North Korean Economy Watch

According to the Washington Post:

The White House is ramping up its efforts to enforce sanctions against North Korea by forming a new interagency team to coordinate U.S. actions with other nations, senior administration officials said today.

The new team will be led by former ambassador to Bolivia Philip S. Goldberg, who is slated to leave for China in the near future as the U.S seeks concerted action to stop the North Korean regime from developing nuclear weapons.

“There is a broad consensus about the need to have a focused and engaged effort to see that these sanctions are implemented … and that we’re sharing information with each other,” one official said, speaking on background.

U.S. officials described the new group as a way to focus the administration more squarely on implementation of the latest sanctions, which were approved by the United Nations in the wake of North Korea’s nuclear test last month.

The officials said they are hoping the group — with representatives from the State Department, the White House, the National Security Agency, Treasury and others — will help “shine a spotlight” on the actions of the regime.

“We wanted somebody who woke up every morning and thought about nothing but sanctions implementation,” one official said. “It’s a huge difference when you have somebody who isn’t worried about any of the other aspects of this.”

The White House also announced a renewed effort to use the authority of the U.N. resolution to take financial actions against the North Korean regime in an effort to choke off the money flowing from small arms trade and other activity.

Treasury officials have issued a public memorandum to private financial institutions reminding them of the global condemnation and other risks of doing business with the North Korean regime.

The letter warns that North Korean banks and institutions often use deceptive techniques to engage in financial transactions that could place legitimate financial firms at risk.

“Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring,” the letter states.

One senior official said the U.S. is confident that the financial sanctions will over time help to further isolate North Korea and pressure its leaders to abandon its nuclear program.

“It’s going to take time to have a bite,” he conceded. “But we’re trying to get out of the box quickly.”

The Bush administration also had a sustained effort to implement United Nations sanctions after North Korea first tested a nuclear weapon in 2006.

The Counterproliferation Directorate of the White House National Security Council coordinated the effort, while the State Department and Treasury also co-chaired an interagency effort to examine specific cases that eventually worked their way up the chain for approval.

A team of senior officials, led by the undersecretary of State for arms control, traveled to Asia to work closely with allies. But the effort was dropped after Bush shifted course and decided to pursue diplomacy with North Korea.

Their first stops: China then Malaysia.

Citations:
New North Korea Sanctions Team Formed
Washington Post
Michael D. Shear and Glenn Kessler
6/26/2009

U.S. North Korea sanctions team to visit Malaysia
Reuters UK
7/2/2009

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-6-16-1
6/16/2009

The amount of inter-Korean exchange has shrunk considerably this year, as tensions between the North and South continue to mount. According to the ROK Customs Administration’s inter-Korean trade office, cross-border transactions between January and April of this year fell 24.8 percent from 2008; trade amounted to 426.35 million USD, down from 566.92 million USD during the same period last year. South Korean imports were down only 9.5 percent, at 260.19 million USD, but exports to the North amounted to a mere 59.4 percent of the amount sent last year, recording 166.17 million USD. 54.9 percent of these goods (by value) traveled across the border by passing through Dorasan Station; 32.8 percent went through Incheon Harbor; 6.4 percent through Busan Harbor, 1.6 percent through Sokcho Harbor; and 1.1 percent passing through Goseong.

In April, with the North’s launch of a long-range missile in spite of the opposition of the international community, inter-Korean trade dropped to 69.2 percent of last year’s level, falling to 105.53 million USD. In fact, inter-Korean trade fell relative to the same month in the previous year eight months straight, beginning in September of last year.

With last month’s sudden nuclear test and South Korea’s subsequent joining of PSI, inter-Korean trade is expected to continue to wither in the latter half of the year. The amount of trade seen from January to April of this year is equivalent to 23.4 percent of the total trade for last year (1.82078 billion USD), and even if the current level of trade is maintained for the rest of the year, it is expected to amount to a mere 70 percent of what was traded in 2008.

Inter-Korean trade had previously been recording significant growth; in 1999, during Kim Dae Jung’s ‘People’s Government’, inter-Korean trade was worth only 328.65 million USD, but began to climb, growing more than five-fold by 2008, topping out at 1.82078 billion USD last year. However, after the launch of the current government, the amount of goods imported by the North from the South began to fall; exports to North Korea in 2008 were worth 883.41 USD, 145.15 million less than in 2007.

North Korean companies involved in processing-on-demand, agriculture and fisheries work have been part of Pyongyang’s trade ambitions, and these companies have also been hurt by the freeze in inter-Korean relations, with dozens of businesses facing closure, and many more severely hit by the North’s shrinking trade.

UPDATE: From Timeout (Vietnamese English publication):

The largest collection of paintings from the Democratic People’s Republic of Korea (North Korea) ever shown in Southeast Asia was put on display at the Nha Trang Sea festival last week.

The paintings were produced by more than two dozen artists with recognized artists – so-called Merited artists – and emerging talents all contributing.

