The recent announcement that Russia and North Korea have agreed to write off nearly all of the hermit kingdom’s $11 billion in Soviet-era debt — more than half of North Korea’s foreign debt obligations – reminds us that the bonds between the Sino-Soviet Bloc and its enfant terrible have depreciated into economic surrealism. Here we recount some of the notable chapters in the 65-year effort to float the Democratic People’s Republic of Korea, the world’s most reclusive regime.
This is Part I of a five-part series.
A Premature Bugle
The Korean War was a promising overture for the newly formed DPRK. Flush with funds from its Communist benefactors, it immediately began diverting resources to invest heavily in its military as the Cold War heated up in the 1960s. Troops from both North and South swelled along either side of The Most Ironically Named Place on Earth, the DMZ. DPRK troops faced south and leaned forward. The cost of these efforts spiraled recklessly, and instead of self-funding its military, the DPRK chose to borrow heavily from foreign governments to supplement its Sino-Soviet allowance.
This precipitated a period of unprecedented financial dealings between the hermit kingdom and Western European countries, which were now willing to lend to the DPRK in a world in which nuclear weapons froze the West and East and Nixon could sit down with Mao in the Forbidden City. That week might have changed the world in 1972, but it had no effect on North Korea’s financial acumen. The ability to raise debt from new players was a delectable byproduct of a general détente in Korean relations with the West, and North Korea was hungry for new sources of cash. For reasons that remain unclear to your author — either a poor economic calculus, an overly sanguine debt market or the DPRK’s oddly impressive financial shell game — the rest of the world did not foresee that North Korea could not service the debt. And by “service” I mean “pay it back.” It would take decades to unwind the deals struck by the DPRK’s naïve creditors, but no matter: A new client with a voracious appetite for capital emerged, and western lenders weren’t about to ignore it.
In 1972, Pyongyang borrowed $80 million from France. That the funds were applied to a fertilizer plant says as much about the agrarian needs of the North (did you forget about those? So did the Great Leader) as it does about the country’s metaphorical return on capital: It quickly approaches la merde. A year later, North Korea borrowed $160 million from the UK to build a cement factory, because, as the empty squares of Pyongyang remind us, a Communist state can never have too much cement. And the year after that it borrowed $400 million from a number of countries for large-scale plant equipment (everything’s bigger in North Korea). Debts to OECD countries in the 1970s alone totaled $1.3 billion.
Reliance on Western capital did not, however, stop the DPRK from hitting up its neighbors in the region for extra cash. Even if, say, those neighbors were the brutal imperialists who once occupied the peninsula and enslaved its people, and who still invoke a unique brand of hatred in the Korean psyche.
As it happened, Japan had already inadvertently given the DPRK the greatest aid the kingdom could have asked for: sophisticated, massive industrial capabilities it developed on the peninsula in the first half of the 20th century. When the Allies defeated Japan in 1945 and liberated Korea, they found that the north possessed more than three-quarters of Korea’s mining production, 80% of its heavy industrial capacity, and 92% of its electricity-generation capabilities.1 While the DPRK moved to capitalize on its accidental riches, the ROK was left to ponder the market value of charred rice paddies.
But the advantage over the south wouldn’t last long. America’s carpet-bombing during the war decimated the north’s Japanese inheritance and evened out the fortunes of north and south with ferocious efficiency. As one guide explained during my visit to Pyongyang, “the Americans dropped 400,000 bombs—one for every person.”The DPRK managed to borrow from Japan again anyhow. It was the Japanese who were hardest hit by North Korea’s intransigence, and the DPRK no doubt enjoyed the satisfaction of sticking it to its extraordinarily brutal colonial rulers. By 1973, Pyongyang was asking Tokyo to accept iron ore for its imports instead of cash. In July 1974, just as the DPRK was building up those massive plant factories, it failed to make an initial down payment for steel products from Japan. The Japanese spent much of the 1970s and ‘80s scheduling and rescheduling the DPRK’s debt payments, then found, as the US would 30 years later in the Banco Delta Asia laundering affair, that disentangling economic and international relations is difficult when the DPRK flexes its (malnourished) muscles.
Enter the Rangoon Bombing. On October 9, 1983, a rebel troika with ties to North Korea detonated a bomb in Burma intended for South Korean president President Chun Doo-hwan. It was timed too early to kill the leader of the ROK (the result of a premature bugle) but did manage to kill 21 others and wound 46 more. In response, Japan applied sanctions on Pyongyang to express displeasure with its choice of diplomatic methods. North Korea stopped making its payments on its Japanese debt, which by that time amounted to $667 million. Three years later and left on the hook, Japan was forced to pay nearly $200 million to 32 different insurance companies to cover North Korean defaults. But the cash-strapped North Koreans made at least one effort to repay their Japanese creditors — this time, in sushi. When Tokyo declined to accept an offer of freshly-caught fare from the Korean Bay in lieu of currency,2 even North Korea couldn’t deny that its finances were fishy.
North Korean debt had become a political and social weapon, and the regime was not afraid to brandish it. At the same time, it began to lose its meaning altogether (debt being a conceptual promise made real by, you know, actual payments). Borrowing shenanigans of this sort continued through the final chapters of the Cold War, when Eastern European Communist satellites were willing to lend to their siblings in the Far East. The story here repeats itself in comical predictability: The DPRK borrowed from its friends east of Berlin, drew out these debts for years, and missed or ignored its payments altogether. In July 1987, a group of about 140 European banks declared North Korea a default state. That the debts were small, relatively speaking, made them easier to disregard — until a new generation of leaders reviewing old credit deals with Pyongyang came knocking years later.
Those knocks would arrive in 2008, when the world, and the DPRK’s conception of itself within it, had radically shifted. The regime would face its creditors just as it was feeling both radically empowered and shamelessly desperate. And that is a dangerous combination when it comes to discussing one’s obligations to unhappy creditors.
1 Cha, Victor. The Impossible State: North Korea, Past and Future. New York: Ecco, 2012