By Nicholas Hamisevicz

North Korea’s decision to launch a satellite in the midst of important regional political transitions underscores its disregard for building better relations with new leaders throughout its neighborhood. Rather than creating a favorable environment for South Korean presidential candidates who had been talking about re-engaging with the DPRK, Pyongyang has slammed the door in South Korea’s face on the eve of critical elections. With high level talks that had been scheduled to take place with Japan recently called off on news of North Korea’s rocket plan, it seems Pyongyang felt that rapprochement with Tokyo could wait. And although China new leadership attempted to dissuade North Korea from going ahead with the launch, Kim Jong Un’s government seemingly isn’t worried about being the cause of Xi Jinping’s first foreign policy crisis.

The timing of today’s rocket launch shows that North Korea’s leadership calculated that immediate internal benefits far outweighed any potential gains from the outreach in 2013 that may have materialized without a launch. Indeed, the prospects for increased engagement, aid, and better regional ties have all now been shunned in favor of actions North Korea’s neighbors other than China view as provocative. Instead, it appears that North Korea was motivated to go ahead with the launch in order to gain from key domestic reasons related to symbolic timing, domestic prestige, and military considerations.

As we know, North Korea’s previous April 2012 launch appeared to be a continuation of Kim Jong-il’s policy to celebrate the 100^th year anniversary of Kim Il Sung’s birth.  Seemingly, the late Kim had hoped that by putting a satellite into space, Pyongyang would be able to demonstrate to its people that North Korea was indeed becoming a “strong and prosperous” nation. The April launch was an embarrassing failure, so it seems Kim Jong Un was compelled to try again, with this December launch announcement connecting the new attempt to the “true to the behests of leader Kim Jong Il.”  Moreover, commemorating of the 100^th anniversary year of Kim Il Sung’s birth and the one year anniversary of the death of Kim Jong-il with a successful rocket and a satellite in orbit was another bonus for internal sentiment and the legacy of Kim Jong Un as a leader.

KCNA’s reporting on today’s launch also illustrates how domestic motivations were extremely important for North Korea. The internal prestige Kim Jong Un will have garnered through a successful launch is not hard to see, with DPRK media quickly showing dances in Kim Il Sung square and placing ecstatic news presenters on TV to break the news. With the launch being hyped domestically as a major policy success of the regime, it will also very likely help Kim Jong Un consolidate power during his first year as leader.

An additional motivating factor may have been Kim Jong Un’s desire to placate possible military pressure by trying a second launch.  Recent reports indicate numerous military purges have taken place of late in North Korea, with the high profile departures of Ri Yong Ho and Kim Jong-gak suggesting that Kim Jong-un has been working hard to replace foes with individuals he believes can better support his vision and rule.  But because some of these former foes were well respected military officials, Kim may have also used this launch as a means to buy much-need approval and time from an uncertain military.

While North Korea’s satellite success will lead to a number of domestic gains for Kim Jong Un, an external environment that had appeared ready for better relations with North Korea will now change. The apparent success of the rocket launch will increase pressure on the United Nations to think of new ways to punish North Korea’s Security Council Resolution violations while at the same time decreases the chances for any inter-Korean, Japanese, or U.S. based engagement. Those countries could potentially take more unilateral measures against North Korea to punish this action and try to prevent future provocations. North Korea’s assertiveness in launching a rocket despite encouragement not to do so from its most important donor, China, puts focus on Xi Jinping and the new Chinese leadership.  Outcomes from the UN Security Council and China’s own unilateral response will quickly provide evidence to the international community about China’s future relationship with North Korea. Unfortunately, early statements from China and commentary from Xinhua suggests North Korea can continue to count on Chinese support after this launch.

