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DONG Yong-Sueng

US Sanctions on North Korea

DONG Yong-Sueng

May 31, 2006

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The confrontation between the United States and North Korea over the latter's clandestine nuclear program is turning for the worse, following the US financial sanctions against North Korean assets at the Macau-based Banco Delta Asia (BDA).

US assistant secretary of state Christopher Hill has insisted that the US action is a regulatory action, unrelated to the six-party talks. Recently, however, he has mentioned the possibility of much tougher financial sanctions against Pyongyang. In response, the North's vice foreign minister Kim Gye Kwan lambasted Washington for putting political pressure against his regime, claiming that Hill's unwillingness to hold bilateral talks in Tokyo was a proof of the US intransigence.

This is not the first time for Pyongyang to face accusations of counterfeiting the US dollars. But it has drawn more attention this time with the US Treasury Department designating the BDA as a "primary money laundering concern" under Section 311 of the US Patriot Act. The US announcement alleges that the BDA has been involved in counterfeiting US dollars, and that the money laundering activities involving the BDA have been linked directly to Pyongyang.

Washington also claims its action against the North taken through the BDA was essentially a financial regulatory action, rather than an outright financial sanction. The US only suggested, not officially approved, that US financial institutions should refrain from the BDA. Whatever the official justification, it prompted the Macao Monetary Authority to freeze North Korea's accounts at the BDA, with the purpose of preventing a run on the bank and other international financial institutions, that would terminate business with North Korea.

Pyongyang, strongly criticizing the US action, declared the financial sanctions should be first discussed at the forthcoming six-party talks, and not the nuclear issue. At the same time, the North has made some indication that it was ready for a compromise, saying its government has never engaged in counterfeiting, but it will severely punish any North Koreans or companies proven to have engaged in criminal activities.

The US government has no doubt that North Korea has been engaged in illicit money laundering and counterfeiting. Pyongyang has dispatched its deputy director of the Foreign Ministry, Ri Gun, to the US for talks last March, but failed to narrow the differences over the financial issue. Christopher Hill, the chief US delegate to the six-party talks, declared that money Pyongyang stood to get from its brinkmanship was nothing compared to what they could get if they got rid of the nuclear weapons. Hill has even indicated the possibility of the US investigating North Korean leader Kim Jong Il's secret Swiss bank accounts.

Stung by this statement, Pyongyang has gone so far as to proclaim that it will not participate in the six-party talks, but that it will strengthen its nuclear deterrent.

How will all this affect North Korea's economy?

Freezing of US$24 million in the BDA's account is a major blow to the already cash-strapped North Korean government. Still, the North seems to tolerate the current inconvenience as other banks have yet to take actions against North Korean assets. During the 16 th inter-Korean ministerial talks held in Pyongyang last September, Seoul broadcasters aired their programs with the assistance of North Korea's equipment. The South Korean broadcasters wanted to make their payments through the North's overseas accounts. Payment to the Central Broadcasting Station was made via Singaporean accounts. However, another US$13,000 paid to the [North] Korea Post and Telecommunications Company via BDA accounts has been frozen.

Pyongyang has been so far able to survive the US sanctions by rising trade with the outside world: US$1.5 billion with China , US$1 billion with South Korea and US$1.5 billion with the rest of the world, including Russia, the European Union, and Southeast Asia. Furthermore, North Korea has been able to mitigate the sanctions as it uses the euro for trade, and conducts foreign exchange transactions through Singapore and London markets, not the US money market.

Why then is Pyongyang so unhappy with the US sanctions when it's scarcely affected by the US move?

The answer appears to be political. Pyongyang seems to believe that the US is using the financial sanctions as a means of pressuring it to return to the six-party talks. At the same time, the North is reacting nervously to the financial sanctions as it believes it could worsen the already bad economy. This is why it is questioning the move against the BDA.

Both China and South Korea play a pivotal role in propping up the North Korean economy with their combined trade worth US$2 billion, which is the minimal amount Pyongyang needs to survive. This is also the amount of trade that North Korea carried out during its most difficult period following the collapse of the Soviet Union. If Chinese and South Korean banks join the US financial sanctions against Pyongyang , then it could push the North's economy to the brink of collapse.

Knowing that the potential financial threat would have dire consequences to North Korea's economy, Pyongyang is making conciliatory gestures as well as expressing anger over the US action. For example, the North claims it has never been involved in any of the alleged counterfeiting activities. Yet, it has left the door open for some North Koreans or companies committing such crimes, repeating that it will sternly deal with such counterfeiters.

In 2002, North Korea's leader Kim Jong-Il admitted to Japan's Prime Minister Junichiro Koizumi that North Korean agents did indeed kidnap Japanese citizens, but he had no personal knowledge of it, that he will severely punish the kidnappers, if they are found. Today, the international community is unlikely to accept such explanation.

Going one step further, the North has shown willingness for bilateral talks with Washington, and that it was ready to join the Asia-Pacific Group on Money Laundering, which is designed to fight such crime. However, the US had reiterated its position that Pyongyang should first return to the six-party talks before demanding any bilateral talks.

While the tough US financial regulations have so far failed to trigger an immediate crisis in North Korea, at least they prevented Pyongyang from reaching out to its foreign assets. If the US begins to impose much tougher sanctions on the North, then both China and South Korea would have no alternative but to go along with Washington's action. In such case, the US financial institutions might have to terminate business not only with Pyongyang, but also with their counterparts in South Korea or China .

How far will the US go in reinforcing its sanctions against the North?

For the time being, Washington's pressure on North Korea won't be raised significantly. However, this may change if Pyongyang does not return to the six-party talks. If this happens, Chinese banks may begin halting business with North Korea. For example, the Central Bank of China said it will have no alternative, but to follow the US financial sanctions when they are placed on the North. The same goes for South Korea . Unless Pyongyang returns to the six party talks, South Korea would find it difficult to continue its aid to the North.

Financial sector is critical component of every economy. A well-performing financial sector not only boosts the manufacturing sector, but also amplifies the overall economy. North Korea is no exception to this rule. For Pyongyang to join the international community, it must end all its illicit activities, and work toward integration into the broader world of international finance.

The writer formerly headed the Economic Security Team at the Samsung Economic Research Institute. He is now vice president of Trinity Capital Development Partners, Inc. The views expressed are his own and do not reflect those of the publication that carries them.
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