Archive for the ‘International Governments’ Category

“Maximum pressure” and the North Korean economy: what do market prices say?

Friday, March 9th, 2018

By Benjamin Katzeff Silberstein

With the news today about a summit between Kim Jong-un and Donald Trump tentatively planned for the end of May, there has been much debate about the role of the US policy of “maximum pressure” through economic sanctions.

The efficacy of the policy is difficult to evaluate, particularly since it often takes many months or even years for the full effect of sanctions to play out. Whether the policy has been effective or not depends on, well, how you judge success or failure. There is little doubt that North Korea’s exports have taken a significant hit not primarily from the sanctions themselves, but from China’s enforcement of them. This is the single biggest difference between how sanctions have hit the North Korean economy during the past year, versus previous years. It seems fairly indisputable that sectors of the economy have suffered, with export industries taking the biggest hit.

But what has been the impact on the economy as a whole? It’s difficult to say, but we have two important indicators: prices of rice and foreign currency on North Korean markets. The data on these two indicators is far from perfect, and it is difficult, if not impossible, to draw firm conclusions from it. (For an explanation of this data, and the rationale for using rice prices in lieu of the formal goods basket used to measure inflation in other countries, see this article, for example). Nevertheless, neither of the two indicators suggest a situation out of the ordinary on North Korean markets during the period that “maximum pressure” has been applied.

First, a look at rice prices. If sanctions were truly devastating the North Korean economy, there is a whole host of reasons why one should expect rice prices to increase.

One of them is expectations of worse times to come as importing inputs for agriculture as well as food becomes increasingly difficult. Another is that if importing food products in general* becomes more difficult, perhaps because Chinese traders anticipate that their North Korean counterparts won’t be able to pay, consumers would be expected to switch more of their consumption to domestically sourced goods, increasing demand and thus prices. In general, anxiety about worsening times often leads to inflation.

This does not seem to have happened. In fact, rice prices have been remarkably stable over the past year (if the graph looks strange, click for full image):

There may well be other forces at work, too. Increased smuggling of cheaper Chinese rice, for example, may well have contributed to the price stability. But this is in itself a sign of the resiliency of the North Korean economy; when some supply decreases, there are ways of compensating through other means.

Exchange rates are another important metric. If the inflow of foreign currency (in this case US dollars) decreases, its price – the exchange rate – should go up. Expectations matter here, too: if the market expects that foreign currency supply will dry up in the future, it tends to act in the present and make purchases today to hedge for tomorrow. As with rice prices, exchange rates have been remarkably stable over the past year (again, click for better image):

In sum, we have little or no hard evidence that the North Korean economy, on the whole, has suffered significantly and harshly from sanctions thus far. That may itself not be an argument against sanctions, since again, it may take much longer than just a year for their full impact to play out. But it does call into question the claims that “maximum pressure” is the chief reason for Kim Jong-un’s outreach to Donald Trump.

*This likely holds true regardless of the level of self-sufficiency in North Korea’s agricultural production.

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North Korean markets insulated from sanctions, but not forever

Wednesday, March 7th, 2018

Posted by Benjamin Katzeff Silberstein

Analysis at Daily NK:

