Tag Archive | "sanctions"

New Sanctions Aim at North Korean Economy, Less so Missiles and Nukes

Won hold steady as gasoline prices soar, but for how long?                                               

By William Brown

China and Russia watered down the new UN sanctions, imposed after North Korea startled the world with its apparent thermonuclear test September 3. However, their impact on the economy still could be severe, even crippling eventually.  By accepting tough rules on textiles, joint ventures, and overseas employment, both former communist capitals seem to have tossed out their previous, probably pretend, concerns for the well-being of the people and aimed squarely at the general economy.

Meanwhile, specific U.S. sponsored sanctions that would have disproportionately hit state enterprises and the government were denied, especially in the oil sector.  Kim Jong -un predictably reacted to the outside world with more bluster and yet another intermediate range missile test over Japan on September 14.  But we don’t know as much about what he and his circle of leaders are thinking and doing domestically, something probably of far greater importance.

One thing is for sure; big adjustments in economic policy are needed if he is to maintain progress on the two byongjin fronts—the nuclear program and economic growth. If he isn’t careful, inflation caused by commodity shortages will come roaring back to crack what remains of his command, or fixed-price economic system. This would undo what so far has been Kim’s crowning domestic achievement, getting a handle on a monetary system left in chaos by his father and grandfather (see byongjin blog).  As the leadership learned in a monetary panic in 2009, just as young Kim was being prepared to take over the government, nothing will bring people, even North Koreans, to the streets faster than an assault on their money. And if true nearly ten years ago, it is far more important today given the wide expansion in the use of money and markets that is contributing to economic growth.

If Kim needs any reminders of this predicament, all he needs to do is look down the street. Diplomats, and Daily NK reporters are saying the price of gasoline in Pyongyang has nearly doubled just in the past three weeks. A kilogram of gasoline is reported to cost W23,000 on September 9th, the equivalent of about $8 a gallon at the widely used black market exchange rate, up from W18,000 at the beginning of the month, W14,000 in late August, and 8,000 won in January.  Unlike a price jump in April, this time taxi and auto activity in Pyongyang is said to being impacted, and business is slowing.  Likely even more concerning to the government are similar jumps in diesel and kerosene prices, just as the important and fuel-intensive harvest season is beginning.  Diesel is widely used in portable generators providing essential electrical services in Pyongyang as the national grid supply remains unreliable. Complaints are bound to be rising, especially among the newly enriched entrepreneurial classes who need electrical generators to pump water for their high-rise apartments.

Petroleum though might be among the least of Pyongyang’s new concerns. The price jumps occurred despite what appears on paper very modest oil sanctions, suggesting prices may come down if the inflow is not actually squeezed.  The U.S. had hoped for an embargo of Chinese crude oil deliveries though few expected that would happen.  Instead crude oil will continue at its historic rate of about 4.4 million barrels a year (about 600,000 tons) and will likely remain free to the North Korean government based on a secretive Mao-era aid agreement. (I argue elsewhere that ending this aid is the key to pressuring Pyongyang.) Refined petroleum product sales to North Korea are capped at 2 million barrels a year, 500,000 barrels a quarter beginning in October, slightly less than the 2.2 million barrels China exported last year, but more than what China reports as having provided through July of this year.

Apparently, as reported by western news agencies, foreign exchange shortages are squeezing the North Korean importers so Chinese suppliers, such as the giant China National Petroleum Corporation, are withholding normal export credits, this was occurring even before the new sanctions.  If so, it may be that finance, rather than sanctions, will be the limiting factor on oil deliveries.  The U.S. government, on the other hand, asserts Pyongyang imports more than twice what North Korea’s trade partners admit to selling North Korea and that somehow all of this will be subjected to the 2-million-barrel a year cap.  This would mean that the total annual petroleum supply from all sources would fall from about 8 million barrels to about 6 million, a significant but not a drastic drop, and it would save Pyongyang precious foreign exchange.

Much more damaging to North Korea would be a collapse in the NK won, and attendant inflation, a logical outcome of the new embargos on North Korean textile and apparel exports and fish products.  According to Chinese customs, textiles have risen from almost nothing ten years ago to $330 million in the first seven months of this year. This is already down about 20 percent from the same period in 2016 and, if the sanctions are enforced, will drop to nothing in coming months. The foreign exchange cost to North Korea will be much less than that, since North Korea imports more textile related materials from China than it exports and much of these will no longer be needed.  Still, the disruption to the industry, one of the country’s largest employers, will be severe.  In recent years, textile factories have retooled to serve the export market and now will have switch back to a much less viable domestic market. Workers in the large, unproductive state factories will be generally unaffected but thousands, maybe tens of thousands of productive workers not in the socialist system will be forced out of their private or foreign joint venture workplaces. Many may try to go to China where factories will be in even greater need of cheap labor, but the new overseas employment restrictions will make that hard to do, at least legally.  How the regime responds to this soon to be hard-hit labor and export intensive industry should thus be watched very carefully.

