North Korean Economy Watch

Benjamin Katzeff Silberstein: 

On Saturday August 5th, the United Nations Security Council approved a resolution banning member states from importing North Korean export goods such as minerals and seafood products, and from hiring North Korean laborers. Wall Street Journal:

U.S. Ambassador Nikki Haley praised the council’s solidarity, saying more days like this one were needed at the United Nations. She also personally thanked China for helping move the resolution from talk to action. The U.S., which had drafted and put forward the resolution, negotiated for more than a month with China over the text and final measures targeting Pyongyang.

“This resolution is the single largest economic sanctions package ever leveled against the North Korean regime,” said Ms. Haley, adding the council had put the country and its leadership “on notice” and “what happens next is up to North Korea.”

President Donald Trump said on Twitter, “The United Nations Security Council just voted 15-0 to sanction North Korea. China and Russia voted with us. Very big financial impact!”

Both China and Russia urged a return to talks with North Korea and told the Security Council that the U.S. must abandon its military exercises with South Korea and dismantle the missile-defense system in South Korea known as Thaad because North Korea perceived that as a threat and it undermined the security of the region.

“We stress that additional restrictions cannot be an end to themselves, they need to be a tool to engage in dialogue,” said Russia’s new ambassador to the U.N., Vassily Nebenzia.

The nine-page resolution steps up trade restrictions with Pyongyang by aiming to cut off a third of its $3 billion annual export revenue. It bans North Korea from trading coal, iron, lead, iron and lead ore, and seafood.

The resolution also prohibits countries from hiring North Korean laborers and bans countries from entering or investing into new joint ventures with Pyongyang.

Diplomats and sanctions experts have long warned that export revenues, even remittances from foreign workers, are cycled back to North Korea’s military and nuclear programs.

A Security Council diplomat offered this estimate on North Korea’s foreign revenue earnings in 2017: $295 million from seafood; $251 million from iron and iron ore, and $400 million from coal trade.

North Koreans work in China, Russia and the Arab countries in the Persian Gulf in a variety of businesses ranging from factories to restaurants and nightclubs and are estimated to send home several billion dollars in revenue, a large portion of which the government claims, according to U.N. sanctions experts.

The new resolution restricts North Korea’s technology trade and tightens enforcement of sanctions on North Korean vessels by banning violators from entering ports around the world.

Under the resolution, North Korea’s Foreign Trade Bank, which handles foreign exchange, will be added the U.N.’s sanctions list that freezes the assets of targeted entities.

It remains to be seen whether the new sanctions will deter North Korea’s pursuit of advanced ballistic missiles and nuclear weapons or bring its leader Kim Jong Un to the negotiating table.

North Korea’s economy has managed to stay afloat largely because China, its main trade partner, and Russia and some African nations haven’t fully enforced existing U.N. sanctions. The U.S. Treasury in June sanctioned Chinese entities—primarily banks and shipping companies—and individuals for violating sanctions and conducting trade that contributed to North Korea’s military and nuclear program.

China’s Ambassador Liu Jieyi said his country denounced unilateral sanctions by the U.S. and said action against North Korea must be through the U.N. mechanism. Mr. Liu told the council he welcomed the U.S. position that it wasn’t seeking regime change in North Korea.

“China has always been firmly opposed to chaos and conflict in the [Korean] peninsula,” Mr. Liu said.

Although China and Russia have pushed for a resumption of the six-party talks with North Korea, disagreement remains on how to bring Washington and Pyongyang to the table. China and Russia have called for a freeze-for-freeze plan under which North Korea would halt any more military or nuclear action and the U.S. would end its military exercises with South Korea.

Full article here:
North Korea Hit by $1 Billion Sanctions After Missile
Farnaz Fassihi
Wall Street Journal
2017-08-5

The UN summary of the resolution reads as follows:

The Security Council today further strengthened its sanctions regime against the Democratic People’s Republic of Korea, condemning in the strongest terms that country’s ballistic missile launches and reaffirming its decision that Pyongyang shall abandon all nuclear weapons and existing nuclear programmes in a complete, verifiable and irreversible manner.

Unanimously adopting resolution 2371 (2017) under Article 41, Chapter VII of the United Nations Charter, the 15-nation Council decided that the Democratic People’s Republic of Korea shall not supply, sell or transfer coal, iron, iron ore, seafood, lead and lead ore to other countries.

Expressing concern that Democratic People’s Republic of Korea nationals working abroad were generating foreign export earnings to support the country’s nuclear and ballistic missile programmes, it also decided that all Member States shall not increase the total number of work authorizations for such persons in their jurisdictions, unless approved by the Security Council Committee established pursuant to resolution 1718 (2006).

Through the text, the Council decided that States shall prohibit the opening of new joint ventures or cooperative entities with the Democratic People’s Republic of Korea entities and individuals, or expand existing joint ventures through additional investments.  In addition, it decided that Pyongyang shall not deploy or use chemical weapons and urgently called for it to accede to the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and Their Destruction.