The exhibition included a series of beautiful paintings in a variety of styles and materials – prints, watercolour, oil, pencil drawings and “jewel-powdered paintings”, a Korean specialty art.
 
With little exposure to the outside world, North Korean art is considered very pure. North Korean artists are loyal to their country and adhere to the country’s political philosophy.

In the absence of influences by contemporary art trends from the rest of the world the painters have, in a unique manner, developed their own techniques and the use of colors in an original style.

The displayed paintings include, among other things, a variety of beautiful sceneries of nature and of North Korean daily life. These pieces of artwork give a rare insight into the lives and thoughts of the people of this country.

Some of the most impressive pieces are the products of the veteran artist Han Gyong Bo and the emerging artist Han Song Il, a precocious 24-year old who has won many top prizes at national and international exhibitions.

Han Gyong  Bo is famous for his watercolour paintings of wistful and fanciful landscapes created in strong, deep and bold brush strokes. Meanwhile Han Song Il bewitches viewers with his romantic yearnings and smooth style. With refined and flowery strokes, Il’s paintings express the beauties of his country’s natural landscapes.

The painting collection belongs to Swiss businessman Felix Abt and his Hanoi-born wife Doan Lan Huong, who lived and worked in Pyongyang for seven years, where they got to know and love North Korean arts.

At present Abt and his family mostly stay in Nha Trang, Vietnam where they manage their own website Pyongyang-painters.com, one of the very few on-line galleries outside North Korea permitted to sell art and to represent the country’s leading artists as well as new talents.

“Much to our surprise we noticed that (artistic) talents are identified very early in a person’s life and systematically fostered thereafter. As a consequence a high number end up as painters with extraordinary skills. Unfortunately this is largely ignored by the outside world,” says Felix Abt.

Together with the Korea Paekho Fine Arts Company in Pyongyang, Felix and his wife prepared last year the systematic launch and promotion of North Korean paintings on the world wide web and through other marketing measures.

Famous painters from North Korea as well as promising new talents, including young female painters, are now being introduced to a wider public. Abt’s website has been up and running since the beginning of this year and orders are coming from all over the world.

During his time in Pyongyang, Abt and his wife Huong had the opportunity to get acquainted not only with the country’s institutions involved in fine arts but also with numerous artists across the country.

“We learnt that the Koreans were not merely transmitting Chinese culture but also assimilating and adapting it and creating a unique culture of their own while also influencing neighbouring cultures for thousands of years,” says Abt.

But Abt knows that a good website alone is not sufficient to introduce North Korean paintings to a larger public. The paintings need to be physically closer to potential buyers.

“The Sea Festival in Nha Trang, where both Vietnamese and foreigners spend holidays and may want to shop in a relaxed atmosphere was a good opportunity for us to ‘test the market’ in Vietnam,” says Abt.

“In addition, since Nha Trang is a beautiful place with a highly promising potential for tourism, we intend to operate this business out of Nha Trang for both the domestic and international arts markets.”

Talking about their future galleries in Hanoi and Ho Chi Minh City, Abt shares that making beautiful North Korean paintings available in these cities is a good idea since there are certainly a sufficient number of people in both cities who would love to have such paintings and can also afford them.

But instead of setting up their own galleries they would prefer to build up a close partnership with a couple of existing galleries in these cities that meet their expectations. Moreover, “this business model which we start in Vietnam could then be applied to other major cities in the region such as Singapore, Kuala Lumpur and Bangkok.”

Read the Press Release below:

(more…)

Yale Global
Bertil Linter
6/11/2009

BANGKOK: The global economic meltdown has claimed an unexpected victim: North Korea’s chain of restaurants in Southeast Asia. Over the past few months, most of them have been closed down “due to the current economic situation,” as an Asian diplomat in the Thai capital Bangkok put it. This could mean that Bureau 39, the international money-making arm of the ruling North Korean Workers’ Party – which runs the restaurants and a host of other, more clandestine front companies in the region – is acutely short of funds. Even if those enterprises were set up to launder money, operational costs and a healthy cash-flow are still vital for their survival. And, as for the restaurants, their main customers were South Korean tourists looking for a somewhat rare, comfort food from the isolated North of the country. The waitresses, all of them carefully selected young, North Korean women dressed in traditional Korean clothing, also entertained the guests with music and dance.

But thanks to the global economic crisis, not only has the tourist traffic from South Korea slowed, the fall in the value of won has also reduced their buying power. The South Korean won plummeted to 1,506 to the US dollar in February, down from 942 in January 2008. No detailed statistics are available, but South Korean arrivals in Thailand – which is also the gateway to neighboring Cambodia and Laos – are down by at least 25 percent.