This weekend diplomats in Pyongyang reported that about W8,000 will still buy a dollar in local exchange markets, no change from over the past few years, making the dollar price of gasoline among the highest in the world.  This stability is remarkable given the drop in exports, and indicated further drops on the way.  But here again North Korea, and its half-market, half-command economy is anything but normal.  This stability is probably the result of extreme caution in providing new credit, effectively preventing new investments, or wage increases for impoverished state workers, and in allowing foreign currency, U.S. dollars, to invade the economy at all levels. Pyongyang may even be intervening in the new foreign exchange markets to support the won, expending precious dollars to do so.  North Korea, quite amazingly, thus seems on its way to becoming a dollarized or currency board type economy, one in which the government has little control over the money supply, the banking system, and even its own budget.  If North Koreans are like people the world over, and there is no reason to think they are not, once a small break in the value of won occurs, they will panic and sell their won for available dollars in a downward, self-realizing, spiral.  The government knows this and is valiantly holding the line.

Sooner or later we can expect the rate to crack, just like ancient Korean houses  in Ryanggang province reacting to the September thermonuclear explosion. How then will the young Marshal respond?

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Photo from Roman Harak’s photostream on flickr Creative Commons.

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North Korea Tests Missile Over Japan Again: Stronger Action Needed

By Troy Stangarone

For the second time in a little more than two weeks, North Korea has launched a missile over Japan. The easy temptation in the aftermath of the latest UN sanctions would be to simply view the most recent test as North Korea expressing its displeasure at additional economic pressure. But because the regime has on multiple occasions stated that sanctions would not hurt North Korea, perhaps it’s best to view the test as what it is — a continuation of North Korea’s provocative steps to develop a wide array of nuclear weapons and delivery systems.

However, if past tests have been provocative, this one comes with a greater sense of dread than prior tests. In the past, Pyongyang has threatened to turn Seoul into a sea of fire or conduct a nuclear strike on Washington, DC. Of course, most North Korean threats have an air of bombast to them, and should not be viewed literally. However, with the North testing a hydrogen bomb and coupling the recent test over Japan with the threat that the country “should be sunken into the sea,” North Korea’s actions are beginning to hit too close to home.

If North Korea is beginning to be able to marry threats with capabilities, and to couple them with tests that demonstrate the havoc it could cause, the question becomes: what should the international community do about it? For one thing, at the UN, the advancement of North Korea’s nuclear program has historically received more attention than the development of the delivery systems needed to utilize those weapons. This needs to change.

There is one simple step that China could take to mitigate this growing threat. While China was reluctant to cut North Korea’s supply of oil in the new UN sanctions resolution, Beijing should seriously consider a temporary halt in oil shipments to send a clear signal to Pyongyang that it needs to back off from its constant string of tests. Cutting off oil supplies to North Korea will take time and force Pyongyang to explore alternatives such as coal liquefaction, but this is at least something that China can do to demonstrate its resolve.

In the long-term, however, there also needs to be a fundamental rethink of how the international community handles North Korea’s missile tests. As I previously noted:

Given the frequency of North Korea’s missile tests and the traditional slow pace of the UN Security Council’s response, it’s time to consider a different method. To do this, the United States should consider working with China and Russia to develop a new set of sanctions that would go into place incrementally for each additional test that North Korea conducts, while also leaving room to address other issues with the regime in Pyongyang. Without raising the level of sanctions after each North Korean missile test, there is little deterrent to stop the regime from continuing to move its program forward.”

While this is something that China and Russia would likely be reluctant to consider, what we do know is this – North Korea will conduct another missile test in the near future. The question is what the international community will do to try and prevent the regime in Pyongyang from perfecting its missile technology.

If China is reluctant to push North Korea further, it should also consider the costs of choosing not to utilize all of the leverage it may have with the regime in Pyongyang. In the past, China has said that it will not allow anyone to undermine its interests and start a war on the Korean peninsula. But the longer it holds back on fully using its leverage, the more China’s inaction risks ceding that possibility to North Korea by providing Kim Jong-un more opportunities to miscalculate.

Troy Stangarone is the Senior Director for Congressional Affairs at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Stefan Krasowski’s photostream on flickr Creative Commons.

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The North Korean embassy in London. The UK maintains diplomatic relations with Pyongyang.

North Korea Loses More Friends and Trading Partners

By Jenna Gibson

North Korea’s decision to shoot a missile over Japan and, just a few days later, to carry out its sixth nuclear test seems to have been the last straw for several countries around the world which had maintained some relations with the reclusive state.

In back-to-back announcements, both Peru and Mexico announced that they would be expelling the North Korean ambassador from their countries, although they stopped short of cutting off diplomatic ties altogether. Both countries said they would maintain diplomatic relations with North Korea, although neither has a physical embassy in Pyongyang.

“It’s inappropriate to maintain relations with that country,” Peruvian Foreign Minister Ricardo Luna told journalists after the announcement. “Though we haven’t broken off ties, by expelling him the level of diplomats in charge of relations is lowered.” According to the Asahi Shimbun, two North Korean diplomats will remain to run the embassy in Lima.

Egypt is also stepping up its pressure on Pyongyang, reportedly planning to cut off military ties with the North. Another Middle Eastern country, Kuwait, has announced that they would be executing a total ban on the shipping of North Korean goods, suspending North Korean commercial licenses, discontinuing North Korean work visas, ending remittances from North Korean workers, blocking North Korean loans from Kuwait’s state bank, and putting into place a total ban on direct flights to and from North Korea, according to Newsweek.