In short, the regional dynamics have changed for the new and incoming leaders. The launch will draw the U.S. and its allies closer together and provide an important common ground that can get South Korea-Japan relations off to a more positive in 2013. The successful launch makes it difficult for Japan to restart the postponed talks with North Korea. The launch indicates North Korea’s willingness to choose internal benefits over outside support with a confidence that it can survive on its own, with some unspoken hope that China’s support will not wane too much, if at all.

Finally, the rocket launch demonstrates that North Korea will disregard international resolutions and interactions with its neighbors despite efforts and opportunities for engagement. These factors indicate 2013 will be even more complicated for the regional players in Northeast Asia courtesy once again of North Korea.

Nicholas Hamisevicz is the Director of Research and Academic Affairs for the Korea Economic Institute. The views represented here are his own.

Flickr photo by NOS Nieuws

By Troy Stangarone

With sanctions by the United States and the European Union continuing to tighten on Iran, Korea has announced that it will halt imports of Iranian oil as of July 1. Korea’s decision makes it the first of Iran’s major export markets, and a key Asian consumer of Iranian oil, to fully cut off its supply of Iranian crude. Korea’s move contrasts with Iran’s other key export markets and could pay dividends to Korea in the future, but does not come without costs.

While the United States recently granted Korea a 180 day waiver from U.S. financial sanctions, the European Union has refused to grant a waiver from its ban on the sale of protection and indemnity insurance (P&I) for shipments of Iranian oil. The EU’s sanctions have proven effective because 90 percent of P&I is handled through European insurers, including 100 percent of Iranian shipments. Without the ability to purchase insurance for their shipments, Hyundai Oilbank and SK Energy would have been unable to insure a tanker’s cargo, its liability after a collision, environmental pollution and the risk of war – a real potential given Iran’s prior threats to seal off the Strait of Hormuz and Israel’s unease with Iran’s nuclear program.

Asian countries are the biggest purchasers of Iranian oil, accounting for 60 percent of Iran’s oil exports. However, in contrast with Korea, the 4^th largest purchaser of Iran’s crude oil, Japan, India, and China have all sought ways to get around the EU ban. Japan recently passed a law to provide its importers with sovereign, state based, insurance for their imports,  an option Korea choose not to take. India and China have reached varying deals for Iran to provide insurance and ship the oil.

While Korea imports almost 10 percent of its oil from Iran, it has been preparing for this eventuality. Had it not received a waiver from U.S. sanctions, it would have likely had to take similar steps. Knowing that, Korea has essentially taken three measures to address the crisis. First, it sought to build up its oil reserves.  It stockpiled Iranian oil, increasing imports by 57 percent in April, before declining by 40 percent in May as it worked to secure a waiver from the United States. At the same time, Korea sought out alternatives to Iranian oil during President Lee Myung-bak’s trip to the Middle East in February. The deals struck on that trip have allowed Korea to replace its imports of Iranian crude with other suppliers in the Middle East. According to Reuters:

Shipments from Kuwait in the first five months rose 23.3 percent to 348,493 bpd, while those from Saudi Arabia rose 7.9 percent to 838,678 bpd. Imports from the UAE increased 8.6 percent to 258,263 bpd, the KNOC data showed.

January-May imports from Qatar rose 14.3 percent to 280,829 bpd.

In the short term, Korea has addressed its energy needs in a manner that reduces its risks from the uncertainty surrounding Iran’s nuclear program. It will also have distinguished itself from its competitors in the region by not skirting the sanctions. This will likely not go unnoticed by the United States, the European Union, and numerous Middle Eastern states that have concerns about Iran’s nuclear program. This could benefit Korea through deeper ties with other states in a key region for meeting Korea’s energy needs.

However, there are potential costs. Iran has not yet made a statement on Korea’s decision, but Korea does have broader interests in Iran that its decision to halt imports could affect. First, Korea has developed a significant commercial relationship with Iran and it has been becoming an increasingly important market for Korean exports. Over the last decade, Korea has seen its exports to Iran increase from $1.2 billion to $6.0 billion last year. Iran could seek to limit the access of Korean exports to its markets in retaliation. Additionally, should a solution be found to the Iranian nuclear crisis, Korea could find itself less welcome in Iran than Japan, India, and China, all of whom will continue to import Iranian oil.

