Sanctions Bite Orascom in North Korea

It must have seemed like a good idea at the time.

When Orascom Telecom , the successful Egyptian operator headed by Naguib Sawiris, won the right to set up North Korea's first 3G network as a monopoly in partnership with the state telco, it must have seemed a sound bet.

Seven years on, it still looks good on paper.

The joint venture, Koryolink, 75%-owned by Orascom, has net assets of 8.3 billion Egyptian pounds (US$1.1 billion) and cash assets of EGP4.1 billion ($537 million). Koryolink, North Korea's sole provider, reportedly has around 2.4 million customers, or 9% of the population.

But that was before the US, Japan and China ramped up sanctions on the international pariah state and the company is now confronted by what accounting firm Deloitte describes as a series of "financial and operational obstacles."

A report from Deloitte issued with Orascom's quarterly results last week said that international sanctions were making it difficult for Koryolink to "operate, maintain and develop" its mobile network.

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The chief problem is the long-term financial sanctions, which mean Koryolink cannot transfer cash to Orascom Telecom. It also means key goods and services required to run a network have become difficult to obtain.

But even without the sanctions, Koryolink's cash balance, held in North Korean currency, cannot be converted into hard currency at official rates without approval from Pyongyang financial authorities.

That's not all. As well as the bite from the sanctions, Koryolink has now lost its privileged status as North Korea's sole operator. Another government agency has launched a rival mobile provider and in response Koryolink management has sought a merger.

Orascom believes it has won "initial consent" from the government for a deal, but negotiations are continuing.

— Robert Clark, contributing editor, special to Light Reading

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thebulk 6/29/2015 | 12:52:47 PM
Was it ever a good idea? Orascom had to know this was a big possiblity going into this deal. I can't imagine this was much of a surprise to them. Sure it sucks for them, but it was a gamble and right now it's not paying off. 
sowen557 6/29/2015 | 3:14:59 PM
Re: Was it ever a good idea? Wouldnt Huawei been the only vendor allowed to supply equipment into N. Korea?  Orascom would have setup some sort of global supply agreement with Huawei so prices in Italy, Canada would have been same as in N. Korea.  Dont think capital expense of hardware was too much a burden on Orascom.
danielcawrey 6/29/2015 | 4:10:19 PM
Re: Was it ever a good idea? This is a risk in emerging markets. And I wouldn't even call North Korea an emerging market. It's a dangerous market to run a business in.

The only hope here is that so many people get their hands on cell phones there that business needs dictate a change in policy. But I have a hard time seeing that happen anytime soon. 
DHagar 6/29/2015 | 9:33:48 PM
Re: Was it ever a good idea? thebulk, agreed, when it is "too good to be true", it IS too good to be true.

Dealing with an unstable government, political dictatorship, a weak economy, limited consumerism, and people living at poverty levels, does not sound like a good environment - even as sole source.  The fact that the government is now piggy-backing on Orascom's investment is not surprising either, given their track record.

My guess is that it was never a good idea.
thebulk 6/29/2015 | 10:12:42 PM
Re: Was it ever a good idea? I am not even sure that Huawei would be allowed... Technically 
thebulk 6/29/2015 | 10:14:03 PM
Re: Was it ever a good idea? @DHagar, given the outcome, and all the negative points going into the deal I have to assume more then a few people have found themselves out of a job... 
thebulk 6/29/2015 | 10:16:47 PM
Re: Was it ever a good idea? @danielcawrey, I also wouldn't call North Korea an emerging market, I am not sure what to call it at all.... 

And even if I ton of people got their hands on cell phones I have to imagine they wouldnt be used in the same way most people outside of North Korea use them today. No social media, no messaging apps. just phone calls and state run email. 
DHagar 6/29/2015 | 10:21:54 PM
Re: Was it ever a good idea? the bulk, one would wonder, would'nt they?  At least unemployment would be the preferred alternative - given the history in N. Korea!
thebulk 6/29/2015 | 10:26:13 PM
Re: Was it ever a good idea? True, no job is better then hard labor in a Nort Korean prison camp. 
R Clark 6/29/2015 | 10:33:26 PM
Re: Was it ever a good idea? Telecom network equipment is not banned from export to North Korea. No-one admits to being a supplier, but almost certainly it's ZTE, Huawei or Samsung.

For what it's worth, North Korea's no.2 Kim Yongnam paid a visit to Huawei HQ in August 2013, according to Chinese media.

Koryolink's fat cash balance is surely an irresistible target for a klepto-gangster regime like this one. The setting up of the rival operator, and then agreeing to merge, sounds like a classic shake-down.


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