In Southeast Asia, the Malaysian Prime Minister announced during his visit to Washington, DC this week his intention to review the country’s diplomatic and trade ties with the DPRK, which have already been frosty following the assassination of Kim Jong-un’s brother Kim Jong-nam in the Kuala Lumpur airport. And the Philippines suspended all trade with North Korea in an effort to comply with the new UN sanctions — a sizeable move considering that the Philippines was North Korea’s fifth largest trading partner, conducting around 30 million in trade so far in 2017.

Despite its usual “Hermit Kingdom” moniker and increasing pressure to isolate and punish the DPRK for its provocations, North Korea has established diplomatic relations with 164 states, and maintains 48 embassies and six consulates around the world.

Some countries, like the United Kingdom for example, have continued to work with the North in hopes of exposing them to outside information instead of cutting them off. According the UK government’s website, “Our policy is one of critical engagement – making clear the views of the UK and the international community on the DPRK’s nuclear weapons programme and proliferation activities and on its human rights record. We encourage the DPRK to understand and work with the outside world through educational and cultural exchanges.”

Despite the engagement and exchange side of its strategy, the UK has taken a tough stance on the DPRK of late, strongly supporting several rounds of new sanctions in the United Nations and is going ahead with the launch of the BBC’s new Korean language service, which will broadcast news into North Korea (much to the chagrin of the North Korean government).

But these recent moves by Peru, Mexico, and others may signal a tipping point. With an increased pace of missile testing over the last few years and a sharp spike in provocative behavior in the last month, countries around the world must ask themselves if they can still afford to maintain military, economic and diplomatic ties with the regime in Pyongyang. Of course, as long as North Korea can lean on Beijing, which provides the vast majority of trade and aid to Pyongyang, these moves from other countries around the world may only have a small, albeit symbolically significant, impact.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Laika ac’s photostream on flickr Creative Commons.

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New North Korea Sanctions: The Best that Could be Expected

By Troy Stangarone

After North Korea’s sixth nuclear test, there were expectations that the United Nations would pass a new round of sanctions that would potentially be debilitating for North Korea. Early discussions included bans on exports of oil to North Korea and cutting off North Korea’s use of overseas laborers to earn hard currency. Steps that far were always unlikely, but based on initial reporting of the expected measures in the new sanctions resolution and a review of a recent draft of the new sanctions resolution, the United States likely achieved the best result it could have hoped for in a new round of UN sanctions.

With the last round of UN sanctions having been passed only on August 5 and barely implemented, there was likely always going to be resistance to harsh new sanctions before member states had a chance to determine if the last round of sanctions were having an effect. It takes time for sanctions to take effect and states such as China and Russia most likely would not want to pile on a significant amount without knowing how the new sanctions would impact North Korea.

Additionally, complete bans on exports of oil to North Korea and the use of North Korean laborers were always unlikely, despite the serious nature of North Korea’s most recent nuclear test. While the Global Times and others suggested that China should end its supply of oil to North Korea if it tested another nuclear weapon, Beijing also has concerns about the long-terms stability of the regime in Pyongyang, concerns it is unlikely to let go of in the near future.  China wasn’t the only one to back off of the suggestion of cutting off North Korea’s oil supply — Russia also quickly dismissed suggestions of an oil embargo. Without Russia’s support both in the UN and as a potential supplier of oil to North Korea, stringent sanctions on oil were unlikely.

Banning the use of North Korean labor was also always a longshot. China and Russia are the two largest consumers of North Korean labor, and Russia in particular was unlikely to support a complete ban, as North Korea supplies an important source of labor in the sparsely populated Russian Far East.

That being said, the new resolution does move the process forward in terms of restricting North Korea’s ability to earn hard currency and to limit its imports of oil. Much as initial caps on North Korean exports of coal, the new resolution would place a cap on North Korea’s imports of refined petroleum at 500,000 barrels for the rest of 2017 and 2 million for subsequent years. Also similar to the coal caps, it would require states to report their exports to the United Nations on a monthly basis.

It also places a softer cap on exports of crude oil to North Korea, which China provides to Pyongyang as aid. The soft cap limits exports to the amount exported in the prior year, but since China does not report its exports of crude to North Korea and there is no reporting requirement for crude, there is still the potential for China to export more than would be expected to North Korea.

The new restrictions on use of North Korean labor, while a step forward, are also potentially exploitable. While it would prohibit countries from issuing work permits for North Korean nationals except for humanitarian purposes or for objectives consistent with prior UN resolutions, it also allows contracts signed prior to the resolution to continue. This means that we are not likely to seen a reduction in North Korean workers abroad soon.

The resolution also contains a ban on the export of North Korean textiles, potentially reducing North Korea’s earnings of hard currency by $800 million. While this will remove one of North Korea’s major remaining export items, textiles are also a labor-intensive industry. By banning exports of textiles, this also removes one potential tool for reshaping North Korea over time — developing a larger consumer base that can eventually pressure the regime internally.

