North Korean Economy Watch

Writing in today’s Asia Times, Dr. Leonid Petrov analyses the complexity of Russia, Rok, DPRK, and Chinese relations:

Russia and North Korea:

Territorial claims, in one form or another, involve almost all countries adjacent in this region with the exception of Russia and Korea. The Joint Russian Federation-DPRK Commission for the Demarcation of State Borders has recently completed its work by documenting and marking the 17-kilometer frontier. This strip of uninhabited and swampy land in the mouth of the Tumannaya (Tuman-gang) River plays an exceptionally important geopolitical role. It not only provides the two countries with land access to each other, but also prevents Chinese access to the East Sea (Sea of Japan).

China and North Korea: 

Here, some 50km north of the small port that forms the core of North’s Rajin-Seonbong Special Economic Zone, the interests of Russia and China are now at stake. Russia is rapidly repairing the railroad track, and China (in a similarly speedy manner) is constructing a new automobile highway, both leading from their respective borders to the port of Rajin. Russia, investing at least 1.75 billion rubles (US$72 million) into this project, seeks to strongly connect Rajin (and the rest of northern Korea) to its Trans-Siberian Railroad. China, in turn, hopes to divert the growing cargo traffic to its own territory, offering the efficient network of railroads for delivery of South Korean and Japanese goods to Central Asian and European markets. What position will the government of North Korea take in this clash of ambitions?

Russia and South Korea (energy and trade):

In 2007, the volume of the export of “black gold” from Russia to South Korea reached 38.13 million barrels (2.7 times more than in the previous year). The relative proximity of the Russian oil and gas fields is an attractive factor for Korean companies who actively search for alternatives to Middle East oil suppliers. This year South Korea will for the first time start importing natural gas from Russia. The expected volume of delivery during 2008 is 1.5 million tons (or 5.1% of South Korea’s annual demand).

and

Trade relations between Russia and Korea are steadily growing. According to customs statistics, last year Russia recorded the sharpest increase of South Korean imports (56.2% more than in 2006). Due to the inflow of “petro-dollars” the new class of nouveaux riches in Russia began actively buying Korean automobiles, cell phones, television sets and LCD monitors. South Korea exported to Russia goods worth US$8.1 billion (including $3.296 billion of automobiles, $859 million of mobile phone equipment, motor vehicles and spare parts worth $659 million). As for trade with North Korea, in 2006 Russia occupied third place after China and South Korea and absorbed 9% of the total $3.18 billion spent by the North on imports.

More on Russia/South Korea energy talk here. 

The whole article deserves reading here:
Russia lays new tracks in Korean ties
Asia Times
Leonid Petrov
3/5/2008

Ecerpt from the Korea Times
Jung Sung-ki
2/5/2008

The U.S. government is preparing to ship a second batch of 54,000 tons of fuel to North Korea this month, a U.S.-funded radio station reported Tuesday.

Radio Free Asia (RFA) said the U.S. State Department was scheduled to report the shipment plan to Congress in the coming days.

Under a multinational nuclear deal reached in February last year, South Korea, the United States, China and Russia promised to provide 50,000 tons of oil in turn to the poverty-stricken North. Washington sent the first batch of 46,000 tons of fuel to the North last October, while other nations have fulfilled their pledges.

Japan, another participant at the six-party talks, refused to participate in the aid plan due to a dispute with the North over Japanese citizens kidnapped by North Korean agents in the past.

Daily NK
Jung Kwon Ho
12/12/2007

A source in North Korea informed the Daily NK on the 11th that there was a train explosion incident in Hyangsan, North Pyongan on November 12th that left 8 passengers dead.

The source said that “The train, traveling between Pyongyang and Manpo, was carrying a shipment of butane gas tanks when it suddenly burst into flames. It is speculated that the explosion resulted from a cigarette that was lit in the vicinity of a gas leak coming from the tanks, however this has yet to be confirmed.”

People use butane gas for lighters in North Korea and can refuel lighters at street stalls everywhere.

The source relayed that the Rail Safety Agents are undergoing interrogation, suspected of taking bribes in return for allowing traders to load butane gas tanks on the train. The wounded passengers were taken to the People’s Hospital of Hyangsan for treatment of their injuries.

According to the source this is the second serious explosion since last July. The first occurred at the “January 20 Munitions Factory” located in Eundeuk, North Hamkyung Province. Resulting from the ignition of large stores of gunpowder, it produced mass casualties.

The January 20 Munitions Factory manufactures trench mortars, cannon balls, anti-tank guided missiles and bombs for aircrafts.

The source reported that around 50 workers having their lunch died in the factory and around 100 workers were wounded. However, the numbers were relatively small considering that most of the workers had left the factory on their lunch hour.