Though staunchly socialist at home, the North Korean government has been quite successful in running capitalist enterprises abroad, ensuring a steady flow of foreign currency to the coffers in Pyongyang. North Korea runs trading companies in Thailand, Hong Kong, Macau and Cambodia, which export North Korean goods – mostly clothing, plastics and minerals such as copper – to the region. At the same time, they import various kinds of foodstuffs, light machinery, electronic goods, and, in the past, dual-purpose chemicals, which have civilian as well as military applications. Those companies were – and still are – run by the powerful Daesong group of companies, the overt arm of the more secretive Bureau 39.

North Korea embarked on its capitalist ventures when, in the late 1980s and early 1990s, the country was hit by a severe crisis caused by the disruption in trading ties with former communist allies. More devastatingly, both the former Soviet Union in 1990 and China in 1993 began to demand that North Korea pay standard international prices for goods, and that too in hard currency rather than with barter goods. According to a Bangkok-based Western diplomat who follows development in North Korea, the country’s embassies abroad were mobilized to raise badly needed foreign exchange. “How they raised money is immaterial,” the diplomat says. “It can be done by legal or illegal means. And it’s often done by abusing diplomatic privilege.”

North Korea’s two main front companies in Thailand, Star Bravo and Kosun Import-Export, are still in operation. In the early 2000s, Thailand actually emerged as North Korea’s third largest foreign trading partner after China and South Korea.

Bangkok developed as a center for such commercial activities and Western intelligence officers based there became aware of the import and sale of luxury cars, liquor and cigarettes, which were brought into the country duty-free by North Korean diplomats. In a more novel enterprise, the North Koreans in Bangkok were reported to be buying second-hand mobile phones – and sending them in diplomatic pouches to Bangladesh, where they were resold to customers who could not afford new ones. In early 2001, high-quality fake US$100 notes also turned up in Bangkok and the police said at the time that the North Korean embassy was responsible as some of its diplomats were caught trying to deposit the forgeries in local banks. The North Korean diplomats were warned not to try it again.

The restaurants were used to earn additional money for the government in Pyongyang – at the same time, they were suspected of laundering proceeds from North Korea’s more unsavory commercial activities. Restaurants and other cash-intensive enterprises are commonly used as conduits for wads of bills, which banks otherwise would not accept as deposits.

For years, there have been various North Korean-themed restaurants in Beijing, Shanghai and other Chinese cities. But the first in Southeast Asia opened only in 2002 in the Cambodian town of Siem Reap. It became an instant success – especially with the thousands of South Korean tourists who flocked to see the ancient ruins of Angkor Wat. It was so successful that Pyongyang decided to open a second venue in the capital Phnom Penh in December 2003. A fairly large restaurant in the capital’s Boulevard Monivong, which offered indifferent Korean staple kimchi and other dishes and live entertainment by North Korean waitresses, closed earlier this year for lack of business.

In 2006, yet another Pyongyang Restaurant – as the eateries were called – opened for business in Bangkok. It was housed in an impressive, purpose-built structure down a side alley in the city’s gritty Pattanakarn suburb, far away from areas usually frequented by Western visitors but close to the North Korean embassy and the offices of its front companies in the Thai capital. This was followed by an even grander restaurant in Thailand’s most popular beach resort, Pattaya, which was also housed in a separate building with a big parking lot outside for tour buses. A much smaller Pyongyang restaurant opened in Laos’s sleepy capital Vientiane, but that one became popular not with South Korean tourists, but with Chinese guest workers and technicians. The Vientiane restaurant may be the only North Korean eatery that is still in operation.

After years of watching North Korea’s counterfeiting and smuggling operations, the United States began tightening the screws on Pyongyang’s finances in September 2005. This occurred after Banco Delta Asia, a local bank in Macau, was designated as a “financial institution of primary money-laundering concern.” The bank almost collapsed, and North Korea’s assets were frozen. The money was eventually released as part of an incentive for North Korea’s concession in the Six-Party talks and returned to North Korea via a bank in the Russian Far East. But, coupled with UN sanctions, the damage to North Korea’s overseas financial network was done – including the ability of Pyongyang’s many overseas front companies to operate freely. For example, the two-way trade between Thailand and North Korea peaked at US$343 million in 2006 – but then began to decline. It was down to US$100 million in 2007, and US$70.8 million in 2008.

Now with North Korea conducting a second nuclear test and firing off missiles, Washington has raised the possibility of the re-listing of North Korea as a state that supports terrorism. If that were to happen, many private companies would become hesitant to deal with Pyongyang and its enterprises for fear of being blacklisted by the US Treasury.

With its various money-making enterprises coming unstuck, Pyongyang is increasingly under pressure. The worldwide financial crisis has already put North Korea in a tight corner. There was never anything to suggest that the money earned by North Korea’s economic ventures abroad were to be used for social development at home, or to be spent on basic necessities such as putting food on the tables of the country’s undernourished people. Now, there won’t even be food for sale to South Korean tourists in the region.

UPDATE: IFES has contacted us with an update to this report:

“North Korea exports between 2-3 million tons of coal, collecting approximately 200 million USD.”

