North Korean Economy Watch

Joong Ang Daily
July 28, 2006

North’s accounts were in Macau branch, Korean legislator says 

The United States is encouraged by Beijing’s “affirmative steps” in freezing North Korean accounts at a Chinese bank, White House Spokesman Tony Snow said on Wednesday.

His remarks were the first official confirmation of a South Korean lawmaker’s earlier claim that the Bank of China had frozen North Korean assets. Beijing remained silent on the issue after Grand National Party lawmaker Park Jin revealed the news, citing an unidentified former White House official as his source, after a trip to Washington.

Mr. Park said yesterday that the frozen accounts he was referring to were only in the Bank of China’s Macau branch, but that he is looking into whether the Beijing branch will make a similar move.

Mr. Snow was asked if Washington had knowledge of China’s actions in regard to freezing accounts. He answered yes, and said the move was related to counterfeiting issues.

In a related development, Stuart Levey, the undersecretary for terrorism and financial intelligence of the U.S. Treasury department warned yesterday in an interview with Yonhap News Agency that North Korea could use funds legally gained through trade for military purposes. A diplomatic source in Washington said yesterday the remarks by Mr. Levey could mean Washington might pressure Seoul about the Kaesong Industrial Complex and the Mount Kumgang tours, through which Pyongyang receives cash from the South.

A government official in Seoul said yesterday that if Washington tries to alter the current course of inter-Korean projects it would meet “heavy resistance” from Seoul.

Unification Minister Lee Jong-seok has repeatedly said the inter-Korean projects would not be influenced by North Korea’s recent missile salvo.

In October last year, the U.S. Treasury department designated eight North Korean entities as being involved in the proliferation of weapons of mass destruction. Under U.S. law, all transactions between the designated entities and any person in the United States are prohibited while all assets of these entities are frozen in territories under U.S. jurisdiction. 

From Xinhua via NKZone:

China and North Korea have signed an agreement to facilitate transportation through and environmental protection of a border river.

According to the agreement inked last Friday in Changchun, capital of northern China’s Jilin Province which neighbors North Korea, the two sides will cooperate on the management of navigation buoys and the dredging of part of the Yalu River.

During a nine-day meeting, traffic officials from both sides also discussed measures to prevent environmental damage caused by the dredging works.

The two sides also agreed to tighten management of cargo ships plying the river, according to sources who attended the meeting.

This is big news.  The Bank of China has frozen DPRK-owned bank accoounts for one of two reasons:

1.  The Bank of China plans to list on the New York Stock Exchange (NYSE), as a result, it has to comply with western regulations and concerns…making its role as the new faciltator of DPRK monetary transactions more difficult to accept.  

2.  The Chinese now suspect the DPRK of counterfeiting the Chinese Yuan.

I am not sure of the real reason just yet.  Anyway, here is the coverage in the South Korean press: 

From the Joong Ang Daily:

Bank of China freezes North’s money accounts
Lawmaker, citing U.S. official, blames counterfeiting concerns
by Brian Lee 

The state-run Bank of China has frozen its North Korean bank accounts due to concerns over counterfeit money, a Grand National Party lawmaker claimed yesterday.

Lawmaker Park Jin said his information came from a former senior U.S. government official of the Bush administration, who served at the White House.

Nevertheless, an official with the Foreign Ministry said yesterday that there was no information in regard to Mr. Park’s claim while the Chinese Embassy to Seoul said it was not in a position to comment.

Mr. Park visited in Washington recently with ruling and opposition lawmakers.

The lawmaker said that after Washington initiated an operation called “Smoking Dragon” in September of last year, which was designed to target North Korean counterfeit activities, a Macao-based bank was put under financial sanctions and North Korea moved its bank accounts to China in response.

Mr. Park said the former official told him that continuing probes by Washington led to the measure taken by the Chinese bank.

Mr. Park said yesterday that the Chinese bank was opting to list its stock at the New York Stock Exchange and was told it had little choice but to freeze the accounts.

The lawmaker said he didn’t know the exact timing of when the Chinese bank had frozen the North Korean accounts but speculated that a recent rift between Beijing and Pyongyang was due in part to that incident.

China agreed to a UN resolution passed earlier this month that was drafted in response to North Korea’s missile launch, which occurred despite Beijing’s efforts to stop it.