While the potential for costs exists, Korea has deftly handled a difficult situation. As an energy importer, it has managed to replace most of the oil that it would have lost and ensure that its broader economy will not be impacted by either U.S. or European sanctions on Iran. It also avoided having the state take on additional liabilities by not choosing to supply insurance for Iranian shipments. At the same time, the steps it has taken should also help Korea to deepen its ties with more stable energy suppliers in a volatile region.

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

Photo from Daniel Ramirez’s photo stream on flickr Creative Commons.

By Ben Hancock

It’s still unclear whether the rapid political shift underway in Burma can carry its momentum. Even the matter of what is truly driving its evolution seems to be guesswork at this point; and as the NYT’s Edward Wong reminds us, there is the minor matter of a seething rebellion in the Kachin region for the government of President Thein Sein to overcome — hopefully in a way that ends without dramatic displacement or violence. But either way, if what the world is witnessing now signals a lasting change in a country long seen as Southeast Asia’s answer to North Korea, it raises a fresh set of questions about what an open, U.S.-oriented Burma could mean for the Korean Peninsula.

For U.S. policy makers, past and present military engagement between Pyongyang and Naypyidaw appears to be the area of chief concern. Senate Foreign Relations Committee Ranking Member Richard Lugar (R-Ind.) said in November that his panel was told years ago about the North helping Burma to develop nuclear weapons. Speaking just before Secretary of State Hillary Clinton’s trip to Burma (which included a stop-off in Busan), Lugar put that information out there to “throw a spotlight on this issue and make sure it’s on the table in our talks with the Burmese government,” an aide told The Washington Post. The information had already surfaced in cables released in 2010 by Wikileaks, although doubts were raised then, too, about the degree to which a Burmese nuclear program could have advanced.

It seems fair to assume that if Mr. Sein continues along his current trajectory, Burma’s military cooperation with the North — however limited or expansive it really is — will grind to a halt. With a U.S. ambassador on the way and prospects for eased sanctions on the horizon, the promise of economic development in Burma is almost sure to outweigh any perceived benefits of maintaining military links the North. In a recent editorial, Sydney Morning Herald writer William Pesek asks an interesting question: Could that mean the North follows Burma’s lead.

There are clear differences between the states. Pesek writes that Burma was never as “surreal” as North Korea has become; the surprising durability and pervasiveness of the authoritarian regime in the North is unique. David Steinberg, professor of Asian studies at Georgetown, writes in the Irrawady that the propaganda machine employed by the Burmese junta was never as effective at cocooning its people in misinformation as Pyongyang’s is. But Pesek also makes another interesting point: Burma could be just the latest in a string of lost customers to North Korea. The Arab Spring revolutions — which took out Gaddafi and rattled Syria — have whittled at its list of weapons buyers.

A Burma that embraces the U.S. may also mean a Burma that leans away from China. News media have documented how the neighbors are already on thin ice over the Myitsone hydroelectric dam. That project is being pursued by a Chinese state-owned enterprise, but was suspended last year by Burmese leaders in a surprising response to public opposition. It’s possible that this clears the way for increased investment from close U.S. ally South Korea — a resource-poor country that already has its hand in the Burmese market. Seoul and Naypyidaw announced in 2010 that they were upping their cooperation in the energy sector by exploiting two more gas blocks.

Perhaps more importantly, Burma’s political shift could lessen the moral hazard that Korean companies face in investing in the Southeast Asian country. Korean Gas Corp (KOGAS) and Daewoo International hold sizable stakes in the Shwe gas pipeline project, which has been deeply controversial. EarthRights International filed an official complaint against the companies via the Organization for Economic Cooperation and Development (OECD), charging that they had ignored human rights abuses entailed in the construction of the pipeline. That kind of behavior doesn’t seem to be particularly new; complaints filed in the U.S. against the now-defunct Unocal oil company in 1997 involved many similar claims.