While this may have been the best that could be achieved at the United Nations, it is disappointing that China and Russia would not support more robust sanctions against North Korea. While the new sanctions continue to restrict North Korea’s ability to earn hard currency, more should have been done in response to North Korea’s test of a thermonuclear device. By holding back on more stringent sanctions, China and Russia risk sending a signal to North Korea that it should not be worried about strict consequences for their actions.

Despite China and Russia’s reluctance to go along with more stringent sanctions, it is important for the United States and its allies to continue to maintain Moscow and Beijing’s cooperation. This is not a problem that the United States can solve on its own.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from United Nations Photo’s photostream on flickr Creative Commons.

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Responding to North Korea’s Sixth Nuclear Test

By Mark Tokola

Now that North Korea has defied warnings from the international community not to conduct a sixth nuclear test, including from its friends China and Russia, the challenge is, how to respond?  North Korea knows it has made a hugely provocative step.  The September 3rd test was by orders of magnitude larger than any of its previous tests, indicating a thermonuclear capability.  It comes after a relatively long pause, the last test was in September 2016.  It collapsed a tunnel, showing either by design or by mistake, that it was even more ‘successful’ than intended.  And the test came hours after North Korea broadcast a picture showing Kim Jong-un admiring, up-close, a nuclear warhead (or model thereof) designed to fit into a missile nose-cone.  North Korea must be expecting an international response, or if need be a unilateral response from the U.S., in consultation with South Korea.  What should that response be?

Russia has called for “immediate talks” and talks would be desirable if North Korea was prepared to offer anything, which it has not signaled.  The September 3rd test would seem to indicate that North Korea is still on its path of acquiring a credible, reliable nuclear weapons capability capable of striking the U.S. and its allies, and perhaps to gain a second-strike capability, before it will be willing to talk – if Kim Jong-un is willing to talk at all.  The international community has assumed that North Korea would eventually want to talk to see sanctions lifted.  There is a possibility that Kim Jong-un is relying on the sanctions to internally justify his weapons program.  In that case, Kim Jong-un would only want to talk for the purpose of being welcomed to the international nuclear club.

Following the September 3rd test, the main question is whether there can be a response stronger than the one North Korea undoubtedly expects.  The last, impressively tough, round of sanctions was not enough to deter North Korea from conducting its sixth test.  What kind of response would get their attention?  Among the options are a diplomatic response, an economic response, and a show of deterrence.

A diplomatic response could be to expel North Korea from the United Nations.  This is possible under the U.N. charter and would be a serious blow to North Korea because it cares about international prestige.  This response would show Pyongyang that it lacked any international support, including from Russia and China who could veto the expulsion if they chose.  The grounds are clear enough.  North Korea has repeatedly defied U.N. Council resolutions through its weapons program.  The U.N.’s patience should have limits.  China and Russia would be reluctant to expel North Korea from the U.N., but their patience should have limits, too, and they may prepared to go along with a diplomatic step rather than the alternatives.

An economic response may be to move beyond sanctions and to impose an economic embargo on North Korea, as has been advocated by former South Korean national security official Chun Young-woo.  If no degree of stepped-up sanctions have applied sufficient economic pressure, an embargo would be the last step in the escalatory chain of economic measures.  Would this cause the North Korean people to suffer as well as the North Korean regime?  It would, at least in the short run, but not as much as it would have in the past because of North Korea’s market liberalization of recent years.  Domestically produced food and other necessities would still make their way to the markets.  An embargo might even accelerate the pace of de facto privatization of the North Korea economy.  An exception could be made for medicines and other strictly humanitarian requirements.  It may be worth giving economic measures one last chance to work.

A strong deterrent measure might be to overfly North Korea with short or intermediate range U.S. or South Korean missiles.  North Korea has not hesitated to launch missiles over Japanese territories, so it cannot argue that there is a taboo against such a step.  The North Korean air defense system probably is robust enough that overflying North Korea with military aircraft would be too risky.  They probably would not have the ability to intercept a missile over-flight, and even if they did, the interception of a missile within North Korean air space would still show that its weapons program was not making North Korea any safer.

The goal is still to bring North Korea to a negotiating table.  A strong response to the September 3rd test may be more likely to make that happen than no response at all.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo from Russ Allison Loar’s photostream on flickr Creative Commons.

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U.N. Sanctions Against North Korea: A Look Back

By Juni Kim

North Korea’s two ICBM (intercontinental ballistic missile) tests last month marked an ominous milestone in the reclusive nation’s weapons programs. For the first time, North Korea demonstrated the capability of launching a missile that could reach the lower 48 states. In response to the recent tests, the United Nations Security Council passed its latest resolution sanctioning North Korea over the weekend. The resolution targets some of North Korea’s most profitable industries, including coal, iron, lead, and seafood. U.S. Ambassador to the U.N. Nikki Haley said in a statement that the new sanctions package would reduce North Korean total exports by a third.

