UPDATE 2-Russia writes off 90 pct of North Korea's debt

Tue Sep 18, 2012 6:05pm IST

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* North Korea's debts to Russia stood at about $11 bln

* Russia to reinvest outstanding debt in North Korea

* Points to closer engagement with new Pyongyang regime

By Maya Dyakina and Lidia Kelly

MOSCOW, Sept 18 (Reuters) - Russia said on Tuesday it agreed to write off 90 percent of North Korea's $11 billion debt and would reinvest the balance in the reclusive Asian state, in a sign of closer engagement with Pyongyang under new leader Kim Jong-un.

By writing off most of the sum owed by North Korea, one of the world's poorest countries, Russia granted a level of forgiveness in line with debt reduction deals it has given to its most impoverished debtors.

Moscow said the remaining $1 billion or so of the debt racked up by Pyongyang when it was a client state of the Soviet Union would go towards energy and education deals as well as development aid.

"It will be decided later by the parties for what purposes the funds received for the repayment of this debt will be used," Konstantin Vyshkovsky, head of the debt department at the Russian Finance Ministry, told Reuters.

Parts of the international community have been seeking to re-engage with North Korea since the death of Kim Jong-il, amid hopes that his son and successor would seek ways to end years of isolation and poverty.

RAIL AND POWER LINES

Analysts believe infrastructure deals will likely be a big part of the investments, including in railway and power lines.

Russia is also considering building a gas pipeline to energy-hungry South Korea - which Alexander Vorontsov, head of the Korean and Mongolian Studies department at a Russian Academy of Sciences institute, said Pyongyang would be bound to welcome.

"Yes, they're in conflict (with the South), but undoubtedly, North Korea is very interested in the pipeline," he said.

The two Koreas remain technically at war and are separated by one of the world's most militarised frontiers.

Analysts say those tensions and other sources of gas that South Korea benefits from mean the pipeline project is unlikely to get off the ground, at least for the time being.

"Nothing will happen immediately," Vorontsov said. "But the (debt) agreement is a success - first, it will improve economic cooperation with North Korea itself and this could gradually lead to the expansion of Russia's influence in Eastern Asia."

North Korea traditionally played off China, its main economic and political backer, against the former Soviet Union until the latter's collapse in 1991. Negotiations on restructuring the debt to Russia stalled for most of the past two decades, with fresh talks starting only a year ago.

Russia, which hosted an Asia-Pacific summit earlier this month near the North Korean and Chinese borders which Pyongyang did not attend, is keen to increase its influence in Asia's fast growing economies.

Moscow ships half of its exports to Europe but, prompted by the region's debt crisis, the government wants to double the share of exports that go to the Asia-Pacific region, which now make up a quarter of the total.

At the summit in Vladivostok, gas export monopoly Gazprom signed a draft deal with Japan on a liquefied natural gas export terminal on Russia's Pacific seaboard that dealt a blow to the trans-Korea pipeline's prospects.

The outstanding debt owed by North Korea will be managed by Russia's state development bank, Vnesheconombank.

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