North Korean Economy Watch

From Yonhap:

By Lee Dong-min
WASHINGTON, May 22 (Yonhap) — South Korea is fiscally able to handle its economic aid to North Korea, but the situation may change in the future when it will be required to spend more on its social welfare system, a senior official at Moody’s suggested Monday.

Speaking at a symposium by the Institute for Corean-American Studies (ICAS), Thomas Byrne, vice president of the international credit rating agency, said he does agree that North Korea is headed to meaningful economic reforms.

South Korea is one of three nations whose geopolitical risks are considered in judging its credit rating. Israel and Taiwan are the others.

Divided since the end of the three-year Korean War in 1953, the Korean Peninsula remains tense and volatile as Pyongyang seeks nuclear weapons it claims it needs as a deterrent against possible U.S. attack.

According to Byrne, the situation keeps South Korea one notch below the credit rating it normally deserves.

In trying to ease the tension, Seoul has been trying to engage Pyongyang by providing food and other types of economic assistance. A recent project involves an industrial complex in the North Korean border city of Kaesong where South Korea’s smaller firms have built manufacturing plants to use North Korea’s cheap labor force to make their products more price-competitive.

Byrne said Moody’s assesses the fiscal implications of South Korea helping to keep North Korea’s debilitated economy afloat.

“In fact, the North Korean economy is more unstable now,” he said, citing hyperinflation, backfired currency reform efforts and minuscule international trade hovering at US$3 billion a year.

Seoul, along with Beijing, is a major donor to Pyongyang, but it may be pressured to think otherwise, according to the Moody’s official.

With its aging society and expected large expenditures in social welfare and health care, South Korea will need a larger domestic budget, he said.

“Domestic social welfare demands would compete with sunshine/co-prosperity policy if the latter continues to increase, or increase sharply in the future,” said Byrne.

Despite North Korean leader Kim Jong-il’s visits to China that many saw as his study of Beijing’s economic reform path, the Moody’s official didn’t see any significant signs.

“I don’t see any internally generated reform process,” he said. “North Koreans aren’t anywhere near the positions of embarking on policies of China… or Vietnam.”

Kaesong is, at least for now, more important for South Korea than North Korea and not enough to show that Pyongyang is changing, he said, “If there were five other Kaesongs in North Korea, then it may mean something to North Korea… then, maybe North Korea is changing,” Byrne said.

The tension over North Korea’s nuclear problem intensified with U.S. accusations that Pyongyang was counterfeiting American currency and dealing in contraband.

In September, the U.S. Treasury designated Macau’s Banco Delta Asia (BDA) a primary money laundering entity working for North Korea, saying the bank was abetting Pyongyang’s illicit financial activities.

Daniel Glaser, deputy assistant secretary of treasury, said there is “very little question” that North Korea was involved in counterfeiting U.S. dollars, mostly $100 notes commonly called “supernotes.”

“Every seizure of these notes has been linked to each other… all of them have involved distribution by North Korean diplomats,” he told the ICAS symposium.

He again denied that the action against BDA was in any way meant to affect the nuclear negotiations with North Korea.

“This is a new approach to U.S. national security,” Glaser said, emphasizing that it was under new laws and newly created offices that steps like those against BDA were coordinated.

Wendy Cutler, assistant U.S. trade representative, focused on upcoming free trade agreement (FTA) negotiations with South Korea that she hopes will have far-reaching effects beyond the two nations.

“This agreement will help underscore U.S. commitment to engage the Asian region … the U.S. is committed to developing robust trade relationships in Asia,” she told the symposium.

Seoul and Washington will hold their first formal FTA talks next month in Washington and hope to come up with a final draft by end of this year.

Cutler, who heads the U.S. side in the negotiations, noted that FTAs require political decisions that defy strong domestic opposition.

FTA opponents in South Korea plan to come to Washington to protest the launch of the negotiations, alarming law enforcement officials of both countries.

Cutler said despite press reports of such opposition, polls indicate general support.

“It’s important to know that the Roh (Moo-hyun) administration and the majority of the Korean population and business community support the FTA,” she said.

A U.S. trade official, reacting to reports of protesters coming to Washington, cited the same polls.

“You need to keep in mind that based on polls in Korea, overall sentiment in Korea is strong support for the FTA,” the official said.