Party authorities in Eundeuk considered this incident to have been the work of spies and started educating workers on anti-socialist activity. However, the explosion was later found to have been caused by an electrical fault.

Yonhap
10/28/2007

GS Caltex Co., South Korea’s second-biggest oil refiner, said Sunday it is set to supply 21,000 tons of heavy oil to North Korea as part of a nuclear disarmament agreement.

The oil shipment will be sent later Sunday via the port of Yeosu, a port city about 455 kilometers south of Seoul, to arrive at the North Korean ports of Songlim and Sunbong.

GS Caltex and European oil trading company Vitol have recently won a tender issued by the U.S. Agency for International Development to supply a combined 50,000 tons of heavy oil to the North as part of the disarmament-for-aid deal.

BBC
10/28/2007

North Korea has been forced to ground a fleet of Soviet-era military planes because of the high oil price, South Korea’s Yonhap news agency reported.

Fuel is being diverted for other training flights, Yonhap quoted a military source as saying.

The Antonov An-2 biplanes – of which North Korea’s air force is thought to have about 300 – are able to drop special forces behind enemy lines.

The planes, which can cruise below radar, carry some 12 soldiers.

North Korea’s impoverished economy has suffered from energy shortages for years, and rising oil prices have made the situation worse.

Low speed

The Antonov, designed and built in the Soviet Union, first flew in 1947, and is still used by a number of military and civilian operators around the world.

The plane is useful in special forces operations because of its extremely low minimum speed – it can fly as slowly as 48km/h (30mph) without stalling, according to aviation experts.

North Korea’s air force fields hundreds of aircraft, but the vast majority are ageing Soviet models – such as the MiG 21 fighter – or Chinese copies outclassed by more modern aircraft fielded by the US, South Korea or Japan.

North and South Korea are still technically at war as a peace accord to bring an end to the 1950-53 conflict has never been signed.

Yonhap
10/5/2007

Leaders of the two Koreas discussed issues relating to oil field development and exploration at the latest summit in Pyongyang, South Korea’s top economic policymaker said Friday.

“The oil development issue was discussed at the summit, and North Korean leader Kim Jong-il expressed keen interest in the South’s oil field and gas exploration projects,” Finance Minister Kwon O-kyu said in a press briefing.

“South Korea also discussed the development of resources in North Korea, including oil fields.”

Kwon said the oil development issue may continue to be discussed at talks of the proposed Joint Committee for Inter-Korean Economic Cooperation, a committee to be formed through upgrading the status of the existing Inter-Korean Economic Cooperation Promotion Committee in an effort to accelerate bilateral economic cooperation.

Kwon played down concerns about potential financial burdens on the government from proposed inter-Korean business projects.

At the three-day summit, ended Thursday, the two Koreas agreed on a range of cross-border business projects, including creation of a special economic zone at the North’s western port city of Haeju, development of an existing port of Haeju, and expansion of an industrial complex in the North Korean border town of Kaesong.

The two also agreed to jointly repair and maintain the North’s dilapidated expressway linking Kaesong and Pyongyang, as well as the North’s railway between Kaesong and Sinuiju on the North’s western Chinese border.

The two countries also decided to construct an inter-Korean joint shipbuilding complex in Nampo, near Pyongyang.

South Korea will be able to finance the development of Haeju port through a proposed 2 trillion won (US$2.2 billion) overseas port development fund, which will be created by the nation’s port authority, Kwon said.

In a related note, Maritime Minister Kang Moo-hyun said in a meeting with reporters that about 220 billion won will be spent for the development of the port which will have eight berths, including two container berths.

The government will also able to attract international cooperation for repairing the railways since it is part of a wider international railway project of Trans-Siberian Railway, he said.

South Korean shipyards, which hold a combined 45 percent share of the global market, by investing in the envisioned shipbuilding complex will be able to maintain their competitiveness through access to North Korea’s cheap labor, Kwon said.

In case of the summit’s impact on domestic financial markets, Kwon declined to make concrete predictions, but said rising expectations of improving profitability and competitiveness by domestic businesses might be able to boost investor spirits.

Yonhap
9/13/2007

The United States is preparing to provide heavy fuel oil to North Korea as part of incentives it pledged for Pyongyang’s denuclearization, the State Department said Thursday.

Sean McCormack, the department spokesman, said the notification this week to Congress of such intent was “done with an eye towards” North Korea fulfilling its commitments.

“What it does is, it prepares us in the case we do need to fulfill some commitments” on the part of the U.S., he said.

South and North Korea, the U.S., China, Russia and Japan are members of the so-called six-party talks that in February struck an agreement to eventually dismantle Pyongyang’s nuclear weapons and programs. The communist state would receive in return political and economic benefits, including diplomatic normalization with Washington and Tokyo.

