RUSSIAN-NORTH KOREAN ECONOMIC COOPERATION: DISTANT TRAIN

UNCLAS SECTION 01 OF 03 VLADIVOSTOK 000094

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON PREL ETRD RS
SUBJECT: RUSSIAN-NORTH KOREAN ECONOMIC COOPERATION: DISTANT TRAIN
WHISTLE

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1. (U) Summary. Russian and North Korean officials have signed
an agreement to renovate the railroad linking the two countries
and to jointly develop the North Korean port of Najin to handle
major container cargos. The move, which has been anticipated
for years, is seen as the first step in upgrading the entire
Trans-Korean Railway (TKR) to allow for direct overland freight
deliveries between South Korea and Europe. Not everyone here is
thrilled about the agreement, however. Some are concerned that
Najin, with its cheap labor and newer infrastructure, will draw
business away from existing Russian Far East (RFE) ports,
further isolating Pacific Russia from the rest of the country.
They would prefer to see the government invest in modernizing
existing RFE ports. Given the economic uncertainties, some
analysts assume that the real driving force behind the
development of Najin and the TKR is political: that is,
competition with China for influence in northeast Asia.
Regardless of its motivations, the fact that announcements about
Russian-Korean railway cooperation have over the years far
outpaced actual construction, it does not seem likely that the
TKR will be completed any time soon. End summary.

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Russia and DPRK Agree to Cooperate on Railway, Port
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2. (U) Longstanding plans to link the Trans-Korean Railway with
the Russian Trans-Siberian Railway (TSR) came one step closer to
reality in April with the signing of a memorandum of cooperation
between President of Russian Railways (RZhD) Vladimir Yakunin
and North Korean Minister of Railways Kim Young Sam. The
"Khasan-Najin" pilot project will include the renovation of 54
kilometers of dual track between the Khasan railway station on
the Russian border with North Korea and the North Korean port of
Najin, as well as the construction of a jointly-operated
container terminal at Najin. According to Russian news agency
deita.ru, a fiber optic cable will be installed along the
Khasan-Najin railroad by TransteleKom Ltd and the North Korean
Communication Ministry. The railway will reportedly use digital
equipment. The joint venture between a subsidiary of RZhD (70
percent) and the Port of Najin (30 percent) has been set up for
a 49-year period and will be responsible for attracting other
investment and finding contractors to complete the work.
According to an RZhD spokesman quoted in the newspaper Gudok
(owned by the railway),the track renovation and container
terminal construction at the port requires an initial
investment from the Russian side of 200 million USD, while the
North Koreans will provide a long-term lease on land and
infrastructure along the Tumen River-Najin route. Both sides
agreed to simplify customs and border formalities between Khasan
and the adjacent North Korean railway station at Tumangan to
allow for efficient cargo transfers.


3. (U) At the moment, Najin is not equipped to handle container
traffic and specializes in bulk cargoes - e.g., fertilizers,
aluminum, and grain. In late July, however, Gudok reported that
preparations are underway to construct a container terminal at
Najin capable of handling 400,000 TEUs (twenty-foot equivalent
units) per year. It is anticipated that the first stage, which
will account for a quarter of the total capacity, will be
finished in a year. At the same time, Pier No. 3 at the port is
currently being renovated to handle large vessels capable of
carrying 1,000 containers. The port is ultimately capable of
handling up to 600-700,000 TEU in the future. Meanwhile, the
Vladivostok newspaper Zolotoy Rog reports that the railway
renovation is expected to begin soon, and will most likely be
handled by RZhD daughter company ZarubezhStroytekhnologiya Ltd.
The railway will reportedly be constructed with dual-gauge track
to accommodate both Standard Gauge (1435mm) trains, as well as
1520mm Russian Broad Gauge trains.

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Just the Tip of the Railway
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4. (U) The Khasan-Najin project is considered to be the first
step in more ambitious plans to link South Korean ports by rail
with markets in Russia and Europe. According to experts,
renovation of the entire 781-kilometer North Korean railroad to
the South Korean border and construction of a modern logistics
center for container cargo transit will require an initial
investment of 2.5 billion USD. In 2001, North Korean leader Kim
Jong Il permitted Russian specialists to examine the condition
of North Korea's railways. According to their report, the
majority of the 590 bridges and 165 tunnels in the system are in
unsatisfactory condition; of these, 179 bridges and 42 tunnels

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are in urgent need of repair. Consulate contacts who have
traveled in North Korea add that frequent power outages are also
a serious problem along the country's railroads, bringing trains
to a halt a number of times over the course of their journeys.
According to reports, the Russian experts had to use automobiles
to inspect the rail lines because the frequent power outages and
poor quality of the track made doing it by train impossible.
Because of the poor conditions, trains traveling along the
railway average only 15 to 30 kilometers per hour (9 - 18 mph).
According to the Russian specialists, the only decent aspect of
North Korea's railroads is the quality of the gravel used in the
roadbeds. After their inspection, the RZhD specialists
estimated that it would take five years to restore the entire
railroad. (Note: Early last year, MFA First Secretary Maksim
Volkov told congenoff that it would only take "a half year or
so" to upgrade the Trans-Korean Railway. End note.)

