Finance

North Korea is newest frontier for a daredevil investor

Penn Bullock
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North Korean leader Kim Jong Un waves to workers during a visit to the Pyongyang Children's Foodstuff Factory in this undated photo released by North Korea's Korean Central News Agency (KCNA) in Pyongyang December 16, 2014.
KCNA | Reuters

He searched for oil in the badlands of Somalia and fueled a stock market boom in Mongolia. He sued the world's smallest republic, far out in the Pacific, for a chunk of what it is worth.

Now, he is betting on North Korea.

James Passin, a hedge fund manager at Firebird Management, believes the nuclear-armed country sits on as much as a billion barrels of crude — enough to make it as big a producer as Oklahoma.

If the oil exists, he wants to help unlock it.

"You have a country with 25 million people — young, highly disciplined, literate — and a strong military-industrial complex," he said in an interview.

"It's possible that the early investors will be rewarded with potential for massive appreciation."

The risks of sinking cash — even just $7 million or so of Firebird's $700 million in assets — into a neo-Stalinist state with labor camps and virtually no private property are obvious.

The geopolitical volatility was on full display last week, as North Korea claimed that it had tested a hydrogen bomb.

And Mr. Passin is treading on murky investment territory, given the American sanctions against the country.

His investors have experienced the wild rides that come with such frontier markets.

Two of his funds are being liquidated after deep losses, including on banking in Iraq, gold in Armenia and oil and gas in Kenya.

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But Mr. Passin isn't deterred. "I see opportunities when other people are afraid," he said.

Mr. Passin, 44, studied philosophy at St. John's College in Maryland.

He was inspired to enter finance, he said, in part by the story of Thales, a philosopher in ancient Greece who got rich by monopolizing olive presses before a bumper harvest he had foreseen in the stars.

After graduating, Mr. Passin began his career as an editor at Taipan, a financial newsletter in Baltimore, recommending obscure foreign stocks.

Peter Schiff, the chief of Euro Pacific Capital in Connecticut, met Mr. Passin in his newsletter days and later invested, on his advice, in Hurricane Hydrocarbons, an oil company in Kazakhstan, buying shares for as little as 25 cents apiece.

Eventually, the company was sold at $55 a share, Mr. Schiff recalled.

"I've bought some stocks from him that have gone to zero," Mr. Schiff said. "But this was such a big winner."

In 1999, Mr. Passin joined the New York-based Firebird, becoming one of several fund managers at the firm.

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"He took a very different path than your typical hedge fund manager," Mr. Schiff added. "He's not a Harvard M.B.A., he didn't work at Goldman Sachs, he didn't do a two-year internship — he's just a smart guy."

Contrarian instincts have led Mr. Passin to out-of-the-way markets like Chechnya, Congo and Somalia.

Joseph Naemi, one of Mr. Passin's longtime business partners, recalled joining him in a brash attempt in 2002 to buy Uzbekistan's national oil company, Uzbekneftegaz.

They had a meeting with a dozen Uzbek government officials, and Mr. Passin's pitch was simple: He was there to write a check for $600 million to $700 million to buy the entire company.

But the country did not go for the proposal.

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"The skeptical look around the boardroom was actually hilarious," Mr. Naemi wrote in an email.

In 2006, Mr. Passin toured Mongolia and zeroed in on its stock exchange. It was "just a room with some computers," Mr. Passin recalled.

He said he snapped up shares in "anything that was listed." By 2011, the country's economy was clocking one of the fastest growth rates in the world — 17 percent a year — as vast troves of minerals were discovered under the steppes.

Since then, Mongolia's bull market has crashed, Mr. Passin said, and the economy has slowed.

But he is redoubling his efforts there, aiming to construct a set of world-class Mongolian corporations — a project he has broadly likened to the empire-building of Genghis Khan.

Mr. Passin is also wagering on distressed debt in the South Pacific.

Firebird has been suing the tiny, destitute island nation of Nauru for repayment on about $24 million of defaulted government-backed bonds, equal to about one-sixth of the country's gross domestic product.

Firebird, which bought the bonds from the original creditors at a fraction of their face value, stands to make money if it wins.

The hedge fund has been fighting in Australian courts to garnish Nauru's state bank accounts — and briefly succeeded in freezing the accounts.

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The tactics are similar to those used by larger, more prominent firms like Elliott Management, run by the billionaire investor Paul E. Singer, who has sued Argentina over debt repayment.

In December, Australia's highest court denied Firebird access to Nauru's state bank accounts.

But Mr. Passin might still try to claim any wealth the eight-square-mile coral atoll holds outside Australia.

"We will go to every corner of the world to find assets," he said.

Mr. Passin's North Korean investments may be his most contentious.

Firebird owns nearly half of a Mongolian company, HBOil, which entered a joint venture with the government of Kim Jong-un in 2013.

The partnership gave the small company expansive rights to overhaul North Korea's primitive energy sector by opening 100 gas stations, restarting a derelict refinery and drilling for oil and gas.

The projects have yet to materialize.

Companies have been searching for oil and gas there since the 1980s, and it remains unclear whether the country has any significant quantities.

Mr. Naemi, who is advising HBOil, believes there are deep reserves of oil — perhaps as much as a billion recoverable barrels on land.

But the current low price of oil means that if it exists, and can be extracted, it still might not be profitable.

Mr. Passin's investment also raises legal questions.

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Alexandra López-Casero, a sanctions lawyer at the Boston-based law firm Nixon Peabody, said the investment might violate American sanctions against North Korea absent a license from the Treasury Department in Washington.

Other experts disagree, noting that the United States has not issued a blanket prohibition on investing in the North.

Mr. Passin said that Firebird had neither sought such a license nor needed one.

He added that an expert had reviewed the venture for him and concluded that it was legal.

Some analysts worry that any oil exploitation would fortify Mr. Kim and others in the country's ruling elite.

"The security risk is not small, as the oil business in D.P.R.K. is exclusively handled by the Communist Party and the military," said Keun-Wook Paik, an expert on North Korean oil at the research institution Chatham House, using the abbreviation for the Democratic People's Republic of Korea, the country's official name.

"It will be a kind of Pandora box opening."

Mr. Passin dismisses such concerns.

He said business with North Korea would both benefit ordinary people and encourage the totalitarian state apparatus to become "more open and less harsh."

Besides, he argued, if the West avoided commerce with unsavory nations, much of the world would be off limits.

"I believe there are companies that will emerge out of the D.P.R.K. that will be of lasting importance," he said. "That will survive for centuries."