By Troy Stangarone

Nutritional aid might not be the only cost of North Korea’s recent failed satellite launch.  Only a few months prior to Kim Jong-il’s death there had been significant discussion of building a pipeline to transmit Russian gas through North Korea to the South. North Korea had indicated that it would be willing to take part in the project and South Korean President Lee Myung-bak had agreed to work closely with Russian President Dmitry Medvedev to push the project forward. Now, only a few months into the new regime under Kim Jong-un there are real questions if the project is viable.

On the surface, the pipeline made sense for all parties involved at the time and Kim Jong-un had indicated his support for the project in April. The Russian Far East is rich in natural resources, including natural gas, and tapping the South Korean market would allow Russia to diversify its exports away from European markets and place pressure on China in their stalled gas talks. For South Korea, which is dependent on imports for its energy needs, the pipeline promises a supply of natural gas potentially 30 percent below what it currently pays. For North Korea, which is seeking to prop up its economy the project presents the prospect of a significant infusion of hard currency from the estimated $100 million dollars in annual transit fees the pipeline would provide. Everyone would seem to have something to gain.

Under Kim Jong-il, one could have been fairly confident that the political risk surrounding the project could be managed based on the experience of the Kaesong Industrial Complex. While Pyongyang has sought raises for workers beyond the contractual agreement between North and South Korea in the complex, it has also refrained from interfering in the complex’s operations during periods of heightened tensions between the two sides.

Russia and South Korea in their talks in the fall had also taken steps to try to disincentivize North Korea from interfering in the pipeline. Russia would be responsible for the transit fees, and has indicated that it’s willing to structure the contract so that it is responsible for delivering the gas to South Korea if Pyongyang were to interfere with the pipeline. Additionally, South Korea has proposed running the pipeline to Seoul before it cuts back up to Pyongyang, meaning North Korea would cut off its own gas supply if it were to interfere with the pipeline. These steps would take away potential leverage that North Korea would gain from the pipeline, but still leave the possibility that Pyongyang could try to tap the pipeline upstream for its own uses. The project had been promising enough that Gazprom and Kogas held talks as recently as April 9 to discuss the commercial parameters of the project.

However, with North Korea having defied international consensus to conduct its satellite launch, made suggestions that it will turn parts of  Seoul to “ashes”, and a third nuclear test in the offing it would only seem prudent for all of the parties involved to reassess their positions in the project. Even if the rhetoric coming out of Pyongyang is dismissed as par for the course, the prospect of a significant financial return for the regime from the pipeline has not tempered the regime’s actions. At the very least it would seem there is a significant prospect of the project being delayed. After the missile launch the United Nations Security Council statement stated that “If North Korea chooses to again defy the international community, then the Council has expressed its determination to take action accordingly.” Pushing forward with the pipeline project in this environment could send both the wrong message to the new regime in Pyongyang and lead to the unfortunate appearance of providing the new regime with a significant cash infusion at a time when it has taken multiple actions condemned by the international community.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

Photo from Leftik’s photo stream on flickr Creative Commons.

By Dr. Richard Weitz

During his campaign for the Russian presidency, Vladimir Putin wrote several lengthy articles detailing his views and policy recommendations. In his foreign policy treatise, Putin devoted a surprising amount of attention to North Korea.

Putin writes that, “We have consistently advocated the denuclearization of the Korean Peninsula – exclusively through political and diplomatic means — and the early resumption of Six-Party Talks.” At the same time, Putin says that. “I am convinced that today it is essential to be particularly careful. It would be inadvisable to try and test the strength of the new North Korean leader and provoke a rash countermeasure.

“In coming years, “We will continue conducting an active dialogue with the leaders of North Korea and developing good-neighborly relations with it, while at the same time trying to encourage Pyongyang to settle the nuclear issue. Obviously,” Putin adds, “it would be easier to do this if mutual trust is built up and the inter-Korean dialogue resumes on the peninsula.”

In some ways Moscow is well-situated to serve as a key mediator in international efforts to resolve the disputes between North Korea and South Korea. Not only does it have good relations with both Koreas, but Russian economic and security interests would be bolstered by a lengthy period of harmony and stability in the Koreas.

For starters, Russia shares ethnic and historical ties with Koreans as well as a 17-km long border with the DPRK. This proximity ensures Russian interest in participating, even indirectly, in any multilateral dialogue concerning the Koreas.

More importantly, Russian policy makers seek to enhance Russia’s integration with the flourishing East Asian region. Securing additional South Korean, Chinese, and Japanese investment and trade would help revitalize the Russian economy, especially the lagging but strategically significant region of the Russian Far East (RFE). Russia’s trade relations with the major East Asian nations of Japan, South Korea, and China falls far behind these three countries’ economic interactions with each other.