But one would hope that a regime that is now releasing political prisoners would also lay the groundwork for a more responsible business environment. The next test of the new regime’s commitment to democracy will come on April 1, when the country holds a by-election for parliamentary seats.

Ben Hancock is a reporter covering international trade and investment. He has studied Korean language and culture since 2004, and lived in Korea most recently from 2008 to 2010. His views are his own.

Picture from DPRK – Myanmar Military Delegation Visit, 2008.

By Troy Stangarone

Despite the financial crisis of 2008, the global downturn that followed in 2009, and a year of tension between North and South Korea, the Kaesong Industrial Complex has been remarkably resilient. New numbers from the Ministry of Unification show that production at the complex was up 38 percent in September from a year earlier to $36.8 million, setting a new monthly high. The number North Koreans working in Kaesong’s 123 factories also set a new high of 48,242, up 8.4 percent from a year ago.

The growth at Kaesong is interesting in light of the challenges of recent years. After the Cheonan was sunk, South Korea implemented a series of sanctions against North Korea. New investments in the Kaesong complex were prohibited and ongoing expansions were halted. While some of the restriction on investment have recently been lifted, they would be unlikely to account for the increase in production over the last year. At the same time, visits to Kaesong by South Koreans were limited to essential personnel.

The continued growth of Kaesong is also bucking recent global economic trends. While South Korean trade as a whole was down 20 percent in 2009 from the global economic recession, trade with North Korea through Kaesong has continued to grow. Inter-Korean trade from Kaesong was up 7.9 percent in 2009 and 48.9 percent in 2010 despite North Korea’s provocations. Through the first half of this year it is up 19.5 percent from last year and a significant 135.8 percent since 2009.

As we approach 2012, a symbolically important year for North Korea, production growth at Kaesong is likely to continue. South Korea is working to improve road access from Kaesong to the industrial complex and providing additional buses to transport workers from their homes. Additionally, after removing the restriction on construction in the complex, South Korea is moving ahead with the construction of a fire station, medical facility, and resuming construction on facilities for seven companies that had already received permits, including three metal and machinery plants, three textile factories, and one electronics factory.

However, while trade has been up, and the increase in workers and wages means North Korea will earn more from the complex, below the surface the picture is less robust.  An increasing number of firms are facing bankruptcy, and at the end of August 40 firms wrote to the government to request a grace period for their debts.

Despite being enticed to Kaesong with some combination of low interest loans, preferential tax rates, political risk insurance, and state subsidies, the political risk has clearly taken its toll on some firms in the complex. Even prior to the sinking of the Cheonan, it was unclear how profitable firms were in Kaesong, and the sanctions from May 24 likely only increased losses for firms that saw a halt to the importation of needed equipment, continued construction, or a decrease in orders. While some firms have suffered from the sanctions, the complex as a whole has sought to increase the supply of North Korean labor to boost production. These two factors likely explain why production has significantly increased as more firms face financial difficulties.

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

By Chad 0Carroll

After nearly three years of interruption, a flurry of recent diplomatic activity has suggested that signifcant efforts are being made to restart the Six Party Talks.   In July, officials from Pyongyang and Seoul met in Bali for the first time in months, with a second meeting taking place in Beijing just a few weeks ago.   Washington had direct contact in July through Ambassador Stephen Bosworth in New York – and now looks set to hold a second meeting with North Korean negotiators in Geneva later this month.   But do these four meetings, coupled with recent State visits by Kim Jong-il to Russia and China, give cause for optimism on a swift resumption of Six Party Talks?  A closer look at the key parties’ current positions suggests otherwise.