Sanctions have played a foundational part in the international community’s efforts to curtail North Korea’s weapons programs over the past decade. Each sanctions resolution was passed in response to either a nuclear or missile technology test by the North, with earlier sanctions targeting weapons materials and the more recent sanctions targeting North Korea’s trade industries. The effectiveness of such sanctions is still hotly debated in policy circles, but the advances that North Korea has made in its nuclear and missile technology in recent years are gravely undeniable. The fiery rhetoric between the U.S. and North Korea in the past few days has only further highlighted the threat that North Korea poses to U.S. security.

The graphic below shows a selected overview of sanctioned materials outlined in U.N. resolutions. The list is not meant to be comprehensive and is meant to give a general idea of what each resolution sanctioned. The resolutions are not designed to replace previous versions, but usually recall and reinforce the prior resolutions while adding new items, organizations, and individuals to the sanctioned list. It should also be noted that individual nations maintain their own unilateral sanctions against North Korea in addition to the U.N. resolutions. For the original resolution texts, you can click on the corresponding links below.

UNSCR Sanctions 2

Links to the U.N. press release on each resolution and the resolution text

UNSCR 1695 – July 15, 2006

UNSCR 1718 – October 14, 2006

UNSCR 1874 – June 12, 2009

UNSCR 2087 – January 22, 2013

UNSCR 2094 – March 7, 2013

UNSCR 2270 – March 2, 2016

UNSCR 2321 – November 30, 2016

UNSCR 2356 – June 2, 2017

UNSCR 2371 – August 5, 2017

 

Juni Kim is the Program Manager and Executive Assistant at the Korea Economic Institute of America. Noori Kim, an intern at KEI, made contributions to the articles. The views expressed here are the author’s alone.  

Graphic created by Juni Kim. Photo from Ashitaka San’s photostream on flickr Creative Commons.

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Are the New UN Sanctions Enough to Slow North Korea’s Missile Development Program?

By Troy Stangarone

The United Nations Security Council has unanimously passed new sanctions on North Korea in response to Pyongyang’s intercontinental ballistic missile tests on July 4 and 28. These measures are long overdue. While the international community has taken steps to sanction North Korea over its development of nuclear weapons, its push to develop the delivery systems necessary to utilize those weapons has faced relatively few sanctions. That has now begun to change.

The new sanctions take important steps to significantly reduce North Korea’s efforts to earn hard currency. The key provisions in the sanctions relate to a new ban on exports of coal, iron ore, lead, lead ore and seafood products. The ban is a step in the right direction, as it continues to remove loopholes from prior resolutions that North Korea has been exploiting. In the case of coal, for example, North Korea was able to earn more from coal exports after the sanctions than it had prior to sanctions due to rising prices. To address this issue, the UN placed a hard cap on coal exports in Security Council Resolution 2321, passed in November 2016. The cap is now gone and a full ban is in place. These new sanctions also ban new joint ventures with North Korea and any additional investment in joint ventures that already exist.

However, the provision prohibiting an increase in the number of overseas laborers will likely have minimal impact. The trend was already in this direction — over the last year, many countries have been reducing their use of North Korean labor. The one significant outlier had been Russia, who earlier this year agreed to expand its usage of North Korean labor. That the new UN sanctions only place restrictions on increasing the usage of North Korean labor likely reflects the reluctance of Russia and China to cut off the usage of low wage North Korean labor completely. Additionally, much as was the case with earlier efforts to reduce Pyongyang’s earnings from coal exports, North Korea could earn increasing amounts from the laborers already abroad if their wages were to increase.

While the new UN sanctions are an important step to begin imposing a price on North Korea’s missile program, we should not expect the new sanctions to stop North Korea’s missile development. Pyongyang has demonstrated consistently that it is willing to bear the burden of sanctions to advance its weapons programs. Additionally, while some expect that these sanctions will result in a one third reduction of North Korea’s total earnings, the impact may not reach that level, as new sanctions primarily cover goods trade. North Korea likely earns significant amounts from illegal arms trade, smuggling, and other activities as well.

Despite the constraints that come from any new sanctions efforts, this move is an important step forward in sanctioning North Korea over its missile development. Prior to the current set of sanctions, there had been few UN Security Council resolutions explicitly in response to North Korean missile tests, despite a significant increase in tests under Kim Jong-un.  So far this year, North Korea has conducted two ICBM tests and has conducted a new missile test once every 2.6 weeks on average. Demonstrating to North Korea that there will be a cost for these tests is important. However, rather than simply reacting to these tests after they occur, the international community should consider pre-negotiating sanctions measures in advance of tests to make clear to North Korea the cost of its actions. At a minimum, the international community should not allow North Korea to continue to conduct new missile tests at this rate without additional sanctions.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from United Nations Photo photostream on flickr Creative Commons.

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Pyongyang’s Deficit Soars: Won Steady But for How Long?

By William Brown

ICBMs are not the only things soaring in North Korean skies.  Comprehensive second quarter data released by China Customs last week shows a huge jump in North Korea’s trade deficit with China—sharply falling North Korean exports and flat imports, a double bad combination.  And, potentially troubling to the Kim regime, the composition of trade seems to be promoting market activity rather than the decrepit, but still enormous, command economy.