One of the economic incentives is 1 million tons of heavy fuel oil to be provided by the five parties. South Korea already delivered 50,000 tons as North Korea shut down its primary nuclear facilities, fulfilling the first phase of the denuclearization deal.

The second phase requires North Korea to disable the facilities and declare all of its nuclear stockpile.

Reuters reported Wednesday that the U.S. administration sent the legislative notification this week, saying it was prepared to give North Korea US$25 million in heavy fuel oil.

According to the document cited by Reuters, the administration deems the initial progress in the six-party talks “sufficient justification to begin preparations for a first shipment by the United States.”

McCormack said while there is preparation, the actual aid is still predicate on North Korea’s fulfillment of its promises.

“If North Korea does in fact follow through on their commitments as stated under the understanding of that phase two commitment, then the other parties have some commitments,” he said. “This would be part of the U.S. fulfilling that commitment, although it’s not done yet.”

After a bilateral nuclear deal in 1994 between Pyongyang and Washington, the U.S. had annually shipped 500,000 tons of heavy fuel oil to the North as energy assistance. The shipment was stopped after the U.S. accused North Korea in 2002 of cheating by running a secret uranium-based weapons program.

Institute for Far Easter Studies
NK Brief No. 07-8-14-1

The second inter-Korean summit meeting is coming up soon, scheduled to open on August 28 in Pyongyang, and interest is building regarding discussion on economic cooperation. It is true that the North is prioritizing political and military issues in order to shore up its government by normalizing relations with the United States. However, considering its serious economic woes, the ability of South Korea to offer a ‘gift package’ can significantly influence the success or failure of this summit.

It is not yet clear how economic cooperation will fit into the agenda, but Seoul and Pyongyang have been constantly discussing this issue, so some insight has been given. In particular, the ‘consumer’ North has been referring to domestic and international cooperation, and through Pyongyang’s requests, some clarity has been added to what goals could unfold during the upcoming meeting.

Energy Sector

The North Korean economy is saddled with severe shortages of electricity and fuel oil, causing production to slow and therefore stagnating consumption, putting the country into an ongoing vicious circle of economic depression. North Korea possesses facilities to produce 7.7 million kW of steam- and hydro-electric power, but in reality is incapable of operating these facilities at more than 30%.

The opinion that expansion of North Korea’s electrical infrastructure is necessary, not only for the North, but also for South Korea, is gaining strength. South Korean projects to develop North Korean mines and import its coal have been delayed due to a lack of electrical power. In the future, enterprises looking to set up in North Korea will also require a steady supply of electricity.

In what way the two Koreas will cooperate on energy is not yet known, but North Korea is sticking to its demand for light-water nuclear reactors. If construction were restarted on the reactors begun by the now-defunct Korean Peninsula Energy Development Organization (KEDO), North Korea could quickly have not only the energy production amount currently available, but an additional 2 million kW, as well.

North Korea’s power facilities are in a state of deterioration, but the number of facilities in the North are adequate for the current state of the economy, so a plan for the restoration of generation and transmission facilities, or the 2 million kW of electrical power offered by the South Korean government two years ago could be considered sufficient.

Natural Resource and Infrastructure Development

One other highly probable agenda item on inter-Korean economic cooperation will be development of natural resources. This is because a model in which North Korea’s relatively abundant underground natural resources are developed, and in which these resources being used by South Korean businesses, would create a ‘win-win’ result for both Seoul and Pyongyang.

According to a report given by the Korea Resources Corporation at a conference last year, North Korea possesses upward of forty different valuable minerals, including iron-ore. Analysis of these North Korean resources shows that a considerable amount of South Korea’s 40 trillion won (430 billion USD) worth of mineral imports per year could be brought in from North Korea instead.

As development projects in North Korea’s graphite mines are already underway, and the import of North Korean anthracite is being considered in order to meet quickly growing demand for charcoal in the South, cooperation in the natural resource sector appears to be one of the core points to inter-Korean economic cooperation.

As for North Korea’s railways, the heart of the country’s distribution infrastructure, completion of the section of track on the Kyungui Line between Kaesong Station and Moonsan Station, as well as the section of the East Sea Line between Mt. Kumgang Station and Jejin Station, means that the infrastructure for regular service between the two countries is now in place, although talks regarding the details of such regular service are not being held.

If regular service on these two lines between North and South Korea can be achieved, expensive transportation costs can be reduced, and of course, in the future, connection of the railway with continental rail networks such as the Trans-Siberian Rail and the Trans-China Rail would help to enable the Korean Peninsula to emerge as the hub of North East Asian distribution.

