North Korean Economy Watch

Bertil Lintner wrties in the Asia Times:

For more than a decade, the world around North Korea has been shrinking. In the wake of its missile and nuclear tests and recent accusations that it torpedoed a South Korean naval vessel, the list of internationally imposed sanctions and trade restrictions aimed at isolating the reclusive state has grown ever longer.

But the North Koreans, who have been in a state of war for more than half a century, have often found ingenious ways around those restrictions and added pressures from the United States, Japan and other countries, most visibly seen in the string of front companies and bank accounts it maintains across Asia.

Recent indications are that Pyongyang has sought willing trade partners outside of Asia and its new closest commercial ally appears to be Brazil. Relations between the two countries have warmed considerably since leftist Luiz Inacio Lula da Silva became president in January 2003.

The official Chinese news agency Xinhua reported in October 2004 that North Korea planned to open an embassy in Brasilia, its fourth in the Latin and South American region after Havana, Cuba, Lima, Peru and Mexico City. On May 23, 2006, the official Korean Central News Agency (KCNA) and the Brazilian media reported that the two countries had signed a trade agreement.

More recently, the KCNA reported last December that a “protocol on the amendment to the trade agreement” had been signed in the capital Pyongyang. “Present at the signing ceremony from the DPRK [Democratic People’s Republic of Korea, or North Korea] side were Ri Ryong Nam, minister of foreign trade, and officials concerned and from the Brazilian side Arnaldo Carrilho, Brazilian ambassador to the DPRK, and embassy officials,” according to the news report.

China’s role in facilitating trade between Brazil and North Korea remains a matter of conjecture, but it is significant that the state mouthpiece Xinhua has eagerly reported on the warming of relations between the two countries. China remains Pyongyang’s most important base for all kinds of foreign trade – legitimate as well as more convoluted business transactions through front companies in Beijing and elsewhere.

But North Korea also needs more discreet trading partners, as China is often criticized in international forums for its close relations with the North Korean regime and is undoubtedly closely watched by Western intelligence agencies. And it is hardly surprising that Brazil, which is known to harbor its own nuclear ambitions, albeit for stated peaceful purposes, has emerged as such a friendly nation to Pyongyang.

Significantly, Brazil has established what appears to be an understanding with another aspiring nuclear power: Iran. “Also like Iran, Brazil has cloaked key aspects of its nuclear technology in secrecy while insisting the program is for peaceful purposes, claims nuclear weapons experts have debunked,” according to an April 20, 2006 Associated Press report.

While Brazil is more cooperative than Iran on international inspections, some worry its new enrichment capability – which eventually will create more fuel than is needed for its two nuclear plants [1] – suggests that South America’s biggest nation may be rethinking its commitment to nuclear non-proliferation.

”Brazil is following a path very similar to Iran, but Iran is getting all the attention,” said Marshall Eakin, a Brazil expert at Vanderbilt University in the United States. ”In effect, Brazil is benefiting from Iran’s problems.”

In September 2009, Lula declared before the United Nations General Assembly: “Iran is entitled to the same rights as any other country in its use of nuclear energy for peaceful purposes.” He added to reporters outside the UN General Assembly, “I defend for Iran the same rights with respect to nuclear energy that I do for Brazil.” He added: “If anyone is ashamed of having relations with Iran, it’s not Brazil.”

But it is Lula’s budding cooperation with North Korea that is especially worrying to some Western observers. According to one longtime observer of the North Korean scene, “Both nations have long-standing ambitions to develop a nuclear capability as well as missiles and space-launched vehicles. Both have been the subject of intense US political pressure at times, Brazil on-and-off, North Korea all the time. And Brazil has access to technology that North Korea can only dream about.”

Because Brazil is not on any international sanctions list, it is easier for it to obtain dual-use materials. It remains to be proven, however, that Brazil has served as a conduit for such goods ultimately destined for North Korea.

According to official trade statistics, available at www.stat-trade.com, North Korea’s largest trading partner in 2009 was China, with two-way commerce totaling US$2.67 billion. That was followed by South-North Korean trade worth $1.68 billion. A surprising third on the list was Brazil with US$221 million in two-way trade, well ahead of Singapore, Hong Kong and North Korea’s other traditional Asian trading partners.

The nominal figure may not be impressive in an international context, but it is substantial for North Korea, a country with an estimated total gross domestic product of about $22 billion. North Korea’s trade with Brazil has recently increased almost at the pace it has decreased with Thailand, from where it previously sourced dual-use chemicals, raw materials and machinery. Thailand no longer figures prominently in recent trade statistics, which is noteworthy given that their two-way trade reached a record US$331 million in 2004.

Those deals were done under the government of Thaksin Shinawatra, who at one point even proposed signing a full-blown free-trade agreement with North Korea. In August 2005, the former Thai premier was formally invited by North Korean leader Kim Jong-il to visit Pyongyang. The visit never materialized, however, and when Thaksin was ousted in a September 2006 military coup, Thai-North Korean relations began to deteriorate. By 2008, bilateral trade between Thailand and North Korea fell to $76 million and in 2009 dipped further to $47.1 million.

Among North Korea’s more remarkable export items before the September 2006 coup in Thailand were 1.3 tons of gold and 10 tons of silver. Another pre-arranged shipment of 12 tons of silver arrived in Bangkok in October of that year. However, business is now reportedly sluggish at the two main trading companies that North Korea is known to maintain in Bangkok, Star Bravo and Kosun Export Import.

Successive Thai governments that have ruled the country since Thaksin’s overthrow are believed to have complied more strictly with international pressure to restrict dealings with North Korea. In Brazil, however, North Korea has a long history of involvement with various leftist groups, the distant offshoots of which are now in power in Brasilia.

