.

21. (SBU) Number of KIC Workers Rises: According to the MOU on
July 13, the total number of North Korean workers at the Kaesong
Industrial Complex (KIC) reached 40,255 people as of the end of June
this year, an increase of 1,324 workers from end of 2008.
Currently, 109 ROK firms operate at KIC, up from 93 firms as of the
end of 2008.

22. (SBU) Inter-Korean Trade Fell 19.7 Percent in June 2009:
According to data recently released by the MOU, inter-Korean trade
in June fell 20 percent to USD 118 million. Trade between the two
Koreas has declined for ten consecutive months since September last
year. Commercial transactions between the two Koreas declined 16
percent to USD 117 million, while non-commercial transactions fell
88 percent to USD 1 million, reflecting the chilled inter-Korean
ties. Meanwhile, cumulative inter-Korean trade in the first half of
the year drop 26 percent over the same period of a year earlier to
USD 653 million. ROK exports to the DPRK in the first half of the
year also declined 41.8 percent to USD 267 million, while the
imports slightly fell 8.7 percent to USD 386 million.

INTER-KOREAN TRADE IN JUNE 2009
-------------------------------
(UNIT: USD THOUSAND, PERCENT)

Commercial Transactions
-----------------------
South Exports South Imports Total
To North from North
------------- ------------- -----
General Trading 1,038(-72) 17,904(-34) 18,942(-39)

Processing-on
Commission(POC) 15,238(12) 9,542(-14) 24,780(-0.1)

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Kaesong
Industrial
Complex 37,599(-21) 32,343(35) 69,942(-3)

Mt. Kumgang
Tourism Project 279(-96) 117(-86) 396(-95)

Other Economic
Projects 1,443(-36) 1,246(2) 2,689(-23)

Light Industry
Cooperation 0 0 0

Subtotal 55,597(-25) 61,152(-5) 116,749(-16)

Non-Commercial Transactions
---------------------------
South Exports South Imports Total
To North from North
------------- ------------- -----
NGO Aid 990(-83) 0(0) 990(-83)

Government Aid 0 0 0

Social,Cultural
Projects 0 0 0

Energy Aid 0 0 0
(HFO)

Subtotal 990(-88) 0(-100) 990(-88)

TOTAL 56,587(-31) 61,152(-5) 117,739(-20)
----- ----------------------- --------------

(1)Source: Ministry of Unification
(2)Note: Figures in parenthesis indicate the comparison from the
same month of 2008.

Foreign Aid
-----------

23. (SBU) China Reportedly Sends 370 Military Vehicles to the DPRK:
RFA reported July 2 that China has recently shipped 320 military
trucks and 50 military jeeps to the DPRK. RFA cited a Chinese
source claiming the shipment of military vehicles was made at the
request of the DPRK Minister of Armed Forces who secretly visited
China on June 10 this year.

24. (SBU) U.S. NGO Helps DPRK Agricultural Industry: According to
Voice of America on July 31, the Mennonite Central Committee, a
U.S.-based non-governmental organization, plans to spend USD 1
million to help the DPRK agricultural sector. It will initiate a
conservation agriculture project in three cooperative farms in
Hwanghae Province, North Korea, including the provision of
agro-machinery and technical training. The project is scheduled to
be completed in December 2011.

25. (SBU) French NGO Restores DPRK Reclaimed Land: RFA reported
July 28 that Triangle Generation Humanitaire (TGH), a French NGO
helping the DPRK has recently restored a land reclamation project on
the west coast of North Korea. The reclaimed land, the largest in
the DPRK with a total of 3,200 hectares, was originally reclaimed in
1994 but mismanaged dykes rendered the site useless by 1995. TGH
said that the restoration project will help in mitigating food
shortage problems in the region. Around 7,000 North Koreans in the
region took part in the construction works and they received food
supplied by the French NGO. TGH has carried out this project with
the financial support of 2.1 million Euros (USD 3 million) by the
Swedish government and the European Union.

TOKOLA

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