Russian entrepreneurs envisage converting the DPRK into a transit country for Russian energy and economic exports to South Korea and other Asia-Pacific countries. Such a development would further Russia’s integration into East Asia as well as revitalize Moscow’s ties with North Korea. They have discussed linking a trans-Korean railroad with Russia’s rail system, which would allow Russia to become a transit country for South Korean trade with Europe, which now involves mostly long-distance shipping. Furthermore, Russian planners want to construct energy pipelines between Russia and South Korea across DPRK territory.

This bright scenario has one major problem: it cannot occur without a reduction of tensions on the Korean Peninsula. For this reason, Russian diplomats have regularly engaged in high-profile Korean diplomacy.

Unfortunately, a decade of Russian diplomacy has had little impact on regional affairs. Breaking with precedent, Vladimir Putin visited Pyongyang in July 2000 to bolster and reenergize ties. The new Russian president also hoped to bolster his diplomatic credentials. But his efforts failed to secure a tangible agreement, souring Moscow on Pyongyang for several more years.

Almost a decade later, both Russia and China each sent two high-level delegations to Pyongyang in 2009. The DPRK’s leader, Kim Jong Il, decided to meet with Premier Wen Jiabao and PRC Defense Minister Liang Guanglie, however, he did not so much as greet Foreign Minister Sergey Lavrov or Russian parliamentary leader Sergey Mironov.

Russia’s problem is that its economic and political influence in the Asia-Pacific region is too limited. The territorial dispute with Tokyo over the South Kuriles/Northern Territories excludes a genuine Russian-Japanese partnership. Although Russian ties with Beijing and Washington are better, Chinese and U.S. diplomats focus their Korean diplomacy on Pyongyang, Seoul, and each other. In order to increase their regional influence, Russian officials must become more conciliatory towards Japan, and less beholden to China.

Dr. Richard Weitz is a Senior Fellow and the Director of the Center for Political-Military Analysis at the Hudson Institute. The views expressed here are his own.

Photo from Jonathan Davis’ photo stream on flickr Creative Commons.

By Troy Stangarone

During the Cold War, Russia served as North Korea’s primary trading partner and provider of security guarantees. As the Cold War came to an end, however, Russia reoriented its foreign policy towards the West and relations with North Korea were downgraded as Moscow sought closer ties with Seoul. That may be changing. In recent months there have been indications that relations could again be warming between Russia and North Korea.

Today, North Korea has become dependent upon China. China’s share of North Korea’s trade has grown from 41.6 percent in 2007 to 57.1 percent last year. This is similar to North Korea’s dependence on the Soviet Union when the Cold War was coming to an end. In 1988, trade between the Soviet Union and North Korea had grown to $2.8 billion, accounting for 56 percent of North Korea’s two-way trade.

With the ending of the Cold War the relationship began to change. Military cooperation and Russia’s obligation to defend North Korea slowly came to an end, and trade began to dry up after Mikhail Gorbachev converted all of the Soviet Union’s trade relations to commercial terms. What had been North Korea’s most important trade relationship has fallen to a mere $62 million in two-way trade in 2010 according to the WTO’s Trade Map.

That has begun to change recently as North Korea seeks aid and investment for its economy in advance of 2012. However, increased economic ties between Russia and North Korea have long been blocked by Pyongyang’s inability to pay off Soviet era debt, but the two sides have recently found a way to address this issue. Under the current proposal, Moscow would forgive 90 percent of North Korea’s debt and reinvest the remaining 10 percent in projects in North Korea.

At the recent summit in Ulan-Ude, Russia provided North Korea with 50,000 metric tons of grain as food aid and the two sides agreed to explore the development of a gas pipeline through North Korea that would supply Russian gas to South Korea. The project would potentially provide North Korea with $100 million in transit fees per year, or about five times as much as it currently receives in wages from the Kaesong Industrial Complex with South Korea.

Russia is also undertaking other economic development projects in North Korea. It recently repaired a rail line connecting Khasan in Russia to Rajin in North Korea, where it is building a container terminal.  It has also expressed an interested in ultimately connecting the Trans-Siberian Railway to the Inter-Korean Railway, perhaps as part of the gas pipeline project.

On the security front, Russia and North Korea have also announced they will conduct joint naval exercises in 2012. The exercises will focus on joint search and rescue operations.

As cooperation between Russia and North Korea has increased, Seoul has grown weary. Improved ties between Moscow and Pyongyang, however, are unlikely to be a challenge for South Korea. Russia’s interests in North Korea ultimately have little to do with North Korea itself, but rather a means to a larger ends.