North Korea expert Joseph S Bermudez wrote in his 1990 study “Terrorism: The North Korean Connection”:

From 1968 to 1971 the DPRK provided financial and military assistance to several leftist organizations in Brazil, most notably to Carlos Marighella’s National Liberating Action (Acao Libertadora Nacional – ALN) and the Revolutionary Popular Vanguard (Vanguarda Popular Revolucionaria – VPR). By November 1970, the DPRK established a training base in the Porto Alegre area, where a small number of guerrillas were given guerrilla warfare, small arms, and ideological training. A small number of ALN and VPR personnel is believed to have also received training within the DPRK.

Marighella – a Marxist, writer and founder of the ALN – was the leader of a militant movement that fought against Brazil’s US-supported, authoritarian right-wing governments in the 1960s. In September 1969, the guerrillas even managed to kidnap US ambassador Charles Burke Elbrick for 78 hours. After his release in exchange for 15 imprisoned leftists, Elbrick remarked, “Being an ambassador is not always a bed or roses.” Two months later, Marighella was killed in an encounter with Brazil’s police. But on November 4, 2009, the 40th anniversary of the death of Marighella, Lula declared him a “national hero”.

Although ideology may be less important than profits in today’s capitalist world, there are old emotional bonds between North Korea and Brazil under Lula that should not be entirely discounted. Brazil may be among the countries which have condemned North Korea’s nuclear program, as was shown when, in May 2009, the Brazilian government called on North Korea “to sign the Comprehensive Nuclear Test Ban Treaty and to strictly observe the moratorium on nuclear tests”.

But bilateral trade between the two sides is nevertheless – in relative terms – now booming. In May last year, North Korea’s Foreign Affairs Minister Pak Ui-chun arrived in Brazil to meet with his Brazilian counterpart, Celso Amorim. Pak expressed Pyongyang’s interest in receiving assistance in its deep-water oil prospecting efforts from PETROBRAS (Brazilian Petroleum Corporation), while Amorim said his country was reportedly interested in exporting what he referred to as “farm” machinery.

So far no military hardware, or material that could have military applications, is known to have changed hands between North Korea and Brazil. But Pyongyang has found at least one new trading partner which could potentially replace some of its former business allies in Asia. It’s a budding relationship that will be closely monitored by North Korea watchers in Japan and the West.

Read the full story here:
Brazil, North Korea: Brothers in trade
Asia Times
Bertil Lintner
Asia Times
6/3/2010

According to the BBC:

A United Nations panel has accused North Korea of continuing to export nuclear and missile technology in defiance of a UN ban.

The experts said North Korea has used front companies and intermediaries to sell weapons and provide illegal assistance to Iran, Syria and Burma.

The preliminary report was compiled by a seven-member group that monitors Pyongyang’s compliance with sanctions.

…

The 47-page report outlined a broad range of techniques used by North Korea to evade sanctions imposed by the UN after the North’s nuclear tests of 2006 and 2009, the Associated Press reports.

The report said North Korea had moved quickly to replace banned individuals and entities with others to enable it to continue the nuclear trade.

Among a number of “masking techniques”, it said the North describes exports falsely, mislabels shipping container contents, falsifies information about the destinations of goods and uses “multiple layers of intermediaries, shell companies, and financial institutions”.

The report said North Korea has a range of legitimate trade offices but also sustains links with international criminal organisations to pursue the banned trades.

An unnamed diplomat told Reuters the findings were “not entirely surprising”.

“The point is that North Korea has been providing that kind of aid to Iran, Syria and Burma,” he said.

The report comes before a crucial day of talks in New York about the future of the Nuclear Non-Proliferation Treaty.

It also comes at a time of increased tension surrounding what international investigators say was a deadly North Korean torpedo attack on a South Korean warship in March.

Read the full article here:
North Korea ‘trading nuclear technology’ says UN panel
BBC
5/28/2010

According to Bloomberg:

Japan tightened controls on sending money to North Korea and authorized the Coast Guard to search the communist regime’s ships in response to the deadly attack on a South Korean naval vessel.

The cap on undeclared cash transfers will be lowered to 3 million yen ($32,800) from 10 million yen, Chief Cabinet Secretary Hirofumi Hirano said today in Tokyo. Parliament passed a bill allowing the boarding of ships in international waters suspected of carrying North Korean nuclear or missile technology.

The toughened sanctions come a week after an international report concluded that a North Korean torpedo sank the 1,200-ton Cheonan in March, killing 46 sailors. Japan banned almost all trade with Kim Jong Il’s regime last year in response to a second nuclear weapon test and several missile launches.

“The cabinet has decided to take these new measures prompted by the unforgivable torpedo attack,” Hirano said. Japan also reduced the amount of money an individual can legally take into North Korea to 100,000 yen from 300,000 yen, he said.

Prime Minister Yukio Hatoyama will hold a two-day summit with South Korean President Lee Myung Bak and Chinese Premier Wen Jiabao starting tomorrow on South Korea’s Jeju Island. Japan and the U.S. are pushing Wen to acknowledge and condemn North Korea’s role in sinking the ship.

Koreans in Japan

Japan is home to about 589,000 Korean nationals, based on 2008 data, most of them the descendents of forced laborers brought back from the peninsula during Japan’s 1910-1945 occupation. South Koreans number almost 400,000 and North Koreans about 40,000, according to the Korean Residents Union, a pro-South group in Tokyo. Chosensoren, a Japan-based group that supports North Korea, doesn’t disclose its membership numbers.

North Korean residents in Japan have sent billions of yen in money and goods back home to relatives since the 1953 end of the Korean War, much of it derived from their operation of pachinko gambling parlors. Sanctions imposed last year and in 2006 have reduce the amount.

“Japan has imposed so many sanctions in the past that the new measures won’t have much impact,” said Pyon Jin Il, author of the “The Truth of Kim Jong Il” and chief editor of the Tokyo-based monthly Korea Report. “This is more symbolic, to show the world that Japan is doing something.”