Mr. Park asserted that Pyongyang is also forging Chinese yuan currency. However, Unification Minister Lee Jong-seok who was asked about it yesterday at a briefing to the National Assembly’s Unification, Foreign Affairs and Trade Committee, said Seoul had no information one way or the other about the forging.

From the Korea Times:

China freezes N.K. accounts: lawmaker
By Lee Joo-hee

A South Korean lawmaker yesterday claimed that the Bank of China froze its North Korean accounts in relation to the alleged counterfeiting activities of the communist regime.

Citing former and incumbent Washington officials, Grand National Party lawmaker Park Jin said the latest move by China was connected with the United States’ financial measures against North Korea’s counterfeiting and laundering of money.

“This is a virtual ban against dealing with North Korea by China, leaving North Korea all the more devastated,” Park said. Park was in Washington to attend a seminar that started on July 15.

Last September, the U.S. Treasury Department cautioned American banks from dealing with Banco-Delta Asia, a Macau-based bank, which allegedly helped circulate North Korea’s counterfeit U.S. dollars.

The measure eventually forced the Macau bank to freeze the North Korean accounts, which amounted to $24 million.

North Korea immediately protested the move and has since boycotted the six-party talks.

“According to U.S. officials, although the $24 million may not appear to be a large sum, North Korea is sensitive to this issue because most of the funds are used for bribery and purchases of weapon components,” Park said.

Park said that following the freeze of BDA, the U.S. Treasury Department trained their radars onto other banks in Macau. North Korea has moved its accounts into banks in China since, he said.

Washington is currently evaluating the data from BDA for proof that North Korea counterfeited U.S. dollars.

North Korea is apparently concerned that the BDA measure could also affect some $200 million to $300 million accounts that are scattered in Singapore, Austria, Switzerland and Russia.

In yesterday’s parliamentary session, Park questioned Unification Minister Lee Jong-seok over North Korea’s counterfeit currency.

Park contended that North Korea was also counterfeiting Chinese yuan, but Lee responded that he did not have any specific information about it.

Reports in Tokyo yesterday said Japan was contemplating revising foreign exchange and trade laws, as part of its additional sanctions on North Korea over its missile launches.

The revisions are likely to require about 300 Japanese-based companies with business ties with North Korea to suspend exports of about 40 materials to destinations that are believed to be linked to the North’s missile program, the Yomiuiri newspaper reported.

It will require the companies to report to the Trade Ministry the details of their exports of targeted materials, including large trucks, titanium alloys and carbon fiber, the Yomiuri said.

Japan is also considering banning cash remittances and freezing North Korean assets in the country.

From Yonhap:

Chinese bank said to freeze N.K. accounts for currency counterfeiting

North Korea is suspected of having printed fake Chinese currency, which prompted the Bank of China (BOC) to freeze all of its North Korean accounts in an apparent retaliation, a South Korean legislator asserted on Monday.

Quoting a number of unidentified U.S. officials, Rep. Park Jin of the main opposition Grand National Party (GNP) said the freezing of North Korean accounts at the BOC is tantamount to virtual imposition of sanctions by Beijing on the North.

“I understand the North is even more frustrated because this means China is in fact imposing sanctions on North Korea,” the opposition lawmaker told Yonhap News Agency in a telephone interview.

Park has just returned to the country after a three-day trip to Washington along with 12 other ruling and opposition party legislators.

The GNP lawmaker claimed Washington may have been aware of the Chinese bank’s move as early as late last year when its Treasury Department imposed sanctions on a Macau bank suspected of circulating counterfeit U.S. dollars printed in the North.

“I suspect (the United States) did not announce the part related to China considering the sensitivity of the issue,” Park said.

He later claimed Beijing may be working with Washington to crack down on Pyongyang’s alleged counterfeiting of Chinese yuan.

“Following U.S. dollars, North Korea is also counterfeiting China’s currency, the yuan,” Park said during a meeting of the National Assembly Unification, Foreign Affairs and Trade Committee.

The claim, if found true, is expected to further complicate the stalled negotiations over North Korea’s nuclear weapons program as the United States has been looking to China to convince the North to return to the multilateral talks.

Pyongyang has been staying away from the talks since November, shortly after Washington imposed sanctions on the Macau bank, Banco Delta Asia.