From Yonhap:

North Korea continues to buy raw materials and components from various foreign sources for ballistic missiles despite announcing in 1998 that it would suspend missile tests, according to a recent U.S. intelligence document.

“North Korea is nearly self-sufficient in developing and producing ballistic missiles, yet continues to procure the required raw materials and components from various foreign sources,” the report said.

The “Report to Congress on the Acquisition of Technology relating to Weapons of Mass Destruction and Advanced Convention Munitions” was submitted by the office of the director of national intelligence to Congress earlier this month.

The report said that in 2004, North Korea continued to abide by its voluntary moratorium on flight tests adopted in 1998 and reaffirmed in May a pledge made in September 2002 to extend the moratorium beyond 2003.

The 15 intelligence services, including the Central Intelligence Agency (CIA), also expressed caution about the kind of sensitive material North Korea could potentially sell.

“We remain concerned about North Korea’s potential for exporting nuclear materials or technology. At the April 2003 trilateral talks in Beijing, North Korea privately threatened to export nuclear weapons. During the third round of six-party talks on the North Korean nuclear issue in June 2004, Pyongyang included a ban on nuclear transfers in its nuclear freeze proposal,” the report said.

It added that inspectors from the IAEA (International Atomic Energy Agency) recovered two tons of uranium hexaflouride from Libya in May 2004 that was linked to the North.

Froom the Daily NK: 
5/18/2006

Approximately one million crossed the DPRK/PRC border back and forth during the food shortage. Today, the border area is where most recent, accurate information about North Korea can be obtained.

China stationed soldiers from Shunyang military district to the North Korea-China border three years ago. The border line of North Korea including Yalu River and Tumen River is 1,376.5 km. North Korea-China border is 1,360km, and North Korea-Russia border line is 16.5km.

North Korea has 100-110 thousand strong ground forces on the border area in order to control the inflow of information from outside and the illegal smuggling and border transgression of North Korean defectors. It means that each soldier guards 14m.
Ground Forces on the border increased rapidly after the treaty of friendship between China and South Korea

The reinforcement of the border in the 1990s has much to do with the change in international politics including the demise of the Cold War the growth of friendship between China and South Korea. Until the early 1990s when North Korea sustained the “blood alliance” with USSR and China, North Korea only focused on increasing the military power on north of the 38ty parallel.

Kim Jong Il said in regards to the treaty of friendship between South Korea and China, “38th parallel is outpost for the military power, while the [chinese] border is outpost for the ideology”. North Korea reorganized the military to reinforce the border control.

In 1992, the Department of Military Mobilization in various parts of North Korea recruited high school and middle school students, office workers and farmers to organize the border control.

In 1992, the responsibility for border control and coastal defense was delegated from National Security Agency to Border Control Command under Ministry of People’s Armed Forces. The Coast Guard was assigned under military base under Ministry of People’s Armed Forces in each district. Border Control Command was located in Ganggye, Jagang Province, but was moved to Pyongyang in 2002.
The Military Force of the Border Control

A North Korea defector Heo Yong Sun (43) who used to be a border guard says there are 4 Brigades, including Division 10 (located at Baeksa dong) in ShinEuiJoo, Brigade 32 in Chongjin, Brigade 37 in Jagang Province, Brigade 44 in Yanggang Province. Division 10 at ShinEuijoo has 14 battalions, which is qualified for division.

Mr. Heo says the border control brigades have 11 battalions on average. One brigade operates 4,000-5,000 soldiers and one battalion has 350 soldiers. There are 3 companies of 100 soldiers under battalions, and companies cover platoons and guard posts of 30 soldiers.

Mr. Lee Chul Young (34) who used to be a commander of a military district of Border Control and entered South Korea in 2004 says, “There are cavalry brigade and tank brigade under the Border Control Command, and the military force amounts to over 10~30 thousand soldiers. Companies have 250~300 soldiers and one battalion has more than 1,000 soldiers, which shows that the scale of military force is different from other People’s Armed Forces.

The smallest unit of Border Control is a platoon. One platoon is in charge of 3km, and one platoon has 12 guard posts. Guard posts have round of inspections during the day, and at nights, 2~3 soldiers are on a stakeout. They are on guard in three shifts a day.

