What Happens With North Korea Now?

Kim Jong-Il died this past weekend. North Korea's "Dear Leader" succumbed to great mental and physical strain, according to official government reports. Perhaps the effort of keeping up a vast curtain of lies finally got to him. North Koreans, meanwhile, will continue to believe that he was the perfect dictator, a demi-god on Earth, and had a better golf game than Tiger Woods and Jack Nicklaus put together.

A devastating dynasty
The North Korean poverty trope is well-worn in the media, but how often do you see the country directly compared to its more successful southern cousin?

Source: CIA World Factbook.

Any comparisons to East and West Germany underestimate the utter depths of North Korean poverty -- while reunification cost the two countries dearly, one estimate pegged East Germany's per capita GDP at $9,800 in 1984 dollars. While this apocryphal source probably exaggerated the truth, it just goes to show how far away North Korea is from modernity when compared to other woeful outposts of outdated ideologies.

The long-standing Kim policy of military-backed extortion worked out pretty well for the ruling party, though its haul has declined of late. Prior to the election of Lee Myung-bak to the South Korean presidency in 2007, the North successfully extorted some $2.2 billion in annual "protection" money from its neighbors in a sort of Sopranos-esque Mafia racket on a global scale. But by last year, the payoff was estimated to be closer to just $700 million a year. The money -- and its decline -- isn't much for the South, but a big deal in the devastated North, which has smirked and snarled its way to aid while simultaneously demonizing its industrialized patrons to the North Korean people for decades.

Potential outcomes
The situation in North Korea is far from a binary outcome. For one thing, Kim Jong-Un has been a public figure for a far shorter time than his father, who succeeded North Korean founder Kim Il-Sung after a promotional campaign that stretched on for two decades. Much of the established party leadership is getting old, and none (including Kim Jong-Un) have anywhere near the presence of the Dear Leader, whose face is plastered across much of the country.

Even with more preparation, transitioning from Kim Il-Sung to Kim Jong-Il back in 1994 didn't go all that smoothly, and it's hard to imagine such a heavily propagandized and isolated country immediately settling into a similar routine with an unknown master. Young Kim may feel the need to do more than rattle the military's saber at the South to endear himself to his people. If the transition goes poorly, any number of chaotic scenarios might play out. Using U.S. family businesses as an analogy, the odds are against the transition from a business standpoint -- only 13% of businesses maintain their success through a third generation of the same family.

South Korea is on alert, as is Japan. Russia and China, too, must keep an eye on North Korea's potential instability. Investors may want to avoid the iShares MSCI South Korea Index Fund (NYS: EWY) for the time being. An unexpected bombing (though probably unlikely) could be devastating for Seoul, which sits a rocket's launch away from the border. Any national reconciliation (though also unlikely) would, as with Germany, take years and bear immense reconstruction costs.

How you can play it
Political pessimists aren't likely to find much to invest in here -- with the possible exception of gold, via the SPDR Gold Trust (NYS: GLD) or a miner such as Yamana Gold (NYS: AUY) . Patiently optimistic investors might find opportunities in the chaos, particularly in energy companies that could take integral roles in any North Korean rebuilding and powering-up, to say nothing of those bringing greater connectivity to the masses.

The Market Vectors Russia ETF (NYS: RSX) is one way to play things, as it's well-stocked with Russian oil companies that could supply needed petro-power for any sort of regime. Korea Electric Power (NYS: KEP) is a longer shot, contingent on much greater unity between the two nations. Based on the rapid adoption of mobile telephony in other developing nations, SK Telecom (NYS: SKM) , the South's largest mobile carrier and a leader in technology adoption, would be an ideal company to lead the mobile charge northwards.

Foolish final thoughts
Keep in mind that many things might happen in North Korea in the near future, and many more could take place before we know for sure how Kim Jong-Un's government will operate -- or if it even can. Don't let regional instability hinder your investing, but make sure to look at this situation with a critical eye before diving in or running away.

I remain a pragmatic idealist: I hope that this marks the beginning of a transition toward greater economic success and freedom for the North Koreans, but any such transition will take blood, sweat, tears, and gobs of money. Power rarely gives up its hold until its hand is forced.

Let me know your thoughts with a comment. If you'd rather find some companies that won't be thrown into chaos by regional conflict, we've got a new report for 2012 with 11 rock-solid dividend stocks that our analysts feel can hold up in any economy. Claim your free copy while they last.

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