From the Financial Times:

China’s food aid to North Korea soars
By Mure Dickie in Beijing
July 21 2006

China’s soaring cereal shipments to politically isolated North Korea made it the world’s third largest food donor last year, according to the United Nations World Food Programme.

The scale of China’s supplies of wheat, flour and coarse grains highlights the sensitive issue of Beijing’s support for a Pyongyang regime whose recent missile test launches have drawn international opprobrium.

It is likely to spur calls from the US and elsewhere for China to do more to push North Korea to rejoin international talks aimed at ending its nuclear weapons programme.

Pyongyang received more than 90 per cent of the 576,582 tons of cross-border food aid provided by China in 2005, according to data from the WFP’s International Food Aid Information System.

The shipments meant China’s total food donations climbed 260 per cent year-on-year and were surpassed only by those of the US and EU.

Beijing has long been North Korea’s most important supplier of fuel and food, but the World Food Progamme figures suggested a sharp increase in Pyongyang’s reliance on its traditional communist ally.

Chinese officials argue that they have little influence over Pyongyang, as shown by the limited results of their years of effort to persuade North Korean leaders to emulate Beijing’s economic reform and opening policies.

However, food aid from China and South Korea, which supplied nearly 400,000 tons, last year allowed North Korea to order international aid agencies out of the country, curtailing the work of the WFP itself. Seoul recently suspended shipments of humanitarian aid to the North in a response to the missile tests that was also linked by some observers to Pyongyang’s ejection of aid groups. Fears have since grown of another food crisis in North Korea, after typhoons and floods that have wiped out crops in some areas.

Chinese officials yesterday declined to comment on their plans for food donations to North Korea, with one official of the Ministry of Commerce saying: “I can’t tell you. It’s a state secret.”

From the New York Times:

The biggest recipient of [UNWFP aid] was Ethiopia, followed by North Korea and Sudan. The report is at www.wfp.org/interfais.

From the Joong Ang Daily:

The United States is blocking all possible ways of transferring money to North Korea. Along with a United Nations resolution, Washington is putting pressure on companies and banks of all countries that have business transactions with North Korea to cut the relations. Japan has blocked money transfers to North Korea, banned a North Korean ferry from entering its ports, frozen North Korea’s assets and banned companies from having transactions with North Korea.

The hardest blow on North Korea was China’s approval of the UN resolution. As the only ally to North Korea, China has provided it with more than half the food and energy the North needs. It is North Korea itself that has made China change its stance.

North Korea-China relations these days are the worst since in June 1995. Back then, North Korea’s leader Kim Jong-il released a statement in the Rodong Sinmun, or Newspaper of the Workers that China had betrayed the spirit of socialist revolution by introducing a market economy. Although the head of North Korea depends heavily on China for the survival of his country, he recently told an American delegate that China was unreliable.

The 2005 winners of the Nobel Prize in Economics were selected for “having enhanced our understanding of conflict and cooperation through game-theory analysis”.  I would check out thier work in order to make sense of the current DPRK/ROK diplomatic posturing.

From the Washington Post:

South Korea on Thursday suspended humanitarian aid to North Korea until it agrees to return to international nuclear disarmament talks.

The action infuriated visiting North Korean officials, who immediately cut off high-level talks in South Korea and stormed back home.

The decision to postpone consideration of a North Korean request for 500,000 tons of rice marked the South’s first punitive action against its impoverished communist neighbor since it defied the international community and test fired seven missiles, including a long-range Taepodong-2, on July 4.

The move came as the administration of South Korean President Roh Moo Hyun has come under sharp public criticism at home for what many there viewed as a weak response by Seoul to the North’s missile tests.

South Korea on Thursday reiterated its deep opposition to a push by Japan and the United States to impose broader sanctions on North Korea through a draft resolution at the United Nation’s Security Council. Seoul has also vowed to maintain its “sunshine policy” of engagement, which has fostered the warmest ties between the Stalinist North and capitalist South since the Korean War divided them in two more than half a century ago.

But the decision to follow through with a previous threat to suspend food aid if North Korea tested missiles — a threat many experts doubted the South Koreans would stick to — displayed a new willingness by the South to use its significant economic clout to apply pressure on the North.

The North Koreans — for whom economic assistance by South Korea is topped only by China — appeared jolted by the decision. At talks being held in the South Korean city of Pusan that were originally scheduled to end Friday, Pyongyang’s delegation abruptly departed Thursday afternoon.