In 2017 alone, the United Nations Security Council passed four major sanctions resolutions against North Korea: Resolutions 2356, 2371, 2375, and 2397. Under the measures, the North’s crude oil imports were restricted, and coal and mineral exports were banned. Additionally, the North was prohibited from sending its laborers to work abroad – one of the key ways in which the regime earns foreign currency.
“One cannot say that, on a macro level, sanctions against North Korea have been ineffective,” said Lee Seok Ki, a senior researcher at the Korea Institute for Industrial Economics and Trade (KIET). “Since around August or September of 2017, the North’s exports have dropped significantly, and we have seen a major impact from sanctions on their industrial output. The country’s anthracite (coal) exports are down 66% compared to the previous year, which is a devastating hit to their mining sector, and the trend is expected to continue.”
Lee added that while most indicators point to declining imports, it remains difficult to conclude that sanctions have had the same effect on the North Korean manufacturing sector. Despite this, Lee noted that “sanctions are having an effect on the trade sector and we will continue to see both quantitative and qualitative effects in the long term.”
Other experts support the opinion that sanctions are working against the North’s overall trade. “North Korea’s exports to China are down 37%, which has led to a further 1.8% drop in growth for the North’s economy over the last year,” said Kim Byung Yeon, a professor at the Department of Economics at Seoul National University.
“If the North is unable to get sanctions lifted, the growth rate for their economy could drop to as low as minus 5% in the next year,” Kim added, explaining that the effects on economic growth will be significant due to the structure of the North’s economy and the relatively high proportion that exports contribute to it.
Kim said that citizens working in the trade sector have been most affected by sanctions, though he points to the government as taking the most damage. “Most trade has been conducted by state-owned and party- or military-run companies, meaning that the elite class and government officials take a big hit from sanctions,” Kim said. “Kim Jong Un relies heavily on trade as a source of income (for his regime), which means that the person most impacted by sanctions is none other than Kim Jong Un.”
But while sanctions appear to be having a significant effect on the North’s trade and industry, experts are noting that the local markets in the country have not been affected as heavily.
“When you look at the price of rice or the exchange rate over time, it’s hard to see any major effect of sanctions (on local markets),” KIET researcher Lee said.
Daily NK’s own research has come to the same conclusion, finding that the price of rice in North Korea’s markets has remained steady at around 4,000 to 5,000 KPW per kg since the beginning of the recent surge in international sanctions.
“People have been relying on themselves, actively participating in the markets and smuggling since the end of the Arduous March (great famine of the 1990s), which means that sanctions do not yet seem to be having an effect on the markets,” said a source in North Hamgyong Province, pointing to the steady availability of consumer goods as evidence.
“Kim Jong Un has instituted improvements in the quality of domestic-made goods, leading to these products in many cases pushing out Chinese versions from the markets,” said Lee Geun Young, Professor at the Yanbian University Department of Political and Public Administration. “There are now fewer items being brought in from China, so these products are having less influence on market prices.”
However, experts also believe that the damage inflicted by sanctions will inevitably reach the markets. “It’s not easy to precisely predict when the effect of sanctions will reach the markets,” Professor Kim said. “But one thing is clear: because many items rely on some form of importation, the long-term effects of a continuing decline in trade will inevitably lead to a reduction in the volume of available goods and a decrease in consumer purchasing power.”
Article source:
North Korean markets insulated from sanctions, though not forever
Jang Seul Gi
Daily NK
2018-03-07
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US prepares maritime interdiction to stop North Korean sanctions evasion

Friday, February 23rd, 2018

By Benjamin Katzeff Silberstein

As the Winter Olympics with all its inter-Korean contacts wind down, the US is preparing to place Coast Guard forces to stop and search vessels in Asia-Pacific waters, to prevent North Korean sanctions circumvention. Reuters:

Washington has been talking to regional partners, including Japan, South Korea, Australia and Singapore, about coordinating a stepped-up crackdown that would go further than ever before in an attempt to squeeze Pyongyang’s use of seagoing trade to feed its nuclear missile program, several officials told Reuters.

While suspect ships have been intercepted before, the emerging strategy would expand the scope of such operations but stop short of imposing a naval blockade on North Korea. Pyongyang has warned it would consider a blockade an act of war.

The strategy calls for closer tracking and possible seizure of ships suspected of carrying banned weapons components and other prohibited cargo to or from North Korea, according to the officials, who spoke on condition of anonymity. Depending on the scale of the campaign, the United States could consider beefing up the naval and air power of its Pacific Command, they said.

The U.S.-led initiative, which has not been previously reported, shows Washington’s increasing urgency to force North Korea into negotiations over the abandonment of its weapons programs, the officials said.

North Korea may be only a few months away from completing development of a nuclear-tipped missile capable of hitting the U.S. mainland, despite existing international sanctions that, at times, have been sidestepped by smuggling and ship-to-ship transfers at sea of banned goods, according to officials.