Also through the resolution, the Council named nine individuals and four entities to be subject to a travel ban and asset freeze already in place, as well as to request that the International Criminal Police Organization (INTERPOL) issue special notices with respect to designated individuals.

In addition, it reaffirmed that its provisions were not intended to have adverse humanitarian consequences for the civilian population of the Democratic People’s Republic of Korea, and that the Security Council Committee established pursuant to resolution 1718 (2006), on a case-by-case basis, exempt from sanctions those activities that would facilitate the work of international and non?governmental organizations engaged in assistance and relief activities for civilian benefit.

Furthermore, through the text, the Council called for the resumption of the Six-Party Talks between China, Democratic People’s Republic of Korea, Japan, Republic of Korea, Russian Federation and the United States towards the goal of a verifiable and peaceful denuclearization of the Korean Peninsula.

Speaking after the resolution’s adoption, the representative of the United States said the Council had put the Democratic People’s Republic of Korea’s dictator on notice by increasing the penalty of its ballistic missile activity to a whole new level.  All Member States must do more to put more pressure on that country, she said, adding that the United States would take defensive measures to protect itself and its allies, including through joint military exercises.

China’s representative said that, while today’s resolution had imposed further sanctions, it did not intend to negatively impact such non-military goods as food and humanitarian aid.  Calling on all parties to implement the resolution’s provisions fully and earnestly, he recalled that China and the Russian Federation on 4 July had put forward a road map to resolve the issue through two parallel tracks — denuclearization and the establishment of a peace mechanism.  Recalling that the United States had recently indicated that it was not pushing for regime change or for the Korean Peninsula’s reunification, he said an escalation of military activities would be detrimental to all countries of the region.

Japan’s delegate said the sheer number and frequency of the Democratic People’s Republic of Korea’s nuclear and ballistic missile tests “show how unprecedented and unacceptable these provocations are”.  Not only was the quantity outrageous, but the qualitative advancements were alarming.  Noting that today’s resolution would reduce the Democratic People’s Republic of Korea’s revenue by approximately $1 billion, he said all Member States must demonstrate renewed commitment to implement the Council’s decisions.

The Russian Federation’s representative, while calling on the Democratic People’s Republic of Korea to end its banned programmes, said progress would be difficult so long as it perceived a direct threat to its security.  Emphasizing that military misadventures risked creating a disaster, he said sanctions must be a tool for engaging Pyongyang in constructive talks rather than to seek the country’s economic asphyxiation.

The Republic of Korea’s delegate said that Pyongyang’s missile provocations on 4 and 28 July, together with its nuclear programme, posed a grave threat to international peace and security.  Indeed, such reckless acts of defiance should be met with stronger measures, he said, adding that additional sanctions contained in resolution 2371 (2017) would significantly cut off the inflow of hard currency that would otherwise have been diverted to illicit weapons programmes.

Full article:
Security Council Toughens Sanctions Against Democratic People’s Republic of Korea, Unanimously Adopting Resolution 2371 (2017)
United Nations Meetings Coverage
2017-08-05

Benjamin Katzeff Silberstein

Yonhap reports:

The estimated expansion of the gross domestic product (GDP) represents a sharp turnaround from 2015 when the economy of one of the world’s most isolated countries shrank 1.1 percent due mainly to a drought.

Last year’s growth is the highest since 1999 when North Korea’s economy expanded 6.1 percent, according to the Bank of Korea (BOK).

North Korea’s economy expanded 1.2 percent on average between 2012 and 2016, a sign that its economy is mired in low growth.

There are no indications that the North’s economy has suddenly improved since late 2011 when North Korean leader Kim Jong-un took power on the sudden death of his father and long-time leader Kim Jong-il, an official said.

“North Korea’s economic structure is very fragile and is not really set up for high growth,” the official spoke on the condition of anonymity.

The BOK estimated North Korea’s gross national income (GNI) stood at 36.4 trillion won (US$32.4 billion) in 2016. South Korea’s per-capita GNI stood at 31.98 million won, which is 22.1 times larger than the North’s 1.46 million won.

Related to last year’s growth, the central bank said North Korea’s mining industry grew 8.4 percent, the highest since 1999 when it expanded 14.2 percent.

North Korea’s trade volume came to $6.55 in 2016, up 4.6 percent from a year earlier, the BOK said. The increase came despite tightened U.N. sanctions imposed on North Korea over its repeated nuclear tests and its long-range rocket launches.

The sanctions call for, among other things, a ban on the country’s exports of coal and other mineral resources to cut off North Korea’s access to hard currency.

Still, the provision will not apply if transactions are determined to be exclusively for livelihood purposes and unrelated to generating revenue for North Korea’s nuclear or ballistic missile programs or other activities prohibited by previous U.N. resolutions.

China accounts for nearly 90 percent of North Korea’s foreign trade, and mineral resources are a key part of their bilateral trade.