South Korea’s Yonhap news service reported that the North Korean officials left after circulating a statement calling the rupture the result of “reckless” attempts by South Korea to raise “irrelevant issues.” Those issues, South Korean officials said, were the recent missile tests and the North’s refusal to return to six-party talks on its nuclear programs.

The North bitterly condemned Seoul’s decision to suspend food aid, saying “the South side will pay a price before the nation for causing the collapse of the ministerial talks and bringing a collapse of North-South relations.”

South Korean officials, who in recent years have rolled out the red carpet for their visiting North Korean kin, this time offered them a simple meal and welcome bereft of customary sightseeing excursions and photo opportunities. When the North’s representatives understood they would not be returning with promises for more food aid, they simply left.

“The North Korean side expressed their position that additional negotiations would be unnecessary under the circumstance that additional humanitarian aid they need would be impossible,” Lee Kwan Se, a South Korean Unification Ministry official, told reporters.

For the United States and Japan, both pushing for a strong draft resolution at the United Nations that would ban international trade of North Korean missile and other military technology, the South Korean action was a rare diplomatic bright spot.

Christopher Hill, Washington’s top envoy on North Korea, left Beijing for Washington on Thursday after it became clear that Chinese efforts to persuade the Pyongyang government to come back to the six-party talks had apparently failed.

Before leaving, Hill said there was no indication that the North Koreans had changed their position to boycott the talks, which have been stalled since last November.

Japan, which has been deeply rattled by the North’s missile tests, vowed to continue pushing for a tough resolution that would impose sanctions on the North Koreas. But China and Russia back their alterative U.N. resolution unveiled on Wednesday. That draft would censure North Korea for its missile tests, but would endorse only voluntary measures aimed at restraining Pyongyang’s ballistic missile and nuclear weapons programs.

“The Chinese are as baffled as we are,” Hill told reporters in Beijing before departing. “China has done so much for that country and that country seems intent on taking all of China’s generosity and then giving nothing back.”

By Anthony Faiola
Washington Post Foreign Service

From the Korea Times:

You may be surprised to hear that North Korea is either in violation, or the target, of more than 13 U.S. laws, which include laws dealing with transfer of missile technology to other countries and human rights issues. Three of these laws, however, have direct bearing on U.S. economic sanctions against North Korea.

The first is the U.S. Export Control Act of 1949 that became the basis for the U.S. invoking a total embargo against North Korea on June 28, 1950, only three days after North Korea invaded South Korea. The second is the Trade Agreement Extension Act of 1951 that was the basis for banning the most favored nation (MFN) tariffs on North Korea’s exports to the United States. As you know, all member countries of the World Trade Organization have to abide by the MFN regulation that requires these nations to levy the same low tariffs to all member nations of the WTO. Without MFN, there is no way for North Korea to export anything to the U.S. because higher tariffs make them impossible to compete. The MFN is so widely spread that it is now known as the normal trade relation (NTR). North Korea was denied MFN tariff status on September 1, 1951.

The third is the Export Administration Act of 1979 that allowed North Korea to be branded as a terrorist state when its agents blew up KAL 007 on November 19, 1987. At the time of the explosion, Korean Air Lines 007 was in flight from Bagdad (Iraq) to Bankok (Thailand). The explosion killed 115 passengers and crew. On January 20, 1988, North Korea was placed on the list of countries supporting international terrorism.

Placement on the list made it impossible for North Korea to borrow development funds from international financial institutions such as the World Bank and the International Monetary Fund.

On May 25-28, 1999, former U.S. Defense Secretary William Perry visited North Korea and delivered a U.S. proposal. On September 13, 1999, North Korea responded positively by pledging to freeze long-range missile tests. On September 17, 1999, President Clinton agreed to the first significant easing of economic sanctions against North Korea since the end of the Korean War in 1953 by announcing the lifting of most export restrictions applied to North Korea in response to North Korea’s willingness to cease long-range missile testing.

Details of eased U.S. economic sanctions on North Korea were announced on June 19, 2000. Key provisions included that the ban on exports to North Korea had ended, that U.S. passports were valid for travel to North Korea, and that U.S. travel service providers were authorized to organize group tours to North Korea. Among the notable U.S. sanctions that were not lifted are the denial of MFN status and the placement on the list of countries supporting international terrorism.

