Photographer: SeongJoon Cho/Bloomberg

Kim Punished Over Rocket With South Korea Set to Turn Off Lights

  • Seoul shuttering shared industrial park over rocket launch
  • Gaeseong has been source of hard currency for North Korea

South Korea plans to cut off power and water to a joint factory park in North Korea to punish Kim Jong Un for his recent nuclear test and rocket launch, said a government official with knowledge of the matter, shuttering the last avenue for economic cooperation between the countries.

The government in Seoul hopes to have withdrawn its nationals from Gaeseong within a week, the official said Thursday, citing an internal memo. In doing so, it is seeking to deprive North Korea of cash for its weapons programs: More than 120 South Korean firms operated in the complex just north of the demilitarized zone, paying the salaries of 54,000 North Koreans to the government in Pyongyang.

The moves have drawn criticism from companies involved. A Gaeseong business group protested the decision, saying the announcement gave them little time to minimize losses. The Unification Ministry has set up a team of legal and accounting experts to address complaints from companies, it said on its website.

While the government has said it will provide compensation, shares of companies operating at the park tumbled. Hyundai Merchant Marine fell as much as 20 percent. Apparel maker Shinwon Corp. declined as much as 13 percent and watchmaker Romanson Co. dropped almost 15 percent.

‘Worst Situation’

"Even though businessmen were aware of the political risk of running a factory in the complex and also the benefits of using cheap labor forces that can communicate with them, the decision is the worst situation for them," said Nam Dong Woo, head of equities in Seoul at Eastspring Asset Management, Prudential Plc’s Korean unit. "No matter how much the government would compensate them, no one knows whether the complex is shut down permanently or will be reopened later,” Nam said.

The pullout marks the first time the South Korean government has chosen to shutter the site. Gaeseong was dormant for about five months in 2013 when North Korea -- slapped with tighter sanctions after its nuclear test that year -- held back its workers.

Gaeseong, which was launched during a period of detente in the early 2000s, has been one of the biggest sources of hard currency for the isolated regime. North Korea has received 616 billion won ($514 million) in cash since the complex began, including 132 billion won last year, South Korea’s Unification Minister Hong Yong Pyo said Wednesday. The government in Seoul and private citizens have invested more than 1 trillion won in the project, he said.

‘Without Notice’

"The government unilaterally made the decision without any notice to us in advance,” said Park Yun Kyu, chief executive officer of Fine Renown, an apparel maker with its production based in Gaeseong. “It is so frustrating and unfair for us. We don’t expect much compensation because we didn’t receive much in 2013 when the complex temporarily closed down.”

South Korea, the U.S. and Japan have all announced unilateral actions to pressure North Korea after it followed a nuclear test in January with a long-range rocket launch on Feb. 7. China, while condemning Kim’s actions, has opposed tougher sanctions -- including on the energy imports it supplies -- that could destabilize its ally and neighbor. South Korea has also agreed to talks for the U.S. to deploy on its soil a ballistic missile-defense system called Thaad, a move opposed by China.

Annual Drills

Tensions with North Korea are set to stay high as the U.S. and South Korea prepare for annual “Key Resolve” and “Foal Eagle” drills that Pyongyang calls a dress rehearsal for war. This year’s exercises will be the largest ever, a South Korean Defense Ministry official said. They will begin in either late February or early March.

“My main concern is the whole thing is moving in a destabilizing direction,” Jim Walsh, a research associate in the securities studies program at the Massachusetts Institute of Technology, said by e-mail. “South Korea’s military doctrine has changed to a much more aggressive posture. The South has acquired new weapons with new ranges and capabilities and now Thaad perhaps. In the North, purges continue at an unprecedented rate. Taken as a whole this is a recipe for escalation if leaders aren’t careful.”

In the latest removal of a senior official, Kim executed military chief Ri Yong Gil earlier this month on charges of graft and factionalism, Yonhap News reported Wednesday.

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