North Korea's Foreign Exchange Speculation
By Lee Kyo Kwang
Chosun Ilbo
May 21, 2001

Despite its economy being closed to the outside world, North Korea has performed well in foreign exchange transactions. Pyongyang has fostered expertise in manipulating foreign currencies, by setting up a "foreign exchange manipulation bureau" in the mid-1960s, a sort of foreign exchange dealer office, in the Korea Trade Bank. The North at that time exchanged a franc-denominated loan introduced from France into American dollars, and managed to earn a substantial gain when the latter appreciated in six months thereafter. Astonished at the good news, then President Kim Il Sung is said to have instructed the establishment of a foreign exchange business office in the Korea Trade Bank, bringing the foreign exchange manipulation bureau into being.

Most North Korean banks, the Korea Trade and Korea Taesung Banks among them, have foreign exchange speculation office staffed by eight or so officials. All of them handle slush funds held by their national leader, National Defense Commission Chairman Kim Jong Il, all under the supervision of Room Number 39 of the Workers' Party, that takes charge of foreign exchange earnings. For a payment voucher written by a foreign exchange manipulation bureau member to be issued, it should be approved first by his immediate superior or senior instructor, then by the bureau head, who gets it approved by Room 39, which, in turn obtains approval from Kim Jong Il's secretariat. Without being cleared by the national leader, not even one U.S. dollar can be paid out of the North.

General foreign exchange transactions done by the North, however, are limited in scale. Because under a moratorium the North has proclaimed due to its incapacity to reimburse overseas debts, Pyongyang is unable to conduct ordinary credit-based foreign exchange transactions. The North only undertakes margin call transactions, for which guarantee money corresponding to 5% of the sum a bank intends to transact must be deposited in advance. To engage in a foreign exchange dealing of US$20 million, for example, a North Korean bank has to deposit US$1 million with the foreign bank it does business with. Only then can it receive a credit line of $20 million, amounting to 20 times the guarantee money, within the ceiling of which transactions can be effected.

Since the North's foreign currency reserves were depleted in the wake of its economic woes in the 1990's, Pyongyang has not spared assistance to foreign exchange manipulation bureaus aimed at helping them earn foreign exchange gains, like extraordinarily allowing them to tune into foreign broadcasting stations.

The typical foreign exchange speculation technique Pyongyang employs with great success is cross exchanges, seeking gains from market value fluctuations when a specific foreign currency is changed for another. Bureau Number 5 of the Korea Taesung Bank (charged with military funds, currently the Korea Changgwang Trust Bank) is said to have hit the jackpot in 1982 by accepting arms sales - proceeds equivalent to US$500 million in pounds which it exchanged into yen. A short while later, the bank is said to have earned a foreign exchange profit of US$300 million on account of devalued pound and appreciated yen.

North Korea recorded another major foreign exchange gain in 1992. A North Korean financial firm operating in Rome intended to exchange into the American dollar a lira fund worth US$100 million, which it was unable to transfer outside the region where the Italian currency was in circulation. Fortunately there appeared a British firm keen on getting lira currency equivalent to US$100 million, with which it swapped the lira fund into pounds worth US$100 million. In the wake of that contract, the market value of lira plummeted while that of pound rose slightly, by which the firm made a US$40 million profit.

Instrumental to these successes in foreign exchange transactions was reportedly a high level of expertise gained by North Korean bank officials who had undergone training courses at European banks including those in Austria since the 1980s. North Korean staffers of foreign exchange transactions are recruited from among graduates from Kim Il Sung University, the University of International Affairs and the University of National Economy, majoring in international banking. These recruits, including those involved in the earning of foreign currencies, are said to undergo a variety of training courses given by financial institutions and trading firms.