In the 11 months through February, 55 million yen was wired or brought to North Korea from Japan, down from 280 million yen in the April to March 2006 fiscal year, according to Ministry of Finance data.

Trade between Japan and North Korea fell 97 percent to 793 million yen in 2008 — all in Japanese exports — from 21.4 billion yen in 2005. Last year’s sanctions added to a previous ban on exports of luxury goods imposed in 2006 following the communist nation’s first nuclear test.

Read full story here:
Japan Tightens Control on Sending Cash to North Korea
Bloomberg
Takashi Hirokawa and Sachiko Sakamaki
5/28/2010

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-05-27-1
5/27/2010

On May 24, the South Korean government announced, in response to the Cheonan incident, the cessation of inter-Korean exchanges and other sanctions against Pyongyang. These measures will directly impact the North, costing it 250~300 million USD. According to the Ministry of Unification, North Korea earned 245.19 million USD from inter-Korean cooperative schemes not related to the Kaesong Industrial Complex. This does not include additions monies for customs fees, transportation costs, mediation fees and other incidentals.

About 254 million USD worth of goods were produced on commission in the North after raw materials or partially manufactured products were sent from the South. 10~15 percent of this (25-38 million USD) covers labor and other costs. Therefore, by halting all exchanges and cooperative schemes other than the Kaesong Industrial Complex, North Korea stands to lose at least 200 million USD.

In particular, as the South has banned the import of North Korean sand and marine products, both known to be money-earners for the North’s military, it appears these sanctions have the potential to really pressure Pyongyang. In addition, preventing North Korean ships from using South Korean waters could cost an additional nine million USD. An additional 6 billion won-worth of government-related projects for the North has also been suspended. Ultimately, the cessation of inter-Korean exchange will cost North Korea 250~300 million USD.

The Korea Defense Institute estimates that through inter-Korean projects, tourism, and the Kaesong Industrial Complex, North Korea earned 180 million USD in 2004, but that jumped to 233 million USD in 2005, 341 million in 2006, and 534 million USD in 2007, before falling to 490 million in 2008, and 347 million USD last year.

It appears that the reduction in foreign currency earned by the North has somewhat impacted its economy. Now, the cessation of inter-Korean contacts means further reduction in the North’s access to foreign currency, possibly causing severe shortages of daily necessities because of a lack of trade and insufficient production capacity. If inter-Korean trade ceases, the North can no longer earn foreign capital from Seoul, and this could cause DPRK-PRC trade to drop off, if the North is unable to cover its bills.

It will also cause a loss of jobs for all those North Koreans involved in consignment production, fishing, farming, and other areas of the economy hit by the freeze in trade with the South. As the processing-on-consignment business has reached 30~35 million USD per year, labor involved in the industry nears that of the Kaesong Industrial Complex, and could mean the loss of as many as 40,000 jobs.

While the government has decided to maintain the Kaesong Industrial Complex, it plans to downsize the ROK manpower by 40-50 percent. The reason given is to be able to ensure the safety of the workers, but if the number of workers is cut by 50 percent, this cannot help but have a huge impact on production, raising concerns with North and South Korean employees alike.

According tot he Joonang Ilbo:

The U.S. government has nominated Robert Einhorn, an expert in nonproliferation issues, as its new coordinator for implementing UN Security Council sanctions against North Korea, diplomatic sources in Seoul said on Thursday.

Einhorn is currently the special adviser to U.S. Secretary of State Hillary Clinton for nonproliferation and arms control, and a source here said Einhorn is one of Washington’s leading experts in Korean Peninsula and North Korean nuclear issues.

The sources said the United States is looking to streamline the process by which it implements sanctions, as it prepares to seek a UN resolution that addresses the sinking of the South Korean warship Cheonan. Last week, a multinational team of investigators concluded that North Korea attacked the 1,200-ton corvette with a torpedo on March 26.

“The U.S. administration was seeking more efficient management of implementation of sanctions, which had been divided between the State and the Treasury departments,” the source said. “Philip Goldberg, the assistant state secretary at the Bureau of Intelligence and Research, had been doubling as the implementation coordinator, but Einhorn is poised to take over.

“The U.S. government also tried to strengthen its sanctions system after the second North Korean nuclear test last year, when Goldberg was named the coordinator,” the source said. Goldberg was appointed to his Bureau of Intelligence and Research post in February.

Another source said Einhorn’s nomination is also part of the U.S. government’s efforts to follow up on President Barack Obama’s order to review “existing authorities and policies” on North Korea. Soon after South Korean President Lee Myung-bak unveiled Seoul’s countermeasures against Pyongyang Monday, the White House expressed its support and said in a statement, “This review is aimed at ensuring that we have adequate measures in place and to identify areas where adjustments would be appropriate.”

According to the State Department, Einhorn spent 29 years at the department and served as a senior adviser at the Center for Strategic and International Studies from 2001 to 2009. He held arms control and nonproliferation positions at the U.S. Arms Control and Disarmament Agency, and from 1999 to 2001 he was the assistant state secretary for nonproliferation.

In October 2000, Einhorn accompanied then-Secretary of State Madeleine Albright to Pyongyang, where he met Kim Jong-il twice. Einhorn was also involved in missile talks with North Korea.

“Aside from his knowledge of North Korean nuclear issues, Einhorn is tight with Gary Samore, the weapons of mass destruction coordinator at the White House, and other nonproliferation officials in the Obama administration,” another source in Seoul said. “Einhorn should be able to provide leadership in his new role.

“And since he’s also been dealing with financial sanctions on Iran as the special adviser at the State Department, Einhorn is a great fit to manage financial embargoes against North Korea.”