“There is no doubt we all have to do more, short of direct military action, to show (North Korean leader) Kim Jong Un we mean business,” said a senior administration official.

The White House declined official comment.

The effort could target vessels on the high seas or in the territorial waters of countries that choose to cooperate. It was unclear, however, to what extent the campaign might extend beyond Asia.

Washington on Friday slapped sanctions on dozens more companies and vessels linked to North Korean shipping trade and urged the United Nations to blacklist a list of entities, a move it said was aimed at shutting down North Korea’s illicit maritime smuggling activities to obtain oil and sell coal.

Tighter sanctions plus a more assertive approach at sea could dial up tensions at a time when fragile diplomacy between North and South Korea has gained momentum. It would also stretch U.S. military resources needed elsewhere, possibly incur massive new costs and fuel misgivings among some countries in the region.

The initiative, which is being developed, would be fraught with challenges that could risk triggering North Korean retaliation and dividing the international community.

China and Russia, which have blocked U.S. efforts at the United Nations to win approval for use of force in North Korea interdiction operations, are likely to oppose new actions if they see the United States as overstepping. A Chinese official, speaking on condition of anonymity, said such steps should only be taken under United Nations auspices.

China’s Foreign Ministry, in a statement to Reuters, said they did not know anything about the plan, but that in principle China believes U.N. resolutions on North Korea should be fully and thoroughly implemented.

“At the same time, we hope relevant countries act in accordance with Security Council resolutions and international law,” it added, without elaborating.

Full article:
Exclusive: U.S. prepares high-seas crackdown on North Korea sanctions evaders – source
Phil Stewart, David Brunnstrom
Reuters
2018-02-23

I won’t go into the strategic and political implications, but when it comes to sanctions circumvention, a plan like this, thoroughly executed, would likely raise the costs of North Korean sanctions circumvention. Even with what sanctioned trade still goes on, there’s likely a substantial premium charged by traders that deal with North Korea because of the risks involved. As those risks go up, so should the premium. No measures can make circumvention fully impossible, but it can get a whole lot more expensive.

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North Korea’s largest overseas restaurant closed down

Friday, February 16th, 2018

By Benjamin Katzeff Silberstein

The largest of North Korea’s overseas restaurants has closed, and its workers have gone home, reports Daily NK. Those formerly employed in North Korea’s overseas joint ventures abroad, and as overseas labor with other companies, have been returning home in stages since sanctions passed by the UNSC last September forbade joint ventures with North Korea.

These restaurants are (were?) an interesting phenomenon. I’ve visited them in Vietnam, Cambodia, and China, and the last time I went to one was in 2013. At the time, it was packed with tourists, mostly from South Korea, and some locals. This was generally my experience with these restaurants from the first time I visited one in 2008, but of course I can’t say for sure whether that impression was representative of a general picture.

The last time I went to one was in 2016, in Beijing. On a regular Saturday night, the place was virtually empty, save for a couple of middle-aged men donning Kim Il-sung badges, drinking beer and chain smoking. Our party got our own room, complete with karaoke, even though we didn’t ask for one, simply because the place was so empty. I got a hint about what the reasons might have been earlier in the day when I called to make a reservation: since I spoke to the staff in Korean, they felt obligated to inform me that customers from South Korea were no longer welcome. This business-killing restriction was likely imposed after the mass defection to South Korea, from one of the restaurants earlier that year. For what it’s worth, this particular one – in central Beijing – seemed like a dying endeavor over a year before the sanctions, though one can’t generalize from just one data point.

Here’s Daily NK’s story:

Ahead of the Lunar New Year holiday, Daily NK obtained photos of employees of a recently-closed North Korean restaurant called Pyongyang Koryo Pavilion in the Chinese border city of Dandong returning home to North Korea.

Pyongyang Koryo Pavilion was the largest of North Korea’s overseas restaurants, and originally employed 200 people. However, the restaurant shut down in November due to intensifying international sanctions targeting North Korea for its nuclear and missile development. Its employees have continued to return to North Korea in groups.