China North Korea Trade Balance
*  China stopped reporting crude oil shipments in first quarter 2014 but the trade is reliably said to be continuing, probably at the old aid agreement terms which provides about 150,000 tons of crude each quarter.  The charts, above and below, have added in the value of that volume at generally declining Chinese crude oil export prices–$50 million in the most recent quarter.

Pyongyang has been able to keep a clamp on the exchange rate—won can be traded informally for U.S. dollars in markets around the country—but likely at some cost to the government’s reserves and its ability to expand money supply without sparking inflation, and perhaps with a little help from the balloons. But food and other commodity prices, meanwhile, may be on an upswing as drought followed by flooding diminishes prospects for the critical fall rice crop, and as worries about Chinese supplies may have pushed up gasoline and diesel prices.  An informal inflation index produced by DailyNK has inflation rising to a 16 percent rate in July, suggesting Kim’s signal achievement of fighting inflation may be at risk.

Officially, the Chinese data show a $174 million North Korean deficit in June and $574 million for the quarter, both at record levels. Considering China has taken its crude oil exports “off the books,” the actual North Korean deficit is probably even larger — in the graphics below we have added between $115 to $50 million each quarter to North Korean imports since 2014 to account for the oil.

China North Korea Trade exports and imports

How North Korea finances this large deficit in the face of sanctions on its nuclear and missile activities is not well understood, making policy analysis of those sanctions next to useless. Even South Korea’s Bank of Korea, which bravely estimates North Korean GDP, says it can’t guess at the country’s balance of payments or its hard currency reserves.  But for the sake of argument, and given the trade deficit with China has averaged about $200 million a quarter for the better part of a decade, it would seem reasonable to expect that about this amount of hard currency is earned or borrowed in a combination of net trade with other countries; foreign aid to North Korea including the offset for the crude oil; UN and other international expenditures inside North Korea; small amounts of inward foreign investment and loans; remittances from overseas workers and refugees or Korean immigrant families in Japan, South Korea, China and Russia; and tourism.

  • Probably to re-build domestic confidence after the country experienced a disastrous currency redenomination in 2009, followed by hyperinflation in 2010, Pyongyang’s monetary authorities appear to have fixed the unofficial won’s value at just above 8,000 won per dollar, and began to ignore the official 135 won per dollar rate.  Monetary stability since then is impressive, probably owing to some combination of market price caps, restrictions on the use of foreign currency, conservativism in expanding won credit, direct intervention using the regime’s own reserves and, most interestingly, a willingness to allow legal trading and use of dollars in the market places. And now, with five years of stability, won holders appear satisfied not to chase the dollar.
  • Still, the mystery of the day is why smart money dealers in Pyongyang aren’t taking advantage of the deteriorating export situation by buying up U.S. dollars and forcing a panic.  Either something else is happening that we don’t know about or there is trouble ahead for the country’s always-tenuous finances. One easily can imagine another breakout in favor of the dollar and panic selling of won—hugely disruptive in North Korea’s newly forming half-market economy.

North Korean Won

  

North Korean Exports Labor Intensive and Mining Products

North Korean exports to China fell to only $361 million in the second quarter, the lowest level since 2010, and even this was suppported by generally higher prices for most items.  Major export commodities included:

  • Apparel and other textiles accounted for almost half of its exports—$149 million, up from $145 million in second quarter 2016.
  • Ferrous and non-ferrous ores rose to $78 million, up from $65 million.
  • Fish product exports at $67 million, were up sharply from $31 million.
  • In contrast, mineral products, including coal, was recorded at only $2 million, down from $236 million in the same period of 2016.

None of these items would appear to be big hard currency earners for the regime, although they help provide employment.  Labor intensive textiles exports have grown in recent years as the industry makes better use of its antiquated mills, allowing exporters to pay workers directly in some cases and thus improving productivity of labor and capital alike.  Ore exports would seem problematic, given the UN sanctions against them, but Chinese firms were said to have invested heavily in the huge Musan iron ore complex on the border with China some years ago and may now be recouping investment costs by trucking the ore over into China.  This mine previously served North Korea’s largest industrial complex, the Kimchaek iron and steel mill in Chongjin, which is now dilapidated and only marginally productive. So the iron ore earnings may be coming at the expense of higher value-added steel products once exported from that plant and are likely controversial, even in North Korea, as they are thought of as a giveaway of the nation’s natural resources. China has also invested in a copper mine, and likely in other non-ferrous metals, but results from these are spotty and now largely sanctioned.  Fish products are essentially traded by fishing boats, with flows going both ways depending on the season.

Textiles lead North Korea’s imports

Imports from China also appear to be increasingly driven by consumer rather than government or investment demand.  Textiles, cell phones and television imports are growing at the expense of some industrial inputs and agricultural inputs, and cereals. Petroleum product imports, plus gasoline and diesel fuels, remain sanctioned and low.

  • Textiles and apparel imports reached $258 million, up from $198 million in second quarter 2016.
  • TV and cell phone imports totalled $50 million, up from $38 million.
  • Food products of all kinds registered $123 million, up from $96 million.
  • Diesel, gasoline, and kerosene imports were $19 million, down from $31 million, again from second quarter of 2016.