For night time guards, 3~4 soldiers are mobilized including the commander of the platoon, and one agent from National Security Agency is included. A post for the stakeout is a half-underground cave where the soldiers can have a 120 degree view on China.

Border guards are equipped with AK Automatic Rifle-58 and 68. A commander and high level soldiers are equipped with cartridge and low level soldiers are supplied with blank cartridge. On the border, gunfire is preferably restricted, and when someone wanted by the National Security Agency intrudes the border line, gunfire is allowed.

One advisor from National Security Agency was assigned for each platoon since 1999. However, the advisors encouraged illegal border transgressions with bribery, which caused the Ministry of People’s Armed Forces to assign one advisor at each company since May 2002.

Border guards aim to “Earn Three Hundred Thousand Won” causing costs to rise for transgressions.

The biggest wish for the border guards is to make money while in the military. They are on the lookout for border transgressors rather than protecting the border from intrusion of spies. Until 1990s, the soldiers tried to “earn thirty thousand Won”, but it changed to three hundred thousand won because the currency depreciated.

Border Control Command shifts around the border guards at Pyongan, Yanggang and Hamkyung Province every two years in order to prevent frequent corruption of the soldiers. It is understood that two years is enough time for the soldiers to get down to cooperating with the locals to receive briberies.

Mr. Lee Chul Young said, “On fortunate days, it is possible to earn couple hundred thousand won. Commanders are involved in smuggling through Foreign Currency Earning Organizations, and lower officials make small money through controlling the border transgressors”.

The cost for border transgression rose after the order to control the border. In 2004, the transgressions cost 300 Yuan($40), but it rose to 500 Yuan ($65) and to 800 Yuan ($120) now.

North Korean defectors who crossed the Tumen River recently said, “You have to pay 500~1,000 Yuan for lower officials and more than 1,000 Yuan for the Commanders (Generals)”.

Transgression in the winter is the cheapest. However, around March when the ice melts on the river, the border guards have to go through the difficulty of wearing rubber pants and helping the transgressors cross the river, which costs more than 1,000 Yuan.

From the Joong Ang Daily:

During the last two years, Japanese maritime police officers have frequently caught foreign ships leaving North Korean ports trying to smuggle fake cigarettes, the Japanese newspaper Tokyo Shimbun reported.

Citing intelligence data from satellites, the newspaper said that the fake cigarettes were at times transferred onto other ships waiting in the South Korean port of Busan or near Taiwanese waters. The foreign ships were from Cambodia, Mongolia and Taiwan.

The top cigarette brand forged by North Korea was the American Marlboro. Japanese brands, such as Mild Seven and Seven Star, as well as British tobacco brands were also included in the list.

The Japanese newspaper said in its report over the weekend that North Korean manufactured cigarettes use high-quality wrapping paper, while the tobacco leaves used in the forged cigarettes are inferior to the genuine products.

Japanese authorities did not confiscate the goods because they were not intended to be smuggled into Japan. Nevertheless, authorities have notified foreign intelligence organizations. The Japanese Maritime Police is conducting security checks on all ships that pass through Japan’s exclusive economic zone.

Experts say a crackdown on forged cigarettes in China has led to an influx of machinery used for making those cigarettes into the North, which has started to manufacture them on a mass scale. Increased production of fake cigarettes by the North is said to make up for decreased profits from drug trafficking due to a crackdown by governments. Washington recently reported that the North earns more money selling fake cigarettes than it does on any of its illicit activities.

From the Donga:

North Korean imitations of Japanese cigarettes being transported to South Korea and Taiwan were verified by a foreign vessel inspection by the Japanese maritime security force.

The Japanese maritime security force did not confiscate the North Korean imitation cigarettes, however, since they were not being smuggled into Japan. Instead, they traded information with foreign authorities.

Two kinds of cigarettes from Japan, Mild Seven and Seven Star, and several more American and English cigarettes such as Marlboro were found aboard a ship sailing from North Korea. These cigarettes have different packaging, but consist of the same ingredients.

America has recently pointed out imitation cigarettes as North Korea’s biggest source of illegal profits. Japan’s maritime security force’s view is that as smuggling drugs or stimulants became difficult, North Korea chose imitation cigarettes as a new source to obtain foreign currency.