Another diplomatic source said the Obama administration needed to tighten its sanctions regime. The source said when North Korean overseas accounts were closed off by U.S. sanctions, they simply changed the name of the individual or the company which had opened the account and resumed transactions. The sanctions were aimed at banning transactions by companies or individuals suspected of involvement in the North’s weapons of mass destruction programs.

“U.S. officials have taken note of such [name-changing] practices and they’re preparing measures to eliminate them,” the source said.

U.S. officials are also continuing to press China to join them in punishing North Korea. In an interview with National Public Radio yesterday, Korean time, Kurt Campbell, the assistant secretary of state for East Asian and Pacific Affairs, said that because China is cooperating with the United States about nuclear issues in Iran, he hopes it will do the same in dealing with the Cheonan case.

In another related move, Obama and Japanese Prime Minister Yukio Hatoyama condemned the Cheonan attack in a phone conversation and pledged cooperation with South Korea. Japanese Chief Cabinet Secretary Hirofumi Hirano said Japan will lower the limit on the amount of undeclared cash that can be carried into North Korea to 100,000 yen ($1,097) from the current 300,000 yen, as part of Japan’s toughened sanctions.

Read the full story here:
U.S. nominates sanctions ace
Joongang Daily
Kang Chan-ho, Yoo Jee-ho
5/29/2010

UPDATE 4:  Global Security gives a rundown of the steps the DPRK is already taking:

North Korea has begun to freeze ties with the South, which already halted most trade with Pyongyang in retaliation for the sinking of a South Korean warship. The North has denied responsibility for the attack on the vessel and is accusing the South of launching a “smear campaign” against it.

Pyongyang has expelled eight South Korean government officials from a joint factory park in the North. And, it is threatening to block what little cross-border traffic exists.

The Unification Ministry in Seoul says hundreds of South Korean managers and other workers from the South were allowed to enter the industrial complex in the west coast Kaesong border city, Wednesday.

But ministry spokesman Chun Hae Sung tells reporters North Korea quickly acted on other aspects of its threat to cut all communications ties with the South.

He says Pyongyang Wednesday halted contact between the Red Cross delegations in the truce village, Panmunjom, and the North Korean Navy contacted the South to inform it that all marine communications between the two Korea’s are now cut.

Relations between the two Koreas have deteriorated steadily since the Cheonan, a South Korean naval vessel in the Yellow Sea, exploded a month ago, killing 46 crew members. An international investigation concluded last week that the coastal patrol warship was hit by a North Korean torpedo.

South Korea’s defense ministry tells VOA News that plans to send tens of thousands of leaflets northward by ballon have been delayed because of wind conditions, but they could go aloft as early as Thursday. Officials say the leaflets are intended to inform North Koreans about the sinking of the South Korean naval vessel. The North views Southern pamphleteering as hostile propaganda.

South Korea’s military is using loudspeakers along the border, silenced for six years, and re-instituting FM broadcasting to the North.

North Korea’s state television newscaster announced such propaganda will not be tolerated.

The North Korean newscaster says it will open fire on the South Korean loudspeakers and destroy them.

Pyongyang says a resumption of the propaganda campaign will also compel it to totally shut down the Kaesong industrial complex, where more than 100 South Korean firms employ about 42,000 North Korean workers.

The two countries have no diplomatic relations and technically remain at war following a 1953 truce which ended the three-year Korean War.

The United States, which has 28,000 troops in South Korea, has hurriedly announced plans for several joint military exercises in the coming month. In the past, Pyongyang has strongly condemned U.S.-South Korean drills, claiming they are preparations for an invasion of the North.

UPDATE 3: Pyongyang confirms it wants to keep running the Kaesong Zone.  According to Yonhap:

North Korea has said it wants to keep a joint industrial complex with South Korea going and will ban southern firms from taking factory equipment out of the zone, a Unification Ministry official said Monday.

An unidentified North Korean official made the remark Sunday to a South Korean staffer at a joint commission handling the operation of the factory park in the North’s border town of Kaesong, the official said on condition of anonymity.

The remark represents a softening of Pyongyang’s stance on the project as it contrasts with a threat to shut a cross-border route leading to the zone in anger over a series of steps South Korea announced in retaliation to the North’s sinking of a southern warship.

It also appears to reflect the North’s concern that the park’s closure would leave tens of thousands of its workers there without jobs and the regime without a key source of hard currency that has helped prop up the North’s moribund economy.

UPDATE 2:  Pyongyang has scrapped a joint-Korean agreement which ensures the safety of South Koreans crossing the Military Demarcation Line and threatened to close the Kaesong Zone if Seoul resumes propaganda broadcasts.  According to the Korea Times:

“Seoul will take stern measures if Pyongyang harms South Korean workers staying at the Gaeseong Industrial Complex, even by a tiny amount,” Lee Jong-joo, a spokeswoman at the Ministry of Unification, said.

The remark came a day after the communist North issued a statement that it would scrap an inter-Korean pact to ensure the safety of South Koreans crossing the Military Demarcation Line (MDL), which separates the two Koreas.

On Wednesday, Pyongyang also threatened to close the industrial park if Seoul begins broadcasting anti-North Korea propaganda through loudspeakers along the Demilitarized Zone (DMZ).

“We can neither let North Korea harm our citizens in retaliation to the resumption of psychological warfare against it, nor tolerate such rationale,” the spokeswoman said.

UPDATE 1:  According to the Washington Post work is continuing at the Kaesong Industrial Zone:

There was a semi-hopeful signal Wednesday that rising animosity over the sinking of a South Korean warship may not shatter all economic ties between the two Koreas.

Production continued at the Kaesong Industrial Complex, a six-year-old factory park just north of the heavily armed border that separates North and South Korea.

At the last remaining symbol of economic cooperation between the two countries, about 45,000 North Koreans went to work as usual for 121 South Korean companies located in the complex.