 

Selected Imports from China

 

Visibility of Chinese-made consumer products among the general public is spreading the suggestion that the economy is doing fairly well—South Korea’s Bank of Korea estimated last week that North Korea’s proxy GDP rose 3.9 percent in 2016, the fastest in well over a decade and this despite the sanctions. But a large question is how far the regime will let this go, given what is clearly a big drain on limited foreign exchange.  Grain imports also rose slightly in the second quarter but remain much lower than in the recent past, and may need to rise much more if the fall harvest turns out to be weak.  Some grain is provided by foreign aid agencies, purchased in China and shipped to North Korea, thus counting as a North Korean import in the trade accounts, but with an offsetting credit in the (unpublished)  transfers account.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Illustration by Jenna Gibson, KEI.

Posted in China, Economics, North Korea, sliderComments (0)

Target of New North Korea Sanctions Bill: Finances

By Phil Eskeland

(“That’s Where the Money Is.”[1])

Last week, the House of Representatives and the Senate overwhelming passed and sent to President Trump’s desk a new sanctions bill for his expected signature. The bill originally focused on Russia and Iran when it was first adopted by the Senate, but was expanded after bipartisan, bicameral negotiations to include sanctions provisions against North Korea as well.  With all the talk in Washington about the inability of different sides to work together, few issues unite more U.S. public policymakers on both sides of the political spectrum than getting tougher on North Korea.  Last May, the House of Representatives passed the Korea Interdiction and Modernization of Sanctions Act (H.R. 1644) by another overwhelming bipartisan vote of 419 to 1.  Essentially, this new sanctions bill – Countering America’s Adversaries through Sanctions Act (H.R. 3364) – takes almost every word from the House-passed North Korea sanctions bill to include it as part of Title III.

Much of the attention to this legislation has been directed at the first title of the bill affecting Russia.  The debate has primarily focused Congressional limitations on the flexibility given to the Executive Branch to implement the bill.  In the past, most sanctions-related legislation grants the President some discretion to waive or delay the imposition of sanctions, because the U.S. government may need flexibility in diplomacy and cannot wait for Congress to pass a bill to amend or end sanctions.  If there was any constraints on the Executive Branch, it was usually done when there was divided government (i.e., the Republican Congress passed the Helms-Burton Act in 1996, when Democrat President Bill Clinton was in office, that placed into statutory law many of the presidential Executive Orders affecting U.S. trade with Cuba, and thus cannot be unilaterally lifted or altered by the President without the consent of Congress).  It is interesting to observe a Republican Congress reasserting itself as a co-equal branch of government by imposing a series of constraints on the ability of a Republican president to unilaterally waive part of the sanctions against Russia.

However, any additional Congressional limitations on the President’s ability to waive or delay the imposition of these new sanctions do not affect the provisions of the bill dealing with North Korea, despite a last-minute effort by some Senate Republicans.  Nonetheless, the primary purpose of Title III of H.R. 3364 is to close loopholes and target new areas to deprive the North Korean regime of the money it needs to operate.  The fundamental philosophy behind the effort is to “cut off the Kim Jong Un regime’s access to hard cash” and “to restrict North Korea’s ability to engage in illicit trade.”

How does this bill accomplish these goals?  First, the legislation mandates sanctions against foreign persons who engage in five activities that have been identified as major revenue-generating activities for the North Korean regime – high-value metals or minerals, such as gold and “rare earths;” military-use fuel; vessel services; insurance for these vessels; and correspondent accounts, which are used in foreign currency exchanges to convert U.S. dollars into North Korean won.

Second, H.R. 3364 increases the discretionary authority of the U.S. government to impose sanctions on persons who engage in one or more of 11 different activities that generate revenue for North Korea, including those who import North Korean coal, iron, or iron ore above the limits set by the United Nations (U.N.) Security Council resolutions; who buys textiles or fishing rights from North Korea; who transfers bulk cash or precious metals or gemstones to North Korea; who facilitates the on-line commercial activities of North Korea, such as on-line gambling; who purchases agricultural products from North Korea; and who are engaged in the use of overseas North Korean laborers.

Third, there is a provision closing one loophole in the international financial system that would prohibit North Korea’s use of indirect correspondent accounts.  These accounts temporarily use U.S. dollars when converting one foreign currency into another, such as North Korean won.  The aim of this provision is to further cut off North Korea from the U.S. financial system and restrict the ability of the DPRK to conduct business with other nations.

Fourth, the legislation curtails certain types of foreign aid to countries that buy or sell North Korea military equipment in the effort to dry up another source of revenue to the regime.  Nations will have a choice: buy North Korean conventional weapons or receive U.S. foreign aid to help their people.

Fifth, H.R. 3364 augments sanctions that target revenue generated from North Korea overseas laborers who work under inhumane conditions.  It would ban the importation into the U.S. of any product made by these laborers.  The bill would also sanction foreign individuals who employ North Korean laborers.

