The Other Nuclear Option

Much info on the economic front of late, including some initial, sketchy evidence to back U.S. claims that the sanctions are biting.

The Chosun Ilbo continues to tremble over what the U.S. Treasury Department’s next move could be. Have a look at Section 311 (115 Stat. 298) of the USA PATRIOT Act, and if you can bear it, keep reading. It empowers Treasury to declare all of North Korea a jurisdiction of special money laundering concern — as we’ve apparently done to the Ukraine for a brief period — and thereby force the entire world economy to choose between the United States and North Korea:

[T]he designation of North Korea as a whole would likely paralyze its transactions with any international financial institutions, which must maintain a place of business in the U.S. if they are to conduct dollar transactions. “It would mean North Korea is in effect kicked out of the international financial world, where the U.S. exercises the greatest influence,” a government official said.

It’s curious to watch how North Korea’s neighbors have only just “discovered” supernotes within their own borders. Partly as a result of a single massive seizure last year, Seoul is reporting a dramatic rise in the amount of counterfeit currency detected in South Korea last year (Discrepancy alert! Was it $40,000 or $140,000? If last year’s total was in fact $121,760, I presume that it’s the lower figure.). The DailyNK reports that China is cracking down on North Korean counterfeiting, to which I’d add that the threat of sanctions against Chinese banks may have been an incentive.

Next, I pick up where James left off with this Washington Post piece, which notes that there’s some debate about how this will affect diplomacy with the North. Some believe North Korea will keep stalling; others believe North Korea’s Tokyo meeting with representatives of the other five nations means that the North is newly incentivized. The pressure isn’t relaxing yet:

Japanese politicians have made progress on both a bill threatening sanctions if it does not negotiate in good faith on the nuclear issue and a dispute over Japanese citizens abducted by the North Koreans during the 1970s and ’80s to help train potential spies. On Tuesday, Japan added 20 North Korean firms and institutions to an export restriction list aimed at keeping them from obtaining materials and technology that could have military use.

How is this affecting North Korea? It’s obviously hard to say with certainty, but the Dong-A Ilbo makes an admirable effort to pierce the opacity:

North Korean authorities no longer have access to outside financing after fiscal restrictions imposed by the U.S. blocked North Korean access to illegal funds, estimated to be worth 500 million dollars annually. These funds were largely generated from the trading of counterfeit dollars, drugs, and missiles.

The making and selling of weapons of mass destruction has become an impossible task for North Korea now because it lacks sufficient funds to buy the necessary high-tech components. Recent visitors to the North tell stories of how North Korean authorities often express their agonies over the financial crackdown.

Chairman of the National Defense Commission Kim Jong Il met Chinese President Hu Jintao January this year and said, “U.S. fiscal restrictions might disintegrate the North Korean system,” reported an article from the latest edition of Newsweek.

Finally, what may be the most curious story of all: why are members of the North Korean elite reportedly buying up large amounts of dollars (presumably a mixture of real and fake) on the black market?

The official exchange rate in the North is W150 per dollar. But in the black market, the greenback had soared from around W2,000 to W2,600 by late last year. “It varies from region to region, but the dollar now seems to have risen to W3,000 because of the financial sanctions,” a South Korean official said.

A North Korean defector says in some black markets in Pyongyang and Shinuiju $1 will fetch W3,800-4,000 and rising. An expert on North Korea said rumor has it that some people are hoarding dollars in the expectation that their value will keep going up.

Given that the average monthly income of North Korean workers is around W3,000, the surge has effectively reduced their wage to less than $1 a month.

Obviously, one wishes that the hardship imposed by these actions could be focused tightly on the elite, rather than ordinary workers. Barring that, it should cause us to redouble our efforts and public pressure to get a strictly monitored feeding program in place.