North Korea had threatened Tuesday that it would severe all relations with South Korea. Its move was in retaliation for trade and other sanctions that Seoul imposed Monday on Pyongyang for its apparent role in a stealthy submarine attack that torpedoed a South Korean ship and killed 46 sailors.

The North denies sinking the ship and threatens war if there is any move to punish it. But its actions at Kaesong were nearly not as uncompromising as its rhetoric.

North Korea allowed several hundred South Korean managers and engineers to cross the border Wednesday and go to work.

It did kick out at least eight South Korean government officials and cut North-South phone lines for some manufacturers. But one company official said that North Korean workers were allowed to work and South Korean managers were allowed to manage.

“The situation at Kaesong at this moment is that nothing much has changed,” said Song Ki-suk, former chairman of Korea Micro Filter, a South Korean auto parts company that employees 350 North Koreans.

…

Still, it appears that North Korea wants Kaesong to operate. The industrial park injects more than $60 million a year in rent, fees and worker salaries into the country’s moribund economy.

I would take issue with the last paragraph.  I am pretty sure that the vast majority of hard currency transfers from South to North mean very little to the broader North Korean economy.  Those revenues are held pretty tight.  However, jobs at the Kaesong Zone are among the most desired in the country and there is no doubt that the complex has improved life in the Kaesong Region.

Read the full story here.

ORIGINAL POST: On Monday the South Korean government announced it was severing nearly all trade relationships with the DPRK.  One notable exception to this policy was the Kaesong Industrial Zone.  Today, however, the DPRK announced that it is reciprocating. According to Reuters:

The following are key points from the text of the report issued by the North’s KCNA news agency.

“The Committee for the Peaceful Reunification of Korea, accordingly, formally declares that from now on it will put into force the resolute measures to totally freeze the inter-Korean relations, totally abrogate the agreement on non-aggression between the north and the south and completely halt the inter-Korean cooperation.

“In this connection, the following measures will be taken at the first phase:

“1. All relations with the puppet authorities will be severed.

“2. There will be neither dialogue nor contact between the authorities during (South Korean President) Lee Myung Bak’s tenure of office.

“3. The work of the Panmunjom Red Cross liaison representatives will be completely suspended.

“4. All communication links between the north and the south will be cut off.

“5. The Consultative Office for North-South Economic Cooperation in the Kaesong Industrial Zone will be frozen and dismantled and all the personnel concerned of the south side will be expelled without delay.

“6. We will start all-out counterattack against the puppet group’s ‘psychological warfare against the north.’

“7. The passage of south Korean ships and airliners through the territorial waters and air of our side will be totally banned.

“8. All the issues arising in the inter-Korean relations will be handled under a wartime law.

“There is no need to show any mercy or patience for such confrontation maniacs, sycophants and traitors and wicked warmongers as the (South Korean President) Lee Myung Bak group.”

The Choson Ilbo reports on some of the economic implications if the Kaesong complex was closed:

It would cost about US$500 million to shut the joint-Korean Kaesong Industrial Complex in the North, the government estimates.

A government official on Sunday said the estimate includes insurance payouts from the Inter-Korean Economic Cooperation Fund for South Korean businesses operating at the industrial park if the North decides to shut the industrial park or if Seoul decides to pull out South Korean staff for safety reasons.

The North has earned more than $96.81 million in cash from wages from 2004 to March this year. It expects to earn another $40 million this year.

“Some 100 of 121 South Korean firms at the industrial park are insured with the Inter-Korean Economic Cooperation Fund,” a Unification Ministry official said. “The indemnity insurance will compensate for up to W7 billion (US$1=W1,199) or up to 90 percent of their investment.”

But no firm that voluntarily withdraws before the North or the South shuts the industrial park is entitled to insurance payouts. An executive of a firm operating at the industrial park said, “The total investment South Korean firms made in the industrial park probably exceeds W1 trillion.” That means the $500 million estimate by the government is too low, and despite the insurance limit of W7 billion, quite a few firms have invested more than W20 billion, he added.

It is difficult for early starters to withdraw given that they are making profits now and the amount of their indemnity insurance has shrunk due to depreciation of their properties.

But many latecomers are ready to leave if there is an adequate compensation, though the ministry official said none have yet told the government they want to pull out.

The North Korean media have been repeatedly reporting a statement issued last Friday by the North’s Committee for the Peaceful Reunification of the Fatherland saying it considers itself at war and will respond resolutely to any action the South takes over the sinking of the Navy corvette Cheonan on March 26. It also threatened to cut off all ties with South Korea and scrap a bilateral non-aggression pact.

In 2007 the DPRK’s top trading partners were (in order) China, South Korea, Thailand, Russia, India, Brazil, Singapore, Germany, Netherlands, Taiwan, Algeria. In 2008, China and South Korea accounted for more than 80% of the DPRK’s total trade (China 67%).  Inter-Korean trade was nearly zero until 1988.

According to Reuters:

The state-run Korea Trade-Investment Promotion Agency (KOTRA) said North Korea’s trade, including commerce with South Korea, fell 9.7 percent to $5.09 billion last year from 2008.

Excluding trade with the South, foreign commerce feel 10.5 percent to $3.41 billion last year, KOTRA said in a statement.

It said trade with China, the North’s sole supporter, amounted to about $2.7 billion.

The prospect of further sanctions as a result of the sinking of a South Korean naval vessel by a suspected North Korean torpedo in March would slow trade even more, KOTRA said.

“North Korea’s trade this year is seen shrinking further and depending more on China due to the U.N.’s continuous sanctions against the North and possibilities of further measures,” KOTRA said.

North Korea does not announce its own trade data and KOTRA said it compiled the data from the agency’s overseas offices.

Last week, Seoul released the findings of a report which concluded that a North Korean submarine had fired a torpedo that sank the Cheonan corvette, killing 46 sailors.

South Korea has repeatedly said it would not strike back at the North, aware that would frighten away investors already jittery about the escalating tension on the divided peninsula.

