North Korean Economy Watch

Institute for Far Eastern Studies (IFES)
2/24/2011

The trade volume between North Korea and China has steadily increased, reaching its record high of USD 3.4 billion in 2010. Total exports amounted to 1.19 billion USD while imports doubled that figure to USD 2.22 billion. Imports have continued to grow, increasing by 2.4 times over the previous year.

Since the Cheonan incident and the implementation of May 24 sanctions, inter-Korean economic cooperation has come to a halt, naturally resulting in rise in exports to China. In particular, a significant growth in anthracites exports was observed. The monthly anthracites exports that averaged around USD 10 million surpassed USD 70 million mark last August and maintained USD 50 million monthly average between September to November. In addition, cost-per-ton of anthracite in March which was USD 52.2, jumped to USD 82.8 in November, a climb of 60 percent. This boost is attributed to its increased export.

The current supply of electric power consists mostly of hydroelectric power — reaching over 60 percent– but during the winter season most of the hydropower plants are unoperational due to frozen facilities from harsh winter weather. Anthracites were the alternative resource to fill this gap. Sacrificing power production and exporting great amount of anthracites despite severe winter is a strong indication of the poor foreign currency situation in North Korea.

In its New Year’s joint editorial, North Korea placed heavy emphasis on its anthracite export that took up 60 percent of its total exports. In the statement, four vanguard sectors of coal, electricity, metals, and railroads were highlighted as important industries as “rich underground resources that will help with securing funds and resolving raw material problems.” This is the first time in 13 years – that is, since the Arduous March — for coal to be mentioned first in the New Year’s message.

North Korea also began to lift export restraints of mineral resources like coal and silver from the latter half of last year and ordered to increase imports of rice and corns in place of minerals.

The reason food procurement is placed first at the expense of its mineral resources is believed to be associated with the implementation of the succession involving Kim Jong Un, and to keep North Korean people’s dissatisfaction under control and manage the domestic situation.

North had placed restraints on coal, gold, silver, lead, and zinc exports from 2007 through adopting export control of mineral resources.

In addition, North Korea and China will meet in Beijing to sign an agreement on joint development of underground resources. This agreement will include Musan Mine and rare-earth mines that POSCO (The Pohang Iron and Steel Company of South Korea) has shown interest in in the past for development. China’s moves in this sector are suspected as China’s attempt to monopolize the DPRK’s underground resources.

The DPRK’s Joint Venture and Investment Guidance Bureau and China’s Ministry of Commerce were expected to meet on February 15 to discuss agreements related to underground resources development. On the agenda was Musan Mine, abundant in gold and anthracite, and other mines rich in rare-earth elements. Other mines are also known to be specified in the agreement.

China is expected to bring private companies into the underground resources development project after reaching an agreement with the DPRK. According to our source, “both parties will establish a joint venture investment corporation in Hong Kong after signing the agreement.”

Construction of a highway connecting Heilong City of Yanbian Korean Autonomous Prefecture to Nampyong and Chongjin of North Korea and railway system linking the cities of Heilong, Nampyong, and Musan are currently underway, expected to be in operation by end of this year. Jilin Province and Ministry of Railways of China began construction of this railway system from October 2010 investing CNY 1.19 billion, which runs a distance of 41.68 km. However, it is expected to extend further onto Chongjin and is considered to become the major transportation hub, integrating economic cooperation between the two countries.

Musan Iron Mine is known as the largest outdoor iron mine in Asia and Tonghua Iron and Steel Group along with three other Chinese corporations acquired 50-year development rights of Musan Iron Mine. They are bringing in about 120 tons of iron ore each year and more is expected to be brought in once the Heilong-Musan rail link is completed.

UPDATE 4 (2/20/2011): Kim Tong-un (김동은) named Kim Jong-il’s fund manager.  According to Yonhap:

A senior official of North Korea’s ruling party has been named to lead a special party bureau, code-named Office 38, that oversees coffers and raises slush funds for its leader Kim Jong-il and the ruling elites, a source on North Korea said Sunday.

Kim Tong-un, formerly head of Office 39 in the Workers’ Party of Korea, assumed the post in May last year, when North Korea revived Office 38, which was merged with Office 39 in 2009, the source said on condition of anonymity. Office 39 is believed to be another organ that governs a wide network of business operations both legal and illegal.

