"UN Security Council Imposes Tough New Sanctions on North Korea": UNSC Resolution 2397

December 29, 2017 5:15 PM

How many times have we read that headline? This iteration—from NBC News, but it could have been a dozen others—is correct; UNSC Resolution 2397 does mark yet another incremental turning of the screw, and with both Russia and China on board. But rather than simply reiterating what is in the resolution, we need to ask the more important questions. First, what would we need to know to decide whether these sanctions are tough or not? Not surprisingly, implementation is key. And how will North Korea respond if they do end up biting? The blithe presumption is that North Korea will come crawling back to the negotiating table with its tail between its legs, but there is little evidence to support that presupposition. Things are likely to get worse, not better, as sanctions take effect.

What does the resolution--UNSC 2397--actually say and what is politically significant? Here are the bullets:

  • Context. In the past, there has been some reluctance on the part of China to respond to missile tests, saving UNSC resolutions for nuclear tests. As Xian Wu and Steph Haggard showed in an earlier post, that is changing, and particularly after 2012 with the confluence of new leadership in both Beijing and Pyongyang. UNSC resolutions 2087 (01/22/13, satellite launch), 2356 (06/02/177), 2371 (08/05/17), and this one all came in response to missile tests, and 2270 (03/02/16) targeted both the fourth nuclear test and a follow-on ballistic missile test.
  • The sanctions.
    • Crude oil. The resolution is worded as a complete ban with one important caveat and a larger floor of support. The caveat is the retention of a case-by-case exemption for shipments that are for livelihood purposes, allowing an out. The floor is set at 4 million barrels or 525,000 tons (global) for subsequent 12-month periods.  This would appear to be down from the limit set in UNSC 2375 of whatever was then being shipped through the Dandong-Sinuiju pipeline. The problem is that we don't know how much was being shipped, but the US actually shared its intelligence in a brief on 2375 that suggests they were receiving 4 million barrels. On a plain reading, this would appear to simply confirm the existing cap.
    • Refined products. Here is where the resolution gets tougher: 500,000 barrels for subsequent 12-month periods, again, as a global cap that needs to be coordinated. This is down significantly from the 2 million barrel cap in 2375, which was in turn against the US estimate (in the cited brief) of 4.5 million barrels at the time of 2375 (an estimate that is significantly higher than the low-end of 2.4 million barrels by the US Energy Information Agency). 
    • Sectoral sanctions on North Korean exports. An extension of sectoral bans on exports from North Korea to include: food and agricultural products (HS codes 12, 08, 07), machinery (HS code 84), electrical equipment (HS code 85), earth and stone including magnesite and magnesia (HS code 25), wood (HS code 44), and vessels (HS code 89). Individually, these are all single-digit shares of North Korean exports or less. But their most important effect is in the signal as much as the material effect: China and Russia are both signing on to continued limitations on commercial foreign exchange earnings after the much larger bite taken out through the limits placed on coal, seafood, and textile exports.
    • Sectoral sanctions on exports to North Korea: all industrial machinery (HS codes 84 and 85), transportation vehicles (HS codes 86 through 89), and iron, steel, and other metals (HS codes 72 through 83) except spare parts to maintain the safety of commercial aircraft.  
    • Foreign workers are to be repatriated "immediately," but no later than two years from the passage of the resolution (with language that would allow accommodation for asylum seekers or those seeking refuge as a result of human rights violations). Services trade is always harder to track than merchandise trade, and some estimates of the earnings from labor exports—such as Halley's $500 million a year—seem a little high. But total payments in the hundreds of millions cannot be ruled out.
    • Shipping. The US has been clear that it would like to see the UN grant authority to a wider interdiction regime, hoping that "actionable intelligence" language of violations might sway the recalcitrant. This was never meant to be, but the resolution does contain a lengthy section on shipping that includes injunctions to go after ship-to-ship transfers that are violating sanctions. But much of the shipping language appears to be weak, reiterating measures that had already appeared in prior resolutions.
    • Travel ban and asset freezes. With two exceptions of individuals tied directly to the weapons program, this round of designations is made up entirely of North Korean representatives of banking institutions, mostly the Foreign Trade Bank.
  • Implementation and enforcement.
    • The most obvious unknown is how diligently these sanctions will be enforced on the part of the major actors, a list that is rapidly dwindling down to Russia and China as other smaller players jump ship. On the one hand, there is clearly a long list of countries that have been involved in sanctions violations, even if they are not all wholesale violators: a new report by ISIS listing countries that have been non-compliant in one way or the other lists 49 countries that have been caught. On the other hand, Josh Stanton's One Free Korea has a post outlining the growing number of states that are severing ties with North Korea altogether. This approach makes sense and should be pursued aggressively. If North Korean embassies are little more than hubs for illicit activity and sanctions evasion, and North Korean visitors are almost certain to be engaged in such activity as well, it is simpler to simply sever ties rather than devote resources to retail sanctions enforcement.  
    • In the end, though, it comes down to China. The stories are necessarily contradictory because as sanctions tighten the financial return from violating them goes up; to think that you can eliminate leakage is a fantasy. The US intelligence community has reasonably convincing satellite imagery of ship-to-ship transfers on the high seas that were forbidden under the UNSC Resolution 2375 passed in September. South Korea has now seized a ship suspected of illicit oil trade. But China keeps designating new ships as well. But the game is cat-and-mouse, as it has subsequently been revealed that China vetoed six ships on a list of ten that the US sought to sanction, and Beijing has subsequently flatly denied such violations in the wake of a presidential tweet. UN Security Council resolutions have not established effective monitoring mechanisms, which could easily be done with respect to pipeline shipments or even cross-border trade for example: station inspectors on the ground. Needless  to say, this is unlikely to happen.   
  • The reserve question.
    • The biggest and less obvious unknown is the extent of North Korean reserves. As sanctions bite, it implies a widening of the current account deficit with China as exports fall. This deficit has to be financed. How? There are a limited number of possibilities: reserves held abroad in a variety of accounts (this is not a normal central bank), credit from the Chinese government, credit from Chinese firms, or simply the running up of arrears, which only go on as long as Chinese firms are willing to let it. In the absence of such financing, we would expect the market for foreign exchange and basic commodities to ultimately show signs of distress, with prices for imported commodities showing the most volatility. William Brown at KEI's The Peninsula blog has done the most recent deep dive into this issue, and the mysteries remain. But North Korea appears on an unsustainable path; something has to give. The first signs will be a depreciation of the black market exchange rate, a sharp rise in imported fuel and oil products more generally, ultimately spilling over into commodity markets (rice and corn) as smart money moves out of exposure to the won. Sanctions don't work until they do; these are taking enough of a bite out of foreign exchange earnings to have effect.
  • The larger political question
    • But how will North Korea respond? Some things are obvious: more smuggling, efforts to sell assets, such as fishing rights or other franchises to raise cash, a deeper dive into the global financial underworld. But don't rule out more military signaling and even risk-taking, even if signals are sent about a willingness to talk. This next phase of pressure will not be pretty.

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