News / Economy

S. Korea, Russia Agree on Backdoor Investment in North

South Korean President Park Geun-hye (R) shakes hands with Russian President Vladimir Putin (L) during their meeting at the presidential Blue House in Seoul, Nov. 13, 2013.
South Korean President Park Geun-hye (R) shakes hands with Russian President Vladimir Putin (L) during their meeting at the presidential Blue House in Seoul, Nov. 13, 2013.
Daniel Schearf
A deal reached with Russia this week will allow South Korean investors to take part in a railway and port project in North Korea, circumventing Seoul's limits on direct investment. Russia plans to improve the North Korean port Rajin to ship goods to and from Europe.

South Korean President Park Geun-hye and Russian President Vladimir Putin signed a memorandum of understanding (MOU) effectively granting South Koreans investment into North Korea, which Seoul currently restricts.

The MOU, signed Wednesday in Seoul during Putin's one-day visit, allows South Korean firms to get around those limits by purchasing shares in a Russian-led project in North Korea.

A consortium of South Korean companies have the option to buy a stake in the $340 million Rajin to Khasan railway and port project in North Korea's Rason Special Economic Zone.

The joint venture, “RasonKonTrans”, aims to connect North Korea's Rajin to Russia's trans-Siberian railway.

Russia owns 70 percent of the project and North Korea owns 30 percent. South Korean media say steel maker Posco, state-owned Korean Railway, and Hyundai Merchant Marine are expected to buy about half of Russia's shares.

At a joint press conference, South Korean President Park Geun-hye hailed the agreement.

She said the project will promote cooperation between South Korean and Russian companies in the future.

Spokespersons for the three South Korean companies were not available or declined to comment.

Seoul banned South Korean firms from all trade and investment with North Korea in 2010, when it blamed Pyongyang for sinking a South Korean warship.

South Korea's Ministry of Unification told the Yonhap news agency the railway and port project does not break the sanctions as it is about indirect investment.

South Korea does allow investment in the North through the inter-Korean Kaesong Industrial Complex just inside North Korea.  The decade-old joint venture ran relatively smoothly through periods of tension until April when Pyongyang pulled its 55,000 workers citing hostility from South Korea.

Factory operations resumed in September after months of slow negotiations.

Cho Bong-hyun is with the Economic Research Institute of the Industrial Bank of Korea. He said the railway and port is less vulnerable to political tensions because of Russia's involvement.

He said if it was a project between the two Koreas, it could be halted by politics as was seen in the case of the Kaesong Industrial Complex. But this project, he said, is a cooperation among three countries including Russia, so North Korea cannot unilaterally ignore Moscow.

Nonetheless, Cho said the possibility that North Korea could suddenly stop the project cannot be excluded as North Korea sometimes does not cooperate for diplomatic or military reasons.

Russian President Putin brushed aside those concerns, adding that the Russian position is that the three-way cooperation should not be based on political factors. He said it should be a unifying force.

The Rajin-Khasan railway was first proposed in the 1990s but faced delays, including tensions over North Korea's nuclear weapons program. It was completed in September but the port phase of the project, the third wharf, is still under construction.

The South Korean and Russian Presidents hope to one day link the North Korea to Russia line with an inter-Korean railroad. Such a network would stretch from the South's Busan port all the way to Europe.

Moscow and Seoul also plan to build a pipeline across the peninsula to feed natural gas to energy hungry South Korea.

The plans are ambitious, but economic researcher Cho said the timetable for them remains uncertain.

He said more time is needed on the Rajin port investment and the gas pipeline project, because the countries must first solve outstanding issues including inter-Korean relations and international sanctions on North Korea.

Rail traffic between the two Koreas was resumed in 2007 for the first time in 56 years. But, Pyongyang severed the line, amid tensions, in 2008 after only one year in service.

In a bid to encourage other forms of South Korean investment in Russian markets, banks from the two sides signed financing MOUs worth $3 billion.

South Korea's Ministry of Strategy and Finance indicated that support could include the North Korea railroad and port project.

In a press release Thursday, it said the agreements aim to encourage Korean investment in energy, infrastructure, and natural resources, including projects such as electricity and railways across Eurasia.

Aside from the railway project, the South Korean and Russian presidents also agreed to mutual 60-day visa free travel. The relaxed rules, taking effect next year, aim to encourage visitors from their countries as well as lucrative tourist dollars.

VOA Seoul producer Youmi Kim contributed to this report.

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