After the Cold War, Russia’s influence in Asia and the Korean peninsula began to wane and its cooperation with North Korea is part of its efforts to restore its influence in the region, while at the same time integrate the Russian Far East into East Asia.

The Russian Far East has some of the world’s largest deposits of oil and natural gas and the pipeline to South Korea will help Russia diversify beyond its current Europe customers and help to put pressure on China in its negotiations with Russia. Even linking the Trans-Siberian Railway with the Inter-Korean Railway is more about connecting Russia to South Korea than greater ties with North Korea.

If Russia is to find new markets for its natural resources, as well as potentially entice South Korean capital to help modernize Russia, it needs stability on the Korean peninsula and a direct connection to South Korea. This will require it to improve its ties with North Korea, which could also enhance its influence in the region, meeting both of Russia’s goals for its policy towards the region. Ultimately, though, increased ties with Pyongyang are more about South Korea than North Korea.

Troy Stangarone is the Senior Director of Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

By Troy Stangarone

After more than a year of heightened tensions over the sinking of the Cheonan and the shelling of Yeonpyeong Island a proposed gas pipeline from Russia to South Korea through North Korea is potentially changing the factors on the ground.  Ever since Kim Jong-Il and Russian President Dmitry Medvedev agreed in principal to construct a pipeline through North Korea in late August, a project that only a few months ago would have seemed inconceivable is quickly moving towards reality as all three sides move closer to an agreement.

The project dates back to a 2008 summit between Russia and South Korea where a tentative deal was reached for Russia to supply South Korea with 7.5 million tons of gas a year for a 30 year period starting as early as 2015. The initial plan left open the option of supplying the gas via either pipeline or tanker, but with a pipeline being the preferred option due to the lower cost of transport. While a potential economic win for South Korea, there are five potential issues to consider for any pipeline through North Korea.

Could the pipeline change inter-Korean relations? This is ultimately a commercial agreement and should be judged on those merits. While some officials in South Korea and Russia have suggested that the pipeline deal could lead to a change in inter-Korean relations, any expectations beyond the easing of tensions needed to complete the project may be expecting too much. In fact, because the pipeline would be an easy money earner for North Korea, it could undermine incentives for greater North-South cooperation.  The only incentive for North Korea would be to ensure that the checks continue arriving, not that it considers a major rethink of its relations with South Korea.

Can North Korea be trusted with a pipeline?  The simple answer is no. Disputes between the North and South will make the pipeline a tempting target for North Korean officials to use as leverage against South Korea. This is not merely a reflection of the North Korean regime. Few would argue that North Korea is a more open or dependable regime than the Ukraine which has in the past shut down gas flows to the European Union in disputes with Russia. At the very least, North Korea can be expected to try and extract higher transit fees in the future has it has done with the Kaesong Industrial Complex. At the worse, it may attempt to use the pipeline for leverage over South Korea on other issues.

Can South Korea minimize or eliminate North Korea’s leverage over the pipeline? The simple answer to this is yes, and early indications are that South Korea is attempting to protect itself against North Korean attempts to leverage the pipeline. One idea that has been suggested is for Russia to provide a 30 percent discount on gas as compensation if North Korea were to interfere with the pipeline. However, there are other steps South Korea could take as well. If Russia were contractually obligated to ensure that the agreed upon amount of gas is delivered to South Korea via pipeline or tanker and Russia were required to cover any requests for an increase in transit fees, it would reduce any leverage North Korea might gain from the pipeline and the risks for South Korea.

Is this the best way to engage North Korea? If long-run goal is to encourage reforms in North Korea and reduce tensions between the North and South, this is not the best option. For North Korea the deal is primarily about the infusion of hard currency. It is expected to make $100 million dollars in annual transit fees and land leases for the project. This would represent about five times the revenue that North Korea earns annually from salaries in the Kaesong Industrial Complex. However, unlike the project at Kaesong, no meaningful skills or best practices are transferred to North Korea.  There is no need for a greater interaction between North and South Koreans if they are not involved jointly with the construction or maintenance of the pipeline.

Does the pipeline make commercial sense for South Korea? This will be the deciding factor on whether South Korea moves forward with the pipeline project. As a nation with no domestic energy reserves the pipeline project could potentially secure the equivalent of nearly 30 percent of South Korea’s gas imports from 2009. In addition, the project has been estimated to reduce its price for natural gas by up to 30 percent. Those are compelling economic incentives for South Korea to move forward with the project. However, there is one other issue to consider. With new retrieval techniques expanding the global supply of natural gas, will the potential for reduced prices in the future make a 30 year contract with Russia at a fixed price less attractive in the long-run?

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. His views are his own.