North Korean Economy Watch

McClatchy Newspapers
Kevin G. Hall
5/16/2007

The owner of a tiny bank in faraway Macau that the U.S. government blacklisted after accusing it of laundering the illicit gains of North Korea’s leaders has appealed to the U.S. Treasury to reverse its decision. He claims that the U.S. government itself had encouraged him to maintain North Korea’s accounts.

The May 2 statement by Stanley Au raises new questions about the Treasury’s decision March 19 as well as the Bush administration’s assertions that the North Korean regime has used the Banco Delta Asia to introduce counterfeit U.S. $100 bills into circulation.

In his declaration, Au said that some $160,000 in counterfeit American currency had turned up at his bank in 1994 but that he’d reported the incident to Macau’s police after he’d learned the money was fake. A short time later, U.S. government agents called on him, he said.

“I cordially answered the questions and asked if their preference was that we should desist from doing business with North Korean entities,” Au wrote. “They said they would like us to continue to deal with them, as it was better that we conducted this business rather than another financial entity that may not be so cooperative with the United States.”

Au made his statement as part of an appeal of the Treasury’s blacklisting of his bank for what it describes as insufficient controls against money laundering and passing fake U.S. currency into the global financial system. The family-owned bank in the Chinese-controlled enclave of Macau is now in government receivership.

Au said that because the meetings took place 13 years ago, he’d forgotten the agents’ names. The U.S. Secret Service, under Treasury control at the time, investigates the counterfeiting of American currency, but Au didn’t specify with what agency he met.

The Treasury declined to comment on Au’s statement or the appeal.

“In the next couple of years, the Bank was periodically contacted by other U.S. government agents and we cooperated in their inquiries,” Au said in a statement to the Treasury first published by China Matters, an Internet blog.

“Since those meetings, I believed that the U.S. government knew of my willingness to cooperate with regard to the Bank’s North Korean business and, indeed, to end that business if this would help prevent unlawful conduct.”

The statement to the Treasury also said that international accounting giant Price Waterhouse Coopers audited the bank’s finances annually and didn’t raise questions about its business or accounting practices.

Shortly after the Treasury’s initial September 2005 action sent the bank into receivership, Macau’s monetary authorities asked independent auditor Ernst & Young to audit the bank’s books. The audit, obtained and published by McClatchy Newspapers, found insufficient money-laundering controls but no evidence that North Korea used the bank to introduce fake $100 bills.

Au’s 10-page declaration also countered another allegation by the Treasury, that Banco Delta Asia maintains a relationship with one source of the bills in 1994.

Au said he’d closed two of the three accounts into which the counterfeit bills had been deposited, San Hap General Trading Co. and Kwok Tou, an individual. Both were known to have been doing business with North Korea, and neither challenged the closure. Au said he’d assumed that was an acknowledgement of guilt.

However, the third company, Zokwang Trading Co. Ltd. – which the Treasury alleges remains in an unsavory relationship with Banco Delta Asia – told authorities and bank officials that the counterfeit money deposited into its account had come from China and that it had no knowledge that it was fake.

Au said he’d warned Zokwang officials that the account would be closed if counterfeit money came through again. Shortly afterward, Banco Delta Asia began sending all large U.S.-dollar deposits to Hong Kong for screening at what today is banking behemoth HSBC.

“To the best of my knowledge, Zokwang has never since 1994 been found to be the source of counterfeit funds deposited with Banco Delta Asia,” Au said.

Daily NK
5/15/2007
Yang Jung A

KOTRA “Last year trade deficit $110mn.”

In 2006, North Korea’s trade deficit was over $110mn.

On the 14th, the Korea Trade-Investment Promotion Agency released a report on North Korea’s foreign trade stating, “Last year, North Korea’s imports totaled $2.049bn, an increase of 2.3% compared to 2005. However, exports decreased 5.2%, approximately $1.102bn worth of trade deficit.”

North Korea’s total foreign trade figures were close to $2.996bn, a decrease of 0.2% compared to the previous year.

KOTRA analysts said North Korea’s foreign economic situation worsened following the world attention it caused by its long range missile test last July and the subsequent October nuclear test.

Following the 2002 July economic reforms, North Korea’s foreign trade steadily increased, even peaking at $3bn, a considerable achievement compared to the early 90s. However, a sudden decrease in Western investment led to a significant reduction in overall trade.