Full article:

N. Korea’s economy grew 3.9 pct in 2016: BOK

Yonhap News

2017-07-21

Benjamin Katzeff Silberstein

A little over a week after the Kyodo News interview, Washington Post has also talked to Ri Jong Ho, the former official from Bureau 39 who now lives in Washington DC. The main takeaway from the interview I think, from an economic point of view, is just how far the North Korean economy has gone in its adaptation to its international environment. Rigidity through flexibility, one could call it:

“We were never in pain or hurting in our trade business because of the sanctions. Instead, we conducted our first nuclear test in 2006,” Ri said in an interview near Tysons Corner.

The 59-year-old, whose job had been to raise money for the North Korean regime, and his family live in Northern Virginia, having defected to South Korea at the end of 2014 and moved to the United States last year.

“I used to be sanctioned, as a North Korean who led trade at the front line, but I never felt any pain from the sanctions. The sanctions were perfunctory,” Ri said.

He described being able to send millions of U.S. dollars to North Korea simply by handing a bag of cash to the captain of a ship leaving from the Chinese port city of Dalian, where he was based, to the North Korean port of Nampo, or by giving it to someone to take on the train across the border.

In first the nine months of 2014 — he defected in October that year — Ri said he sent about $10 million to Pyongyang this way.

[…]

“Unless China, Russia and the United States cooperate fully to sanction North Korea, it will be impossible to hurt them,” Ri said.

China’s interest in North Korea is well known, but Russia’s role in supporting the former Soviet client state is often overlooked. Amid calls for China to limit oil exports to North Korea, Russia has dramatically increased the amount of oil it has sent — some reports suggest exports have quadrupled — to North Korea this year.

North Korea’s financial networks, moreover, are  intentionally murky. The U.S. Treasury has sanctioned more and more North Koreans and North Korean companies by name to try to cut them off from the American financial system, but few, if any, have any exposure to the United States.

For this reason, Ri’s insights are widely sought after in Washington, where successive administrations have been trying to find North Korea’s pressure points.

[…]

Ri said he worked as president of a shipping company and was chairman of Korea Kumgang Group, a company that formed a venture with Sam Pa, a Chinese businessman, to start a taxi company in Pyongyang. Ri suppled a photo of him and Pa aboard a jet to Pyongyang.

He was awarded the title “hero of labor” in 2002 for his efforts, and said he lived the good life in Pyongyang, with a color TV and a car. “I was very loyal to Kim Jong Il, so I was rewarded by him,” he said. “I was rich.”

His last position was running the Dalian branch of Daeheung, a trading company involved in shipping, coal and seafood exports, and oil imports. The company was given targets to meet in terms of profits, he said, declining to go into details.

But in 2014, Ri grew increasingly disillusioned after Kim Jong Un suddenly denounced his uncle, Jang Song Thaek, as a “traitor for all ages” and had him executed at the end of 2013.

Jang had been leading economic cooperation efforts with China, and dozens of people who worked for him were also purged at the time, Ri said. He worried that his family would be next. They escaped to South Korea before moving to the United States, where his two children, now in their 20s, plan to go to college.

[…]

Ri said North Korea has repeatedly found ways to circumvent whatever sanctions are imposed on it.

“North Korea is a 100 percent state enterprise, so these companies just change their names the day after they’re sanctioned,” he said. “That way the company continues, but with a different name than the one on the sanctions list.”

Ri’s Chinese counterparts weren’t bothered, either, he said.

“My partners in China also want to make a profit, so they don’t care much about sanctions,” he said. “When the Chinese government orders them to stop, they stop for a few days and then start up again.”

Growing impatient with Beijing, Washington is increasingly targeting Chinese companies that help North Korea with what are called “secondary sanctions.” At the end of last month, the Trump administration blacklisted the Bank of Dandong, located on the border between the two countries, for its dealings with North Korea.

But without knowing how to really hurt North Korea and teaming up to do it, it will be “impossible” to change Pyongyang’s calculus on the nuclear program, Ri said.

Full article:

By Benjamin Katzeff Silberstein

At 3:30PM GMT+9 on Tuesday July 4th, North Korean television announced that the country had successfully tested an intercontinental ballistic missile earlier in the day. Wall Street Journal: 

The missile, identified as the Hwasong-14, was launched at a steep trajectory and flew 933 kilometers (580 miles), reaching an altitude of 2,802 kilometers, according to North Korean state television. The numbers are in line with analyses from U.S., South Korean and Japanese military authorities.

US Secretary of State, Rex Tillerson, later confirmed that the launched missile was an intercontinental ballistic one.

Here in Seoul, things seemed to continue on as usual, which tends to be the case in this city more than used to its fair share of similar news. The biggest strategic consequence, of course, is that for the US. A successful intercontinental ballistic missile of this sort could potentially strike anywhere in Alaska.