“Management started repatriating the workers in groups following the Pyongyang Koryo Pavilion’s closure, but some of them went to work at other restaurants,” a source in China close to North Korean affairs told Daily NK on February 14. “The 30 people returning ahead of the Lunar New Year holiday were part of the contingent that had been working at other establishments following the shutdown of Pyongyang Koryo Pavilion.”

In September 2017, China’s Commerce Ministry ordered the closure of North Korean companies operating inside the country within 120 days of UN Resolution 2375, which passed on September 11, 2017. The ministry also announced that Chinese joint ventures with North Koreans and North Korean companies would be closed.

Upon the realization that the Pyongyang Koryo Pavilion would likely not be resuming operations, the North Korean authorities began to exfiltrate the workers in stages.

“They’re heading back to their hometowns, where their families live, but they don’t look very happy about it because they’re losing the opportunity to earn money abroad.

Article source (with pictures):
More North Korean overseas workers return home
Seol Song Ah
Daily NK
2018-02-16

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FinCEN designates Latvian Bank for North Korea links

Wednesday, February 14th, 2018

UPDATE 1 (2018-2-19): According to the AFP:

The European Central Bank said Monday it has frozen payments by the third-largest bank in tiny Baltic state Latvia, as its finances have deteriorated in the wake of money laundering allegations from Washington.

“Temporarily, and until further notice, a prohibition of all payments by ABLV bank on its financial liabilities has been imposed, and is now in effect,” the ECB said in a statement.

It is the first time the ECB has used its power to impose a moratorium since taking on eurozone-wide banking supervision responsibilities in 2014.

The US Department of the Treasury last week named ABLV “an institution of primary money laundering concern” and accused it of connections to North Korea’s weapons development programme.

ABLV’s financial position, which had previously been stable, has rapidly deteriorated since as it found its access to the financial system cut off, even threatening the bank’s survival.

In late September 2017, the bank’s balance sheet stood at around 3.6 billion euros ($4.5 billion), with 1.0 billion euros of loans and 2.7 billion in deposits.

Just two days before the ECB’s moratorium, Latvian supervisor FCMC issued a statement saying the bank’s capital and liquidity ratios — key indicators of a bank’s financial health — were in good shape.

The ECB decision on Monday comes after Latvian central bank governor Ilmars Rimsevics, who sits on the ECB governing council, was arrested Saturday by the country’s Corruption Prevention Bureau (KNAB).

A source familiar with the case told AFP there was no connection between the ABLV case and the governor’s arrest.

ORIGINAL POST (2018-2-14): According to the FinCEN press release:

FinCEN Finds the Bank Orchestrates Money Laundering Schemes, Obstructs Regulatory Enforcement, and Has Conducted Activity Linked to North Korea

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) today issued a finding and notice of proposed rulemaking (NPRM), pursuant to Section 311 of the USA PATRIOT Act, seeking to prohibit the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank. FinCEN is proposing this action based on its finding set out in the NPRM that ABLV is a foreign bank of primary money laundering concern.

“FinCEN will continue to take action against foreign banks that disregard anti-money laundering safeguards and become conduits for widespread illicit activity,” said Steven T. Mnuchin, Secretary of the Treasury. “Deficient practices at banks foster a wide array of illicit conduct, including activity linked to North Korea’s weapons program and corruption connected to Russia and Ukraine. FinCEN is committed to protecting the U.S. financial system from these types of risks.”

As described in the finding, ABLV has institutionalized money laundering as a pillar of the bank’s business practices. ABLV’s management permits the bank and its employees to orchestrate money laundering schemes; solicits high-risk shell company activity that enables the bank and its customers to launder funds; maintains inadequate controls over high-risk shell company accounts; and seeks to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.

ABLV’s failure to implement, and disregard for, effective AML/CFT and sanctions policies and procedures have made the bank attractive to a range of illicit actors engaged in organized crime, weapons proliferation, corruption, and sanctions evasion. Illicit financial activity at the bank includes transactions for parties connected to UN-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles. In addition, ABLV has facilitated transactions for corrupt politically exposed persons and has funneled billions of dollars in public corruption and asset stripping proceeds through shell company accounts. ABLV failed to mitigate the risk stemming from these accounts, which involved large-scale illicit activity connected to Azerbaijan, Russia, and Ukraine.