Washington has called for an international response, which could range from fresh U.N. Security Council sanctions on North Korea, although those might be opposed by China, to a statement of condemnation by the world body.

A range of international sanctions have been levied against North Korea in recent years for its missile and nuclear tests.

And according to Leon Sigal in 38 North:

… North Korean trade increased in the two years following the 2006 UN sanctions. Inter-Korean trade totaled $1.8 billion in 2007—about a 33 percent jump from 2006—then rose again to $1.9 billion in 2008. China trade also grew to roughly the same level in 2007, then shot up to $2.78 billion in 2008. North Korea’s total trade increased by more in 2008 than in any other year over the past decade and its economy grew by 3.7 percent according to the Bank of Korea.  

The most recent UN sanctions enacted in 2009 have had similar results. In response to the threat of sanctions, Pyongyang went ahead with a test-launch of a long-range rocket and a second, more successful, nuclear test. The UN Security Council, in response, enacted Resolution 1874 imposing sanctions on the DPRK. The prime target of the new sanctions was the bank accounts of North Korean entities involved in nuclear and missile trafficking. Given the many ways to circumvent the banking system, however, and the reluctance of governments to interpret Resolution 1874 as liberally as the United States did, it is still unclear how much of an impediment this will prove to be. As the Congressional Research Service concluded, “[F]inancial sanctions aimed solely at the DPRK’s prohibited activities are not likely to have a large monetary effect.”

Luxury goods were also a focus of the most recent U.N. sanctions—in the dubious belief that consumerism is as rampant among privileged North Koreans as it is in Georgetown or that Kim Jong Il’s hold on the elite can be loosened by denying them Rolexes or Mercedes imported from China. A Congressional Research Service analysis of Chinese trade statistics for 2008 indicates that Beijing’s exports of luxury consumer goods to North Korea was between $100 million and $160 million, mostly financed by Chinese credit. That trade is not likely to have dropped enough to make any appreciable difference on the loyalty of elites long accustomed to tight belts and even tighter social controls.

Again, the overall economic impact of the sanctions appears to have been limited. Overall, according to U.S. estimates, North Korea’s economy again grew at a 3.7 percent rate in 2009,[7] probably because of a more bountiful harvest. While North Korean exports to China are difficult to estimate because of the introduction of the new currency, imports from China in 2009 dropped sharply to below the 2007 level. Some of the drop was due to the global recession and price deflation.[8] Trade with South Korea fell 8.5 percent in 2009 but still totaled $1.7 billion—five times what it was a decade ago. Trade with Japan was cut to a pittance, though it is difficult to ascertain the extent to which cash remittances from Koreans in Japan still manage to circumvent sanctions. For instance, Tokyo discovered that the DPRK was exporting sanctioned food items such as mushrooms to China and they were then sold to Japan at higher prices. The only losers may have been Japanese consumers.

As for international cooperation to curb the North’s arms sales, the net effect is probably overstated. In 2005, even before sanctions were imposed, the global market for missiles—the big-ticket item—had dried up, as buyers like Iran and Pakistan opened their own production lines, although technological assistance still generated revenue for Pyongyang. Since the UN arms embargo, at least four shipments of arms have been interdicted. Their total value, never mind net profit, fell far short of the estimated $500 million a year North Korean arms sales are supposed to generate. How many of its exports evaded capture is not known.

Read the full stories here:
Sanctions hit North Korea’s crumbling economy: report
Reuters
Cheon Jong-woo
5/23/2010

Looking for Leverage in All the Wrong Places
38 North
Leon V. Sigal

According to the Washington Post:

South Korean President Lee Myung-bak said Monday that his country is stopping all trade and most investment with North Korea and closing its sea lanes to North Korean ships after the nation’s deadly attack on a South Korean warship.

Lee also called for a change in Pyongyang’s Stalinist regime.

The tough measures, announced in an address to his nation, were bound to ratchet up pressure on the isolated Pyongyang government and add a new flash point in U.S. relations with China.

“Fellow citizens, we have always tolerated North Korea’s brutality, time and again. We did so because we have always had a genuine longing for peace on the Korean Peninsula,” he said. “But now things are different. North Korea will pay a price corresponding to its provocative acts.”

Lee then said that “no North Korean ship will be allowed to make passage through any of the shipping lanes in the waters under our control” and that “any inter-Korean trade or other cooperative activity is meaningless.”

A senior U.S. official, traveling with Secretary of State Hillary Rodham Clinton in China, said the United States will back “all the steps the South Koreans are going to announce.” In an indication of the seriousness with which the Obama administration views the drama between the North and South, home to nearly 29,000 U.S. troops, he added: “We have not faced something like this in decades.” Lee apparently has ruled out military action because he does not want to trigger an all-out war.

The official said that, based on talks over the past two days, Chinese officials have not accepted the results of a South Korean investigation — backed by experts from the United States, Australia, Britain and Sweden — that implicated North Korea in the attack on the 1,200-ton Cheonan that killed 46 sailors. As such, it is unclear whether Beijing will support Lee’s measures or his call, also made in the speech, to take the issue to the U.N. Security Council.

China’s reluctance to agree with the report underscores the challenges the United States faces as it seeks to forge closer ties to Beijing. The U.S. official also noted Sunday that China and the United States still do not see eye to eye on the details of planned economic sanctions on Iran for its failure to stop its nuclear enrichment program. Of specific concern, he said, are disagreements between Beijing and Washington about how investments in Iran’s oil and gas sector will be treated. China has committed to investing more than $80 billion in Iran’s energy sector; tightened sanctions against Tehran could threaten those investments.

…

Tough options for China

The attack and its aftermath also threaten China’s place in the region and could force it to make an unwanted choice between South Korea and North Korea — two countries that it has handled deftly since normalizing relations with Seoul in 1992. South Korea wants China, which is a permanent member of the Security Council, to back Seoul’s call to take the Cheonan issue to the council. So does the United States, the U.S. official said.