With the latest launch, North Korea takes one step further along the nuclear side of the Byungjin line of parallel development of nuclear weapons and the national economy, and arguably, one step back on the economic side of the dual-track policy. In the formulation of the Byungjin line, of course, both are interrelated. Missile launches are often described as evidence of progress in industry and science, ultimately benefitting economic progress. This launch was no exception. From KCNA:s statement yesterday, July 4th 2017 (my emphasis):

The success in the test-fire of inter-continental ballistic rocket Hwasong-14, final gate to rounding off the state nuclear force, at just one go is a powerful manifestation of the invincible state might and the tremendous capability of the self-reliant national defence industry of Juche Korea that has advanced at a remarkably rapid pace under the great Workers’ Party of Korea’s new line on the simultaneous development of the two fronts, and a great auspicious event to be specially recorded in the history of the DPRK which has long craved for powerful defence capabilities.

This launch happened in a context where North Korea is already under sanctions designed to strike at its coal exports, one of its most important sources of income, and where the US has just signaled its resolve to go after North Korea’s financial channels through secondary sanctions of Chinese entities. At the same time, Kim Jong-un’s tenure has very much come to be associated with some economic progress (albeit from a low level, and primarily benefitting the relatively privileged classes), symbolized by projects such as the recently opened Ryomyong street.

It is not yet clear what the consequences will be. The US will likely try to add more sanctions targeted against specific entities and persons that help North Korea evade sanctions, and acquire equipment for its nuclear and missile programs.

The US will probably also call for international sanctions, but as Chad O’Carroll points out, the US may have a hard time getting such measures through in a quick manner given its currently tense relationships with both Moscow and Beijing. The US may also further push Beijing to implement the already existing sanctions against North Korea, but nothing appears to have changed with the claimed ICBM-test that would fundamentally alter China’s strategic calculations in the region. In other words, it continues to regard North Korea as a buffer between itself and US forces in the region, and as a geopolitical asset.

Whatever happens, it is safe to assume that it will not be good news for North Korea’s international ties in diplomacy, trade, finance, you name it. It would be easy to assume that economic progress and nuclear weapons development are mutually exclusive, since the second leads to further international isolation and economic sanctions, and therefore hampers the first.

In reality, that may be true. The North Korean Byungjin narrative, that weapons development helps economic progress, is difficult to swallow, especially when one considers the opportunity cost that the weapons programs carry, both in terms of domestic resource dedication and the cost in international isolation.

But there is another way to look at it. Whatever the actual consequences will turn out to be, North Korea is making a strategic calculation that the gains from the test, and from overall nuclear weapons and missiles development, will be greater than the potential costs and downsides. Consider the following two factors:

First, North Korea has made economic progress in the past few years, and particularly since Kim Jong-un came to power, even under years of severe sanctions.  North Korea has been under various forms of UN Security Council sanctions since its first nuclear test in 2006. During these years, its economic development has been impacted far more by domestic policy decisions than by international developments.

Again, we are absolutely not talking about any growth miracle, and some probably exaggerate the degree of the wealth increase in North Korea over the past few years. But without a doubt, North Korea is far better off now than it was eleven years ago, and worlds apart from the famine of the 1990s. Food insecurity prevails in North Korea but the country has not seen widespread starvation since the late 1990s, and largely thanks to better economic frameworks (or rather less predatory), and increased space for private production and trade within the economic system, things are looking much better today than in many years.

Just look at this video recently published by the Daily NK, from Chongjin, one of North Korea’s largest cities in its northeast. Is this long-term, sustainable growth that will eventually lead North Koreans to enjoy the same prosperity as their counterparts in South Korea or even China? Probably not. But at least it’s something.

Second, and relatedly, North Korea likely has a significant amount of channels for trade and various transactions that are not commonly known, but that play highly significant roles for the economy. For example, consider the information that Ri Jong Ho, a former official in North Korea’s Office 39, supplied in a recent interview with Kyodo News. Ri claims that North Korea procures up to 300,000 tons of fuel and various oil products from Russia each year, through dealers based in Singapore. As a point of comparison, a commonly cited figure for crude oil supplies from China is 520,ooo tons per year. Proportionately, then, 300,000 tons is not close to a majority, but still a significant amount for North Korea. While intelligence services or others with access to classified information may have known this already, Ri’s claims, if true (they have not and in all likelihood cannot be fully corroborated),

The point here is that North Korea has gotten so used to going through back channels and unconventional means to acquire highly significant amounts of supplies required for its society to function. It is an economic system where unconventional (and often illicit) channels of trade are not exceptions, but core parts of the economic management toolbox. This is not to argue that sanctions do not or cannot work. Rather, it shows the extent to which unconventional methods are institutionalized within economic management in North Korea.

