Sanctions Watch Update: April 2017
In our last sanctions watch update two months ago, Steph Haggard and I were skeptical that China was enforcing the hard restrictions in UNSCR 2321 concerning North Korean coal exports. Per China’s own customs data, the country imported more coal than 2321 allowed in December 2016.
However, on February 18, China suddenly announced a ban on all coal imports for the rest of 2017. Now that February customs data are available, an interesting detail emerges: the announcement goes above and beyond the mandate of UNSCR 2321 since the import ceiling—in either dollar or volume terms—had not yet been reached according to UN figures. Yun Sun made this same observation yesterday for 38 North. Anecdotally, David Thompson at C4ADS—who tracks North Korean shipping in real time—mentioned that there are North Korean ships that have been sitting outside the major coal ports of Jingtang and Caofeidian for over a month without docking. In other Chinese ports, however, North Korean ships have docked and then returned to the DPRK. It doesn’t look like shipping activity has been completely halted but the patterns are shifting at the least. It’s also hard to know for sure what goods ships are carrying even if they dock at coal terminals.
Is China finally sending a serious signal? Or will a coal deficit simply be made up through imports—or perhaps unrequited exports—of some other goods?
It is too early to tell. The overall DPRK-China trade picture in the figure above approximates past trends, which is not unexpected given that the data do not yet show the reduction in coal imports. Total trade figures for 2016 do suggest the gradual downturn in DPRK-China trade from the peak in 2013. But looking at trade shares, China’s role has unquestionably increased. After Kaesong was shut down in February 2016, effectively ending all inter-Korean economic cooperation, China now accounts for approximately 90 percent of North Korea’s total merchandise trade.
China has long claimed that commercial trade with North Korea is not explicitly sanctioned and Beijing has historically called on states to reject bilateral sanctions that do not reflect multilateral processes through the Security Council (over which China, not coincidentally, exercises a veto). But the big sanctions news over the last six months is that China may not be complying with the sanctions it is able to vet through the UNSC. Chinese trade networks appear to blend licit and illicit trade, as the Dandong Hongxiang and ZTE cases showed, and there is at least some evidence that the PRC is cheating on sanctioned items in the mineral trade.
All of this is quite apart from points of leverage which have gone completely unexploited, most notably oil exports. We still do not how much oil China exports to North Korea because China has not reported them since December 2013. KOTRA independently imputed oil export figures at $500 million in 2014 and $280 million in 2015, with the decrease due to the fall in oil prices.
But something as significant as use of the oil weapon would be visible in broader economic activity, which has not happened. The North Korean Won (KPW)’s black market exchange rate (below), remains as imponderable as ever. The KPW is still remarkably stable amidst a progressive ratcheting up of UN and bilateral sanctions in 2016 and China’s announcement banning all North Korean coal this February. If sanctions were really enforced, a depreciation in the KPW should follow. However, the KPW to USD rate has hovered around 8,000 Won for the past four years suggesting that the regime has figured out how to stabilize it. Since January 2013, the average rate is 8,125, with a standard deviation of 346 based on monthly estimates. Indeed, the latest KPW rate following the China coal ban announcement is 8,035 to one USD, slightly stronger than the four-year mean. The North Korean Won is simply not moving, which either means that traders do not believe the axe is falling on China-DPRK trade, that the KPW is inexplicably impervious to sanctions shocks, or that North Korea has unknown macroeconomic tools in its belt. If anyone thinks they know the answer, please do tell.