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N. Korea Cashes In on Mineral Riches
Financial Need Trumps Longtime Aversion to Foreign Trade

By Blaine Harden and Ariana Eunjung Cha
Washington Post Foreign Service
Sunday, February 24, 2008

SEOUL -- North Korea's Kim Jong Il has a chronic cash-flow problem.

In the 1990s, his Stalinist state nearly capsized -- and millions starved -- for want of subsidies from China and the defunct Soviet Union. Since then, despite arms dealing and the receipt of international aid in return for talking about abandoning nuclear weapons, North Korea has often gone without rice, fuel and medicine.

In the past couple of years, though, Kim's government has quietly begun to milk a long-neglected cash cow: deposits of coal, minerals and precious metals that are among the largest in Asia.

As mineral prices soar on world markets, foreign access to mines in the North is accelerating at a rate unseen in the more than five decades since the division of the Korean Peninsula, according to South Korean government officials, Chinese mining experts and scholars who study North Korea.

They say that Kim's government is increasingly willing to lease mines to outside companies and to negotiate joint ventures with foreign governments.

"North Korea is trading what she has for what she hasn't," said Xu Wenji, a professor of East Asian studies at Jilin University in Changchun, China.

At the same time, mining operations have been delayed and derailed by erratic, maddening and corrupt behavior on the part of North Korean officials, according to businessmen in South Korea and China.

"North Korea -- they are a country of scoundrels," said Sun Demao, a manager at Zhaoyuan Gold, a Chinese company that has canceled all its contracts with mines in the North because of chronic delivery troubles.

Still, exports of North Korean coal and zinc to China have jumped sharply in the past three years, as have zinc exports to South Korea and gold exports to Thailand.

For the first time, North Korea agreed last May to a long-term joint mining deal with the South Korean government, and more deals are in the works, said Jeong Dong-moon, director of the inter-Korean industrial team in the South's Ministry of Unification.

Officials from the two countries met seven times last year, including three inspection trips to a large zinc- and magnesite-mining complex in the North.

"The North Korean leadership now realizes that mining is a realistic tool for getting dollars," said a senior South Korean official who attended the meetings and spoke on condition of anonymity to protect his job. "We could feel their passion. They were really into it."

Kim Jong Il told machinery workers last August, "We have to improve mining machinery spectacularly in greater scale," according to the official Korean Central News Agency.

For many years, Kim Il Sung (who died in 1994) and his son Kim Jong Il (now 66 and leader since his father's death) preached a defiant philosophy of self-reliance, emphasizing local production of goods using local raw materials. Selling unprocessed minerals was seen as a demeaning submission to colonialism. The system worked, after a fashion, throughout the Cold War, with the help of large subsidies from the Soviet Union and China. When those subsidies fizzled out, North Korea descended into heavily armed penury, where it remains.

"North Koreans don't understand modern business because they have never done it," said Andrei Lankov, a professor who specializes in North Korean studies at Kookmin University in Seoul.

That lack of understanding, he said, has stalled and scuttled several mining operations.

More important are Kim's conflicted feelings about mining, said Lankov, a Russian who studied in the North and is a periodic visitor there. "He sees the money now," Lankov said. "But he believes that by reforming, he would be committing suicide. So he wants mining done under strict control of North Korean managers."

The cash infusion the North could receive from large-scale industrial mining is potentially huge, especially for a country that had just $1.4 billion in exports in 2006, according to a CIA estimate.

The estimated value of the country's reserves is more than $2 trillion, according to the Korea Chamber of Commerce and Industry.

There are large deposits of iron ore, zinc and uranium, as well as coal. The North also has the world's largest known deposit of magnesite, an essential part of lightweight metal used in cars, airplanes and electronic equipment.

As North Korea's closest ally and principal benefactor, China has had better access to its mines than any other country.

In exchange for mining rights, China has helped the North construct roads, repair ports and build a glass factory, while providing oil, equipment and food. But even as Chinese investment grew in 2007, exports of some minerals stalled -- as Chinese businessmen bickered with North Korean officials about how to run the mines, according to Xu at Jilin University.

Late last year, in a somewhat alarmist report, the Korea Chamber of Commerce and Industry warned that South Korea was dithering while China was locking up rights to North Korea's minerals.

The report said that in 2006, China imported more than four times the amount of minerals from North Korea as the South did, as measured in dollars.

The report struck a nerve because the South has virtually no mineral wealth of its own. "We really need iron ore and magnesite," said Jeong at the South's Ministry of Unification. "We import everything."

South Korea is rushing to catch up. It has opened regular rail freight service to parts of the North. At a summit last year, the leaders of North and South Korea agreed to $11 billion in economic projects. Zinc exports from the North to the South doubled last year.

An unanswered question for South Korea is whether the new government of president-elect Lee Myung-bak, who takes office Monday, will make denuclearization or human rights a condition of its investment in the North's mines.

"It is clear that somebody has to pay for the infrastructure that will open up the North," said a South Korean official. "It just hasn't been decided who will pay the most."

Cha reported from Shanghai. Special correspondent Stella Kim contributed to this report.

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