The North Korean government is no monolith, and there are almost certainly some parts of the governing apparatus that are more and less pleased with the ICBM-test. But in the higher echelons of the leadership, the strategic calculation is probably that even with the added sanctions that are very likely to come, North Korea will be able to continue along roughly the same economic strategies as it has thus far. Perhaps we can call it North Korea’s own “strategic patience”: continuing with patchwork strategies for international economic relations, with little concern for the impact of lack of sustainable growth on people’s livelihoods, while banking on eventual recognition as a nuclear power. Only time will tell whether targeted secondary sanctions will change that calculation.

Benjamin Katzeff Silberstein

In a fascinating interview by Kyodo News’s Tomotaro Inoue, Ri Jong Ho, a former high-level official in Office 39 of the Korean Worker’s Party, makes several fascinating claims about the supply of fuel to North Korea:

North Korea secures up to 300,000 tons of oil products from Russia each year through Singapore-based dealers, a defector who formerly managed funds for the leadership has told Kyodo News, posing a challenge for the United States as it seeks to isolate Pyongyang.

“North Korea has procured Russia-produced fuel from Singapore brokers and others since the 1990s…It is mostly diesel oil and partly gasoline,” Ri Jong Ho, 59, a former senior official of Office 39 of the Workers’ Party of Korea, said recently in the U.S. capital in his first interview with media under his own name.

Ri also said North Korea relies more on Russia than China for fuel to keep its economy moving, indicating that the U.S. drive for Beijing to restrict oil supplies over Pyongyang’s nuclear and missile programs will only have a limited effect.

“It is a wrong perception that North Korea is completely dependent on China,” he said.

Petroleum products have been shipped to North Korea by tankers leaving Vladivostok and Nakhodka, both in the Russian Far East, with the fuel widely used for cars, ships and trains, helping to support the North’s economy, Ri said.

Other sources familiar with the fuel deals said the petroleum products ending up in North Korea are often purchased by brokers who claim they are destined for China, with the items procured using forged paperwork.

Ri, who defected to South Korea with his family in October 2014, provided details of the activities of Office 39.

The secretive entity, said to have been established by former North Korean leader Kim Jong Il in May 1974, is subject to international sanctions as the United States and other Western countries believe it is engaged in illicit economic activities and the management of slush funds for the leadership.

He said North Korea has been trying to reduce its economic reliance on China, Pyongyang’s most important benefactor, since leader Kim Jong Un issued an order to expand trade with Russia and Southeast Asian countries in August 2014.

The order followed Chinese President Xi Jinping’s visit to South Korea a month earlier, during which he and then South Korean President Park Geun Hye expressed opposition to North Korea’s nuclear weapons development. It was the first time for a Chinese president to visit South Korea before traveling to the North.

Ri said the North Korean leader was “infuriated” by the visit, going so far as to call China an “enemy state,” and began taking measures to boost trade with Russia.

According to Ri, Office 39 has five central groups and systematically acquires foreign currency by sending laborers overseas as well as through gold mining and exports.

“It is an organization that manages the supreme leader’s coffers and the party’s funds to rule the country. It also leads trade activities to earn foreign currency,” Ri said. The office has enormous power as it is directly linked to the leadership and is independent of other government organs, he added.

Ri admitted that Office 39 has evaded U.N. sanctions by asking Chinese and Russian contacts to allow the use of their names for the opening of bank accounts for trade settlement.

The activities of Office 39 require the involvement of hundreds of thousands of people, including those in rural areas who produce items for export. Ri said the bureau is now headed by Chon Il Chun, first vice department director of the party’s Central Committee and a former classmate of Kim Jong Il, the current leader’s father.

A native of Wonsan on North Korea’s east coast, Ri was told to work in Pyongyang by the Central Committee in the mid-1980s. He operated a shipping company at Office 39’s Daehung group and later headed a trade control section in the group between 1998 and 2004.

The Daehung group earns revenue through farm exports and shipping operations, among other means. With exclusive rights to trade “matsutake” mushrooms and snow crabs, it was actively shipping those products to Japan before Tokyo imposed a total ban on trade with the North about 10 years ago.

The four other central groups are Kumgang, which dominates gold export activities, Daesong, involved in the shipment of processed products and intermediate trade overseas, Daesong Bank, in charge of the office’s banking operations, and a group dispatching workers to other countries.

Asked about the possibility that the foreign currency earned by North Korea is being used for its nuclear and missile development programs, Ri only said, “It is up to the supreme leader how to use the funds.”

North Korea receives 500,000 tons of crude oil each year through a pipeline from China, resulting in around 70,000 to 100,000 tons of gasoline and about 100,000 tons of diesel oil after refining, but the oil products are exclusively used by the North Korean army and are not good enough for cars that carry the elite, Ri said.

He also said crude oil purchased from other countries is refined by foreign companies based in China, leading to the importation into North Korea of an additional 50,000 to 100,000 tons of gasoline.

