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The ‘new battlefield’: Oil sanctions on North Korea

by Yoichi Funabashi

In September, the United Nations Security Council responded to North Korea’s sixth nuclear test by adopting a resolution to cap crude oil exports to the country at the level of the past 12 months. While the United States had pushed to completely cut off the oil supply, China and Russia staunchly advocated a more cautious approach. Setting the cap on oil exports represented a compromise between the two sides.

Like previous rounds of sanctions, the cap on oil exports is a rather half-hearted measure, and its efficacy remains in doubt. Indeed, prior sanctions against North Korea have without exception yielded inconclusive results. Among them, however, certain measures have elicited squeals from North Korea.

In fall 2005, the U.S. Treasury Department accused Macau-based Banco Delta Asia (BDA) of involvement in laundering money for the North Korean government, prompting Macau banking authorities to freeze North Korean accounts at the bank. The total amount held in the frozen accounts was roughly $25 million.

At the six-party talks held in November the same year, North Korean Vice Foreign Minister Kim Kye Gwan made a desperate appeal for “the return of the $25 million frozen by financial sanctions.” Kim reportedly grumbled during a private conversation with Victor Cha, who was responsible for North Korea in the White House’s National Security Council, that “you finally found a way to punish us.” To use Kim’s wording, the BDA account belonged to “agencies.” In reality, these “agencies” — over 50 North Korean companies affiliated with the family of Kim Jong Il — had used BDA accounts to launder money.

The U.S. government did not freeze the bank’s U.S.-held assets. Nor did it act in accordance with a U.N. decision to impose sanctions. The Treasury Department simply designated BDA as a “primary money laundering concern.”

The North Korean delegation left the six-party talks and declared they would not return until the country’s BDA assets were unfrozen. Eager to maintain the six-party framework, the administration of U.S. President George W. Bush in June 2007 removed the BDA from its list of sanctions targets. Nevertheless, the North Koreans have not returned to the six-party talks since 2008.

According to Jack Lew, who served as treasury secretary under U.S. President Barack Obama, economic sanctions — and particularly financial sanctions — have become a “new battlefield for the United States, one that enables us to go after those who would wish us harm without putting our troops in harm’s way.”

Now oil sanctions have become yet another “new battlefield.”

The fact that oil has been incorporated into the sanctions against North Korea is of great significance in international political terms. However, whether the new restrictions yield results depends on China and Russia’s cooperation. China accounts for nearly 80 percent of oil exports to North Korea, and Russia most of the remainder.

The U.S. has made Chinese banks, companies and individuals doing business with North Korea the target of secondary sanctions, and has imposed sanctions on Russia since its annexation of Crimea. The fact that the U.S. is fighting concurrently on two different sanctions “battlefields” — one with North Korea, another with China and Russia — complicates its position. Unless the geopolitical conflict surrounding the Korean Peninsula is sorted out, there will likely be no resolution to this state of affairs.

Moreover, economic sanctions are most effective when they serve as a threat to the adversary. There is always a risk that sanctions will lose their effectiveness once that adversary has actually been hurt by them.

Sanctions in and of themselves are not a strategy. Are sanctions intended to drag North Korea back to the bargaining table? Or are they aimed at toppling the regime of Kim Jong Un? Or perhaps they conceal a two-stage approach in which the goal of regime collapse will replace that of reopening the negotiations if the latter fails.

The U.S., Russia, China, South Korea and Japan lack a shared agreement on the strategic goals and calculations accompanying the sanctions against North Korea. Pyongyang clearly views the sanctions as intended for the ultimate goal of regime collapse. The new cap on oil exports may strengthen this conviction.

In fact, oil exports from China to North Korea were suspended for three days in February 2003. The Bush administration had discovered North Korea’s uranium enrichment program, setting off the second North Korean nuclear crisis. In January the same year, North Korea had announced its withdrawal from the Nuclear Non-Proliferation Treaty. China’s suspension of oil exports followed North Korea’s firing of a surface-to-ship missile into the Sea of Japan and restarting of a nuclear reactor. China cited “technical reasons” for the suspension.

Over the course of my research for the book, “The Peninsula Question” (Brookings Institution Press, 2007), an account of the second North Korean nuclear crisis, the Chinese diplomats I interviewed unanimously refuted my suggestion that China’s suspension of oil exports had been intended to serve as a warning to North Korea. One diplomat added that “to draw blood on the first prick is not good.” His reply implied that it would be wrong for China to undertake such a damaging retaliation with potentially fatal consequences.

Does China have the resolve this time to countenance the prospect of harming North Korea? Or if blood is merely trickling out of North Korea, will it pretend not to have noticed as much? The fog continues to hang heavy over this “new battlefield.”

Yoichi Funabashi is chairman of the Asia Pacific Initiative and former editor-in-chief of the Asahi Shimbun. This is a translation of his column in the monthly magazine Bungei Shunju.