Original Post:
Institute for Far Eastern Studies (IFES)
NK Brief No. 09-6-9-1
6/9/2009   

The North Korean military, which has recently taken a hard-line position internationally with rocket launches, a nuclear test and inter-continental ballistic missile (ICBM) launch preparation, appears to be strengthening its position domestically, as well. It has reportedly taken charge of coal exports, previously the responsibility of the Cabinet, and other key economic interests.

According to sources inside North Korea, authority to export anthracite, the North’s most valuable export item, was transferred from a trading company under the control of the Cabinet to a military trading company earlier this year. North Korea exports between 200-300 tons of coal each year, collecting approximately two billion USD in foreign currency. Previously, this was shared among branches of the government, with the military, the Korean Workers’ Party and the Cabinet all similar export quotas.

One source stated, “Recently, China’s trade minister signed a contract for 60,000 tons of coal from a military-run trading company, and delivered one million USD-worth of corn as payment,” noting, “previously, North Korea’s trade partner [with China] was the Cabinet-controlled trade company.” The same source went on to note that it was “exceptional that as North Korea suffers from foreign capital shortages, it demands payment not in cash, but in corn…it looks like it is measure for military use.”

Other sources reported that, as of this year, the military has also taken control of the Bukchang Thermoelectric Power Plant, the country’s largest steam-powered electrical station. The Bukchang plant, built with Soviet supplies in 1968, can produce up to 2 million kW of electricity. It was formerly operated by the Ministry of Electric Power Industry, which is under the control of the Cabinet, but at the beginning of year, some authorities were purged on charges of bribe-taking and providing power designated for government facilities to foreign capital enterprises and other businesses. Since then, the military has run the plant.

The increased number of economic assets in control of the military reflects the military’s recently-strengthened position within the regime. The North Korean economy can be divided into several sectors: Kim Jong Il’s private fund, managed by Party operations; the military-industrial ‘second economy’; and the official economy, under the control of the Cabinet. The military’s increasing control over the official economy appears to be a move to completely implement ‘Military-first Politics.’

UPDATE: In response to the resolution, the DPRK has made some serious threats.  According to the Telegraph:

A commentary in the North’s state-run Rodong Sinmun newspaper claimed the US had 1,000 nuclear weapons in South Korea ready to strike. 

Meanwhile, the Tongbil Sinbo newspaper said that North Korea is “completely within the range of US nuclear attack and the Korean peninsula is becoming an area where the chances of nuclear war are the highest in the world.” 

Over the weekend, North Korea angrily responded to fresh United Nations sanctions by threatening to build as many nuclear weapons as possible. 

Until now, it said, it had only reprocessed one-third of its spent fuel rods into weapons-grade plutonium. Analysts believe the rogue state could end up with enough plutonium to make eight to nine bombs. 

The rogue state also claimed to have a uranium-enrichment programme, the first time it has admitted to one. The claim is alarming, said Professor Yang Moo-Jin, of Seoul’s University of North Korean Studies. 

“The North has abundant natural uranium of good quality, which, if combined with technology and facilities, would result in a great nuclear arsenal,” he said.  

UPDATE:  The United Naitons Security Council (UNSC) has passed a new resolution in response to the DPRK’s second nuclear test.  Althought the text of the resolution has been posted to the UNSC web page (here), below are the economically significant excerpts (taken from Reuters).  The resolution…

1. Calls upon all States to inspect, in accordance with their national authorities and legislation, and consistent with international law, all cargo to and from the DPRK, in their territory, including seaports and airports, if the State concerned has information that provides reasonable grounds to believe the cargo contains items the supply, sale, transfer, or export of which is prohibited;

2. Calls upon all Member States to inspect vessels, with the consent of the flag State, on the high seas, if they have information that provides reasonable grounds to believe that the cargo of such vessels contains items the supply, sale, transfer, or export of which is prohibited;

3. Calls upon all States to cooperate with inspections pursuant to paragraphs 11 and 12, and, if the flag State does not consent to inspection on the high seas, decides that the flag State shall direct the vessel to proceed to an appropriate and convenient port for the required inspection by the local authorities pursuant to paragraph 11;

4. Decides that Member States shall prohibit the provision by their nationals or from their territory of bunkering services, such as provision of fuel or supplies, or other servicing of vessels, to DPRK vessels if they have information that provides reasonable grounds to believe they are carrying items the supply, sale, transfer, or export of which is prohibited … unless provision of such services is necessary for humanitarian purposes;

5. Calls upon Member States … to prevent the provision of financial services … that could contribute to the DPRK’s nuclear-related, ballistic missile-related, or other weapons of mass destruction-related programs or activities;

6. Calls upon all Member States and international financial and credit institutions not to enter into new commitments for grants, financial assistance, or concessional loans to the DPRK, except for humanitarian and developmental purposes;

7. Calls upon all Member States not to provide public financial support for trade with the DPRK … where such financial support could contribute to the DPRK’s nuclear-related or ballistic missile-related or other WMD-related programs or activities;

In the Washington Post, Marcus Noland asserts that this sanctions plan is “clever”. Instead of a “crime and punishment” approach to North Korea, he said, the proposed sanctions are “basically defensive,” relying on interdiction of ships and global financial restrictions. He also went on to say, “The North Koreans will be down to whatever China gives them and whatever they can get from their subterranean customers in the Middle East.”

