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11.06.2013 Author: Lyudmila Zakharova

Economic Sanctions against North Korea has been under foreign economic restrictions for years. For several years now, all freight going in or out of North Korea has been at risk of being detained by any UN member nation if it believes the shipment can be used in the DPRK’s nuclear missile program.

On February 12, 2013, North Korea challenged the international community by conducting yet another nuclear test, its third. In response, the UN Security Council adopted Resolution No. 2094, which toughened the economic sanctions already in place against the DPRK. The list of dual-purpose goods that can be used for both military and civilian purposes and are therefore banned from import into the DPRK significantly limits North Korea’s opportunities for engaging in foreign economic cooperation and attracting investments. The North Korean aluminum rods seized in a Japanese port in March because they could be used to construct centrifuges for enriching uranium are an illustration of that.

The new measures are imposing serious restrictions on North Korea’s links to the outside world both through the banking system and on the use of cash. The resolution specifically urges UN member nations not to allow North Korean banks to open new branches or maintain correspondent ties with North Korean banks. In addition, the UN Security Council has urged that financial institutions of UN member countries be banned from opening branches or bank accounts in the DPRK. These recommendations are accompanied by a proviso that has to do with “sufficient reason to believe that an action can contribute to the DPRK’s nuclear missile programs or constitute an infraction of UN Security Council resolutions.” The wording is vague, and, if desired, it can be used to justify blocking legal foreign economic activities by North Korea under the guise of countering its nuclear missile program. However, the history of North Korea’s nuclear missile program indicates that economic sanctions are not a serious obstacle. The DPRK has succeeded in launching missiles and conducting nuclear tests even with the Security Council limitations in place.

The United States is the main proponent of sanctions against the DPRK. In the past, Washington believed that North Korea’s economy was too small and isolated from the outside world, and therefore the sanctions would not work as a coercive measure. However, the DPRK’s dependence on economic ties with the outside world has increased significantly: Its foreign trade grew from $4.35 billion in 2006 to $8.03 billion in 2011. The current leaders of the United States have evidently decided to try using economic sanctions to put pressure on Pyongyang.

Washington very likely understands that nothing will induce Pyongyang to give up its nuclear weapons, so the actual goal of the United States is to suffocate the DPRK with economic sanctions, create internal instability and, finally, bring about regime change. Convinced that the UN Security Council resolutions are ineffective, US leaders have begun pushing for unilateral measures. In March 2013, the United States imposed sanctions on North Korea’s Foreign Trade Bank, which handles its major foreign currency transactions. These actions were clearly directed less against North Korea’s nuclear missile program than against its overall foreign economic ties.

As it did with Iran, Washington expanded the scope of the sanctions in an attempt to extend them to non-US entities with financial links to blacklisted North Korean organizations and citizens. As a result, foreign companies, banks and individuals with ties to the DPRK are at risk of losing access to the US market, the US financial system and business partners in the United States.

Washington’s ban on its citizens and organizations doing business with North Korea’s Foreign Trade Bank will have little impact on North Korea. The two countries have no significant economic relations: Bilateral trade during the 2011 US fiscal year amounted to only $38 million (less than 1% of the DPRK’s foreign trade). More dangerous for Pyongyang is the US desire to involve other countries in its sanctions and extend them to foreign entities that deal with North Korea’s Foreign Trade Bank.

Russia opposes the measures because the Russian Embassy does business through North Korea’s Foreign Trade Bank (as do European embassies and international organizations that operate in North Korea). In addition, under the 2012 Debt Settlement Agreement between the DPRK and the Russian Federation, Russia’s Foreign Trade Bank has more than $1 billion credited to its account in that institution.

Washington’s actions are definitely having a psychological impact on foreign banks and businesses and are deterring them from doing business with North Korea. For example, soon after the sanctions were introduced, the German Kempinski hotel chain announced that it was canceling its plans to invest in the DPRK (specifically to run the famous Ryugyong Hotel in Pyongyang. In the future, the United States may well be able to justify sanctions against any North Korean citizens or organizations, or against any of the DPRK’s activities that it believes may contribute to the development of its missile or nuclear program. Given the North Korean economy’s lack of transparency and the inability to track where the leadership is directing the country’s revenues, any activity by the DPRK aimed at obtaining foreign currency could theoretically be seen as contributing to the development of its nuclear missile capability. Thus, Washington has scope for additional sanctions.

Unfortunately for the United States, the DPRK’s main economic partner today is China, which accounts for 70% of its foreign trade. Therefore, the effectiveness of economic sanctions depends to a significant degree on the position taken by Chinese leaders. And considering China’s interest in maintaining stability in North Korea, Pyongyang is unlikely to do the United States’ bidding. China will probably continue expanding its economic cooperation with the DPRK to ensure stability on its border and to develop its northeastern provinces. Increasing the sanctions against the DPRK will not force Pyongyang to abandon nuclear weapons, but it will make foreign trade more difficult for North Korea and will probably make it more dependent on China.

The recent much-touted decision by China’s state bank to close its account with North Korea’s Foreign Trade Bank is unlikely to have a significant impact on bilateral economic ties. A significant share of Chinese-North Korean trade is done by barter or cash transactions that circumvent the banking system, or through Chinese regional banks that make a good profit off the transactions and are uninterested in closing their North Korean accounts. Should the sanctions be tightened further, the DPRK would be fully capable of using China as a “window into the world.” There already exists a multifaceted mechanism involving Chinese intermediaries who handle various types of North Korean transactions with the outside world — from exporting North Korean seafood and textiles, to the outsourcing of work by North Korean programmers to the West via Chinese companies.

Lyudmila Zakharova, Cand. Sc. (Economics), is a Senior Fellow at the Center for Korean Studies of the Russian Academy of Sciences’ Institute of Far Eastern Studies, exclusively for New Eastern Outlook.

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