Section 311 actions alert the U.S. financial sector to foreign institutions, such as ABLV, that are of primary concern and through the public rulemaking process, if necessary, cut them off from the U.S. financial sector.

Here is coverage in the Korea Herald:

Last year, an investigation by the US Federal Bureau of Investigation and Treasury found that five other Latvian banks, which mainly serve nonresident clients, violated the United Nations Security Council’s sanctions against North Korea and rules on anti-money laundering and the financing of terrorism.

Latvia’s Financial and Capital Market Commission confirmed the banks’ illicit activity and assigned it financial penalties totaling 3.5 million euros ($4.3 million).

It is the third time the US government has imposed sanctions against a foreign bank for dealing with North Korea.

In 2005, Macau-based Banco Delta Asia had some $25 million in North Korean funds frozen under US sanctions, as 24 companies including Chinese banks stopped dealing with the North, putting Pyongyang under severe financial strain. The US also blacklisted China’s Bank of Dandong in June last year for laundering money for North Korea.

“We have made clear to countries and companies around the world that they can choose to trade with North Korea or the United States, but not both,” the US Treasury’s Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker said in an anti-money laundering and financial crimes conference in New York on Tuesday.

“We will target not only companies that actually know they are being exploited, but also those that should know. We are resolved that anyone who knowingly aids North Korea faces being cut off from the US financial system.”

Read the full story here:
Latvian bank faces US sanctions for dealing with NK
Kim So-hyun
Korea Herald
2018-2-14

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Sanctioned Foreign Trade Bank can’t pay North Korea’s UN dues…

Tuesday, February 13th, 2018

Reuters reports that North Korea cannot pay its UN dues owing to sanctions on its official hard currency repository, the Foreign Trade Bank (FTB). According to the article:

North Korea’s U.N. Ambassador Ja Song Nam met with U.N. management chief Jan Beagle on Friday to ask the world body to help secure a bank transaction channel so Pyongyang could pay the nearly $184,000 it says it owes for 2018.

U.N. member states are required to pay assessed contributions to the world body’s regular and peacekeeping budgets, as well as a budget for international tribunals.

U.S. and U.N. sanctions on the Foreign Trade Bank, North Korea’s primary foreign exchange bank, were preventing the country ”from honoring its obligation as a U.N. member state by hindering even normal activities such as payment of the U.N. contribution,” the North Korean mission said in a statement late on Friday.

The United States sanctioned the Foreign Trade Bank in 2013, while the U.N. Security Council blacklisted the bank last August.

The 15-member U.N. Security Council has unanimously boosted sanctions on North Korea since 2006 in a bid to choke funding for Pyongyang’s nuclear and ballistic missile programs.

According to the U.N. Charter, countries in arrears in an amount that equals or exceeds the contributions due for two preceding years can lose their vote in the 193-member U.N. General Assembly. The General Assembly can grant an exception if a country can show that conditions beyond its control contributed to the inability to pay.

The U.N. website said that as of Jan. 28 there 12 countries in arrears of more than two years. Apart from its 2018 dues, North Korea said it is up to date with its payments.

I know that many in the diplomatic and NGO communities have been physically bringing in cash to fund their operations in Pyongyang since the FTB was sanctioned.

There was a Russian Bank, Bank Sputnik, that had maintained a financial link to the FTB to service the diplomatic community. However, this banking link was severed in September 2017 and apparently remains closed.

UPDATE (2018-2-21): A news site I was previously unaware of has some interesting information on the relationship between the DPRK’s Foreign Trade Bank and the Russian bank, Sputnik. According to Inner City News:

In the face of North Korea sanctions, the UN in December 2017 used the sanctioned Foreign Trade Bank and Russia’s Sputnik Bank to transfer EUR 3,974,920.62 into the country, documents obtained by Inner City Press show. A letter from Sputnik Bank states that “unauthorized person (I.V. Tonkih) led negotiations with Korean party on interbank correspondent relationship.” Photos here.