The Washington Post also states:

But there is little chance that these tougher sanctions will limit the ability of Kim Jong Il’s government to profit from more conventional overseas trade, said Lim Eul-chul, a researcher who specializes in North Korean trade for the Seoul-based Institute for Far Eastern Studies.

“The sanctions will not have much effect on what North Korea trades with China,” he said.

North Korea consistently fails to grow enough food to feed its 23 million people, and its state-controlled economy is moribund, but it does have mineral resources that are coveted by many industrialized countries.

The estimated value of its reserves — including coal, iron ore, zinc, uranium and the world’s largest known deposit of magnesite, which is essential for making lightweight metal for airplanes and electronics — is more than $2 trillion, according to the Korea Chamber of Commerce and Industry.

The manufacturing boom in neighboring China has dovetailed with North Korea’s acute need for hard currency and has accelerated Chinese access to the North’s resources, according to Lim, Chinese mining experts and South Korean government officials. There is, however, a significant new wrinkle in the North’s trade with China, Lim said. “The military is taking control of export sales,” he said, citing informants inside North Korea.

Other branches of the North Korean government, such as the Workers’ Party and the cabinet, have been forced to relinquish their interest in these sales to the military, Lim said. The military has grabbed greater control of export revenue, he said, as it has provoked the outside world with missile launches and the nuclear test.

Based on the recent growth of North Korean-Chinese trade, Lim said he does not believe that China wants to “take any strong measures to crush the North Korean economy.”

An article in the New York Times expresses sckepticism that these new sanctions will deter North Korea’s nuclear ambitions:

This time, in addition to financial sanctions, the proposed Security Council resolution calls for a tighter arms embargo, possible interdiction of North Korean vessels. But most analysts say that none of the threats are large enough to stop a regime that sees nuclear weapons as the key to its survival, and that has endured decades of economic sanctions and hardships, including even starvation, rather than capitulate to outside pressure.

“These are people who didn’t flinch even when 2 million of their own people died of hunger,” said Lee Ji-sue, a North Korea specialist at Myongji University.

And that is assuming that the sanctions are fully enforced. While many of these same measures have been included in previous U.N. resolutions, nations like China and Russia were reluctant to enforce them to avoid antagonizing the North.

Critics and proponents alike agree that the linchpin in making any sanctions work is China, North Korea’s primary aid and trade partner. China shares an 850-mile border with North Korea, and its $2 billion annual trade with the North accounts for over 40 percent of Pyongyang’s entire external trade, according to South Korean government estimates. North Korea’s trade with China expanded by 23 percent just last year, the South Korean government said.

Both United States and South Korean officials fear that although Beijing was disappointed by the North’s continued tests, it remains reluctant to push too hard. They say China fears causing a collapse by the Pyongyang regime that could flood it with refugees and create a newly unified, pro-American Korea on its border.

Finally, The Economist weighs in with some critical analysis:

It is hard to envision that the new sanctions will bring North Korea back to the negotiating table. With few exceptions, previous rounds of economic sanctions have had little impact. In the present case, unanimity was achieved at the price of watering down the provisions that require other countries to search North Korean vessels. The final compromise—that North Korean ships are required to undergo searches but cannot be forced to do so—is hardly a recipe for effective enforcement.

As in the past, China—and Russia, to a lesser extent—may have supported the new sanctions primarily to send North Korea a message of unified international condemnation. But North Korea will hardly infer from the passage of a murkily worded, patchily enforced resolution that it has exhausted its ability to wring concessions from its neighbours and exploit their differences. Moreover, even if the new measures are consistently enforced, it’s not clear that punishments designed to put economic and diplomatic pressure on North Korea will change the regime’s behaviour. North Korea is already one of the most isolated and desperately poor countries in the world.

Divergent interests
A lasting solution to the North Korea problem will require more than just agreeing a common approach and collectively enforcing sanctions. The main problem is not just North Korea’s unpredictability, which is, after all, predictable. It is that there are also major differences between the various interested powers in terms of how they assess the threat and what they view as the optimal outcome.

Although China’s influence over North Korea is often overstated, China alone has the economic leverage to force the regime back to the bargaining table. China’s dilemma, however, is that there may be a fine line between the amount of pressure sufficient to force the stubborn regime to make concessions and the amount that would precipitate its collapse. The fall of the current regime would almost certainly result in a massive humanitarian crisis (more accurately, China would suddenly bear the brunt of the crisis already wracking its chronically famine-stricken neighbour). For China (and Russia) the collapse of North Korea would also be a big strategic setback. The bonds of communist solidarity may have faded since Mao Zedong sent hundreds of thousands of soldiers to fight US-led UN forces during the Korean war—but North Korea remains a buffer state, the loss of which could result in a united, US-allied Korean peninsula. 