Both Offices 38 and 39 belong to the Secretariat of the Workers’ Party, which Kim Jong-il chairs, according to a diagram of the North’s power structure released by the Unification Ministry, which handles inter-Korean affairs. Last year, the ministry had only included Office 39 in a similar diagram.

In a meeting with reporters last week, a ministry official said Office 38 has been spun off from Office 39 and is now running on its own again. The official, who would speak only on the condition of anonymity citing the sensitive nature of his comments, described “a stream of information” that has come through since mid-2010.

Office 38 mainly oversees transactions involving foreign currency, hotels and trade, the official said, while Office 39, headed by Jon Il-chun, drives revenue by dealing in narcotics, arms, natural resources and others.

The North’s revival of Office 38 is interpreted as an effort to cover the increasing cost of leader Kim Jong-il’s ceding of power to his youngest son, Jong-un.

The story was also reported in Yonhap.

UPDATE 3: Here are links to the Ministry of Unification‘s English language organization charts of the North Korean leadership in which some of the changes mentioned below are listed (though not all): Workers’ Party, State Organs, Parties and Organizations

UPDATE (2/15/2011): According to the Daily NK:

The number of Special Departments under the Secretariat of the Chosun Workers’ Party has been increased from 18 to 20, a move that includes the revival of the No. 38 Department, which previously served as Kim Jong Il’s private bank vault, and the foundation of a film department.

The Ministry of Unification revealed the news yesterday in its 2011 North Korean Power Structure and Index of Figures, Agencies and Organizations. It incorporates North Korean changes from December, 2009 up to the present day, completed after consultation with relevant agencies and experts.

The revival of the No. 38 Department and founding of a film department

The report states, “The No. 38 Department, which was merged with the No. 39 Department in 2009, was spun off again last year. Kang Neung Su, who was appointed Deputy Prime Minister in June of 2010, was introduced as head of the film department at the same time. The exact foundation date of the film department is unknown; however, it appears to be newly established.”

No. 38 and No. 39 Departments are directly controlled by Kim Jong Il and serve as a private vault for his ruling funds. The No. 38 Department manages hotels, foreign currency stores and restaurants etc, while illegal weapons trading through foreign trade companies, the smuggling of gold, illegal trade in drugs and the distribution of counterfeit dollars, so-called supernotes, are handled by the No. 39 Department.

“They combined two offices which had different functions, and it appears that this did not result in the intended efficiency,” a knowledgeable source commented.

Meanwhile, on the establishment of a film department, the source added, “North Korea’s cultural art is a political means by which to carry out Party policy and a policy tool to implant policy in the North Korean citizens.”

Among the reshuffled special departments, the existing ‘Munitions Industry Department’ has been renamed the ‘Machine Industry Department’, and the ‘Administration and Capital Construction Department’ has been scaled back to simply ‘Administration Department’.

Elsewhere, the existing National Resources Development and Guidance Department under the Ministry of Extractive Industries has been promoted to National Resources Development Council and, as reported, the Joint Investment Guidance Department rose to become the Joint Investment Committee, while the National Price Establishment Department became the National Price Establishment Committee. Again, as reported, the ‘People’s Safety Agency’ under the Cabinet became the People’s Safety Ministry under the National Defense Commission, while the Capital Construction Department was downsized to become the General Bureau of Capital Construction.

The Central Court and Central Prosecutors Office were also renamed the Supreme Court and Supreme Prosecutors Office respectively.

The Ministry of Unification report also notes that North Korea added Nampo City to its list of eleven cities and provinces, increasing the total number to twelve.

The newly designated Nampo City includes five former parts of South Pyongan Province; Gangseo, Daean, Oncheon, Yonggang, and Chollima districts. Previously, Nampo was under the direct control of the central government as part of South Pyongan Province proper.

At the same time, North Korea also transferred the existing Kangnam-gun, Joonghwa-gun, Sangwon-gun, and Seungho-district, all formerly southern sections of Pyongyang City, to North Hwanghae Province.

Military Commission placed under the Central Committee of the Party

The relationship of the Central Committee and Central Military Commission, which was formerly said to be in parallel, has been changed, reflecting the idea that the Military Commission is now under the Central Committee of the Party.