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Is Najin the Death Knell for RFE Ports?
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5. (SBU) Access to southern ice-free ports, including those on
the Korean peninsula, has been a dream of Russian Railways since
the Soviet Union lost the use of Port Arthur (Lushun) to
Japanese-administered Manchukuo (Manchuria) in the
Russo-Japanese War. (While the ports of Vladivostok and
Vostochniy operate year-round, they may ice over in winter.)
Nevertheless, many question the need to develop Najin.
According to officials at Vostochniy, Russia's largest container
port on the Pacific Coast, the port is operating well below
capacity and is actively looking to expand its operations.
Sources in Primorye say they are concerned that Najin, with its
lower-paid workforce, cheaper service fees, and more efficient
and modern infrastructure, will draw significant cargo away from
the RFE's existing ports, serving, in turn, to further isolate
the region from the rest of the country. Some here wonder as
well why the federal government would deliberately undercut one
of its own central development goals - the modernization of the
country's ports and shipping facilities - by developing a rival
facility in another country.


6. (U) For their part, RZhD officials have stated that Najin
will not compete with existing RFE ports because it will handle
entirely different cargoes. Proponents argue that connecting
South Korea to Russia by rail will be beneficial for both Russia
and East Asian exporters. According to Ekho Planety magazine,
delivering Asian cargo to Europe via the Trans-Siberian Railway
will be over twice as quick and significantly less costly than
sea routes, which currently account for 99% of Asian-European
trade. Ocean transit times average thirty to thirty-five days,
versus ten to twelve days over the length of the TSR. The cost
of shipping a TEU overland is approximately 1,000 USD per
container, compared to 850 USD by sea. But according to Ekho
Planety, shippers can realize savings of up to 300 USD per
container because of the shorter transit times along the TSR.


7. (U) Exploiting the TSR for trans-Asian freight deliveries
will benefit Russia as well. According to reports, Russian
Railways hopes to earn up to 3 billion USD annually from cargo
traffic sent from South Korea via the refurbished Trans-Korean
Railway into Russia. Analysts say that betting on the new
railway is risky, however, because of uncertainty regarding
inter-Korean cooperation after this year's election of South
Korean president Lee Myung-bak, who has taken a harder line
toward the North. Some Russian leaders to worry that the
railway may be jeopardized.

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Competing with China for Influence in DPRK
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8. (U) Some analysts say the real driving force behind the
development of Najin and the Trans-Korean railway is competition
with China for influence in northeast Asia. China, which is
prevented from direct access to the Sea of Japan by the 18-km
border between Russia and North Korea, has been rapidly
extending its transportation infrastructure in eastern Manchuria
with an eye toward developing the Tumen River and North Korea as
a major export route. According to Russian analysts, Moscow is
eager to get there first. The stakes are high in part because
China and Russia operate on different railway gauges -- the
former on 1,435mm Standard Gauge and the latter on 1,520mm
Russian Broad Gauge. The country that manages to develop new
rail lines in North Korea may be in a position to ensure that it
has a privileged position there for years to come. (At the

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moment, China may have a leg up, since North Korea's current
dilapidated system is Standard Gauge.)

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The Local Angle: A Border Settlement Prays for Boom
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9. (U) The 750 residents of the Russian border town of Khasan
are reportedly among the most avid supporters of the planned
upgrade of the TKR. (Note: Khasan lies inside of a special
Russian border zone, and all visitors must apply for a permit to
enter. End note.) Like many small settlements in the RFE,
unemployment in Khasan is high - at 40 percent. Under current
plans, Khasan will gain its own container terminal to be built
on 30 hectares of land adjacent to the local railway station.
At the moment, living quarters for railway workers and other
officials are being constructed. RZhD has also initiated
construction of a five-dome Orthodox church, which dominates the
skyline on the Russian-Chinese-Korean border along the banks of
the Tyumen river. Khasan Mayor Ivan Stepanov told local media
that "it is only a matter of time" before a highway is also
constructed through Khasan, providing motor vehicles access from
Russia to "the whole of the Korean peninsula."

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Comment
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10. (SBU) Enthusiasm for linking the Trans-Korean and
Trans-Siberian railways is not shared by everyone in the RFE.
Apart from the worry that the project will choke off the
region's existing ports, it is not entirely clear that the
development of Najin contributes to the overall goal of linking
South Korea and Russia by land, since the very point of the
railway is to obviate the need for transporting cargo by sea
between the two countries. However, given the many years that
discussions about linking the Trans-Korean and Trans-Siberian
railways have been going on without any physical progress, the
latest agreement should not necessarily be taken as the final
word that the project is ready to go. Indeed, the fact that
Primorye media have been almost silent on the railway since
April's announcement may indicate that some obstacles remain.
ARMBRUSTER