Read the full articles below:
Key excerpts from U.N. North Korea resolution
Reuters
Claudia Parsons
6/12/2009

Value of N. Korea Sanctions Disputed
Washington Post
Blaine Harden
6/12/2009

Will sanctions ever work on North Korea?
New York Times
Martin Fackler and Choe Sang-hun
6/12/2009

Punishing North Korea
The Economist
6/17/2009

ORIGINAL POST: The DPRK has historically faced few substantive repercussions from its missile and nuclear tests due to roles that Russia and China occupy both in the UN Security Council and in their status as North Korea’s neighbors, trading partners, and investors. Russia is developing the DPRK’s Rason Port and seeks to build a natural gas pipeline through the DPRK to South Korea.  China is the DPRK’s largest trading partner. And of course, hundreds (maybe thousands?) of  North Koreans work in both China and Russia to earn foreign currency for their government.

So how have China and Russia responded to the most recent nuclear test and missile launches? China has issued some tough language condeming the test and supposedly canceled some cultural exchanges, and  Russian President Medviev has also expressed concern in the

Western business media:

We have always had good relations with the North Korean leadership. But what has happened raises great alarm and concern. I have had quite a number of telephone talks with the Prime Minister of Japan and the President of South Korea. We need to think about some measures to deter those programs that are being conducted. We hope the North Korean leadership will get back to the negotiating table, because there is no other solution to this problem. The world is so tiny—as we see from the economic problems common to all of us. But indeed, WMD development or [nuclear] proliferation is a danger that is even higher than that. I’m prepared to discuss this matter in more detail during our meeting with President Obama in Moscow in early July. And we’re going to discuss this in other forums also.

As the UN Security Council debates a resolution in response to the DPRK’s recent nuclear test and missile launches, China appears to be the DPRK’s strongest partner.  According to the New York Times:

Negotiations over toughening sanctions against North Korea in the wake of its underground nuclear test last month have stalled over the issue of inspecting cargo ships on the high seas, according to two Security Council diplomats. China has yet to sign off on the idea that North Korean vessels could be stopped and searched, the diplomats said. Ambassadors from the five permanent members of the Security Council — the United States, Russia, China, Britain and France — plus Japan and South Korea, locked in intensive bargaining sessions all week, have agreed on other issues, including widening an arms embargo and financial restrictions, the diplomats said. North Korea has declared cargo inspections an act of war.

So it looks like Russia is “ok” with searching the DPRK’s cargo ships?  That is surprising.

Aside from inspecting cargo ships, the US is pushing for the UNSC resolution to restrict the DPRK from the global financial system (a la Banco Delta Asia).  According to the Washington Post:

State Department spokesman P.J. Crowley confirmed yesterday that the United States was considering targeting North Korea’s access to financial markets. A draft of the resolution urges U.N. member states to cut loans, financial assistance and grants to North Korea and its suppliers for programs linked to its military program. The draft also expands an asset freeze and travel ban.

The Bush administration applied similar financial pressure in 2005, infuriating Pyongyang. Crowley noted that, during a tour of Asian capitals this week, Deputy Secretary of State James B. Steinberg was accompanied by Treasury Undersecretary Stuart A. Levey, the architect of the Bush-era sanctions.

“Obviously, Stuart Levey’s presence on this team would indicate that we’re . . . looking at other ways that we can bilaterally put pressure on North Korea to return to the negotiating process,” Crowley said.

Additionally, the Obama administration has signaled that it might take the advice of John Bolton, former President Bush’s UN ambassador.  According to the Washington Post:

The United States will consider reinstating North Korea to a list of state sponsors of terrorism, Secretary of State Hillary Rodham Clinton said in an interview broadcast yesterday as the Obama administration looks for ways to ratchet up pressure on Pyongyang after recent nuclear and missile tests.

 “We’re going to look at it,” Clinton said on ABC’s “This Week” when asked about a letter last week from Republican senators demanding that North Korea be put back on the list. “There’s a process for it. Obviously we would want to see recent evidence of their support for international terrorism.” 

Secretary of State Clinton’s comment “we would want to see more evidence of their support for international terrorism” refers to a legal requirement for any nation to be added to the list.

Here is the press release on the nuclear test by the US Director of National Intelligence.

