US demand for upfront cash transfer derails Korea investment MOU signing

The United States has demanded that South Korea wire roughly half of its annual investment commitment to the US in cash before the end of this year, a last-minute condition that derailed the signing and announcement of the first investment memorandum of understanding, sources said. Washington pressed Seoul to transfer more than 13 trillion won ($9.5 billion) upfront this year, even though specific investment destinations and project-level allocations have yet to be finalized.

According to political and government sources Thursday, the US recently told South Korea to remit close to half of the annual investment amount by year-end. The two countries had been discussing a framework under which South Korea would deploy $200 billion over 10 years at a pace of $20 billion annually, but the US side's separate demand for a sizable cash transfer within this calendar year has stalled a final agreement.

Seoul had originally considered sending $2.2 billion or more to the US this month as an initial payment, then proceeding with investments of up to $20 billion a year starting next year. The US demand that a substantial portion of the annual investment ceiling be wired in cash before year-end has widened the gap between the two sides, sources said.

The announcement of the investment MOU, which had been scheduled for Friday, was consequently postponed. The government had planned to brief the National Assembly on Thursday and release the MOU on Friday, but both the Assembly briefing and all follow-up steps were pushed back with just one day to go, sources said.

A source familiar with the negotiations said the Ministry of Trade, Industry and Energy asked the National Assembly on Wednesday to cancel Thursday's scheduled briefing after the US made an unreasonable demand for a cash transfer by year-end, even though the selection of investment projects had been largely wrapped up. "All related schedules, including the MOU signing, have been pushed back as a result," the source said.

The source added that receiving such a demand from the US side at the last minute, after a final National Assembly briefing date had already been set, "is evidence of how much we are being dragged along by the United States," and warned it "could also have a negative impact on trust in the negotiating authorities."

Last October, South Korea and the United States agreed to cut the reciprocal tariff rate Washington imposes on Seoul from 25 percent to 15 percent in exchange for large-scale Korean investment. Under that deal, South Korea pledged a total of $350 billion in US-bound investment, comprising $150 billion in shipbuilding cooperation and $200 billion in strategic cash investment. The cash portion was agreed to be disbursed in installments within an annual ceiling of $20 billion over 10 years.

The investment funds were to be drawn from foreign-exchange assets held by the Bank of Korea and the foreign exchange stabilization fund, with any shortfall to be covered through government-guaranteed bond issuances and borrowings from overseas financial institutions.

The US demand to transfer roughly half the annual investment amount in cash before year-end has set off an emergency scramble to secure funding. Because investment financing falls under the Ministry of Economy and Finance rather than the Ministry of Trade, Industry and Energy — which sits at the negotiating table — the process requires inter-agency coordination, adding further delays.

The Korea-US Investment Corp., or KUIC, a Ministry of Economy and Finance affiliate dedicated to managing and executing US-bound investments, has already sent requests for proposals to major domestic and international investment banks to issue up to $2 billion in bonds. Proposals are due next week, and after a document screening, competing securities firms will make presentations, with a lead manager expected to be selected by the end of this month.

The issuance would be KUIC's first foreign-currency bond since the corporation launched on June 18 this year, and is primarily intended to support the government's fundraising for US-bound investment. The government guarantee means the bonds will carry a credit rating equivalent to the sovereign level — a positive factor — but the deal is unprecedented, and KUIC will need to walk overseas investors through the rationale and expected returns one by one.

After lengthy negotiations over project selection, the two countries are understood to have agreed to pursue the construction of a gas-fired combined-cycle power plant in Encinal, Texas, and a large nuclear power plant, though sticking points remain. Talks over an equity stake in nuclear firm Westinghouse are also continuing. South Korea had earlier floated acquiring a stake of 15 percent or more in Westinghouse, but the US side is now said to be offering a lower figure in the 5 to 10 percent range.

Meanwhile, the government has decided to correct a discrepancy between two key documents. The MOU on strategic investment signed last year stipulated that investment funds must be paid no earlier than "at least 45 business days" after notification of project selection, but the operating agreement for the investment special purpose company — which governs the actual mechanics of investment — is to be revised to set the deadline at "within 45 days."

The investment MOU signed Nov. 14 last year defines the payment timing as "a date not shorter than 45 business days" after notification of the selected investment destination. This means funds cannot be transferred until at least 45 business days after a project is designated, but it does not set a final deadline by which payment must be completed — a structure different from the payment deadlines typically written into contracts to prevent delays. The MOU alone therefore leaves unclear when funds must actually arrive after a project is selected. The two governments are understood to have agreed to correct this by setting a "within 45 days" payment deadline in the SPC operating agreement that will govern actual investment plans and execution procedures.

Some observers suggest the US side's sudden demand for an upfront cash transfer is tied to domestic political conditions, including the US midterm elections scheduled for Nov. 3. The US administration may want to lock in a visible, tangible result from the investment agreement ahead of the midterms. If a large sum of cash is wired before specific investment destinations and project-level amounts are finalized, South Korea could face not only a fiscal and foreign-exchange burden but also growing controversy over the recoverability of the funds and the viability of the projects.