Furthermore, North Korea’s number 1 trading partner is China with 56.7% of the total trade. That is followed by Thailand, the EU, Russia and Japan. Then again, trade by these countries including China cover 90% of North Korea’s total trade.

Whenever trade between North Korea, China and Thailand increased, there was a significant decrease in trade with Japan and the EU. Also, as North Korea’s foreign trade situation worsened, greater emphasis was placed on trade with China.

KOTRA’s report stated that a decrease in trade with the EU resulted from the implementation of economic sanctions by western countries which came about after North Korea launched a missile test that has the potential of hitting the United States and then tested a nuclear bomb underground several months later.

Consequently, there was an increase in trade with its traditional friendly nations, China and Thailand, KOTRA added.

KOTRA forecasts that as U.S.-North Korea relations improve, improvements in relations with the other nations will also occur providing a friendlier environment for North Korea’s economic situation. We may see reinvigorated North Korean foreign trade, however that will depend on how well the North Korean nuclear issue is resolved.

Joong Ang Daily
Hwang Young-jin
5/15/2007

North Korean trade with the EU and Japan went into a free fall last year, but China helped pick up the slack.

Missile and nuclear tests interfered with North Korean trade in 2006, leading to the country’s first decrease in five years, a report from the Korea Trade-Investment Promotion Agency said. Decreases in trade with the West caused by political problems were the biggest culprit, the agency said.

North Korean exports to Japan fell 41 percent while imports from Japan dropped 30 percent. Trade with the European Union went down 23 percent in exports and 18 percent in imports. The European Union and Japan are the world’s first- and third-largest economies. Trade with the world’s second-largest economy, the United States, was practically zero.

But trade with China, the nation closest to the North politically and geographically, served as a buffer to reduce the impact of the large drops in European and American trade, so the North’s overall trade figures didn’t change much, the agency said.

Almost 60 percent of North Korea’s trade is conducted with China. The North’s next-biggest trade partner was Thailand, which accounted for 12.5 percent.

The communist country’s trade volume in 2006 fell 0.2 percent, with exports dropping 5.2 percent to $947 million and imports increasing 2.3 percent to $2 billion. Trade has been growing since the start of the new millennium. In 2005, the total trade topped a record $3 billion.

With an international economic blockade in place, trade relations with Japan and the European Union got worse.

The Kotra report said the Feb. 13 agreement reached during the six-nation talks in Beijing regarding the nuclear issue is a positive signal for the recovery of North Korean trade, but it is up to North Korea whether to act on its commitments and allow trade to recover.

Inter-Korean trade was not considered in yesterday’s report. Trade between the two Koreas reached $1.3 billion in 2006, a 28 percent rise year-on-year. The South sold $830.1 million and bought $519.5 million.

Joong Ang daily
5/15/2007

Seoul expects a response on the Kaesong issue at the next round of free trade talks, scheduled to start on July 16.

South Korea wants the European Union to include goods made at a North Korean industrial park in a proposed free trade agreement, casting a potential shadow over their trade negotiations, according to a South Korean negotiator yesterday.

The issue of the products from the Kaesong Industrial Complex was brought up during the first round of free trade talks last week between South Korea and the European Union.

Korea raised the issue in its recently concluded free trade talks with the United States, but the two sides agreed to discuss the matter later.

South Korea considers the industrial park, located just north of the world’s most heavily fortified border, as a model for inter-Korean economic cooperation. More than 10,000 North Korean workers have been employed by 15 South Korean companies in the pilot project, the Ministry of Unification said on its Web site.

“We asked the EU side to positively think over the Kaesong matter during the first round,” South Korean negotiator Nam Young-sook said in an interview with KBS radio. “A good result may be possible if we explain the matter’s symbolic nature well.”

The EU made no particular response to the South Korean request, Nam said, adding, “We will wait for a response in the second round.”

During the 10 months of free trade negotiations between South Korea and the United States, the industrial park was one of the thorniest issues, partially due to the North’s nuclear test in October of last year.

Park Ha-yeon, a spokeswoman of the EU’s delegation in Seoul, couldn’t immediately be reached for comment.

Last week, South Korea and the EU finished their first round of free trade talks in Seoul, with both sides saying they made good progress.

South Korean negotiators said both sides agreed to target eliminating at least 95 percent of the tariffs on goods within 10 years of implementation.

A second round of negotiations will take place the week of July 16 in Brussels.

The EU is South Korea’s second-largest trading partner after China. Two-way trade between South Korea and the EU totaled $79.4 billion last year, and Europe is the largest foreign investor in Seoul, with $5 billion invested in 2005 alone.