The maritime security force gave chase to a North Korean vessel in 2001, when it neglected orders to stop and fled in front of Kagoshima Island. After this incident, it has executed maritime inspections against foreign vessels sailing within its exclusive economic zone (EEZ).

According to the maritime security force, imitation cigarettes have been found on Cambodian, Taiwanese, and Mongolian ships sailing from North Korea since two years ago.

Information from reconnaissance satellites and sailors’ statements leads us to believe that imitation cigarette carriers load their goods at North Korea’s Wonsan, Cheongjin, or Najin harbors and transfer them to Taiwanese or Korean mafia vessels in the Taiwanese or Busan sea.

Hundreds of thousand of packs of cigarettes are loaded onto every ship, and these are sold at 60% of the price of authentic ones. The profit from these cigarettes, minus the cost of materials reaches up to tens of millions of yen.

A Japanese newspaper commented that due to the Japanese goods circulation system that uses vending machines at a fixed price, imitation cigarettes are not brought into Japan.

The Mild Seven series is a popular brand that was the most sought-after cigarette in Taiwan last year, and is among the five most popular cigarettes in Korea. Marlboro, which had the most loadage in imitation cigarettes, was exposed thirteen hundred times between 2002 and 2005.

Mass production of cigarettes supposedly began when China’s cigarette producing machines flew into North Korea as crackdowns on cigarettes in China became harsher.

From the Japanese Asahi:

A South Korean man with alleged connections to a sunken North Korean spy ship is suspected of masterminding the smuggling of nearly 1 ton of illegal drugs from North Korea, police said over the weekend.

The man, Woo Si Yun, 59, was arrested Friday and sent to prosecutors Sunday, along with gangster Katsuhiko Miyata, 58. Police also raided a North Korean freighter at Sakaiminato port in Tottori Prefecture.

Police suspect the two men smuggled hundreds of kilograms of stimulants in October 2002 by having plastic bags filled with drugs tossed from the freighter into waters off Matsue, Shimane Prefecture. The two prefectures are on the Sea of Japan coast, across from the Korean Peninsula.

The 54-year-old captain of a Japanese fishing vessel that allegedly picked up floating bundles of drugs was also sent to prosecutors Sunday on suspected violations of the Stimulant Drug Control Law.

Police suspect Woo carried out similar operations on two other occasions in 2002, for a total of almost 1 ton in smuggled drugs. The drugs, worth 60 billion yen on the streets, were most likely sold to gangs.

The total volume is 2.3 times more than the total stimulants confiscated in Japan in all of 2002. It amounts to about 33 million individual doses.

Woo’s bank accounts showed payments from known gangs dating back to 1998.

Similar smuggling attempts from North Korea, involving large quantities of drugs tossed into the sea to be picked up by accomplices, have grown since the 1990s, police said.

Friday’s arrests also confirmed a North Korean spy ship that sank off Kagoshima Prefecture on Dec. 22, 2001, after a gunbattle with the Japan Coast Guard, had ties to drug smugglers, police added.

A cellphone recovered from the salvaged ship had records of calls to Miyata’s gang office in Tokyo’s Itabashi Ward, they said. The prepaid phone also showed Woo was one of at least 10 contacts the crew had in Japan. Police suspect Miyata arranged the smuggling and sale of the drugs to underworld groups in Japan.

Before it sank, the ship’s crew were seen tossing sacks and drums overboard that police suspect contained drugs.

The spy ship is also believed to be the one used in a separate smuggling case in 1998, according to the coast guard.

Woo is believed to have traveled to Beijing and elsewhere about 40 times between 2001 and 2004.

Police suspect he may have entered North Korea via Beijing to arrange drug deals.

Besides three allegedly successful smuggling operations in 2002, Woo is also suspected of playing a role in another botched attempt. About 240 kilograms of stimulant drugs were found floating off Tottori Prefecture from November to December 2002.

Smugglers apparently failed to pick up the floating packs.

The same North Korean freighter Woo used reportedly was sighted in waters off Matsue around the same time, police said.

According to joint investigations by Tokyo and Tottori police, Woo received several bank transfers from gangs, thought to be payments for drugs.

In one case, a Fukuoka Prefecture-based gang paid Woo 8 million yen in December 1998, while a Saitama Prefecture group paid 10 million yen in August 2003, police said.

