Trump-Kim rail deal could spur a North Korea investment boom

At South Korea’s northernmost train station, the tracks stop abruptly ahead of the demilitarised zone that marks the North Korean border.

A sign reads: “The steel horse wants to run.”

That may soon become a reality as US President Donald Trump and North Korea’s Kim Jong-un prepare for a second summit next week in Vietnam.

The outcome is expected to include some easing of sanctions in return for steps towards denuclearisation – with a rail link first mooted more than 15 years ago one of several key inter-Korean projects that might finally get approved.

In a phone call with Trump this week, President Moon Jae-in said South Korea was ready to move forward with the rail link and other unspecified economic projects if it helped the negotiations.

The talks may also include opening the Gaeseong inter-Korean industrial complex, where more than 120 of the nation’s companies were operating before it was closed in 2016 amid rising tensions.

“We are doing everything – we are ready to go whenever there is an opportunity,” said Shin Han-yong, head of the corporate association of South Korean companies that operated Gaeseong.

Still, he added, many executives were cautious due to the uncertainty over whether a deal can be struck: “It’s not bad, but it’s also difficult to be too optimistic.”

Since declaring a halt to missile and bomb tests last year, Kim has sought to convince the world to lift punitive sanctions that prohibit investment, severely curtail exports and limit oil and gas imports.

Trump has so far insisted that Kim give up his nuclear weapons before sanctions are lifted – a stance that has led to a stalemate in the talks.

Kim and Moon have already laid the groundwork for the rail link over the past year, holding a ceremony in December on modernising lines in the east and west of the peninsula, which will be followed by additional studies and drawing up designs.

While the move would benefit Kim, South Korea also wants to connect with the rest of Asia by land and ultimately link up with Chinese President Xi Jinping’s Belt and Road Initiative designed to boost trade between Europe and Asia.

The rail project was first launched more than 15 years ago, but scuttled by political acrimony and global sanctions imposed on Pyongyang over its pursuit of nuclear weapons.

For a brief period about a decade ago, South Korea ran freight trains into the industrial park in Gaeseong, until political tensions undermined the project.

Restoring the connection and modernising North Korea’s railways would allow South Korea to run trains into Russia, China and beyond, reducing the shipping costs for its export- heavy economy.

Improved infrastructure would also help North Korea lift barriers to monetising its mineral resources, which could be worth $6tn, according to a 2013 estimate by the North Korea Resources Institute in Seoul.

It’s also home to what might be the world’s single-biggest deposit of rare earth minerals, crucial for producing key elements of electronic car engines and many high-tech gadgets that South Korea churns out.

“The rail project is different from the past projects because this is not only aimed at connecting South Korea to the rest of Asia, but it’s also aimed at improving logistics in the North,” said Lee Hae-jung, a senior researcher at Hyundai Research Institute in Seoul. “Rails and roads are important for economies to grow, so helping the North modernise its transport system could really help lift the North’s economy.”

While a lack of information makes it difficult to measure North Korea’s economy, South Korea’s central bank estimates that it contracted 3.5% in 2017 to about $32.3bn.

That gives it about 2% the gross domestic product of South Korea, providing a rare ground-up opportunity for investors if the country opens up.

North Korea’s rail network and signalling hasn’t changed much from when it was rebuilt after the 1950-53 Korean War.

It has five lines that link with China, Russia and South Korea.

The two lines with China has been the most active and probably the most modern in the North.

The rail agreement could benefit South Korean companies from construction to rolling stock makers such as Hyundai Engineering & Construction Co and Hyundai Rotem Co, putting them in a better position against rivals from China that may also want to jump in.

Still, many companies have been burned by North Korea in the past.

Hyundai Group set up a tourism resort in Mount Geumgang and the industrial park in Gaeseong only to see North Korea take over the projects.

Sweden is still awaiting payment for 1,000 Volvo sedans shipped in the 1970s.

A Chinese mining company called its four-year venture in the isolated nation a “nightmare.” And an Egyptian telecommunications giant doing business there can’t repatriate its profits.

Investors from China, North Korea’s economic patron, have also been burned.

Xiyang Group signed a contract in 2007 to set up a venture with the government to process 500,000 tonnes of iron ore per year.

Five years later, Pyongyang terminated the deal and cut off the plant’s access to water, electricity and communications.

Xiyang issued a terse statement after it didn’t receive a cent of compensation.

Still, there is more optimism this time that a thaw is around the corner.

Kim in January specifically offered to resume work at the Gaeseong industrial park and the Mount Geumgang resort in North Korea, and the US has shown a greater willingness to ease sanctions in return for denuclearisation steps.

The facilities provide cash-starved North Korea with hard currency.

South Korean companies have already done research and are ready to move in once sanctions ease, according to Kim Young Hui, a North Korea-born economist at the Korea Development Bank in Seoul.

“The mood has calmed down as things didn’t pan out well, but the fire is being rekindled at this point,” she said. “Now they quietly wait and see.”