But that could risk hurting Pyongyang, and China appears committed to maintaining the North Korean regime above all.

“For China,” the U.S. official said, “they are in uncharted waters.”

China reacted slowly to the Cheonan’s sinking, waiting almost a month before offering South Korea condolences. Then it feted North Korea’s Kim in May, apparently offering him another large package of aid, Asian diplomats said. China’s attitude has enraged South Korea.

Michael Green, a national security official during George W. Bush’s administration, said the Cheonan crisis highlights just how differently China views its security needs than the rest of the players in Northeast Asia. For years, as China worked with the United States, Russia, South Korea and Japan to try to persuade North Korea to give up its nuclear weapons programs, these differences were obscured. But the Cheonan’s sinking has changed that.

According to Yonhap, the Kaesong Industrial Zone will be spared from the chopping block:

South Korean Unification Minister Hyun In-taek said Monday that Seoul will still maintain the joint economic project in Kaesong despite the attack, but will “respond with resolute measures” to any bid by the communist neighbor to undermine the safety of its workers.

“If North Korea ignores our careful consideration to preserve the complex even under current circumstances, and subsequently threatens the safety of our citizens there, we will never tolerate any harm to our citizens,” Hyun said.

Hyun was speaking at a joint press briefing with the foreign and defense ministers following President Lee Myung-bak’s nationally televised speech condemning the North for the ship sinking.

Hyun was apparently referring to the half-year long detention of a South Korean worker in Kaesong last year amid deteriorating political ties between the countries.

Also according to Yonhap, some aid projects will be maintained:

Lee announced his government will suspend all trade and exchange programs with the North except for the Kaesong project, while maintaining minimum levels of humanitarian aid for infants and children living in the impoverished communist country.

“Under these circumstances, any inter-Korean trade or other cooperative activity is meaningless,” the president said, adding that North Korean ships will no longer be allowed to use South Korean waterways as short-cuts.

Yonhap reports:

A suspension of inter-Korean trade would deal a “direct blow” to North Korea by blocking its major source of hard currency needed to govern the reclusive and impoverished country, a Seoul think tank said Monday.

The state-run Korea Development Institute (KDI), however, noted in a report that such a move could fail to achieve its intended goal if other global powers like China do not agree, highlighting the importance of securing international cooperation.

…

“North Korea’s trade with the South has accounted for up to 38 percent of its total trade volume and makes up 13 percent of its gross domestic product. With the dollars obtained through inter-Korean trade, the North has expanded its businesses with China. It (the trade with the South) also helped Pyongyang to cushion any negative external risks such as sanctions by Japan, while acquiring dollars needed to govern the country,” the report said.

“If we push for a measure to suspend the trade, it could translate into a decline in its trade with China and make it tough to find other business partners as a result, dealing a direct blow to its regime by blocking it from obtaining dollars,” it added.

The report noted that a trade ban by the Seoul government would have a maximum level of impact if China follows suit, which it expects could place Pyongyang under a situation where “it has to think about its life or death.”

Currently, the North depends on South Korea and China for up to 80 percent of its external trade and 35 percent of its GDP, according to the report. Especially, China provides many strategically important materials such as oil to the North.

The report said that if China decides to support the North, it would reduce the overall impact but it will still destabilize its regime in the long term by making it heavily dependent on its closet ally and fast-emerging global economic power.

“It would weaken the regime’s principle not to depend solely on a single country even for its trade based on the so-called juche (self-reliance) doctrine. Also China’s support would prompt opening of the reclusive nation to outside, making it more difficult for the regime to keep its tight grip on domestic market and those who want and push for market opening,” the report said.

“In summary, a political choice by China would have some impact but in the end, a trade suspension with the South would cause a significant amount of pain to the country. We need to have to push for such an action with self-confidence if there is a consensus, while taking diverse efforts to persuade China over such a measure, while establishing an international cooperative framework with the United States and Japan as well,” it added.

Business Week (Bloomberg) reports on the impact of UN sanctions last year:

UN sanctions imposed on North Korea after its second nuclear test in May 2009 caused the North’s international commerce to shrink 9.7 percent last year, according to the Seoul-based Korea Trade-Investment Promotion Agency. Stripping out South Korea’s one-third share, China accounted for 78.5 percent of North Korea’s commerce, the agency said. North Korea, whose leader Kim visited China earlier this month, doesn’t release trade data.

The New York Times also has good coverage

The full text of President Lee’s speech can be found here.

All previous posts on the Cheonan are here.

Read full article here:
South Korea to halt all trade with North Korea over sinking of Cheonan warship
Washington Post
John Pomfret
5/24/2010

Geoffrey Cain writes in Time:

Few investors can boast the one-of-a-kind global pedigree of Felix Abt. Since 2002, the Swiss businessman has found his calling as a point man for Western investments in — of all places — North Korea, where he helped found the Pyongyang Business School in 2004. He also presided over the European Business Association in Pyongyang, a group in the capital that acts as a de facto chamber of commerce. A few years ago, that position led him to help set up the first “European Booth” featuring around 20 European companies each year at the Pyongyang Spring International Trade Fair, an annual gathering of 270 foreign and North Korean companies currently underway in the hermit kingdom until Thursday.

Yet Abt, 55, who lives in Vietnam and therefore won’t be attending the trade fair this year, laments the giant cloud hanging over the country: in recent years, political turmoil on the peninsula has raised the stakes even further for doing business in North Korea — even for the country’s main patron, China. Though investors have always faced the prospect of sanctions, he says, the situation has worsened after the United States ratcheted up sanctions on the government in 2006 on allegations that it was counterfeiting U.S. dollars. And in 2006 and 2009 the Kim Jong-il regime tested two small nuclear bombs, prompting heavier sanctions from the United Nations in 2006. Recently, tensions with Seoul have spiked over the March sinking of a South Korean corvette in waters near the North.(See pictures of the rise of Kim Jong-il.)