Joong Ang Daily
Lee Young-jong
5/15/2007

With a one-time test run of an inter-Korean railroad set this week, South Korea’s Ministry of Unification said yesterday it will create an organization designed solely to provide $80 million worth of raw materials to North Korea.

The South promised to provide the materials, for light industry, in return for security assurances over the inter-Korean train line.

South Korea hopes the line will be permanent, but North Korea has only agreed to one test run.

The new organization will be jointly operated by related South Korean government agencies, Unification Ministry spokesman Kim Nam-sik said in a briefing yesterday. The agency will also represent South Korea in talks with the North over the joint development of a mine in North Korea.

The government is scheduled today to hold a meeting hosted by Unification Minister Lee Jae-joung to endorse a 2 billion won yearly budget for the organization, Kim said. The money will come from the Inter-Korean Cooperation Fund.

“The fund the government will provide to the organization is a kind of commission for doing state affairs instead of the government,” Kim said.

Freedom House
5/1/2007

North Korea comes in last place again: 197

Asia-Pacific Region: The Asia-Pacific region as a whole exhibited a relatively high level of freedom, with 16 countries (40 percent) rated Free, 10 (25 percent) rated Partly Free, and 14 (35 percent) rated Not Free. Nevertheless, Asia is home to two of the five worst-rated countries in the world, Burma and North Korea, which have extremely repressive media environments, as well as several other poor performers such as China, Laos and Vietnam, all of which use state or party control of the press as the primary tool to restrict media freedom.

Several bright spots worth noting include Nepal, where wide-ranging political change led to a dramatic opening in the media environment, and Cambodia and Indonesia, which also featured positive movement. Asia saw many negative developments in 2006, however, continuing the downward regional trajectory noted in last year’s survey. Coups and military intervention led to the suspension of legal protections for press freedom and new curbs imposed on media coverage in Fiji and Thailand. Intensified political and civil conflict during the year contributed to declines in Sri Lanka, East Timor and the Philippines. Heightened restrictions on coverage, as well as harassment of media outlets that overstepped official and unofficial boundaries, negatively impacted press freedom in Malaysia, China and Pakistan.

Joong Ang Daily
Brian Lee
5/12/2007

After four days of marathon negotiations, the North’s military gave its blessing for a trial run of an inter-Korean railroad system.

At least once.

South Korea failed to get a permanent security assurance from Pyongyang, fearing that North Korea would try to wrangle concessions every time the train passes the world’s most heavily fortified border.

Most recently, Seoul agreed to give the North $80 million in raw materials for light industry following the test run of the train.

After the long negotiations, several issues were left undecided.

In a joint press release issued yesterday, the two Koreas said, “The two sides share the view that preventing military conflicts and creating a joint fishing zone in the Yellow Sea is an issue to be urgently resolved in the course of easing military tensions and establishing peace.”

The test run of the train is scheduled Thursday.

It would be the first in more than half a century, since an armistice ended the Korean War.

Seoul views the train crossings as a crucial building block to reduce tension on the Korean Peninsula and draw the reclusive state of North Korea more out into the open.

South Korea has built two rail crossings, one on the country’s east coast and another about 60 kilometers (40 miles) northwest of Seoul.

A planned test run in May of last year was cancelled at the last minute. Speculation ran high that the North’s military balked due to its own security worries.

The militaries of the two countries, who are still technically at war, agreed to meet again in July.

The two sides agreed to discuss the issue of establishing a joint fishing zone in the Yellow Sea and look into the possibility of allowing North Korean commercial vessels going to and from the North’s Haeju Port, which is located near the Northern Limit Line that serves as a demarcation line in the Yellow Sea, to directly pass through the border.

The two sides also agreed to try to have defense-minister level talks in the future.

The last and only one took place in September of 2000.

Meanwhile, the Unification Ministry said yesterday that delegations from both sides would meet in Kaesong today to finalize the details of the train test run.

Korea Herald
5/12/2007

South and North Korea have agreed to guarantee security for test runs on cross-border rail connections. The accord will make it possible for trains to resume operations across the Demilitarized Zone after the Korean War stopped the railway service more than five decades ago.

But South Korea may not be 100 percent assured that the test runs will proceed as scheduled, given that North Korean commitments have more often than not proved unreliable. Actually, North Korea withdrew its security guarantee on the eve of the railway test runs that had been scheduled for May 25 last year.