Woo was convicted of smuggling stolen cars in 2004 and served a prison term. He was recently released.(IHT/Asahi: May 15,2006)

From the joong ang:

WASHINGTON – North Korea’s deputy ambassador to the United Nations, Han Song-ryol, dismissed the effect of U.S. financial sanctions on his country, saying that it is cooperating economically with China and Russia. Mr. Han spoke with the Joong Ang Ilbo correspondent here by phone, and said Washington was simply patting itself on the back in claiming the sanctions were effective.
“We have endured sanctions by the United States for 50 years. More sanctions won’t bring any special changes,” Mr. Han said, repeating that North Korea would step up its nuclear deterrence.
Told that there was a perception here that the North’s external financial resources had been drained, Mr. Han replied with a reference to his country’s juche (self-reliance) philosophy. He said the North’s economy was not export-oriented, but was fully self-sufficient. If foreign banks stopped dealing with the North, he said, it wouldn’t matter much.
Washington has threatened to impose financial sanctions on a Macao bank it says has engaged in money laundering for North Korean drug and cigarette smuggling. The bank has frozen assets in some accounts linked to North Korea. And despite Mr. Han’s professed indifference to those sanctions, Pyongyang has refused to return to nuclear negotiations until they are lifted, and specifically until the reported $24 million at the Banco Delta Asia is returned.
Mr. Han said Washington was accusing the North of counterfeiting U.S. currency and imposing sanctions without proof. “The assertion that there are secret funds in Swiss bank accounts is also of the same substance. Hasn’t the Swiss government announced that Washington’s claim is groundless?” asked Mr. Han. (It has not gone that far publicly, but the Swiss ambassador in Seoul said recently that evidence of questionably obtained assets in Swiss banks would be required for authorities to act.)
He said that Washington was raising human rights issues and financial sanctions because it saw no chance of getting favorable results in the North Korean nuclear talks. Mr. Han said that the recent acceptance by Washington of six North Korean defectors was also a move to press Pyongyang.
When asked what he thought on Washington’s claim that photographs existed of North Korean diplomats exchanging counterfeit money, the deputy ambassador said that if that were the case, CNN would already have aired them. He said Pyongyang’s policies would not be affected even if U.S. officials favoring negotiations saw their influence weakened and hardliners gained the upper hand.

From Al-Jazeera (YES!  My first Al Jazeera post!)

Iran bought 18 long-range missiles from North Korea, a German newspaper said, citing an inelligence report.

“Iran has bought 18 disassembled BM-25 missiles from North Korea with a range of 2,500 kilometers (1,553 miles),” Bild newspaper said, quoting a report by the foreign intelligence service BND.

The report said Iran bought the mobile missiles from Pyongyang in the form of kit sets.

The newspaper added that the missiles are based on the Russian SS-N-6 missile for submarine launch and that Iran’s President  MAHMOUD AHMADINEJAD wants to have the range of the missiles “extended to 3,500 kilometers”.

The US Secret Service, which is part of the Treasury Department, has the responsibility to track down counterfit US currency, and becuase of a quirk of history, also protects the President of the USA.

According to Yonhap, the Secret Service has collected up to $50 million of “supernotes,” first discovered sixteen years ago and believed to come from North Korea….

But the latest trend shows the communist regime depends heavily on counterfeiting cigarettes for major income, smuggling at least one 40-foot container every month into the U.S., they said.

Testifying before the Senate in the first Congressional hearing on Pyongyang’s illicit financial activities, Michael Merritt, deputy assistant director of the U.S. Secret Service, gave statistics gathered from a global investigation.

There were more than 170 arrests involving more than 130 countries since the supernote was first detected in 1989 by a Central Bank cash handler in the Philippines, he said.

“Our investigation has revealed that the supernote continues to be produced and distributed from sources operating out of North Korea,” he said.

“These new versions show corrections or improvements in the flaws which are used by banking and law enforcement to detect them,” he said.

“A major source of income to the regime and its leadership, we believe, is the counterfeiting of cigarettes,” he said.

The U.S. government is seeking $5 million in criminal forfeitures in several of these indictments, according to the official.

