Update, March 7. The final version of the resolution is here. We compared the February 29 and final versions and found only very small stylistic differences.
(Note: the following works off of the provisional version of the resolution dated February 29 available here).
The Bottom Line
Assessing the effects of sanctions encompasses at least four elements:
- Statute itself: what is proscribed and with what precision or country-level discretion;
- The likelihood that any given provision will be implemented;
- The effect of the measure, including not only directly on the interested party in the target but on markets and particularly foreign exchange and commodity markets;
- The ability of the target to circumvent the restriction or substitute for the export or import in question.
The bottom line: The sanction resolution is sweeping in scope, in its extension to commercial trade, and in the inclusion of restrictions on transport. But many specific prohibitions are defined in ways that grant discretion to the implementing state. Some restrictions apply only if there are reasonable grounds to suspect the activity is suspicious—making it possible to hide behind a veil of ignorance—or require that the activity be linked—directly? indirectly?–to the DPRK’s WMD or missile programs.
With respect to all of the trade-related measures, China is the key actor given that it’s share of the country’s trade could reach as high as 90 percent following the closure of Kaesong if we include transshipment from third countries. Wild West jurisdictions could provide additional wiggle room for Pyongyang, including by allowing foreign-exchange earning networks to persist. But the key question is whether Beijing will implement in full, in part or will retreat again behind allotted discretion. If China did not want to wield the stick that the resolution represents, however, why not simply fight proposed provisions as it has in the past? All past resolutions avoid sanctioning commercial trade; this resolution crosses that important Rubicon, particularly with respect to coal. Our best guess: not everything will be implemented in full on day one. But China has signaled both to North Korea and to the US that it is serious, and can now calibrate the appropriate level of pressure that it wants to apply.
The material effects of the sanctions and capacity to circumvent will depend on implementation, but don’t rule out the potential significance of second-order market effects. If I were holding North Korean won at the moment, I would be buying dollars or moving into commodities, with predictable implications for prices (depreciation of the won, increases in commodity prices, including rice). Watching these markets is going to provide insight into how much leeway the regime has. But I predict serious turbulence in months if not weeks as the country starts facing severe balance-of-payments and foreign exchange constraints. It may have enough cash on hand, through borrowed name accounts and through cash couriers, to last for a while. And China could tighten, then loosen, the screws. But if the sanctions seriously cut into foreign exchange earnings, how long can the regime effectively draw down reserves?
In short, this time feels different.
As the Chinese rightly point out, sanctions are not an end in themselves. Their purpose is to induce the North Koreans to talk seriously about their nuclear weapons program. Given that we are in the run-up to an important Party Congress, Kim Jong Un may not be in the mood to compromise. But if all of the looming constraints transpire, that could be as risky as going back to the table. Expect some complicated proposals out of both Beijing and Pyongyang that try to put the pressure back on the United States and South Korea in order to buy time. But there may be less time than Kim Jong Un thinks.
In terms of material value, by far the most significant component of the sanctions resolution is the potential restriction on coal exports (para. 29). If implemented, the rest of the resolution would be superfluous: coal accounts for about 40% of the DPRK’s exports to China. The prohibition appears in the main paragraph to be pretty sweeping: no procurement period (except for transshipped coal from Russia and Mongolia). Para. 29b appears to roll this back by exempting “transactions that are determined to be exclusively for livelihood purposes and unrelated to generating revenue for the DPRK’s nuclear or ballistic missile program or other prohibited activities….” But why permit the introduction of this measure only to turn around and negate it as a result of the caveat? At 40% of North Korea’s exports to China, how could coal exports not indirectly fund the weapons program?
In addition to coal, the resolution bans exports of gold, titanium, vanadium and rare earths. These generate much more limited income but as with coal the effects of these restrictions are twofold: not only do they interrupt trade but they also deter potential investors in these activities, investors North Korea desperately needs to develop these resources.
Another trade prohibition that is harder to gauge concerns small arms sales and service contracts related to conventional weapons. UNSC 1718 prohibited the export or import of major conventional weapons systems such as artillery or tanks, but now the small arms market is shut off as well. In contrast to coal, this is an area where the buying jurisdictions are much less likely to be cooperative with the resolution and leakage therefore higher. However, whether North Korea can sustain these markets will depend on transport that I take up in more detail below.