The Ministry of Unification commented, “By revising the Party regulations, the Central Military Commission and Central Committee were marked as parallel in 2009 and 2010. However, after confirming the revised Party regulations at the Chosun Workers’ Party Delegates’ Conference on September 28th last year, this relationship was adjusted, and an election is now held for the Central Military Commission via a plenary session of the Central Committee.”

Also, the ‘Bureau of General Staff’ under the National Defense Commission was judged to be below the Ministry of the People’s Armed Forces, but is now shown to be in a parallel relationship with the Ministry of the People’s Armed Force and ‘General Political Department’.

ORIGINAL POST (2/14/2011): According to Yonhap:

North Korea has revived a special party bureau, codenamed Office 38, that oversees coffers and raises slush funds for its leader Kim Jong-il and the ruling elites, South Korea said Monday in its annual assessment of the power structure in the communist country.

In 2009, the bureau had been merged with Office 39, another organ that governs a wide network of business operations both legal and illegal, according to the Unification Ministry in Seoul.

In a meeting with reporters, however, a ministry official said Office 38 has been spun off from Office 39 and is now running on its own again. The official, who would speak only on the condition of anonymity citing the intelligence nature of his comments, cited “a stream of information” that has come through since mid-2010.

The official would not elaborate on how the information has been obtained, only saying the ministry works closely with “related government bodies” to outline the North’s power structure.

Office 38, whose chief remains unknown, mainly oversees transactions involving foreign currency, hotels and trade, the official said, while Office 39, headed by Jon Il-chun, drives revenue by dealing in narcotics, arms, natural resources and others.

A source privy to North Korea matters said the spin-off suggests that North Korea has been experiencing difficulties in earning foreign currency since merging the two offices.

“Efficiency was probably compromised after the two, which have different functions, were combined,” the source said, declining to be identified citing the speculative nature of the topic. “More importantly, it seems related to the current state of foreign currency stocks. The North is apparently trying to address those difficulties.”

In August last year, the United States blacklisted Office 39 as one of several North Korean entities to newly come under sanctions for involvement in illegal deeds such as currency counterfeiting.

North Korea is also believed to have been hit hard financially after South Korea imposed a series of economic penalties last year on Pyongyang when the sinking of a warship was blamed on it.

Both Offices 38 and 39 belong to the Secretariat of the Workers’ Party, which Kim Jong-il chairs, according to a diagram of the North’s power structure released by the Unification Ministry. Last year, the ministry had only included Office 39 in a similar diagram.

Both offices have often been referred to as Kim Jong-il’s “personal safes” for their role in raising and managing secret funds and procuring luxury goods for the aging leader.

Read the full story here:
North Korea Splits No. 38 and 39 Departments Up Again
Daily NK
Kim So Yeol
2/15/2011

N. Korea revives ‘Office 38’ managing Kim Jong-il’s funds: ministry
Yonhap
Sam Kim
2/14/2011

According to Bloomberg:

North Korea’s exports to China jumped 51 percent to $1.2 billion last year, led by iron ore, coal and copper, Chinese government data show. China’s sales to its ally rose 21 percent to $2.3 billion from a year earlier, with supplies of wheat and oil helping ease chronic shortages of fuel and food. Two-way trade fell 4 percent in 2009, when the United Nations tightened sanctions after Kim’s regime carried out a second nuclear test.

The revival in commerce contrasts with U.S. efforts to isolate North Korea after a year in which 50 South Koreans died in attacks that roiled markets. Kim needs China to meet a pledge to put “rice with meat soup” on every table and build a “thriving nation” by 2012, the centennial of his father and the nation’s founder, Kim Il Sung.

“Even if North Korea’s front door is firmly locked, there is every reason to think the regime can gain what it needs to survive with impunity as long as the back door is open to China,” said Scott Snyder, an adjunct senior fellow for Korea studies at the New York-based Council on Foreign Relations. China’s trade risks making sanctions “ineffective,” he said.

…

China sold $325.8 million of crude oil to North Korea last year, up 37 percent from 2009. China’s coal imports jumped 54 percent to $394.4 million, while iron ore purchases doubled to $195 million, according to China’s customs department.

Two-way trade of $3.5 billion was still dwarfed by China’s $207.2 billion commerce with South Korea.