Read more here:
Medvedev’s Strong Words for North Korea
Business Week
Maria Bartiromo
6/3/2009

Talks on North Korea Sanctions Stall Over Inspections
New York Times
Neil MacFarquhar
6/5/2009

U.S. Pushes U.N. Draft on N. Korea
Washington Post
Colum Lynch and Glenn Kessler
6/6/2009

U.S. to Weigh Returning North Korea to Terror List
Washington Post
Peter Finn
6/8/2009

U.S. Weighs Intercepting North Korean Shipments
New York Times
David E. Sanger
7/7/2009

Newsweek has an interesting article which makes the case that the DPRK economy is not as bad as the public tends to think.  According to the article:

…North Korea isn’t broke—and its economy has been moving away from collapse in recent years-. The Hermit Kingdom may not be getting rich—the CIA estimates its GDP at roughly $40 billion, ranking 96th in the world. But it’s not failing either, and for the past decade, its economy has grown at an average rate of about 1.5 percent a year, according to South Korean statistics. While Seoul estimates that the North’s GDP shrank by 2.3 percent last year, some analysts say it actually expanded, arguing that South Korea’s recent figures on the North are deflated for political purposes.

To understand how the Dear Leader has managed this, you must first drop a few of the myths surrounding his country. First, the North Koreans haven’t been living in caves for the past two decades, nor is their economy de-industrializing, as is sometimes reported. Instead, with help from Beijing, Pyongyang has revamped its outdated infrastructure in recent years and repaired the mining facilities that were battered by massive floods during the mid-’90s. It now aims to shift from recovery to growth, with a focus on steel production, mining and light-industrial manufacturing.

Second, the North doesn’t have to rely on the black market to support itself. True, Pyongyang has sold missiles to Iran, Syria and Pakistan, and annual revenue from such exports is roughly $100 million, but analysts say that other illicit activities like drug trafficking and counterfeiting add very little to that sum. According to a former U.S. diplomat in East Asia who asked not to be named discussing sensitive intelligence, during the Bush years Washington investigated the oft-heard counterfeiting accusations, and found that the notes in question had actually been produced privately by former Chinese military officials, in China. “The Treasury Department couldn’t find a single shred of hard evidence pointing to North Korean production of counterfeit money,” the American says.

The biggest myth is that North Korea remains isolated. Despite supposedly comprehensive sanctions, Pyongyang today has diplomatic and commercial relations with more than 150 countries, including most European Union members. North Korea trades its abundant gold reserves—estimated at 1,000 to 2,000 tons—in cities like London, Zurich and Hong Kong, and buys and sells shares on the New York Stock Exchange via a legitimate London-based brokerage firm it essentially owns. While there are no figures on the volume of such transactions, the former U.S. diplomat says that such activities are “a substantial source of hard currency for North Korea.” In recent years, European firms have also begun eyeing investment opportunities there; In 2004, the London-based energy firm Aminex signed a 20-year deal with Pyongyang for exclusive rights to explore on- and offshore oil-and-gas deposits. Other companies are looking for ways to exploit the North’s cheap labor supply, and while most of these deals have yet to take off for technical and political reasons, ties to the outside world are expanding. In 2008, the country’s overall trade rose 30 percent from the previous year, reaching a record $3.8 billion, including imports of $2.7 billion, according to Seoul’s Korea Trade-Investment Promotion Agency.

North Korea has proved adept at avoiding restrictions: when Tokyo slapped it with sanctions five years ago, Pyongyang simply reshuffled its deals, turning to the BRIC economies as well as South Korea and Singapore. Meanwhile, China now accounts for nearly three quarters of North Korea’s total trade, sending it crude oil, petroleum and manufactured goods in exchange for coal, steel and rare metals like tungsten and magnesite. The North’s natural resources have become a major growth engine: the Musan mine in the country’s northwest is now said to be one of the largest iron-ore fields in Asia, and could eventually yield 10 million tons of ore a year.

Finally, there’s the southern connection. Despite deteriorating relations between Seoul and Pyongyang, factories at the joint Kaesong Industrial Complex are still operating at full gear, earning the North about $35 million annually—enough for eight or nine No-dong missiles. And that figure was projected (before the current crisis hit) to jump to $100 million by next year, says Lim Eul Chul of Seoul’s Kyungnam University.

I should point out that the CIA estimate of the DPRK’s GDP is among the highest.  Most other estimates are below $30 billion for 2008.

Read the full article here:
How Kim Affords His Nukes: The myth of a failing economy.
Newsweek
5/30/2009

If the North Korean government is given to casually breaching its economic, political, and military contracts and agreements, the prospects of serious foreign direct investment in the country look increasingly grim.

Last week the North Koreans canceled their agreements and contracts with the South Korean government which laid the ground rules for the most significant joint-economic project, the Kaesong Industrial Zone.

This week they surprisingly announced that they are no longer bound to the 1953 armistice! According to the Washington Post:

North Korea announced Wednesday that it is no longer bound by the 1953 armistice that halted the Korean War, the latest and most profound diplomatic aftershock from the country’s latest nuclear test two days earlier.

North Korea also warned that it would respond “with a powerful military strike” should its ships be stopped by international forces trying to stop the export of missiles and weapons of mass destruction.

This is bad news for ordinary North Koreans as it will only serve to increase the risks and costs of investing in the DPRK…or at least this is what a simple analysis would predict.

As we have seen recently, however, North Korea has received significant investment in the last few years.  Additionally, the DPRK’s international trade volume (excluding South Korea) continues to grow.

