In North Korea, Coronavirus Hurts More Than Any Sanctions Could
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SEOUL, South Korea — On New Year’s Day, North Korea’s leader, Kim Jong-un, called for a “frontal breakthrough to foil the enemies’ sanctions.” The strategy meant finding new sources of income, legal or illegal, and mainly from China.
Sending North Korean workers to China. Bringing more tourists from there. Smuggling banned cargo, like coal or oil, across the border at night or between ships on high seas.
But there was one thing Mr. Kim did not foresee: the coronavirus.
Barely three weeks after Mr. Kim unveiled his New Year’s resolution, North Korea shut down its border with China to protect itself against the emerging outbreak in the city of Wuhan. It was no ordinary border closure.
China accounted for 95 percent of the North’s trade. Consumer goods, raw materials, fuel and machine parts smuggled into the North across their 870-mile border kept North Korean markets and factories sputtering along, despite United Nations sanctions designed to curb the Kim regime’s nuclear ambitions.
With the border sealed, the North’s official exports to China, already hobbled by the sanctions, have crashed even further. In March, they were worth just $610,000, according to Chinese customs data — down 96 percent from a year earlier. The North’s newly opened ski and spa resorts are empty of Chinese tourists, and its smuggling ships sit idle in their ports.
The virus has isolated the North Korean economy as no sanctions could. It has devastated the regime’s ability to bring in money through legal and illegal trade, leaving it scrambling to protect the country’s diminishing foreign currency reserves.
“To North Korea, Covid-19 is a black swan, none of its policymakers saw it coming,” said Go Myong-hyun, an analyst at the Asan Institute for Policy Studies in Seoul.
The pandemic could hardly have come at a worse time for Mr. Kim, whose attempts to win sanctions relief in talks with President Trump have been fruitless. North Korea’s recent acts of hostility toward South Korea, including the destruction of the inter-Korean liaison office in the North, have been seen in part as acts of economic desperation.
“If you peel North Korea’s problem like an onion, at the core is its economy, and its economic trouble comes down to whether it can lift sanctions,” said Kim Yong-hyun, a professor of North Korean studies at Dongguk University in Seoul.
The North Korean economy has languished for decades, hobbled by communist mismanagement, a famine in the late 1990s and the gradually tougher sanctions imposed by the United Nations since 2006, when the North carried out its first nuclear test.
Mr. Kim has tried to boost the economy with domestic reforms, aimed at creating a “socialist system of responsible business operation.” Factories and collective farms were given more incentives to increase productivity, including the right to keep surpluses.
Mr. Kim also ramped up exports of coal, iron ore, textiles and seafood to China, achieving economic growth of 3.9 percent in 2016, the highest since the late 1990s, according to South Korea’s central bank.
But the North also rapidly 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 noose around the North’s economy by banning all of its major exports.
The economy shrank by 3.5 percent in 2017. It contracted by 4.1 percent the following year, with its exports to China plummeting 86 percent.
By February 2019, when Mr. Kim and Mr. Trump held their second summit meeting, in Vietnam, the North Korean leader was desperate for relief. The Security Council had required China, Russia and other countries to expel all North Korean workers by December, which threatened to deprive the North of another key source of income, estimated at $500 million to $1 billion a year.
But Mr. Kim’s hopes of easing the sanctions ended when the Vietnam talks collapsed.
In his grim New Year’s message, Mr. Kim seemed determined to slog through the sanctions, asking North Koreans to prepare to “tighten our belts” again. He also vowed to boost his nuclear weapons program further, hoping that a more advanced nuclear arsenal would give him more leverage with Mr. Trump or his successor. He threatened to end his moratorium on nuclear and long-range missile tests, warning that the world would soon witness his “new strategic weapon.”
State-run television echoed that sentiment later in January, in a broadcast about Mr. Kim’s brief meeting with Mr. Trump last summer on the inter-Korean border. “We don’t intend to sell our pride and national power for some spectacular economic transformation,” Mr. Kim was quoted as telling Mr. Trump, after the American leader promised the North a better economic future if it gave up its nuclear weapons first.
At the time, Mr. Kim had reason to be so defiant.
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 anything not banned 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 one North Korean industry that had not been affected by the sanctions, and Mr. Kim has been busy building massive new resort towns.
The North also continued to circumvent the 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 short-term tourist or student visas, according to analysts and news reports in South Korea.
But the trade imbalance with China created its own concerns.
Even as the sanctions hit the North’s exports hard, the country continued to buy cooking oil, flour, sugar and other consumer goods, as well as construction materials, from China. The imports were needed to keep its industries going, as well as the unofficial markets that have helped many people to survive, as the North’s food rationing system fails to meet the population’s needs.
Since 2017, North Korea has reported a trade deficit of more than $2 billion every year. In comparison, the North’s total exports last year were $260 million.
“The clock is ticking and the bomb could explode any time,” Kim Byung-yeon, a Seoul National University economist, wrote in December, predicting that the North’s foreign currency reserves would shrink by $1 billion a year, leading inexorably to a crisis.
North Korea has tried to replenish its coffers with revenues from illegal smuggling and cybertheft, as well as “loyalty donations” from what are known as donju — tradespeople with political connections, who have hoarded foreign currency obtained through smuggling and other enterprises.
Mr. Kim’s government also runs shops in Pyongyang, the capital, where the moneyed class spends foreign currency on imported goods. And it has profited by selling Chinese smartphones to an estimated six million cellphone subscribers in the country.
“The debate has been about how quickly or slowly the North’s foreign currency would diminish,” Mr. Go said. “But there is no doubt now that Covid-19 has accelerated the speed.”
Recently, signs have emerged of growing stress on the North’s economy, especially its foreign currency reserves.
The authorities have also cracked down harder on the use of foreign currency in markets in an effort to shore up the won, the local currency, said Jiro Ishimaru, a chief editor at Asia Press International in Japan, who has monitored the North Korean economy for years with the help of correspondents there.
To save on foreign currency, Mr. Kim has encouraged his people to produce more goods at home, like snacks, cosmetics and beverages. But Covid-19 has hit those sectors as well, because they depended on Chinese raw materials to produce the goods.
“Kim Jong-un thought he could survive with tourism revenues, smuggling and Chinese help, but his plans have crumbled because of the coronavirus,” said Mr. Ishimaru. “If the virus has taught him anything, it is how dependent his economy is on China.”