NK News did a better job reporting on the relationship between Sputnik and the FTB.

Read the full story here:
North Korea says unable to pay U.N. dues, blames sanctions
Reuters
2018-2-10

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Is North Korea scaling back winter exercises because it lacks fuel and food?

Tuesday, January 30th, 2018

By Benjamin Katzeff Silberstein

Much has been made of North Korea’s apparent decision to scale back its annual winter military exercises. Some have concluded it’s a sign that sanctions are working: the army lacks both fuel and food, and has therefore had no choice but to change the scale of the exercises.

While this may be true, I haven’t seen anything in the data that proves it. Take food prices, for example. The average rice price among three North Korean cities, according to the latest observation by Daily NK, is 4853 won per kg. It’s declined pretty strongly over the past few months, which isn’t unusual for this time of year. In the comparable period last year, the same price was exactly 800 won lower. In other words, food prices, as measured by rice prices, often used instead of a CPI-basket for the North Korean market, are 20 percent higher today than they were in the comparable period last year.

That isn’t negligible, but I would still say a large part of the price difference falls within the margin of error. Prices can fluctuate heavily on the North Korean market, and the results might have been different even had prices been measured on a different day. And for most of the past few months, prices have pretty much looked seasonally normal.

Lack of fuel is a much more plausible explanation. Prices have steadily climbed since early 2017 and according to data from NK PRO continue to rise. But part of the reason for the increased prices is, likely, that the military has been soaking up more fuel than usual from the market. I don’t think there’s much reasonable doubt that fuel has been more difficult to acquire since sanctions began to be enforced more strictly by China. But we also know that North Korea has continued to import fuel by circumventing sanctions. Some of these methods have been publicly exposed by US intelligence but there’s likely much more going on that we don’t see. If full-scale military exercises were a priority for the leadership, I doubt that it would be impossible for agents and enterprises further down the line to somehow acquire the fuel it needs.

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McDonalds advertising on Uriminzokkiri Youku Channel

Monday, January 29th, 2018

Last year Google and Youtube took the draconian measure of deleting approximately seven years of video footage posted to Youtube by North Korea and its agents (learn more here). The video footage was invaluable to North Korea researchers and it generated no revenue for the North Korean government.

Shame on them.

However, the story does not stop there. North Korea continues to post video content to the Chinese version of YouTube, called YouKu. Videos posted to Youku DO earn ad revenue for the North Koreans through advertising. So by banning video on YouTube and pushing viewers to YouKu, the company is creating a perverse outcome that makes North Korea better off in two ways: 1. North Korea gets more money and 2. We are ableo to learn less about North Korea from its official media (and yes, you can learn a lot about the country from its official media)

Today I was sitting through an advertisement on Youku’s Uriminzokkiri channel waiting for the North Korean evening news to start, and low and behold, I found myself watching an advertisement for McDonalds produced by their Chinese division. I have no idea how advertising decisions are made at McDonalds China, or at Youku for that matter, but I am sure their American parent company does not want this to happen.

Here is the screenshot taken just a few minutes ago:

And for what it is worth, the McDonalds advert is followed by one from Toyota.

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N Korean seafood still sold in China

Monday, January 8th, 2018

Benjamin Katzeff Silberstein

Reports NHK:

North Korean seafood is still being sold in China’s northeastern regions despite UN sanctions resolutions banning such trade.

Chinese retailers at a market in Jilin province near the border with the North were advertising “North Korean seafood”, including live crabs.

Market sources say prices for crab smuggled from the North are less than half of those from Russia. Snow crabs were priced at about 18 dollars per kilogram and hairy crabs at around 24 dollars.

Seafood retailers on another street in the province shut down immediately after the UN Security Council adopted the sanctions resolution in August. But some have since reopened.