North Korea withdrew from the Six Party Talks in April 2009, unilaterally declaring that it would “never again take part in such talks” and would “not be bound by any agreement reached at the talks”.  Never say never though, because when Ambassador Bosworth met his counterpart Kim Kye-gwan in September 2009, he was told that Pyongyang was actually interested in resuming talks, but on condition that the U.S. first discussed a peace treaty and lifted sanctions.  Fast forward to August this year, and these preconditions were dropped all-together after a two hour meeting between Kim Jong-il and Russian President Dmitry Medvedev, bringing North Korea full circle.

Following the second nuclear test, the sinking of the Cheonan, and the shelling of Yeonpyeong, it was easy to understand why South Korea was originally so insistent on North Korea apologizing for its belligerence as a precondition to resuming any disarmament talks.  However, in January leaks from the government made clear  a change in position – that Pyongyang would no longer have to apologize first.  According to a senior ROK government official the current position is now that “The six-party talks will come back to life only if North Korea shows its sincerity by taking the required pre-steps, including a monitored shutdown of its uranium enrichment program”.

As a result of strong ties between Presidents Barack Obama and Lee Myung-Bak, the U.S. position has closely mirrored that of Seoul since the nuclear and missile tests of 2009.  Most recently, this position was articulated in three steps that North Korea would have to take to reinitiate dialogue – on issues related to nuclear weapons, missiles, and its relations with the South.  Predictably, North Korea rejected these, saying that they too should be entitled preconditions if such an approach were to be considered.

In contrast to the major differences between the DPRK, ROK and U.S. positions, Russia and China appear to be on the same page.  Recent initiatives such as the Medvedev – Kim Jong-il summit in Ulan Ude and Beijing’s September hosting of North and South Korean nuclear negotiators underscores a shared Sino-Russian desire to see the Six Party Talks resumed as quickly as possible.  And while little is known about Japan’s current position due to recent political turbulence, some scholars have suggested that Tokyo might be following the lead from the U.S. and South Korea.

As the current narrative would suggest, if next week’s U.S. – DPRK bilateral meeting is to achieve anything, flexibility is going to be critical.  But where will we see the motivation to show flexibility?

From the North Korean perspective, it appears unlikely that Pyongyang will be motivated to dilute its current position.   Making the type of credible gestures required to prove “sincerity” to South Korea and the U.S. would entail at least some foreign inspection presence on DPRK soil to work.   This was something previously achievable only after copious injections of cash or aid through protracted negotiations.  Without material payoff in return, it is hard to understand why Pyongyang would acquiesce to such a demand.  Having been the country to so vocally quit the Six Party Talks in 2009, it’s hard to see why North Korea might feel any burden to prove “sincerity”– after all, it is the one who can take or leave these nuclear negotiations.

The U.S. and South Korea are both in a difficult position regarding the resumption of talks.  With the North Koreans having declared a uranium program, tested a nuclear device and killed South Korean nationals, it is easy to understand why there is so little appetite in Seoul or Washington to water-down current positions.

But at the same time, there is a growing fear that if negotiations remain frozen, North Korea may be motivated to carry out a third nuclear test or attempt to cause further regional agitation.  In addition, left unchecked North Korea is now enriching uranium, improving the accuracy of its long-range missiles, and post-Fukushima, endangering the region through its aging nuclear infrastructure.   As a result, it would appear South Korea and the U.S. have the most to lose should negotiations remain stalled.  The major difficulty lies in facilitating this from a political perspective.

Chad 0Carroll is the Director of Communications for the Korea Economic Institute. The views represented here are his own.

On June 8 – 18, KEI Vice President, Abraham Kim, visited North Korea with a group of American Asia experts.  The purpose of the trip was to analyze the efficacy of sanctions, conditions in the cities/countryside, the integration of technology, the prevalance of cell phones and political conditions.  The slide presentation were shown at the GRS Annual Conference in July 2011 and a forum at Wilson Center in September 2011.