You may wonder what more economic sanctions can be levied against North Korea beyond the three already in place. To answer this question, you need to know the extent of North Korea’s foreign trade.

Contrary to what you may have heard or believe, latest United Nations trade data indicate that North Korea has trade relations of imports, exports or both with no less than 108 countries, which exclude South Korea because inter-Korean trade is not recorded as trade data in the U.S. trade database. North Korea’s major trading partners in 2004 were, in order of the amount, China ($585,651,972), Japan (164,101,115), Germany ($100,739,000), Brazil ($73,412,125), and Mexico ($47,662,978) for exports, and China ($799,450,316), Russia ($204,818,560), Brazil ($169,921,763), India ($121,080,999), and Netherlands ($120,525,232) for imports. The total amount of North Korea’s exports for 2004 was $1,256,533,361, while the total amount of North Korea’s imports for the same year was $1,937,738,240, with the trade deficit of $681,204,879, representing no less than 54.2 percent of total exports.

Now you have an idea. The new economic sanctions may take the form of a multi-national ban of trade with North Korea. The new economic sanctions may also include a complete ban of any transfer of money to North Korea from many Koreans who live in Japan and support North Korea.

There is no doubt that a complete ban of North Korea’s foreign trade, if imposed, would easily lower the current North Korean GNP to the 1999 level when hundreds of thousands, if not millions, of North Koreans starved to death.

In view of the large number of countries engaged in trade with North Korea, it would be impossible to impose a complete ban on North Korea’s foreign trade without naval blockade, which may escalate tensions on the Korean peninsula so rapidly that China and South Korea may not be willing to go along with multilateral economic sanctions.

An interesting strategic analysis fo the DPRK/PRC realtionship in a regional competition context.  From the Council on Foreign Relations:

Introduction

Washington Post
Colum Lynch and Anthony Faiola
7/06/06

Japan imposed limited economic sanctions on the North, including a measure prohibiting its officials, ship crews and chartered flights from entering Japan.

A draft U.N. resolution, formally introduced by Japan, would also require states to prevent the transfer of money, material or technology that could “contribute” to Pyongyang’s ballistic missile program or advance its capacity to develop nuclear explosives or other weapons of mass destruction.

In addition, Japanese officials indicated they might be prepared to halt millions of dollars in remittances that are sent annually to North Korea from Koreans living in Japan.

As for China’s response:

Several observers warned that even if Beijing agreed to some form of censure, it would remain reluctant to impose tough economic sanctions out of fear that such measures could destabilize North Korea and spark a crisis on their shared border.

“I don’t think China will take at this moment stronger political or economic action against North Korea,” said Chu Shulong, a political science professor at Tsinghua University and expert in international security. “We Chinese believe basically, fundamentally it is not our problem, the missile launch problem. It’s a problem between North Korea and the U.S., it’s a problem between the DPRK and Japan, it might be a problem between North Korea and South Korea. But basically it’s not a China problem.”

North Korea experts said the options for the Bush administration remain limited, particularly if the Chinese and South Koreans were reluctant to impose tough economic sanctions. Instead, many said, it was more likely that Japan and the United States would seek to continue isolating North Korea by slowly tightening economic sanctions.

This is weird.  (Hat tip to Lost Nomad)

China sends the DPRK food aid via train.  The DPRK keeps the train and sends the crew back across the border  sans-train.

[F]ood and fuel supplies sent to North Korea have been halted, not to force North Korea to stop missile tests or participate in peace talks, but to return the Chinese trains the aid was carried in on. In the last few weeks, the North Koreans have just kept the trains, sending the Chinese crews back across the border. North Korea just ignores Chinese demands that the trains be returned, and insists that the trains are part of the aid program. It’s no secret that North Korean railroad stock is falling apart, after decades of poor maintenance and not much new equipment. Stealing Chinese trains is a typical North Korean solution to the problem. If the North Koreans appear to make no sense, that’s because they don’t. Put simply, when their unworkable economic policies don’t work, the North Koreans just conjure up new, and equally unworkable, plans. The Chinese have tried to talk the North Koreans out of these pointless fantasies, and for their trouble they have their trains stolen. How do you negotiate under these conditions? No one knows. The South Koreans believe that if they just keep the North Korean leaders from doing anything too destructive (especially to South Korea), eventually the tragicomic house of cards up north will just collapse. Not much of a plan, but so far, no one’s come up with anything better.