A shopkeeper said it was initially difficult to obtain North Korean seafood after the sanctions, but he can now purchase it every day. He said the products come from ports in Liaoning Province.

Traders say the seafood is transferred from North Korean fishing boats to Chinese vessels at sea and mainly smuggled into the city of Donggang in Liaoning Province.

The Chinese government insists it has been strictly implementing the sanctions resolution, so there is likely to be renewed attention on whether it will thoroughly crack down on the smuggling.

Article source:
N.Korean seafood still being sold in China
NHK World
2018-01-08

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The December 2017 sanctions on North Korea: business as usual?

Saturday, December 23rd, 2017

By Benjamin Katzeff Silberstein

Many of the steps in the additional sanctions added by the UN Security Council resolution 2379 on December 22nd, 2017, were expected. Targeting oil and petroleum, export incomes, as well as revenues from foreign workers, are all natural steps if the international community wants to pressure North Korea. It’s still rather unclear what the end-goal is, but if sanctions are intended to make things more difficult for the North Korean economy, they can certainly have an impact to that end. These are the main points:

  • Exports of refined petroleum products will be capped at 500,000 barrels per year.
  • Crude oil transfers will be limited to 4 million barrels/year.
  • Within two years, UN member states are to have expelled all North Korean workers and managers.

When analyzing how this will impact North Korea, there are two sides to the story. On the one hand, as with all sanctions against North Korea, China (and to some extent, Russia) would likely not have agreed to them if they had believed that they created a real risk of severe social instability in North Korea that would risk spilling over its own borders. At the same time, it seems like the US intention is to create economic difficulties so severe that the North Korean regime will crack and agree to negotiate the existence of its nuclear deterrent, at least according to the official, outward line. These two objectives appear to be mutually exclusive in the long run.

Moreover, China and Russia appear to have extracted some significant concessions in negotiating the resolution. North Korean workers are to be expelled no later than within two years, which is not an insignificant time frame. Perhaps by then, things will have changed enough for sanctions to be renegotiated. The cap of 4 million barrels is close to what China is commonly estimated to be transferring in terms of crude oil per year to North Korea (3.64 million). So North Korea will hardly be fully starved of oil. Fuel has never been in abundant supply in the country.

Last but not least, smuggling routes are already well-established. Recall Ri Jong-ho’s claims that North Korea buys 300,000 tonnes of fuel products from Russia each year through brokers abroad, largely under the radar. Such transfers are not impossible, but very difficult, to track and stop. Both Russia and China can claim with some truth that they cannot control all sanctions breaches by entities within its borders, particularly enterprises who aren’t all too law-abiding in normal times. Particularly given the poor state of relations between the US and Russia, and the US and China, it is unlikely that either of the two countries will dedicated significant resources to fully track and prevent sanctions breaches, beyond normal procedure. Also, North Korea has been under various forms of sanctions since at least 2006, and even before that, was never an integrated part of established and open world trade. They’ve existed under harsh conditions long enough to learn and adapt their strategies.

On the other hand, North Korea is not immune to sanctions pressure. No country is. Even if smuggling and other ways of getting around sanctions can compensate for some of the losses, transaction costs likely increase. In other words, those who still choose to sell items like fuel to North Korea now have space to demand a higher mark-up for the additional risk. There are also presumably added transaction costs liquefying coal to generate oil.

The government has the resources and the know-how to largely get what they need, but North Korean businesses at the mid- or lower levels will find it much more difficult to keep up with the added costs and effort needed. This is has been true for each sanctions round through this year and last.

Ordinary North Koreans have been impacted by sanctions for long — this did not start with the sanctions that target goods such as oil and fuel. The opportunity cost of what could have been without them was still present. Of course, one can reasonably argue that the fault lies with the regime, for continuing its development of nuclear weapons and missiles, and not with the international community. But that sanctions would somehow not effect North Korean society while hitting against the regime seems implausible.

Lastly, we can note that both exchange rates and rice prices on North Korean markets have decreased over the past few weeks. There may be additional stress present among some spheres of society, but it seems like no major sense of crisis is at hand.

 

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