London’s Telegraph added this little nugget to the story:

However analysts added that the North’s two-way trade of $3.5 billion – dwarfed by China’s $207.2 billion commerce with South Korea – would still give the regime little more than life support.

Read the full stories here:
North Korea Exports to China Show Birthday-Boy Kim’s `Back Door’ Reprieve
Bloomberg
Bomi Kim
2/16/2011

According to Voice of America:

US news broadcaster Voice of America has reported that the American government allowed 3.1 million US dollars worth of goods to be exported to North Korea last year.

Out of the 18 export cases 15 of them were humanitarian goods such as food and medical items, while the other three were portable generators.

Currently there are various export restrictions placed on North Korea by the US due to the North’s nuclear programs and its human rights abuses.

But the American government allows certain exports for humanitarian purposes such as blankets, shoes and medicine on a case-by-case basis.

Read the full story here:
US Allowed $3.1 Million Worth of Exports to N. Korea : VOA
Arirang News
2/12/2011

Writing at his new blog, Marcus Noland argues that KOTRA overstates the percentage of the DPRK’s trade coming from China.

According to Noland, there are several problems with KOTRA data that makes it less than ideal for drawing policy conclusions.  KOTRA counts DPRK-ROK trade as a domestic exchange, not international trade.  Once corrections are made for South Korean trade and a few other tweaks, China’s share of North Korean trade falls from appx 80% to 30%.

In a different but related story, Yonhap reports on research findings by Drew Thompson, director of China Studies at the Nixon Center.  According to the report:

China’s investment in North Korea was less than US$100 million between 2003 and 2009, indicating Beijing’s investment projects in the reclusive country are still relatively small, a U.S. scholar said Thursday.

Drew Thompson, director of China Studies at the Washington-based Nixon Center, said Chinese investment in North Korea totaled $98.3 million over the seven-year period, compared to $1.2 billion in South Korea during the same period.

It was also less than China’s investments in other neighboring states, including $273 million in Thailand, $473 million in Vietnam, $729.8 million in Myanmar and $890.7 million in Mongolia over the same period.

The majority of Chinese investors in North Korea are small and medium enterprises, though some smaller firms enjoy brand recognition, such as Nanjing Panda Electronics Co., China Minmetals Corp. and Wanxiang Group, the scholar said.

The majority of Chinese investors in North Korea are not state-owned enterprises (SOEs) controlled by the Chinese central government, but privately owned companies and provincial-, prefecture- and municipal-owned SOEs.

Of the 138 Chinese-North Korean joint ventures established between 1997 and August 2010, 41 percent engage in mining, 38 percent in light industry, 13 percent in services and 8 percent in heavy industry, he said.

Thompson said Chinese investors in North Korea are geographically concentrated in the two northeastern provinces bordering North Korea.

Twenty-eight percent of Chinese companies involved in joint ventures are from Jilin, with 34 percent from Liaoning. The rest are from other regions, including Beijing, Shandong and Shanghai.

Jilin and Liaoning share a 1,400 kilometer border with North Korea and are increasingly focused on foreign trade and on achieving competitive economic advantages through their proximity to North Korea.

“(North Korea’s) joint ventures with China are an important aspect of the bilateral relationship, because in addition to propping up the regime in Pyongyang, they contribute to economic development in China’s northeastern ‘rust belt,'” the scholar said in an emailed note.

China’s northeastern region is seen as the country’s rust belt, covered with obsolete and unprofitable factories.

According to the Asahi Shimbun:

Although they feel responsible for the future of their country, they generally work alone in a foreign land. Their family members are kept “hostage,” and they must resort to secretive tactics to bypass international sanctions to feed their leaders’ voracious appetite for Japanese products.

Yet being a trade agent is a favored occupation among North Koreans.

The job allows individuals to live a fairly free life outside of North Korea and can lead to the accumulation of wealth. That is, if everything goes well.

“In the past, the symbol of the wealthy were those Korean nationals who returned from Japan,” a trade agent said. “However, with the suspension of travel by the Man Gyong Bong-92 (cargo-passenger ship that sailed between Japan and North Korea), it has now become the time for trade agents.”

North Korean trade agents in China are under the strict control of Pyongyang.

