SEOUL, South Korea – On New Year’s Day, North Korean leader Kim Jong-un called for a “frontal advance to thwart enemy sanctions.” The strategy meant finding new sources of income, legal or illegal, and mainly from China.
Shipping North Korean workers to China. Bringing more tourists from there. Smuggling of prohibited cargo, such as coal or oil, crosses the border at night or between ships on the high seas.
But there was one thing that Mr. Kim did not foresee: the coronavirus.
Just three weeks after Kim revealed her New Year’s resolution, North Korea closed its border with China to guard against the emerging outbreak in Wuhan City. It was not an ordinary closure of the border.
China accounted for 95 percent of Northern trade. Consumer goods, raw materials, fuel and machine parts smuggled north across its 870-mile border kept North Korean markets and factories despite United Nations sanctions designed to curb the nuclear ambitions of the Kim regime.
With the border sealed, North Korea’s official exports to China, already hampered by sanctions, have plummeted further. In March, they were worth just $ 610,000, according to Chinese customs data, 96 percent less than the year before. The newly opened ski and spa resorts in the North are empty of Chinese tourists, and their smuggling ships are idle at their ports.
The virus has isolated North Korea’s economy like no sanction could. It has devastated the regime’s ability to bring in money through legal and illegal trade, leaving it struggling to protect the country’s declining foreign currency reserves.
“For North Korea, Covid-19 is a black swan, none of its policy makers saw it coming,” said Go Myong-hyun, an analyst at the Asan Institute for Policy Studies in Seoul.
North Korea claims that it has had no cases of coronavirus. But it was one of the first countries to close its border, aware that its woefully under-equipped public health system made it particularly vulnerable to mass infection.
The pandemic could hardly have come at a worse time for Kim, whose attempts to obtain relief from sanctions in talks with President Trump have been unsuccessful. North Korea’s recent acts of hostility to South Korea, including the destruction of the North Korean Inter-Liaison Office, have been seen in part as acts of economic despair.
“If you peel the North Korean problem like an onion, the bottom line is its economy, and its economic problem comes down to whether it can lift the sanctions,” said Kim Yong-hyun, professor of North Korean studies at Dongguk University in Seoul.
North Korea’s economy has languished for decades, hampered by communist mismanagement, a famine in the late 1990s, and gradually tougher sanctions imposed by the United Nations since 2006, when the North carried out its first test nuclear.
Kim has tried to boost the economy with internal reforms, aimed at creating a “socialist system of responsible commercial operation.” Factories and collective farms received more incentives to increase productivity, including the right to keep surpluses.
Kim also increased coal, iron ore, textiles and seafood exports to China, achieving economic growth of 3.9 percent in 2016, the highest since the late 1990s, according to the South Korean central bank.
But the North also quickly expanded its weapons programs, testing three intercontinental ballistic missiles in 2017, as well as what it said was a hydrogen bomb. In response, the United Nations Security Council tightened the knot around the Northern economy by banning all of its major exports.
The economy contracted 3.5 percent in 2017. It contracted 4.1 percent the following year, and its exports to China slumped 86 percent.
By February 2019, when Kim and Trump held their second summit meeting, in Vietnam, the North Korean leader was desperate for help. The Security Council had demanded China, Russia and other countries to expel all North Korean workers in December, threatening to deprive the North of another key source of income, estimated to be between $ 500 and $ 1 billion a year.
But Kim’s hopes of easing sanctions ended when the Vietnam talks collapsed.
In his grim New Year message, Mr. Kim seemed determined to bypass the sanctions, asking the North Koreans to prepare to “tighten their belts” again. He also promised to further boost his nuclear weapons program, hoping that a more advanced nuclear arsenal would give him more leverage with Trump or his successor. He threatened to end his moratorium on long-range and nuclear missile tests, warning that the world would soon witness its “new strategic weapon.”
State television echoed that sentiment later in January, in a broadcast about Kim’s brief meeting with Trump last summer at the inter-Korean border. “We do not intend to sell our pride and national power for a spectacular economic transformation,” Kim said, telling Trump, after the US leader promised the North a better economic future if he first gave up his nuclear weapons. .
At the time, Mr. Kim had reason to be so challenging.
After hitting bottom in 2018, his country’s trade with China grew 15 percent last year, according to data compiled by the Korea International Trade Association. It exported practically everything that is not prohibited by United Nations sanctions: cheap watches assembled with Chinese components; artificial eyelashes; wigs, mannequins, soccer balls and tungsten.
China also sent more tourists to the North after Mr. Kim’s third summit meeting with its leader, Xi Jinping, in June 2018. Tourism was an industry in North Korea that had not been affected by the sanctions, and the Mr. Kim has been busy building huge new tourist cities.
The North also continued to evade sanctions. Last year, it exported $ 370 million worth of coal in illicit ship-to-ship transfers to Chinese barges, according to the United Nations. And despite the ban on work permits for North Koreans, China allowed many to be employed on tourist visas or short-term students, according to analysts and news reports in South Korea.
But the trade imbalance with China created its own concerns.
Although the sanctions severely affected exports from the North, the country continued to buy cooking oil, flour, sugar and other consumer goods, as well as construction materials, from China. Imports were necessary to keep their industries going, as well as the unofficial markets that have helped many people survive, as the Northern food rationing system does not meet the needs of the population.
Since 2017, North Korea has reported a trade deficit of more than $ 2 billion each year. In comparison, total exports from the North last year were $ 260 million.
“Time is ticking and the bomb could explode at any time,” wrote Kim Byung-yeon, an economist at Seoul National University, in December, predicting that the North’s foreign exchange reserves would shrink by $ 1 billion a year, which would inexorably lead to a crisis.
North Korea has attempted to replenish its coffers with proceeds from illegal smuggling and cyber theft, as well as “loyalty donations” from what is known as donju: merchants with political connections, who have accumulated foreign exchange earned through smuggling and others. Business.
Mr. Kim’s government also runs stores in Pyongyang, the capital, where the wealthy class spends foreign exchange on imported goods. And it has benefited by selling Chinese smartphones to approximately six million cell phone subscribers in the country.
“The debate has been about how quickly or slowly the foreign currency of the North will decline,” Go said. “But now there is no question that Covid-19 has accelerated speed.”
Recently, signs of increasing stress have emerged in the Northern economy, especially in its foreign exchange reserves.
The government recently issued public bonds for the first time in 17 years, reported Daily NK, a Seoul-based website that uses informants in the north. Kim tested the loyalty of the elites by asking them to buy bonds in foreign currency, he said.
Authorities have also cracked down on the use of foreign currency in markets in an effort to shore up the won, the local currency, said Jiro Ishimaru, editor-in-chief of Asia Press International in Japan, which has monitored the North Korean economy. for years with the help of correspondents there.
To save in foreign currency, Mr. Kim has encouraged his people to produce more products at home, such as snacks, cosmetics, and drinks. But Covid-19 has also affected those sectors, because they relied on Chinese raw materials to produce the products.
“Kim Jong-un thought he could survive on income from tourism, smuggling and Chinese aid, but his plans have collapsed due to the coronavirus,” Ishimaru said. “If the virus has taught you anything, it’s how dependent your economy is on China.”