Full article here:

N. Korea procuring Russian fuel via Singapore dealers: defector

Tomotaro Inoue

Kyodo News

Benjamin Katzeff Silberstein

Reuters reports:

The United States imposed sanctions on two Chinese citizens and a shipping company on Thursday for helping North Korea’s nuclear and missile programs and accused a Chinese bank of laundering money for Pyongyang.

U.S. Treasury Secretary Steve Mnuchin said the actions were designed to cut off funds that North Korea uses to build its weapons programs in defiance of U.N. Security Council and unilateral sanctions.

“We will follow the money and cut off the money,” he told a news conference.

A Treasury statement identified the bank as the Bank of Dandong and the firm as Dalian Global Unity Shipping Co Ltd. It identified the two individuals as Sun Wei and Li Hong Ri.

The sanctions imposed on the two Chinese citizens and the shipping company blacklists them from doing business with U.S.-tied companies and people.

Bank of Dandong did not respond immediately to a request for comment. A staff member at Dalian Global Unity would not comment on the sanctions and subsequent calls to the firm’s office in Dalian went unanswered.

Mnuchin said U.S. officials were continuing to look at other companies that may be helping North Korea and may roll out additional sanctions.

U.S. foreign policy experts say Chinese companies have long had a key role in financing Pyongyang. However, Mnuchin said the action was not being taken to send China a message. “This wasn’t aimed at China. We continue to work with them,” he said.

China did not respond favorably:

Asked about the U.S. sanctions on Friday, Chinese Foreign Ministry Spokesman Lu Kang said that China consistently opposes unilateral sanctions imposed outside the U.N. framework.

“We strongly urge the United States to immediately correct its relevant wrong moves to avoid affecting bilateral cooperation on the relevant issue,” he said, without elaborating.

China’s ambassador to the United States, Cui Tiankai, said China opposed the United States using domestic laws to impose “long-arm jurisdiction” on Chinese companies or individuals, the official Xinhua news agency reported on Friday.

“If a Chinese company or individual has acted in a way that violates United Nations Security Council resolutions, then China will investigate and handle the issue in accordance with Chinese law,” he told an event in Washington on Thursday evening.

Full article here:
U.S. targets Chinese bank, company, two individuals over North Korea
Joel Schectman and David Brunnstrom
Reuters
2017-06-30

By Benjamin Katzeff Silberstein

The sourcing for this story looks to be some quite thin gruel, but given the current context, it makes sense. Nikkei Asian Review:

According to a source who is familiar with China-North Korea diplomacy, Beijing began instructing Chinese businesses to refrain from hiring North Korean nationals in March 2016 — the month that the U.N. toughened sanctions on the country in response to Pyongyang’s fourth nuclear test.

The instruction has so far been given informally, and in some cases, orally. No formal notices have been issued, the source said.

The companies receiving the instruction are mainly in Jilin and Liaoning provinces, on the border with North Korea. Beijing appears to be gradually including more companies in its whisper campaign, the source said.

The informal sanction appears to contradict the Chinese foreign ministry’s position that the country should not impose any form of sanction against North Korea if it is not based on a U.N. Security Council resolution. At the same time, it is a means by which Beijing can register its displeasure with Pyongyang’s missile and nuclear testing.

Full article:
China telling companies not to hire North Koreans
Oki Nagai
Nikkei Asian Review
2017-06-18

This seems to be the pattern when it comes to Chinese sanctions enforcement against North Korea. Orders and directives are given in a vague, non-specific fashion, making them relatively easy to rescind and relax at a later time. In other words, news like this should not necessarily be taken as evidence of some grand Chinese push against North Korea. The way that policy directives like these are delivered, is itself indicative of their temporary nature. This current period is not the first (and probably not the last) time that China has restricted trade with North Korea, but that itself is not evidence of any long-term “squeeze”. It is probably safe to assume that these directives will be reversed or relaxed soon enough.

By Benjamin Katzeff Silberstein

The non-profit C4ADS has released a new report (Risky Business) about the networks that North Korea uses to get around the international sanctions regime, and to continue trading and financing its weapons programs. Among the most interesting findings, in my opinions, is that of how interconnected and few the Chinese firms that trade with North Korean entities are:

North Korean overseas networks have been extremely adaptive to the combined pressures of international sanctions, in large part due to their ability to nest and disguise their illicit business within the licit trade. Like the cover material of iron ore over the RPG’s aboard the Jie Shun, or the dual role played by Dandong Hongxiang, the problem is particularly acute in the North Korean context where the state controls major aspects of the international trading economy. As early as 2006, former Undersecretary for Terrorism and Financial Intelligence Stuart Levey noted that, “the line between North Korea’s licit and illicit money is nearly invisible.” As North Korea has become ever more isolated internationally, it has had to confine nearly all of its trade to China. Data from 2016 shows that around 85% of total North Korean trade was conducted with China. According to Harvard-based North Korea specialist John Park, “what we are seeing now is the operation of sophisticated North Korean-run networks based in China.” In this relationship, North Korea has repeatedly taken advantage of the system of trade to conduct illicit activity nested within the licit system.