Moreover, the security accord is flawed because it will not apply to commercial operations that will follow the test runs. South and North Korea will have to negotiate enduring rules governing inter-Korea railway transportation in the near future.

At the four-day general-level talks that ended on Friday, the North Korean military withheld a security guarantee for commercial operations for the incomprehensible reason that construction of a southern part of the eastern rail link has yet to be completed. Given that the part in question could be reconnected anytime, the North Korean military no doubt has ulterior motives, including extracting concessions from the South in exchange for a security guarantee.

It goes without saying that North Korea is misguided in refusing to guarantee security for commercial operations. It is North Korea that stands to benefit much more from the rail connections.

But South Korea should also be held accountable for the North’s irresponsible behavior. It made the wrong decision when it decided to provide the North with $80 million worth of intermediate materials for the manufacture of necessities and 400,000 tons of rice in exchange for railway test runs.

When negotiating the terms of commercial operations next time, South Korea will have to avoid making similar mistakes. It has no reason to accept being played for a fool when offering a helping hand.

Korea Herald
5/12/2007

South and North Korea agreed yesterday to provide military security guarantees for the upcoming railway test runs across their border, and to take long-term measures to ease tension on the peninsula.

The deal, struck during unusually lengthy military talks, marked a significant breakthrough in Seoul’s seven-year-old policy of engagement with Pyongyang. Despite growing economic cooperation and other exchanges between the two Koreas, their armed forces remained locked in a tense stand-off.

“The two sides have shared the view that preventing military conflict and creating a joint fishing zone in the West Sea is an issue to be urgently resolved in the course of easing military tension and establishing peace,” read a joint press release issued after an unscheduled fourth-day session of the talks held in the truce village of Panmunjom.

South and North Korea are at odds over their western sea border.

The United Nations forces unilaterally drew the Northern Limit Line (NLL) in the West Sea at the end of the 1950-53 Korean War, but the North has called for a shift of the line southward.

North Korean fishing vessels and naval patrol ships often cross the line illegally. Two major deadly naval clashes occurred in 1999 and 2002.

The North also demanded that commercial vessels going to and from the North’s Haeju port near the NLL be able to pass through the sea border. Currently, North Korean ships have to take a long route through international waters to avoid the line.

The Koreas have agreed to discuss the issue after creating mutual military trust, according to the release signed by two-star generals.

The agreement on principle, however, lacks a concrete plan for taking the trust-building steps, with the two sides only saying they will continue related consultations.

The next round of general-grade talks is slated for July, and the specific date and venue will be fixed later, according to the release.

The two Koreas also adopted a separate statement of agreement on supporting the test runs of trains to run on two reconnected cross-border tracks on May 17. It will be a tentative step for the event, however.

South Korea called for a long-standing agreement to allow the safe passage of trains and vehicles across the heavily-armed Demilitarized Zone, but the North rejected the offer.

“The two sides have decided to discuss the issue of adopting a statement of agreement on military security for the operations of railways and roads,” the joint press release read.

The inter-Korean railroad was severed in 1951 and has been reconnected as a result of the historic summit between the leaders of the two Koreas in 2000.

During the test runs on May 17, a train carrying 100 people is scheduled to run from Munsan to Kaesong on a 27.3-kilometer line of the western section, and from Kumgang and Jejin on a 25.5-kilometer line of the eastern section – all across the Military Demarcation Line dividing the two countries.

Yonhap
5/11/2007

An external audit report on United Nations activities in North Korea will be presented to a general meeting of the United Nations next week, a Washington-based radio station reported Friday.

Citing an informed source, Radio Free Asia said that an audit report is being made of the relevant documents and information without the inspectors visiting the communist country. The audit of all U.N. operations in North Korea began in March amid U.S. allegations that U.N. aid money was being diverted to the North’s regime.

The U.N. Development Program (UNDP) said it has completed the process of wrapping up all of its operations in North Korea, and its two remaining staff members were supposed to leave Pyongyang last week.

The agency suspended operations on March 1 because North Korea failed to meet conditions set by its executive board following suspicions that the aid money might be diverted for illicit purposes, including the development of nuclear weapons. It withdrew seven of its nine international staff in mid-March.

U.N. Secretary-General Ban Ki-moon ordered an external audit of all U.N. operations in North Korea that began on March 12.

The UNDP’s office equipment and materials are currently being safeguarded by the World Food Programme in Pyongyang and will be available to the auditors, officials from the international body said.