The UN has agreed the strongest ever economic and trade sanctions on North Korea, designed to choke off the supply of capital and energy.
However, experts are warning that they will only work if they are complied with over the long term, amid fears that sympathetic nations to North Korea may try to circumvent them.
The headline sanctions are a ban on all textiles exports, a ban on employing additional North Korean workers overseas and a huge restriction on the amount of energy the country is allowed to import. The sale of natural gas to North Korea is to be prohibited, refined petroleum sales are to be capped at 2 million barrels per year, while crude and refined exports are capped at 8.5 million barrels a year – a 30% reduction.
These sanctions have the potential to have a severe economic impact on a struggling economy, but only if adhered to by the rest of the world.
“The magnitude of them depends on the duration. If they are only in force for two or three months, they’re not going to have any bite. These resources when they’re rationed go from the people with no power to the people with power. So it really won’t hurt the folks it is supposed to hurt that much if it’s just 30% [reduction on oil imports],” Tony Nash, CEO of Asian-based analysis firm Complete Intelligence, tells GTR.
Nash adds that often, such sanctions don’t last long enough before illicit trade starts filling the void. “Trade sanctions have bitten Iran in the past, and I could easily see some circumvention with oil from Iran going directly to Korea. They may well be loading up the ships just now. They could satisfy all their needs – it’s really only as good as the enforcement.”
Another factor at play is the belligerence of the North Korean ruler Kim Jong-un. In flouting the UN’s ruling on developing nuclear weapons, Kim has followed in the footsteps of his father, Kim Jong-il. However, he has displayed none of the political nous. Kim senior knew when to draw the line in order to extract just the aid or finance he wanted from global superpowers. His son appears not to know – or care – where that line is.
“Although the new sanctions are likely to cause significant economic damage, past experience suggests they are unlikely to bring Kim Jong-un to the negotiating table. In fact, they could encourage the North to accelerate their nuclear weapons building programme. While we think a war on the Korean peninsula is unlikely, the crisis is unlikely to come to an end anytime soon,” says Mark Williams, chief Asia economist at Capital Economics.
Looking at the make-up of North Korea’s trade, it’s clear that if the agreed sanctions are to have any chance of having an impact, China must be on-board. China was part of the UN Security Council that agreed the latest raft of sanctions and is the primary trading partner of North Korea.
It imported more than US$1bn of coal from North Korea last year, by far the reclusive nation’s largest export, and while the likes of India, the Philippines and Russia also account for some trade with North Korea, the lion’s share is with China.
By being a signatory to the UN sanctions, China has the perception of being a good citizen, in diplomatic terms. However, there is a history of smuggling and barter trade on the Chinese-North Korean border that could also see the embargo flouted – with or without the official sponsorship of the Chinese government.
The chances are this will roll and roll. International trade markets should, in theory, experience little disruption, given the pariah status North Korea “enjoys” already. However, the escalation in risk is likely to have investors second guessing decisions on putting their money into nearby projects and securities.
Many banks and companies with presence in South Korea have already created contingency plans in the eventuality of a renewal of war. Kai Fehr, who heads trade for Wells Fargo in Asia, told GTR’s Trade and Treasury Week in Singapore last week that the bank has equipped staff in Korea with satellite phones and put in place a two-day rescue package.
Political risk insurers are fielding more inquiries thanks to the North Korea crisis too, according to Asia Pacific head of political risk and credit insurance at Chubb, Stephen Capon. However, he tells GTR that these inquiries are yet to filter down into a substantial rise in policies, nor premiums.