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Weapons of Mass Destruction (WMD)

Thriving Black Market Could Mitigate North Korea Sanctions Impact

By Brian Padden September 14, 2017

Illicit evasion and a thriving black market continue to mitigate the impact of sanctions intended to deprive North Korea of billions of dollars in revenue and needed components for its nuclear program.

The latest round of United Nations sanctions imposed on North Korea this week for conducting its sixth nuclear test, and the restrictions put in place in August for repeated ballistic missile launches, including intercontinental ballistic missiles (ICBM) tests, could potentially have significant impact.

Potential impact

The North Korean gross domestic product (GDP) in 2016 was $28.50 billion, according to the Bank of Korea in Seoul. The August sanctions would cut the GDP by $3 billion by banning coal, iron, lead and seafood export industries.

The newest restrictions could cost another $800 million by banning textile exports. And reductions in oil and gas imports and limits on worker permits would also cut off needed fuel and funds for North Korea's weapons programs.

"If fully enforced I think that the amount of hard currency that North Korea would lose would be enough to certainly concern that leadership, because they don't have very much hard currency and this will cause significant problems for them," said David Straub, a North Korea analyst with the Sejong Institute.

A significant reduction in hard currency revenue would make it difficult for the military to purchase weapons components and sow discord between leader Kim Jong Un and the elite in the country, whose loyalty is bought to a degree with imported luxury goods.

Evasion tactics

However few expect these measures to be vigorously enforced as the Kim Jong Un government has become adept over the years in evading sanctions, and North Korea's trading partners, especially China and Russia, have been complicit in permitting illicit transactions to continue despite official support for sanctions.

"Both countries have gotten away for far too long and have faced too few consequences for turning a blind eye to the sanctions busting business activities of their citizens and those of North Korea," said David Albright, a nuclear proliferation analyst with the Institute for Science and International Security, at a U.S. Congressional hearing Wednesday.

To get around sanctions and avoid detection, ships suspected of illicitly transporting North Korean coal have reportedly switched off their satellite GPS navigation devices when in Korean waters. The U.S. sought U.N. authorization to interdict ships suspected of smuggling banned items, but this measure was dropped to gain Chinese and Russian sanctions support.

North Korea also uses trusted agents and third party companies located in other countries to facilitate prohibited trade.

Anthony Ruggiero, a former U.S. Treasury Department official who is now an analyst with the Foundation for Defense of Democracies, described how North Korea and Russia tried to cover up a clandestine oil deal.

"A U.S bank would not process this transaction between sanctioned parties. To avoid this scrutiny the front companies were created in Singapore to obscure the nature of the transaction, allowing almost $7 million in payments for this transfer," said Ruggiero during his congressional testimony.

According to Bruce Klingner, a former CIA analyst who is now senior research fellow at the conservative Heritage Foundation, North Korea's trading system consists of 5,000 companies that are centralized in China and run by a limited number of trusted individuals.

"Although the shell companies can be swiftly changed, the individuals responsible for establishing and managing them have remained often for years," Klingner told the congressional hearing.

Lax enforcement

While there are reports of Russian smugglers exporting oil and other sanctioned goods to North Korea, 90 percent of all North Korean trade goes through China.

The Chinese say they are implementing sanctions along the border, but they have not been forthcoming in issuing clear restrictions to trading companies, or in reporting how required inspections of all goods crossing the North Korean border are being implemented.

"In recent months at least the Chinese have not even been putting the statistics for oil exports to North Korea in their official records. So we really do need for China to be much more transparent," said Straub with the Sejong Institute.

This week China reportedly stopped some of its major state-owned banks from providing financial services to new North Korean clients, in what could be a sign of increased sanctions enforcement to prevent any U.S. retaliation.

But sanctions advocates say that ultimately compelling full compliance from China, Russia, and other countries that undermine U.N. sanctions, will require the U.S. to levy secondary sanctions. The administration of President Donald Trump has indicated it will consider secondary sanctions if the U.N. sanctions are not fully implemented.

Banning Chinese companies, and other entities from third party countries that do business with North Korea, from the U.S. financial system could cause real economic pain for all involved, but may be the only way make sanctions effective.

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