To be chosen as a trade agent, individuals must have the right background, including not having any family link to the old capitalist class or relatives who are considered anti-state.

They must have also worked for a government institution or major state-run company.

Prospective agents are scouted by trading companies and are only approved by the government after a rigorous background check by state security, Foreign Ministry and other authorities.

Many seeking to become trade agents use their personal connections or even bribes, according to sources.

Trade agents allowed to work in China must leave behind at least one family member in North Korea to deter the agents from defecting.

One trade agent from Pyongyang established a base in a condominium in the central part of a Chinese city. At the start of every day, the agent bows to portraits on the walls of Kim Il Sung, the founder of North Korea, and his son, Kim Jong Il, to pray for successful business.

“We have the burden of the nation on our shoulders. We have to use any means possible to turn a profit,” the agent said.

About 300 North Korean trading companies have been confirmed. They are all affiliated with North Korean government agencies or the military.

Sources said Pyongyang has dispatched nearly 1,000 trade agents to Beijing and 600 or so to Shanghai. Major regional cities are also home to between 100 and 200 North Korean trade agents.

Every night, the trade agents must contact supervisors dispatched by the North Korean government to offices in various cities in China. The agents report on their business activities as well as on their personal movements. Those reports are then transmitted to the headquarters of the trading company that dispatched the agents and to related government agencies.

Every Saturday, the agents must gather at the regional offices for study sessions on the instructions and policies of the Workers’ Party of Korea.

Depending on the experience of each agent and the size of the operation, between $5,000 (412,000 yen) and $60,000 from profits are transferred to North Korea. The trade agent has to use whatever is left over for future business and daily life.

Many agents barely eke out a living, and those who cannot fulfill the government-set quotas are recalled.

The trade agents sell North Korean mining resources, such as coal and iron ore, lumber and seafood. They buy foodstuffs, pharmaceutical drugs, daily necessities and equipment from China.

According to Chinese government statistics, North Korea’s total trade with China in 2009 reached about $2.68 billion, an increase of 5.5 times over 2000. As North Korea becomes more isolated, its trade dependence on China has soared to 73 percent.

The more elite trade agents are dispatched by state-run trading companies to major Chinese cities, such as Beijing, on long-term commercial visas.

Although they are company employees, the North Koreans are unlike the agents working for Japanese trading companies, who may have a large support staff.

The elite North Korean agents often work alone and handle large projects with huge piles of money handed to them by Pyongyang.

After North Korea conducted its first nuclear test, Japan banned exports of luxury items, such as expensive foods, cars and precious metals, from November 2006. After Pyongyang’s second nuclear test in 2009, Japan banned all exports to North Korea.

Despite the sanctions, high-quality Japanese products remain very popular in North Korea. That means the elite trade agents must find ways around the strict sanctions to buy Japanese products and secretly transport them to North Korea.

Generally, the agents make it look like the Japanese products have been purchased by a Chinese entity.

According to sources, the agents often have Japanese products transported to a bonded district in a Chinese port where duties do not have to be paid. Those products are then loaded onto another ship bound for North Korea.

Another method is to have Japanese products pass Chinese customs and traded among a number of Chinese companies before being purchased for shipment to North Korea.

“Japanese companies have become much more cautious because of the total export ban, so it has become harder to obtain Japanese products. Still, there are ways to purchase such products,” said a Chinese worker who trades with North Korea.

Sources said North Korean demand is particularly strong for Japanese-made pharmaceutical drugs, medical equipment, cars and cosmetics.

“Although Chinese products are cheap and readily available, their reputation is not good because the quality is bad,” a Chinese source said. “There is strong demand among the affluent for Japanese-made drugs and foods.”

The North Korean leadership understands the importance of the traders and their roles.

Sources said that when Kim Jong Il visited China last year, he heard about complaints from Chinese companies that they were not receiving payments from North Korean trade agents.

After returning to North Korea, Kim Jong Il is said to have ordered trade officials to settle the unpaid accounts to restore trust in North Korea.

The sources said sudden payments of such unsettled accounts became more frequent from late last year.

Read the full story here:
Trade agents do the dirty work for Pyongyang
Asahi Shimbun
Daisuke Nishimura
2/10/2011

According to Yonhap:

North Korea and China are expected to sign an agreement on joint development of the North’s underground resources in the middle of this month in Beijing, a source here said Sunday.