The legislation also ensures that humanitarian aid destined for North Korea is not affected by heightened U.S. sanctions.  However, H.R. 3364 did not retain a provision in the original House version that contained an exemption for planning family reunification meetings with relatives in North Korea, including those from the Korean-American community meaning that family reunions will still be subject to sanctions.  In addition, the bill contains a reward for informants who report violations of financial sanctions on North Korea, in the hopes of increasing the government’s ability to enforce these sanctions.  Finally, it requires a report from the Administration within 90 days after the bill becomes law on the efficacy of putting North Korea back on the State Sponsors of Terrorism list. The debate over reinstating North Korea on the list was revitalized in light of the assassination of King Jong Nam, the exiled half-brother of the ruling leader of North Korea, at the Kuala Lumpur international airport in Malaysia using the VX nerve agent, a banned chemical weapon.

H.R. 3364 should not be seen as an end-goal, but as part of a continuing process of ratcheting up pressure on North Korea to denuclearize.  As this bill is implemented, North Korea will find new ways to evade sanctions.  Further legislation or action by other nations and the U.N. Security Council may be required to further clamp down on these loopholes.  However, the question remains unresolved if heightened sanctions from both the U.S. and the international community will produce the desired outcome – a nuclear-free Korean Peninsula – particularly before North Korea acquires the ability to launch a nuclear warhead on top of an intercontinental ballistic missile (ICBM) capable of reaching the mainland of the United States.   Sanctions are only as strong as its weakest link.  Thus, North Korea’s main trading partner, China, needs to do much more if it is to live up to its rhetoric that “they will strive for the complete, verifiable and irreversible denuclearization of the Korean Peninsula.”

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Image from Shawn Clover’s photostream on flickr Creative Commons.      
———-
[1] Response by bank robber Willie Sutton to the question as to why he robbed banks, January 20, 1951, edition of the Saturday Evening Post, “Someday, They’ll Get Slick Willie Sutton.”

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Scratch North Korea from your Vacation Plans

By Mark Tokola

According to news reports, the State Department will soon publish a new regulation to ban Americans from visiting North Korea for tourism.  State Department spokeswoman Heather Nauert said on July 21, “Once in effect, U.S. passports will be invalid for travel to, through and in North Korea, and individuals will be required to obtain a passport with a special validation in order to travel to or within North Korea.”  It appears the special validation exception is intended to allow the small number of U.S. humanitarian workers to continue their work in North Korea.  There will be a 30-day period after the ban is officially published in the Federal Register before it comes into effect to allow time for Americans in North Korea to depart.

The State Department has made clear that the justification for the ban is “mounting concerns over the serious risk of arrest and long-term detention,” following student Otto Warmbier’s year-long detention in North Korea and his death on June 19.  Three American citizens continue to be held in North Korea.  The State Department has long cautioned against Americans travelling to North Korea because of the U.S. government’s inability to provide protective services in a country in which it has no Embassy or Consulate. But that has not dissuaded several hundred Americans from visiting North Korea every year, usually by means of European travel agencies that offer group tours.

Those who have advocated for a travel ban on North Korea have given reasons other than personal safety.  One is to deprive the North Korean government of the money it makes from tourism.  North Korea charges a great deal for the privilege of visiting their country, and that money goes into government coffers.  Advocates of a travel ban say that tourism revenue directly or indirectly supports both North Korea’s weapons programs and its pervasive system of human rights abuses.  Another reason for a ban would be to prevent North Korea from seizing hostages to gain diplomatic leverage against the U.S.  In the past, North Korea has released American prisoners only in exchange for visits by high-level, current or former U.S. government officials.

Opponents of a travel ban have argued that people-to-people contacts can help change how North Koreans see America.  Even casual contacts with North Koreans, under this theory, will help counter North Korean propaganda that all Americans should be seen as hostile war-mongers.  Some also oppose all U.S. government travel bans on the general principle that American citizens should have the freedom to travel where they choose; travel restrictions are an abridgment of civil liberties.  As a legal matter, the Supreme Court settled this question in the 1965 Zemel v Rusk decision when it upheld the State Department’s power to restrict the use of U.S. passports to travel to Cuba. A final reason to oppose a ban is that it could prove difficult to enforce.  If an American joins a travel group from outside of the United States, to what lengths would the U.S. government go to punish that individual?  How would it even monitor the travels of such individuals?

Beginning in 1968, U.S. passports included a list of countries to which the passport holder could not travel: North Korea, the People’s Republic of China, North Vietnam, and Cuba.  Those restrictions were eventually dropped and there currently are no countries which a U.S. passport holder is prohibited from visiting.  You will ask, “What about Cuba?”  In fact, the current U.S. bar on tourists visiting Cuba is not a State Department ban on using a U.S. passport to visit Cuba; it was a U.S. Treasury Department ban on making any payment to the Cuban government, which had the effect of making travel to Cuba virtually impossible for tourist purposes.  The Obama Administration eased those financial restrictions, but the Trump Administration is restoring some of them.  For more on travel to Cuba, see the Treasury Department’s FAQs from June 16, 2017.

In addition to the State Department’s ban on tourism for the purpose of protecting American citizens from the dangers of travel to North Korea, watch for the U.S. Treasury to impose its own restrictions on American payments to visit North Korea as part of the U.S. sanctions regime, along the lines of the Cuban restrictions.  Although this would seem redundant, it might aid in enforcement of the travel ban once it comes into effect.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo by KEI.

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The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.