Lately, the news about the implementation and impact of sanctions has come in so thick and fast that I’ve been unable to follow it all, and have instead bookmarked it until I can identify patterns and put it into context. A report I saw yesterday, however, demands immediate attention. According to the Daily NK, starting in April, the trading companies the North Korean regime sends to China to earn hard currency began defaulting on payments to their Chinese creditors because of the effects of the new sanctions.
“Companies under the Ministry of External Economic Affairs and other trade agencies have recently been experiencing a severe foreign currency crisis,” a source from South Pyongan Province told Daily NK on Wednesday. “Even those under the Central Party’s Office No. 39 have insufficient liquidity (in foreign currency), and this is creating obstacles for trade with China,” he added. [Daily NK]
This is a reference to Bureau 39 of the Korean Workers’ Party, which is effectively Pyongyang’s official money laundering agency, and is designated by both the U.N. Security Council and the U.S. Treasury Department.
Cross-border transactions had been proceeding relatively unhindered until just a few months ago. However, an increasing number of conflicts have been arising with Chinese trade companies over payments, reported the source. “A lot of trade companies in Pyongyang and provincial areas have not been able to pay on time after bringing in goods from their Chinese counterparts,” he explained.
“In the past, the principal at least was always paid on time for goods that had been brought in past customs. But foreign currency is drying up, so the settlement dates are being dragged out,” the source said. “Up until early May, payments normally wouldn’t be any later than 15 days, but now there are a lot of cases where companies have been unable to pay even half the amount owed over a month past the due date.”
Clear signs of payment difficulties started to become noticeable in mid-April. The North Korean leadership had traditionally secured funds through arms and other illicit trade, but sanctions have made that increasingly difficult, leading to a shortage in money to pay for transactions.
The word has now spread among Chinese creditors that North Korean trading companies are bad credit risks. As a result, other regime trading companies are also finding it harder to get lines of credit.
“Having faced this situation for two months, Chinese companies are now asking for cash payments only and have become extremely reluctant to allow deferred payments,” the source said. “If this lasts for a few more months, all of the previously amicable Chinese traders will start to avoid further business with the North,” he speculated.
Trade banks in Pyongyang have seen their foreign currency supplies dry up, making it particularly challenging for even official trading firms to obtain credit. Trade company heads have been overheard remarking that borrowing from banks is even harder than borrowing money from individuals at exorbitantly high interest rates (loan sharks), said the source.
The effects, so far, appear to be limited to companies that fund the regime. Food prices in North Korea have been stable since April and through North Korea’s spring lean season, despite the liquidity crisis experienced by the trading companies.
Although market prices in the North have remained stable, active trade directly tied to the leadership’s funds has plummeted, suggesting international sanctions targeting the regime may be proving effective.
The Daily NK claims to have multiple sources for its report, including “[a]dditional sources” in South Pyongan and North Pyongan provinces of North Korea. It shows discipline that the Daily NK waited this long to find multiple sources to corroborate an important story that began to emerge in April. I’d love to know who their source was for this anecdote:
“Not so long ago, the Cabinet Premier Pak Pong Ju failed to make a payment of 30,000 USD for a Chinese vessel that arrived at Nampo Port with some 1,000 flat screen televisions, thereby forcing him to return to Pyongyang empty-handed,” the source said, explaining that rumors of the incident quickly made the rounds, igniting concerns about the implications for the economy if even the regime’s trading bodies cannot follow through on a prearranged transaction.
So, how does this report jibe with other sources? Up until mid-April, I read a spate of reports observing that trade across the Yalu River looked outwardly normal, except for the lack of coal and ore shipments. From this, most of the reports concluded that sanctions weren’t working, although those reports didn’t do much to parse sanctioned from non-sanctioned trade. The Daily NK did, however, find evidence that sanctioned cross-border trade in bulk cash, military items and titanium continued through early April.
But when this NK News report dug deeper into the mechanics of the China-North Korea trade, it found something interesting. At the time, I bookmarked the report and decided I’d come back to it if a possible explanation emerged.
There have been interruptions to their business, however these stoppages came purely at the request of their North Korean partners. The two major interruptions to their business occurred in September and October 2011, prior to the announcement of Kim Jong Il’s death and again this year in March, coincidentally (or perhaps not) after the passing of the latest round of UN Security Council sanctions.
“Now, we have stopped and we will come back on the last week of this month (May) and the last shipment made was the second week of March of this year,” Whang told NK News. UN Resolution 2270 was passed March 2.
Whang received no further explanation for the interruption in business, which is the longest he has experienced. It is perhaps surprising given the type of trade he is involved in, as he said, Whang is not “selling Playstations … or Saddam Hussein’s rockets.” Whang has another theory.
“I think it was a security level appreciation, I think for the Party Congress … they would like to reach a (quieter) situation to restart again,” he told NK News. [NK News, Hamish Macdonald]
A few possible explanations for this come to mind. One is that sanctions are making it harder for the trading companies to trade and earn revenue. Around mid-April, Chinese customs reportedly increased its inspections, causing some North Korean trading companies to shift from sanctioned trade to the non-sanctioned trade in importing food into North Korea. Trade statistics also tell us that China is importing less North Korean coal and other goods, although this trend predates sanctions, and may be due to the slowing of China’s economy.
North Korea has also found it harder to buy Swiss watches directly from the makers. Although North Korea can ordinarily turn to Chinese suppliers to circumvent luxury goods sanctions, the anecdote involving Pak Pong-ju reminds us that not even Chinese merchants will sell North Korea luxury goods if its checks won’t clear.
This suggests a second and more likely explanation — that the trading companies’ bank accounts may be frozen. That is also consistent with reports we’ve seen from China as early as February. You wouldn’t necessarily observe the effects of that at border crossings. It would explain why North Korean regime-affiliated buyers can’t pay creditors despite the imperfect enforcement of border controls. While it’s too early to conclude too much, it bears careful watching.