[…]

Although the regime has seen a boom in the sale of natural resources in recent years, the increased sale of fewer and fewer commodities to a single country has left its system of trade progressively more vulnerable. Analysis reveals that the scope of licit trade, in which North Korea nests its illicit networks, is surprisingly small. According to trade records, from 2013 to 2016, there were only 5,233 companies within China that either imported goods from or exported goods to North Korea. To put that number in perspective,as of 2016, 67,163 Chinese companies exported to South Korea. Additionally, these 5,233 businesses are not all unique actors: many of them have subsidiary relationships with companies within the dataset. For example, the network surrounding the DHID, the Liaoning Hongxiang Group, was made up of 18 companies in China alone, many of which appear within the dataset as unique entities.

The report mainly carries three findings:

• In Centralized, we examine key individuals and companies that connect networks from around the world. We discuss case studies of both regime “tactical controllers,” who conduct the operational tasks needed to move illicit goods, as well as “strategic chokepoints” through which these goods and their regime financing must flow.
• In Limited, we explore trends within China-North Korea trade, the largest market exploited by North Korean overseas networks. Our data shows only 5,233 Chinese companies to have traded with North Korea from 2013 to 2016. Our analysis shows a small number of interconnected firms annually account for vast proportions of the trade, limiting the number of avenues in which North Korea can nest its illicit activity.

Full report:
Risky Business: A System-Level Analysis of the North Korean Proliferation Financing System
David Thompson
C4ADS
June 2017

By Benjamin Katzeff Silberstein

Unification Media Group (and Daily NK) continues their series of videos from North Korea highlighting some of the trends and features of the economy. The new video shows, among other things, how private companies are renting space from state enterprises, and notes that private alternatives to state-run businesses often function more smoothly:

Although North Korea’s private economy continues to develop, the public sector is showing signs of rapid decline. This is partly explained by the rise of North Korea’s newly-affluent middle class, who are referred to as “the donju.” Donju traders study the preferences of consumers in order to make profits, while state companies continue to operate according to bureaucratic management principles that have remained unchanged for years.

A video obtained exclusively by Daily NK and filmed inside North Korea’s Chongjin City shows evidence of these trends. In the video, a state-run bathhouse called “Sunam Undokwon” can be seen. In North Hamgyong Province, the state manages a variety of businesses, including barbershops, beauty salons, and restaurants. While the shops appear well kept on the exterior, the interiors reveal the true state of the businesses. The bathhouse, for example, does not have properly running water. Problems like this have caused a steep dropoff in clientele at state-run businesses.

In contrast, bathhouses operated by the donju have drawn a large customer following as they strive to cater to the needs of their clients. A privately-operated bathhouse and a soft drink vending stall can be seen in the video within a business center called Chongjin Shop. The Chongjin Shop is run by Kangsung Trading Company, which itself has an affiliation with the Ministry of the People’s Armed Forces. The bathhouse here has reliably running water and a steam room, and thus is the preferred bathhouse in the area.

“The water isn’t heated at the state-run bathhouse, so customers are forced to fill up small buckets and heat them up on small coal-fired stoves. The brown smoke and burning stench are so severe that customers tend to avoid it. But the privately-run bathhouses have robust fireplaces and the hot water always comes out strongly and without interruption,” an inside source from North Hamgyong Province told Daily NK.

Unlike public bathhouses, private shops offer ttaemiri, professionals who scrub down the bathers with abrasive cloths designed to exfoliate the skin. This service is creating a lot of buzz among customers, with factory workers coming to work as ttaemiri in the evenings. The popular service is drawing in donju and Workers’ Party cadres alike, as they flood into the bathhouses after eating dinner to relieve their stress.

Because the private bathhouses offer these additional services, the fees are higher than the public baths. Access to the open bath costs about 2,000 KPW, while access to the individual baths costs between 5,000-10,000 KPW. These prices are about 1,000-1,500 KPW higher than the state-run establishments. However, owing to the rise in demand for clean, professional bath services, the private shops are attracting more customers.

When asked to explain the popularity of these businesses, the source said, “Because Chongjin is host to a relatively large number of people who make money through the marketplace, private businesses like bathhouses are able to operate more or less according to market principles. Both cadres and donju find the private bathhouses to be convenient since, unlike public bathhouses, there is no need to show one’s ID card upon entrance.”

For these reasons, private businesses are gaining the edge over state-run businesses. There are some instances where publicly constructed buildings are being rented out entirely to donju entrepreneurs, indicative of the increasing dependence of the state economy on the private sector. On one side of the Chongjin Chemical Fiber Complex, a private business sign reads, “Resin-Aluminum Window [Frame] Production” – an example of a privately-run business that is renting out an area of a state-owned building.

The practice of renting out public buildings to private businesses has become particularly prominent since Kim Jong Un came to power. For the donju, such arrangements are more cost-effective than building a new facility from scratch. For the authorities, it offers a way to earn money from buildings that would otherwise be empty and unproductive.

