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North Korea has more than sanctions to overcome for foreign investment: report

FILE PHOTO: North Korean leader Kim Jong Un visits a shoe factory in Wonsan

By Josh Smith

SEOUL (Reuters) - A historic visit by Chinese President Xi Jinping this week may have bolstered Kim Jong Un's hopes that economic relief may be coming soon, but a new report reveals North Korea's road to international investment may be blocked by more than sanctions.

While there are no signs that international sanctions imposed on North Korea over its nuclear weapons will be officially lifted soon, researchers at a U.S.-based think tank say North Korea has more fundamental problems to overcome if it wants access to foreign finance.

"Although an easing of sanctions imposed on the North because of its nuclear weapons program is necessary, it is not sufficient for the North to gain full access to the global capital market," said a yet-to-be published report by The Korea Society seen by Reuters.

"Concentric layers of U.S. and international financial prohibitions, including concerns over money laundering and the integrity of North Korea’s regulatory system, would have to be peeled away," the report said.

U.S. President Donald Trump has held out massive economic stimulus as an incentive for North Korea to give up its nuclear weapons.

North Korea has rejected the idea of trading its arsenal for money, but leader Kim has embarked on a campaign to jumpstart the country's economy.

Xi's visit to Pyongyang on Thursday and Friday raised the prospect of additional economic ties between North Korea and China, but many roadblocks remain.

Even if sanctions are eventually eased, North Korea's government still keeps a tight hold on much of the economy.

Transparency International ranks North Korea as one of the most corrupt countries in the world, and there are few signs that Kim is moving to substantively loosen Pyongyang's control.

"The lack of willingness to reform systemically is a constraint more fundamental than roadblocks posed by U.N. Security Council and U.S. sanctions," the Korea Society report said.

Among the necessary steps North Korea must take are to restructure external debt, normalize relations with creditors,engage the International Monetary Fund, join the World Bank and regional development banks, seek technical assistance for capacity building, improve transparency, obtain an international credit rating, and strengthen economic institutions.

"Pyongyang’s 'marketisation from below' and ring-fenced infrastructure projects will not be enough," said co-authors Jonathan Corrado and Thomas Byrne, referring to the growth of private markets and North Korea's development in tightly controlled special economic zones.

"North Korea will require substantial and sustained amounts of external financing, hence the need for it to establish creditworthiness," they said in an email to Reuters.

North Korea may be able to take some tips from Vietnam and Cuba, as well as China and Russia.

"In the case of China, within two years of embarking on reform and opening, it had joined the IMF and within ten years, it had gained an international credit rating," the report said.

In theory North Korea could make itself more attractive to international lenders and developers, but the process is likely to be "rather convoluted and take some time," said Peter Ward, a Seoul-based analyst who researchers North Korea's economy.

"North Korea could, in a hypothetical future in which sanctions are relaxed, become a significant destination for foreign investment," he told Reuters.

"To do so, however the government would need to gain the trust of international investors."

(Reporting by Josh Smith. Editing by Lincoln Feast.)

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