On the import side, much has been made of the ban on aviation fuel and the effects this might have on Air Koryo (para. 31). Some analysts have suggested that those wanting to circumvent the resolution could allow refueling at the destination airports (see Andrea Berger’s excellent account at 38North). But technically, if purchased by Air Koryo such refueling is still an export and could be challenged. Moreover, not enough attention has been paid to the effect of this measure on the North Korean air force, admittedly the weakest branch of the North Korean military, and rocket forces. Depending on what inventory the regime has on hand, military capabilities could be directly affected by the resolution.
Trade depends on transport, and one of the biggest surprises of the resolution is the potentially crippling restraints it places on maritime transport in particular. Perhaps the most dramatic measure is contained in Para. 23, which names names. It clarifies that since Ocean Maritime Management (OMM) is a designated entity, its assets are subject to freeze and those assets include its vessels, specified by their IMO (International Maritime Organization) number in Annex 3 of the resolution. IMO numbers are supposed to be linked to ships for their lifetime, and are in theory not affected by changes in flag, owner or name. Again in principle, this would eliminate the option of simply repainting the hull and stenciling on a new name or shifting the vessels to new shell companies or owners.
A plain reading of Para. 19 also calls on states to “de-register any vessel that is owned, operated or crewed by the DPRK.” Moreover, the resolution prohibits nationals of all member states from leasing or chartering their flagged vessels and aircraft to the DPRK. Restrictive inspection requirements call on member states to inspect all cargo emanating from the DPRK or headed towards it, limiting the capacity to circumvent sanctions.
These measures clearly depend on the willingness of jurisdictions—including weak ones such as Cambodia—to honor these prohibitions and requirements, and will depend on the interested parties not only policing North Korea but policing potentially offending jurisdictions. Andrea Berger’s account at 38North cited above gets at how North Korea is likely to respond: “keep your flagged vessels close to home, wait and see how implementation proceeds and then determine whether or not any special efforts are needed to get around changes that have occurred.” But such evasion is very costly: trade in the interim is significantly slowed or foregone altogether if transport is unavailable.
The effects of financial sanctions—first introduced cautiously in UNSC 1874—are hardest to gauge. It is possible to put together mirror statistics on North Korea’s trade (although leaving out partners such as Iran that also don’t publish statistics). It is possible to actually track ship movements. But it is extremely difficult to know how much the regime, the Kim family, designated entities and their fronts have on deposit abroad. Borrowed-name accounts, shell companies, brokers, couriers and cash provide opportunities for circumvention of the financial sanctions introduced by the last two Security Council resolutions. North Korea has been adapting to these financial constraints for some time. And small banks in Northeast China, Russia and Wild West jurisdictions may be loath to close lucrative business.
But life is not getting easier. UN sanctions resolutions rely in part on designations: naming particular individuals or entities that are subjected to asset freezes. Annex I and II to the resolution list 16 individuals and 12 companies.
Do we think, however, that the Reconnaissance General Bureau has accounts in China under its own name? And if not, how much work are Chinese regulators and banks going to do to ferret them out?
Designations are not the only restraints though. Para. 32 issues a blanket asset freeze on any and all entities that the member state “determines are associated with” the DPRK’s nuclear or missile programs or other proscribed activities (which could again be narrowly or broadly determined). Paras. 33 and 35—in highly ambiguous and repetitive language—appear at first to restrict the opening of new “branches, subsidiaries and representative offices” of North Korean banks (which we know exist; see the 2013 Joongang story on the Kwangson group at North Korea Economy Watch) but then go on to demand that such entities and even accounts be closed altogether. No sooner had the resolution been passed than a colleague passed on Chinese coverage of a Korean news story that Chinese banks had been ordered to halt all transfers to North Korea. The point is not that the press coverage is true; only time will tell. The four major commercial banks in China had reportedly already stopped such transfers in May 2013 (Asahi Shinbun). The point is how quickly information and disinformation about these measures can move.
It has long been known that North Korean personnel stationed abroad at embassies or as trade and company representatives are tasked—and even given quotas—to harvest foreign exchange through whatever means they can dream up. Exploiting diplomatic status to engage in illicit activities has been one means of doing so; engaging in various business ventures, from running restaurants to managing labor exports have been others. In a new twist, para. 13 requires that such individuals be expelled if they are working as an agent for a designated entity or engaged in any activities proscribed under the resolution. As with a number of other discrete provisions of the resolution, this one can be interpreted narrowly or broadly, and in Wild West jursidictions will simply be ignored. But the resolution not only provides tools for states willing to comply, but presents target activities that interested countries can aggressively pursue vis-à-vis those member states vulnerable to outside influence.