DPRK SANCTIONS: CASH FLOW FROM ROKG PROJECTS FALLS

C O N F I D E N T I A L SEOUL 003997 SIPDIS NOFORN SIPDIS STATE FOR EAP/FO, EAP/K NSC FOR TONG, CHA STATE PASS TO USTR CUTLER, AUGEROT, KI E.O. 12958: DECL: AFTER KOREAN REUNIFICATION TAGS: ECON PREL EINV KS KN SUBJECT: DPRK SANCTIONS: CASH FLOW FROM ROKG PROJECTS FALLS Classified By: EconMinCouns Drew Quinn for reasons 1.4 (b)&(d) SUMMARY -------------- 1.(SBU) Following the South Korean Government's recent decision to maintain the Kaesong Industrial Complex (KIC) and Mt. Geumgang projects as the centerpieces of North-South engagement, the mood at Hyundai Asan Corporation -- the principal entity responsible for both projects -- remains officially upbeat, but concerns are beginning to emerge. The outgoing Unification Minister abruptly cancelled a trip to Mt. Geumgang, with no explanation; the Korean public's enthusiasm for traveling to the idyllic Mt. Geumgang has fallen by half since the DPRK's nuclear test; and interest in new investment in KIC seems to be on hold, for now. End Summary. 2.(C) EconOff met with Hyundai Asan Corporation (HAC) Senior Vice President Jang Whan-bin and discussed HAC's current situation. Jang, a long-time Embassy contact, frequently provides insights into HAC's plans and operations, and through his routine and extensive contacts with North Korean officials, a glimpse into DPRK thinking. -------------- NOT JUST LEAVES FALLING... -------------- 3.(SBU) Hyundai Asan, the exclusive operator of tours to North Korea's Mt. Geumgang, has invested more than USD 200 million in building and upgrading the tourist facility there. By HAC's estimation, an additional 189 million dollars has been invested in infrastructure and tourism-related facilities by the (South) Korea National Tourism Organization, Emerson Pacific and other smaller investors. 4.(U) According to a HAC briefing, since the opening of the Mt. Geumgang complex in 1998, nearly 1.4 million South Koreans have visited the North Korean facility. Only 500,000 or so tourists went in the first six years, having to travel by boat. Nearly 800,000 have made the trip since the opening of a land corridor through the DMZ in 2003. 5.(SBU) Following three consecutive lump-sum royalty payments to the DPRK totaling nearly 400 million dollars, in mid-2001 HAC began paying royalties on a per capita basis. Hyundai Asan's remittances to the DPRK for its Mt. Geumgang operations were: USD 22 million in 2002, 13 million in 2003, 15 million in 2004, 13 million in 2005, and 11 million as of October, in 2006. 6.(C) Jang professed to be less worried about HAC's Geumgang operations following the South Korean government's decision not to alter substantially its policy towards those two projects with North Korea despite the October 9 nuclear test. He nonetheless lamented that bookings for October and November were down by half from previous years. As of mid-month, only 10,000 bookings had been made for the whole month; November bookings normally reached more than 20,000 tourists, he claimed. -------------- DPRK FEELING THE PINCH -------------- 7.(C) The drop in tourists was a serious concern for the DPRK officials associated with the Asia Pacific Peace Committee (APPC),the corporate entity established to receive payments from HAC, according to Jang. APPC officials learned their lesson about the correlation between a decrease in Geumgang visitors and the amount of money remitted to the APPC when they unilaterally slashed the number of South Koreans permitted to visit Mt. Geumgang following an internal HAC management struggle in the summer of 2005. Once they saw their monthly remittances fall by half, APPC officials reversed their decision, according to Jang. APPC officials are expressing their concerns about the recent drop in tourists, not seeming to understand that the decrease in South Korean visitors is a result of the October nuclear test, Jang said. 8.(SBU) Asked about an abrupt decision by outgoing Ministry of Unification (MOU) Minister Lee Jeong-seok not to travel to North Korea to attend a HAC-sponsored event celebrating the eighth anniversary of Mt. Geumgang operations, Jang speculated that Minister Lee did not want his trip to the North to negatively affect his successor's appearance before the National Assembly, scheduled at the same time. -------------- KAESONG IN NEUTRAL? -------------- 9.(SBU) Turning to the Kaesong Industrial Complex (KIC),Jang reported that although site work for the next stage (Phase One) of the KIC was under way, only half of the 24 companies that were scheduled to participate had actually begun construction. No factory construction had been started, in fact, since August 2006. While Jang was reluctant to connect the delay in construction starts for the remaining Phase One companies directly to the Korean public's concern over the DPRK's nuclear test, he conceded that it was troubling to HAC. 10.(C) Jang labeled the notion of making direct payments to KIC workers as "ridiculous," complaining that if the DPRK wanted to take any portion of the workers' salary, the method of payment was irrelevant. Asked if he believed MOU reports claiming that KIC workers were receiving nearly 75 percent of their salaries in coupons that could be used to purchase daily necessities including rice, sugar, oil, and cigarettes, Jang said he found the reports credible but would wait for definitive proof of those claims. 11.(C) Jang relayed that DPRK military officials were complaining about the slow development of the KIC. Those officials, purportedly upset over having surrendered control of an area deemed to be militarily important to the North, wanted to see more benefits flowing from the KIC project. Jang did not specify what those benefits might be, but claimed that KIC workers were now receiving two to three times more -- in pay, rations and other intangible benefits -- than the average Kaesong area resident. In fact, he said, competition for jobs in the KIC was so intense that families were informally limited to having only one KIC employee, so that the benefits could be more widely shared in the region. -------------- COMMENT -------------- 12.(C) It seems clear that despite ROKG insistence on continuing its policy of engagement with the DPRK, Korean citizens and businessmen are more wary of conducting business as usual, at least judging from HAC's projects. The drop in the number of South Koreans going to Mt. Geumgang and their seeming reluctance to make big investments in the KIC are having a knock-on effect of reducing -- albeit by relatively small amounts -- the cash benefits accruing to the North. 13.(C) If Jang's assertions about the growing concern DPRK officials have over the drop in remittances and the slowdown in further KIC development are accurate, continued pressure on these two projects -- combined with the possibility of renewed benefits if the DPRK cooperates -- could prove to be a useful tool in dealing with the North Koreans. VERSHBOW