Furthermore, considering the fact that North Korea’s mining facilities and technology, as well as its ports, loading facilities, and other transportation infrastructure, are severely lacking, a plan linking development of natural resources to projects developing infrastructure also appears viable. It is also already known, to some extent, the nature of North Korean needs in its infrastructure sector, and if this upcoming summit closes successfully, it is expected that an inventory of these needs will become more concrete.

Vitalizing Kaesong Industrial Complex

The Kaesong Industrial Complex (KIC) is also an important undertaking. At the moment, a problem has arisen concerning the construction of a second KIC, but even if only the originally planned 26.4 million square-meter complex is built, the fact is that currently the first 3.3 million square-meter stage is complete, and considering that it employs North Korean labor, this is no easy feat. Companies moving into the KIC are asking that easy communication with South Korea and simplified import procedures be prioritized.

Yonhap
Byun Duk-kun
8/8/2007

North Korea wants to receive various types of assistance, including development-aimed investment, in return for disabling its key nuclear facilities under a landmark denuclearization deal signed February, but it understands and agrees that the benefits could come a bit later than its steps to disarm, a South Korean official said Wednesday.

The North’s apparent concession removes a major hurdle to completing the denuclearization process before the end of the year, as the other countries in six-nation talks on ending North Korea’s nuclear ambition long believed the communist nation would never agree to get rid of its nuclear facilities unless incentives were provided before or simultaneously.

“The North Korean side said that even if its denuclearization steps are carried out in a short amount of time, and the provision of the promised energy and economic assistance takes relatively longer than its denuclearization steps, it will understand there can be a difference of time required and will exercise flexibility based on mutual trust,” a South Korean official told reporters, requesting that he remain anonymous.

North Korea took the position at a working meeting of delegates from South Korea, the U.S., China, Japan and Russia that opened at the inter-Korean border village of Panmunjom on Tuesday for a two-day run.

The talks resumed earlier Wednesday after the North’s delegation, headed by the country’s deputy chief of mission to the United Nations in New York, Kim Myong-kil, crossed the heavily fortified border to the South Korean side of the joint security area.

The main focus of this week’s meeting was to figure out how to ship by the end of the year the 950,000 tons of heavy oil or equivalent aid promised to the impoverished North in the February accord, a timeline insisted upon by the U.S., even though the communist nation has a storage capacity of only 200,000 tons a year.

Under the February agreement, signed by the two Koreas, the U.S., Japan, China and Russia, North Korea can receive energy assistance equivalent to 950,000 tons of heavy fuel oil in exchange for disabling its nuclear facilities at Yongbyon and submitting a complete list of its nuclear programs.

South Korean delegates earlier said that the first day of talks provided an opportunity to hear what North Korea wants, and that they anticipated more “in-depth” discussions with the North on what is within reach and how far the North should move toward denuclearization to get rewards.

North Korean delegates on Tuesday said their country wants to receive the promised oil, as well as what South Korean officials call “investment-based” assistance to help rebuild its dilapidated energy industry.

Pyongyang’s demand became clearer Wednesday, according to the South Korean official who spoke on condition of anonymity.

The North Koreans said their country wants to continue receiving 50,000 tons of heavy fuel oil each month, apparently until the end of the year, and the rest in “support and equipment for repairing and maintaining the North’s energy-generating facilities,” the official said.

South Korea has provided 50,000 tons of heavy oil to the North for shutting down the Yongbyon facilities as the first phase step in the February agreement, while Beijing, the host of the six-way nuclear disarmament talks, has reportedly offered to soon begin shipping the first 50,000 tons of the promised 950,000 tons in the second phase.

Pyongyang has said it will not completely denuclearize unless it is provided with enough benefits — including nuclear power plants.

South Korean officials who attended the two-day working meeting here said the subject never came up during the course of what the chief North Korean delegate, Kim, called “very productive and serious discussions.”

Korea Herald
8/5/2007

China will begin shipping 50,000 tons of heavy fuel oil to North Korea in mid-August as part of the 950,000 tons promised in exchange for the North’s disabling of its nuclear facilities in the second phase of denuclearization agreement, informed sources here said Sunday.

The agreement, signed February 13 by the two Koreas, China, Russia, Japan and the U.S., also commits North Korea to declare all of its nuclear programs.

South Korea completed Thursday the shipment of 50,000 tons of heavy fuel oil to the North in exchange for the North shutting down its nuclear facilities in the first phase of the denuclarization agreement.

“We understand China will begin providing 50,000 tons of heavy fuel oil to the North in mid August,” a diplomatic source here said. “A working group dealing with energy and economic aid slated for Aug.7-8 in Panmunjeom will decide on detailed measures of the provision.”

The working group is one of five groups launched under the February nuclear deal. Other groups deal with denuclearization, normalization of ties between North Korea and the U.S. and Japan and the establishment of a peace regime on the Korean Peninsula to replace the current armistice that ended the 1950-53 Korean War.