This might make for an interesting, if somewhat short, case study for the Harvard Business Review. The lesson? Don’t invest money in Stalinist regimes … which is only second in already-learned lessons to “never start a land war in Asia.” The Washington Post reports that North Korea ended up with a modern cell-phone system by snookering it out of an Egyptian telecom, who saw gold in the captive population of 26 million:
Orascom Telecom and Media Technology is the company behind the astonishing explosion of cell phone usage in hermetically sealed North Korea in recent years.
After taking a 75 percent stake in a new joint venture in 2008, as many as three million North Koreans have signed up for “Koryolink” cell phone services, using re-branded Chinese flip or smart phones. …
For some time, there have been reports that North Korea was not allowing Orascom to repatriate its profits. Orascom had wanted to convert its North Korean earnings at the official exchange rate – putting them at about $540 million. The Pyongyang authorities ironically wanted them to use the black market rate, which would have put the Egyptian company’s profits at about $8 million, Martyn Williams of the North Korea Tech blog reported in July.
Now, Orascom has revealed that it has “deconsolidated” its stake in the joint venture, officially known as Cheo Technology, making it an associate instead of a subsidiary. Basically, this means that it’s lost control of the service, despite having a majority stake, Williams reports.
The Post’s Anna Fifield raises but does not pursue the question of international sanctions and Orascom’s presence in North Korea. Fifield notes that Orascom’s position was made more difficult by the sanctions … but that’s the intended effect. What was Orascom doing in the DPRK in the first place, outfitting a rogue regime with reasonably advanced technology? The UN cut off trade with Pyongyang for many good reasons, chief of which are its pursuit of nuclear weapons and the enslavement of its people by the Kim regime. Shouldn’t Orascom be suffering those questions for opening the business at all, rather than just having sanctions “hamper” the merger?
PC World, which covered this story earlier in the week, notes that the sanctions essentially allowed Kim to stab Orascom’s owner in the back:
The government can’t afford to pay the money at the official rate, and it can’t be seen to officially recognize the black market rate. So the two sides have spent months locked in talks about what to do.
The issue came to light in an auditor’s report in June, and a month later Orascom dropped a bombshell: It said the North Korean government — supposedly its close partner — had set up a second carrier to compete with Koryolink.
With its options limited, Orascom entered merger talks to combine Koryolink with the new carrier. The North Korean government has agreed to the move in principle, but so far nothing has happened.
What’s more, the North Korean government has apparently proposed that it be the majority partner in any new venture that’s formed.
The irony here is that the move will create more long-term headaches for the Kim regime than it solves, as Fifield also points out. When North Korea needs foreign investment again, who will put up the capital after this double-cross? The same currency issues will apply, so investors can forget about repatriating profits. At some point, the Kim regime will simply duplicate what the investors build and eclipse it, forcing them into a subsidiary position or worse. One doesn’t need a Harvard Business School study to learn that lesson.
Of course, no one with any common sense would have needed to learn this lesson the hard way in the first place. Orascom’s Naguib Sawiris allowed himself and his investors to get suckered by a tyrant, thanks to a few dinner parties and the lure of a supposedly untapped market. That was an illusion, as Sawiris learned too late: Stalinists do not tolerate markets which do not profit the tyranny, and only the tyranny.