Those measures hit home for Abt. While he was running a pharmaceutical company in Pyongyang called Pyongsu in the mid-2000s, he learned that the U.N. Security Council had imposed sanctions on certain chemicals — a move that could have forced him to completely stop manufacturing medicine. Thankfully, he adds, he had already secured a large stock of the substance beforehand. “Whatever business you are involved in,” he says, “some day you may find out that some product or even a tiny but unavoidable component is banned by a U.S. or U.N. sanctions because it can, for example, also be used for military purposes.”

Those dilemmas haven’t stopped Abt. In 2007, he co-founded an information technology firm in Pyongyang called Nosotek, whose 50 or so employees design software applications for the iPhone and Facebook. The venture has already seen its share of success: one of its iPhone games ranked first in popularity for a short while on Apple’s Top 10 list for Germany — though he can’t name the software out of concern for protecting his contractors from bad publicity.(See pictures of North Koreans at the polls.)

For some companies, the stigma of a “Made in North Korea” label matters less than the competitive edge gained from having low overhead costs and a diligent workforce whose wages remain less than outsourcing powerhouses like China, Vietnam and India. In the past, North Korea has attracted the interest of multinational corporations looking for cheap labor in fields as diverse as electrical machinery and cartoon animation. Yet few multinationals show their faces at this month’s fair, a decline from the early 2000s when Abt says they were appearing regularly to look for opportunities in electricity, infrastructure, transportation and mining.

Not all foreign ventures in the North are driven by profit margins alone. The 2005 animated Korean movie Empress Cheung, a popular fantasy film drawn jointly by South and North Korean animators, brought attention to the animation industry in North Korea. Nelson Shin, head of the Seoul-based animation studio that started the project, claims he worked with North Korea for a greater cause than cheap labor. “It wasn’t so much because of cost efficiency as because of cultural exchange between the two Koreas,” he says.

For a country so poor, North Korea has churned out a remarkable number of talented engineers and scientists who fuel some of these small sectors (along with its controversial nuclear weapons program). In the 1960s and 1970s, the government pushed the country to become self-sufficient through development projects, a part of its ideology of “Juche” that promotes absolute autonomy from foreign powers. The communist regime of Kim Il-sung prided itself on its universities and public housing system, in particular. “It was an advance from pre-World War II days,” says Helen-Louise Hunter, a former CIA analyst now in Washington, D.C., who researched North Korea during those decades. “Kim Il-sung was genuinely interested in improving his people’s standard of living, and was off to a good start in a couple of areas compared to South Korea in those early days.”

Yet North Korea fell behind after the South’s own military dictators put their country into industrial overdrive throughout the 1970s and 1980s. Then the Soviet Union collapsed in 1989, depriving North Korea of valuable aid. Then came a famine in the mid-1990s that delivered the final blow, leaving up to 3 million people dead and crippling the capacities of the already isolated state.

Today, the pariah regime of Kim Jong-il is allegedly known to raise money through illicit activities like trafficking narcotics and money laundering. But it’s not known how much those activities figure into the country’s GDP of $28.2 billion in 2009 and its $2 billion worth of exports in 2008, the most recent year data is available. “Not that much income comes from illegitimate operations if you mean drugs and counterfeited dollars,” says Andrei Lankov, a North Korea expert at Kookmin University in Seoul. “More come from arms sales, though, but I would not describe this as an illegitimate trade.”

Abt shakes off the image of Pyongyang being the center of a mafia state. He sees himself and other foreign investors as the potential movers and changers of Kim’s hermit regime. “Cornering a country is ethically more questionable than engagement,” he says. “Foreigners engaging with North Koreans are change agents. The North Koreans are confronted with new ideas which they will observe and test, reject or adopt.”

Read the full story here:
Can North Korea Be Safe for Business?
Time
Geoffrey Cain
5/20/2010

According to Yonhap:

South Korean companies have suspended their sand imports from North Korea, one of the longest-running economic cooperation projects between the countries, as tension mounted over the March sinking of a South Korean warship, a Seoul official said Tuesday.

Seven South Korean companies have stopped sending cargo vessels to North Korea since Monday, Unification Ministry spokesman Chun Hae-sung said.

“We warned them to be careful about the safety of their employees” because political tension is rising between the Koreas, Chun told reporters.

He denied that the government pressured the companies into suspending their imports, saying they “voluntarily” halted their operations after the warning.

“There are fears that further deterioration in the inter-Korean ties may undermine their businesses,” he said.

The suspension is the latest in a series of developments that indicate worsening ties between the Koreas after the warship sank near the border with the North, killing dozens of seamen.

South Korea suspects the North was behind the tragedy and is set to announce the results of its weeks-long probe into the sinking later this week, vowing a stern response to those found responsible. Pyongyang denies any role in it.

The cargo companies have brought more than 38 million tons of sand from North Korea since 2004, the ministry said in a statement. Most of the sand came from the western coastal city of Haeju.

The trade, despite its small scale, was considered a symbol of reconciliation because it was seen as mitigating tension along the maritime border between the Koreas.

Their navies have clashed three times near the Yellow Sea border since 1999, the latest in November of last year.

Since last week, South Korea has also stopped funding government-level exchanges with North Korea and urged hundreds of companies to refrain from starting new ventures with Pyongyang.

The countries remain technically at war after the 1950-53 Korean War ended in a truce rather than a peace treaty.

Read the full story here:
S. Korea halts sand imports from N. Korea amid tension
Yonahp
http://english.yonhapnews.co.kr/northkorea/2010/05/18/88/0401000000AEN20100518007600315F.HTML
Sam Kim
5/18/2010