“It has been learned that Pyongyang and Beijing are expected to conclude a deal to jointly develop North Korea’s underground resources on Feb. 15, one day before the birthday of North Korean leader Kim Jong-il,” said the source, noting the accord will be signed in Beijing between China’s Commerce Ministry and the North’s Joint Venture Investment Committee.

“Specifically, the two sides may agree to jointly develop natural resources such as gold, anthracites and rare earths under the bilateral deal. Following the agreement, the two countries are likely to establish a joint venture company in Hong Kong,” said the source, asking to remain anonymous.

Trade between North Korea and China reached US$3.06 billion in the first 11 months of last year, which marked a rise of 9.6 percent from the 2008 annual volume of $2.7 billion. Mineral resources like coals and iron ores account for over 30 percent of the North’s exports to China.

Chinese mining investors have had mixed results in the DPRK despite geographical proximity and monopsony purchasing power (the Chinese can offer lower prices because in many cases they are the only purchaser/investor).

At one point, a Chinese firm had a controlling share of the DPRK’s Hyesan Youth Copper mine (Satellite image here).  As best I can tell, the mine is no longer operable because of flooding from nearby dam construction.

A Chinese firm had also invested in the Musan Mine, the DPRK’s largest, conveniently located on the Chinese border (Satellite image here). This deal also fell trough (see here).

I have heard informally that Chinese mining investors do not particularly like doing business in the DPRK because their North Korean business partners routinely violate contract terms and local officials need to be bribed repeatedly.  Today Chinese mining firms operate across the world in both developing and developed countries, so why bother with the DPRK?

The particular deal mentioned in this Yonhap article is interesting because it hints that the Chinese and North Korean central governments are setting the terms for mining investment in the DPRK for the first time.  This will give local officials less room for post-contractual rent-seeking behavior and could smooth the way for regular/predictable business operations in the DPRK.

Again, centralized corruption is preferable to decentralized corruption for investors.

Read the full Yonhap story here:
N. Korea, China likely to ink deal on joint resource development
Yonhap
2/6/2011

Pictured Above: Pongchon Coal Mine (Google Earth)

Institute for Far Eastern Studies (IFES)
NK Brief No. 11-01-18
1/28/2011

The DPRK Workers’ Party’s newspaper, the Rodong Sinmun, recently featured a front-page editorial urging the North Korean people to increase coal production. On January 26, the KCNA reiterated the call, reporting that the newspaper editorial highlighted fertilizer, cotton, electricity, and steel as products suffering from a lack of coal, and that “coal production must be quickly increased in the Jik-dong Youth Mine, the Chongsong Youth Mine, the Ryongdeung Mine, the Jaenam Mine, Bongchon Mine [Pongchon Mine] and other mines with good conditions and large deposits.”

The editorial also emphasized that “priority must be placed on the equipment and materials necessary for coal production,” and, “the Cabinet, national planning committee, government ministries and central organizations need to draft plans for guaranteeing equipment and materials and must unconditionally and strongly push to provide,” ensuring that the mines have everything they need. It also called on all people of North Korea to assist in mining endeavors and to support the miners, adding that those responsible for providing safety equipment for the mines and miners step up efforts to ensure that all necessary safety gear is available.

In the recent New Year’s Joint Editorial, coal, power, steel and railways were named as the four ‘vanguard industries’ of the people’s economy. Of the four, coal took the top spot, and all of North Korea’s other media outlets followed up the editorial with articles focusing on the coal industry. On January 15, Voice of America radio quoted some recent Chinese customs statistics, revealing that “North Korea exported almost 41 million tons of coal to China between January and November of last year, surpassing the 36 million tons exported [to China] in 2009.” It was notable that only 15.1 tons were exported between January and August, but that 25.5 tons were sent across the border between August and November.

North Korea’s coal exports to China earned it 340 million USD last year, making the coal industry a favorite of Pyongyang’s economic and political elites. Increasing coal production is boosting output from some of the North’s electrical power plants, while exports to China provide much-needed foreign capital. However, even in Pyongyang, where the electrical supply is relatively good, many houses lack heating and experience long black-outs. Open North Korea Radio, a shortwave radio station based in the South, reported on January 24, “As electrical conditions in Pyongyang worsen, now no heating is available.” Farming villages can find nearby timber to use as firewood, but because prices are so high in Pyongyang, even heating has become difficult. Some in the city even wish for rural lifestyles, just for the access to food and heat.