I was told on my last visit to the DPRK that Marlboro Reds were popular in the DPRK and many astute smokers could taste the difference between the American and European versions–and prefered the American product. 

According to Yonhap, the US State Department has reported to the US Senate (who controls its funding) that it does not have “sufficient information to designate North Korean individuals or organizations under the Kingpin Act, a legislation that denies foreign drug traffickers access to American financial institutions.”

According to the Article:

Peter Prahar, a director at the [State] [D]epartment’s bureau for international narcotics and law enforcement, told a Senate hearing that the U.S. does not yet have sufficient information to designate North Korean individuals or organizations under the Kingpin Act, a legislation that denies foreign drug traffickers access to American financial institutions.

He said indictments are unlikely at this point, since they require “a certain level of evidence that I don’t believe exists,” he said.

Asked if North Korea might be put on the major drug trafficker nation list, Prahar said it is something his department considers “on a regular basis.”  But he cited inability to confirm reports of massive opium cultivation in North Korea, or find evidence that the country’s drug transiting is impacting the U.S.

“But this is something…that we consider regularly within the Department of State, and if we have information that will substantiate that finding, that is a recommendation we are going to make,” Prahar said.

Kim Seong-min, a former North Korean director, claimed it is certain that Pyongyang continues to produce opium.  “Youngsters are used to collect extract from opium,” he told the hearing.  As much as 70 percent of three North Korean counties are set aside to cultivate poppy seeds, totaling some 30,000 hectares, he claimed.

Prahar also stressed alarm at North Korea’s counterfeiting of pharmaceuticals which is “still sketchy” so its magnitude cannot be measured.

From the BBC:

A recent report for the US Congress estimated that $45m of the notes are in circulation worldwide. South Korean police this month uncovered a haul of 700 fake $100 bills. “They’re about 95% identical to the real thing,” said Suh Tae-suk, South Korea’s leading expert on counterfeit currency, “but there’s a slight difference in the texture of the paper and the make-up of the chemicals, so experts can still spot them.”

Most of the notes are brought in from China; and organised crime networks are reported to be distributing them in Asia, and through Russia into Europe. American officials say they have no doubt the notes are manufactured in North Korea.   High-level North Korean defectors back up some of Washington’s claims that Pyongyang is involved in counterfeiting and other illicit activities.

One former North Korean diplomat painted a picture of cash-strapped embassies that are expected to finance themselves, and of diplomats racking their brains for new ways to raise money. He asked not to be identified because he had left family behind in Pyongyang, who he now considers hostages of the regime. “We were each given a quota of foreign currency that we had to raise each year to show our loyalty to the state,” he explained. “I was expected to produce $100,000 a year and remit it to a bank in China”.

The former diplomat, who has lived in Seoul since his defection, said a superior once handed him fake US bank notes, mixed in with the real thing, to conduct a trade deal in South East Asia. He said he raised money from kick-backs on trade deals, but would also smuggle gold and “currency by the kilogramme” in diplomatic bags.

And there were other scams: Trading in tax-free cars, smuggling liquor into Islamic countries, and trafficking horns and ivory out of Africa to sell to Chinese businessmen.

At the centre of much of the trade is North Korea’s top-secret Bureau 39, which defectors say was set up in the 1970s to create a personal slush fund for Kim Jong-il.

“Bureau 39 has a monopoly on earning foreign currency,” said Kim Dok-hong, who worked for 17 years alongside the bureau’s agents at the North Korean Workers’ Party Central Committee.   “Bureau 39 has a monopoly of trade in high-quality agricultural products like pine mushrooms and red ginseng. They also control the drug trade. Opium is produced across the country and then refined into heroin. Their other main role was distributing the supernotes,” he said.

North Korea denies the charges of counterfeiting.  It accuses the US of counterfitting its own currency and trying to blame the DPRK. 

North Korea has also asked the government of Switzerland to investigate the authenticity of a U.S. claim that Pyongyang secretly keeps US$4 billion in Swiss bank accounts, and then release a report on its findings.

The North Korean embassy in Switzerland sent a statement to Yonhap News Agency, branding the U.S. allegation a “conventional scheme to damage the image of our republic.”
North Korea has “made an official request to the Swiss government to investigate this matter and release the results of the probe on purpose to guarantee objectivity,” the statement said.