How is this possible?  The North Koreans are not canceling any agreements and contracts with China or Chinese companies (as far as we can tell).

UPDATE: Chinese fishermen seem to have been affected:

“Chinese fishing vessels have begun retreating from NLL (northern limit line) waters since yesterday. We are working to find out if this is based on North Korea’s request,” Yonhap news agency quoted an unnamed South Korean army source as saying.

Read the full stories here:
North Korea Issues Heated Warning to South
Washignton Post
Blaine Harden
5/27/2009

Chinese ships quit North-South Korea border: report
Reuters (via the Boston Globe)
Lee Jin-woo
5/28/2009

According to Yonhap:

North Korean trade with the outside world, excluding South Korea, hit a record US$3.8 billion last year, a report said Monday, despite rising tensions on the Korean Peninsula.

Trade jumped 29.7 percent compared with 2007, the Korea Trade-Investment Promotion Agency, a South Korean trade agency, said in the report.

Last year, North Korea’s exports rose 23 percent to $1.13 billion with imports climbing 32.7 percent to $2.69 billion, the report said. The country still posted a trade deficit of $1.56 billion for the year.

The report also showed that China’s influence on North Korea’s moribund economy is rising quickly.

The communist nation exported $750 million worth of goods to China and imported $2.03 billion last year.

“North Korea’s trade with China hit a record last year and keeps growing,” the report said.

“In the face of the global economic slump and the North’s rocket launch, North Korea’s external trade is expected to shrink this year. But, China’s influence on the North Korean economy is likely to grow further,” it noted.

According to the CIA World Fact Book, South Korea’s 2008 exports totaled $419 billion.

Read the full article here:
N. Korea’s 2008 trade hits record US$3.8 bln: report
Yonhap
5/18/2009

UPDATE: DPRK trade deficit hits record high in 2008
Institute for Far Eastern Studies (IFES)
NK Brief No. 09-5-27-1
2009-05-27

North Korea’s overseas trade (excluding inter-Korean exchanges) continues to grow, in particular with China, and last year recorded the highest amount of trade since 1990.

On May 18, results of analysis by the Korea Trade & Investment Promotion Agency (KOTRA) of overseas trade statistics provided to the Korea Business Center in countries around the world revealed that last year’s exports grew by 23 percent (1.13 billion USD), while imports shot up 32.7 percent (2.69 billion USD). The North registered a 1.56 billion dollar deficit, but the overall volume of trade (3.82 million USD) was the highest since the North’s trade amounted to 4.17 million USD 18 years prior.

Business with China, traditionally North Korea’s largest trading partner, totaled 750 million USD-worth of exports and 2.03 billion USD-worth of imports, as the North’s dependence on trade with its neighbor continues to grow. In 2003, trade with China accounted for 32.7 percent of the North’s overseas trade, but that grew to 48.5 percent in 2004, made up more than half (52.6 percent) in 2005, and rocketed up to 73 percent last year.

KOTRA reported that the North’s imports from China have grown by 46 percent over the last decade, and that in 2008, both trade with China and trade deficit with China hit record highs. At the recent Pyongyang Spring Trade Exhibition (May 11-14), 167 companies from 17 countries, including vendors from China, Russia, Germany, Malaysia, Syria, Sweden, Singapore, Vietnam and Thailand showed their wares, but China’s overwhelming presence was felt, with over 100 of the companies present were from the PRC.

Business with Pyongyang’s second-largest trading partner, Singapore, accounted for a mere 3.1 percent (123.6 million USD) of overall trade, although that showed a 116.1 percent increase over 2007. Trade with India and Brazil, the North’s no. 3 and 4 trade partners was relatively stable.

With sanctions in effect by the United States and Japan, the North’s exports to these countries were practically nonexistent, although imports registered 52.1 million USD and 7.7 million USD, respectively.

According to KOTRA, “it appears that, aside from China, North Korea’s overseas trade with other countries showed no significant change,” and, “with negative issues such as the global economic slump and North Korea’s rocket launce, this year North Korea’s overseas trade is expected to contract slightly, while reliance on China will grow as China’s economic influence on the North expands further.”

The National Committee on North Korea (NCNK) published a paper by Karin Lee and Julia Choi which presents the history of U.S. and UN sanctions against North Korea.   A brief review of phases in US economic policy toward the DPRK is followed by longer sections tracking the major changes in U.S. and UN sanctions over the past six decades. Next, there is a summary of measures taken by other relevant governments, particularly following the missile test and nuclear test in 2006 and the rocket launch in April 2009.  The paper concludes with a summary of U.S. sanctions against North Korea from 2000-April 2009, a timeline listing major events in U.S.-DPRK relations and the imposition and relaxing of U.S. sanctions, and a matrix of luxury items prohibited for export to the DPRK in compliance with UN Security Council Resolution (UNSCR) 1718 (2006).

You can download the paper in Word format here, or in PDF here.