According to Reuters:

North Korea was the supplier of a cache of defective weapons sold to Burundi’s army by a Ukrainian firm, said Western diplomats familiar with the case that has riled Burundi’s anti-corruption body.

The weapons deal with Burundi appeared to be a violation of the international ban on North Korean weapons exports which the U.N. Security Council imposed on Pyongyang in June 2009 after its second nuclear test, the diplomats told Reuters on condition of anonymity.

The case involved the supply of some 60 Chinese-made .50-calibre machine guns to Burundi by a Ukrainian firm called Cranford Trading, the diplomats said. The weapons, which were defective, were sold to the firm by North Korea, they added.

Diplomats say Pyongyang continues to try to skirt the arms embargo. Last year South Africa informed the Security Council’s sanctions committee about a seizure of North Korean arms bound for Central Africa.

The expanded sanctions were aimed at cutting off North Korea’s arms sales, a vital export that was estimated to earn the destitute state more than $1 billion a year.

Some facts about the Burundi weapons deal became known late last year when the country’s anti-corruption watchdog went public about irregularities it found. It said that the arms had been defective and that Burundi had been overcharged.

A report on a state audit of the deal, seen by Reuters, concluded that Cranford Trading provided Burundi’s army defective military material with the complicity of former Defense Minister Germain Niyoyanka, current army chief Godefroid Niyombare and his deputy Diomede Ndegeya.

The auditors’ report said that the bidding offer was $3.075 million, while the amount in the contract was for $3.388 million. A further $1.186 million was paid in transport fees, even though such fees were not agreed in the contract.

The auditors concluded that the defense ministry had spent a great deal of money on defective material and recommended the prosecution of all people involved on suspicion of graft.

North Korea was not mentioned in the auditors’ report.

Several officials at Burundi’s U.N. mission in New York declined to comment when contacted by Reuters.

NO CERTIFICATE OF ORIGIN

“The weapons were transferred by China to North Korea, which then sold them to Cranford,” a diplomat said, adding that the official documentation for the deal had been incomplete.

“There was no certificate of origin of the weapons, which is necessary to comply with international conventions,” the diplomat added. Another diplomat confirmed the remarks.

The contract between Burundi’s defense ministry and Cranford Trading covered the period between October 2008 through 2010. It was not clear how much North Korea would have received when it sold the defective arms to Cranford Trading.

It was not possible to track down Cranford Trading in Ukraine, since the company was not readily accessible in any public lists. Ukraine’s U.N. mission did not respond to an e-mailed query about Cranford and the arms transaction.

It was not clear when China transferred the weapons to North Korea, or who in China was responsible, or whether the Chinese government had knowledge of the deal.

The U.N. arms embargo does not ban the sale of small arms to Pyongyang, though it does require exporters to notify the Security Council’s North Korea sanctions committee in advance about any small-arms sales to Pyongyang.

If the transfer took place after the latest round of U.N. sanctions were approved in June 2009, the exporter would have been required to notify the sanctions committee.

A spokesman for China’s U.N. mission was not available for comment.

The diplomats said the sanctions committee has not been notified about the Burundi case.

Read the full story here:
Defective Burundi weapons came from N.Korea
Reuters
Louis Charbonneau
2/1/2011

According to KBS:

South Korea says it plans to implement during the first half of the year a registration system for South Korean firms that trade goods with North Korea.

An official from the Unification Ministry in Seoul said Monday that revisions must be sought on the law governing inter-Korean exchanges and cooperation in order to introduce the registration system.

The official said that the government will conclude such legal revisions within the first half of the year.

The ministry plans to propose a related bill before May in hopes of winning parliamentary approval for the plan by June.

The ministry had unveiled plans to introduce such a system when it briefed President Lee Myung-bak late last year on its key policies for 2011.

Additional Information:

1. The DPRK is working to bypass ROK trade restrictions.

2. The South Korean government is investigating companies suspected of trading with the DPRK.

Read the full story here:
S.Korea Seeks Registration System for Firms Trading with NK
KBS
1/24/2011