The source continued to describe the arrangements, saying, “The donju pay fees to party cadres to rent out the building and carry out their business there. Renting out public buildings is officially illegal, but the party cadres are just as adept at earning money. So when donju come around looking to do business, the cadres just about throw themselves into the deal. The rental cost depends on a number of factors, like the currency that the payments will be made in (US dollar versus North Korean won) and the schedule of payments.”

Ever since the July 1st Economic Management Improvement Measures were introduced in 2002, the North Korean authorities have inconsistently permitted and then restricted the development of the private economy. Now, in an unexpected development, the public economy is beginning to trail behind the private economy. Marketization has expanded beyond the strict controls of the authorities, and the state economy is now striving to paradoxically maintain its vigor by extracting money from the private economy.

For this reason, business practices that are based on fundamental market principles are spreading with greater speed among the residents. It is likely seen as a potential threat to the stability of the Kim Jong Un regime. However, because the state economy has become dependent on the success of the private economy, an abrupt crackdown on the markets could produce self-inflicted wounds.

“Large construction projects and convenience services were once all run by the state, but now, businesses in these industries are succeeding based on market principles. If the authorities do not dramatically restructure the system sometime soon, it will be difficult to reverse the trend,” an inside source from North Hamgyong Province recently told Daily NK.

Both the donju’s accumulation of power and the resident’s tendency to prioritize money over party loyalty threaten to undermine the regime’s power base. It is therefore possible that the regime may punish a few donju or merchants as scapegoats in order to set an example.

As the private economy continues to flourish, it is possible to see residents using other methods to earn money. Some residents choose not to enter the official marketplace, and instead sell their products in back alleys adjacent to Sunam Market. One such merchant can be seen offering “Rock Portraits.” These are portraits of clients hand painted onto rocks.

“The government is struggling to keep up with the rapid development and diversification of the private economy. The Ministry of State Security and the Ministry of People’s Security usually label new economic activities and services as illegal. Eventually, as they start to receive bribes, they choose to look the other way and the practice becomes more mainstream,” the source said.

Illegal currency traders can also be seen offering services in front of a Chongjin foreign currency store. According to the source, these currency traders have rapidly increased in number over the last few years, and stroll about in front of the store and approach customers who may need to exchange currency. It’s a profitable industry that exists due to daily fluctuations in the currency rates.

“Even residents who don’t normally visit foreign currency exchanges are using the exchange services because they want to accumulate savings in a different currency (ie. not North Korean won). Residents, who fear another devastating currency redenomination like the one that occurred in 2009, are openly circulating foreign currency,” the source added.

By Benjamin Katzeff Silberstein

Reuters reported today on the most recent figures on China-North Korean trade. They show that coal imports have declined, to the lowest level in three years, according to Reuters. It must be remembered that coal trade (in volume terms, not necessarily in USD-numbers) has climbed for several years in a row since 2010, so a relative decline does not mean catastrophically low levels. Also, of course, Chinese customs data should be taken with a huge grain of salt.

Reuters:

The world’s second-largest economy bought goods worth $99.3 million in April from North Korea, the lowest monthly tally since at least June 2014, according to Chinese customs data. Previous data was not available.

That compares with $114.6 million in March and $167.7 million a year earlier.

A fifth of the April total was iron ore imports, which hit 285,000 tonnes, their highest since August 2014. That was up 10 percent from a month earlier and 2-1/2 times higher than a year earlier.

[…]

Cho Bong-hyun, who heads research on North Korea’s economy at IBK Bank in Seoul, said China’s imports from North Korea were likely to continue to decline due to Pyongyang’s repeated missile tests and the suspension of coal shipments to China.

“This won’t be disastrous for North Korea, but it will obviously hurt North Korea because it tends to export goods to China worth around $3 billion per year,” he said.

The value of imports from North Korea has fallen month-on-month since December, the data showed.

CHINESE SALES DOWN AS WELL

China’s exports to North Korea eased to $288.2 million in April, down 12 percent from March. Exports for the first four months of the year were up 32 percent at $1 billion.

Diesel shipments to North Korea in April more than halved from March to 2,606 tonnes and gasoline sales dropped 6 percent to 13,496 tonnes. North Korea gets most of its oil needs from China.

Crude oil exports from China to North Korea have not been disclosed by customs for several years, but sources have put it at about 520,000 tonnes a year.

Cutting off oil to North Korea for an extended period would be a crippling measure that analysts have said they don’t expect China would take.

[…]

Data released later on Tuesday showed China did not take any North Korean coal in April for a second straight month, after Beijing’s ban of such imports following repeated missile tests by Pyongyang.

China imported 1.53 million tonnes of coal worth $72.3 million from North Korea in April 2016.

Full article:
China’s imports from North Korea sink as coal ban bites
Josephine Mason
Reuters
2017-03-23