North Korean leader Kim Jong-Un and US President Donald Trump

Estimates of the impact of sanctions on the North Korean economy vary widely, but analysts generally agree the impacts are negative. However, policymakers should understand that sanctions also inadvertently help the economy in certain ways.

Sanctions imposed under United Nations Security Council (UNSC) Resolution 2375 have certainly affected the welfare of some parts of the North Korean population. The ban on employing North Korean workers in the construction sectors of Russia, China, and other countries deprived tens of thousands of North Korean workers of potential earnings, hurting workers and their families. Sanctions have hampered the activities of humanitarian agencies and foundations (U.S.-based humanitarian agencies have faced additional difficulties following the United States’ ban on travel to North Korea). As a result, large areas of the country face increased food insecurity and a shortage of vital medicines. The ban on imports of a number of goods (including oil and petroleum products in excess of volumes allowed by UNSC Resolutions, as well as luxury goods and foodstuffs) has fueled a growth in smuggling and “gray” import volumes as well as foreign-flagged vessel operations. In general, the number of intermediaries in supply chains has increased, meaning more suppliers along the way are charging an excess fare for “risks” undertaken, thus making the final cost of goods unaffordable for ordinary North Koreans. North Korea has long adapted to international sanctions and has become expert in trading with other countries via gray or black channels, but a tightening of sanctions has led to the proliferation of semi-legal and illegal channels and concomitant corruption and trans-border crime. Tighter sanctions have also facilitated a growth in the economic influence of China, which has nearly monopolized foreign trade with North Korea and continues to export oil and oil products and import North Korean labor, bypassing UN resolutions.

On the other hand, UNSC sanctions (as well as unilateral sanctions) have also had certain positive impacts on the North Korean economy.

For one, a ban on the export of North Korean coal, seafood, and light industry products, as well as labor, has redirected these resources towards the North Korean economy. Prior to the adoption of UNSC Resolution 2375, North Korean coal and ore were exported primarily to China at artificially low prices and in such large quantities that domestic power plants faced shortages of coal. Most of the fish and seafood harvested in the Yellow Sea and Sea of Japan were sold to China, resulting in a shortage of these products in North Korean stores and even facilitating rumors that the resources of the two seas were exhausted, prompting the Korean Central News Agency (KCNA), North Korea’s official media outlet, to issue calls for increased coal production and more “rational” fishing (see KCNA, “A brisk campaign to hit the fishing target for this year is now underway in the DPRK”, June 14, 2017). However, immediately after the adoption of Resolution 2375, coal, fish, and light industry products were redirected towards domestic consumption. Reports emerged of big hauls and record coal production within North Korean official media that were confirmed by visitors to North Korea. The construction of new fishing vessels of the "Hwanggumhae" class was launched (KCNA, “Fishing Boats Built in DPRK,” October 16, 2017), as well as the development of scientific basis of fishing and mariculture. Hundreds of coal mines are being developed (KCNA, “Hundreds of New Coalfaces Secured,” December, 2017) for future use, and observers report that coal production is expanding. State media and visitors to North Korea have also noted the revival of light industry of the country. Factories and workshops that previously produced goods for export have been reoriented towards meeting domestic demand, displacing the products of Chinese light industry in North Korean stores. According to reports from media and visitors and experts’ observations, North Korea seems well-prepared for the sanctions imposed under UNSC Resolution 2375, which target its coal, light, and fish industries—and to have benefited from them.

Experts also note efforts of North Korean leadership to establish independency that would help to avoid undesirable effects of sanctions. Indeed, sanctions have become a powerful incentive for activating North Korean import-substitution policy. Back in 2013, the author was told by scholars in Pyongyang that “the state provides itself with 80% of all resources and is forced to import the remaining 20% from other countries. But we need to get rid of this dependence.” North Korea’s longstanding goal of achieving economic and energy independence is and has been prioritized recently in official media and in the statements of North Korean leadership, including Kim Jong-un's New Year's address (KCNA, “New Year Address of Supreme Leader Kim Jong Un,” January 1, 2019) on January 1, 2019. Strong emphasis is being placed on substituting gas and oil, which are not yet available in sufficient quantities in North Korea. In particular, technologies based on anthracite are being introduced in production facilities. Methods of iron and steel production that do not rely on imported coking coal but rather on fuel and materials available in North Korea have increased, reducing the need for imports of materials and fuel. In order to achieve energy independence, North Korea is also working to modernize its energy system to include hydro- and thermal-power plants, as well as nuclear power plants and green energy sources.

North Korea’s efforts to reduce dependence on fuel imports deserve special mention. While under Kim Il-sung, North Korea began to develop technology for producing synthetic fuel from coal, importing fuel from neighboring countries was a cheaper alternative to investing in the necessary technology for synthetic fuel production. Since the adoption of UNSC resolutions and a concomitant drop-off of oil imports, the country’s leadership has returned its attention to developing synthetic fuel technology. In his speech at the 7th party congress (KCNA, Supreme Leader Kim Jong Un's Report to the Seventh Congress of the Workers' Party of Korea on the Work of the Central Committee (Full Text), June 20, 2016) in May 2016, Kim Jong-un underlined the necessity of establishing a “C1” chemical industry (chemistry of one carbon molecules) so that “the production of such chemical goods as methanol, synthetic fuel, and synthetic resin can be placed on a highly juche-oriented basis.” Experts believe North Korea has already mastered the technology necessary for producing gas from coal. According to the Wall Street Journal, China supplied North Korea with a coal gasifier able to produce 40,000 cubic meters per hour of synthetic gas. North Korea is also able to develop the technology independently or modify old equipment obtained from the Soviet Union in the 1960s. Back in April 2017, KCNA reported (KCNA, “Coal Gas-based Generating System Established,” April 26, 2017) that the Ryongnam dockyard established a 1,000 kVA Korean-style coal gas-based generating system where a diesel-engine generator was converted to a gas-engine generator.

The process of producing synthetic fuel from coal is lengthy and expensive, but for North Korea, it presents a good alternative to oil. There are two potential scenarios: either sanctions will be lifted, and North Korea will resume importing oil, or sanctions will persist, and the technology for producing synthetic fuel will evolve and become more affordable.

Moreover, it is worth pointing out that North Korea has its own oil and natural gas reserves, as well as hydrates. Many analysts think these reserves cannot be accessed by North Korea, which lacks both the experience and the appropriate drilling equipment (specialized equipment for deep-water drilling is required for North Korean hydrocarbons located at a depth of 2500 m off the east coast). However, the country does have enough proven reserves to refine for domestic consumption. If North Korea can improve and update old drilling equipment purchased from the Soviet Union and Romania’s Ceausescu regime (after all, it has done this successfully with missiles), it will reduce the need to import advanced equipment from abroad.

While intended as a tool for undermining Kim Jong-un's regime, another unexpected consequence of sanctions has been to consolidate his power. As in many countries, Kim Jong-un’s legitimacy derives in part from his role in defending the nation from an external enemy. The stronger the perceived external threat, the stronger the cohesion of North Korean society and elites. Even competing factions of North Korean political elites tend to unite if they perceive a real threat to the regime’s survival, which they equate with their own survival.

Thus, the benefits of sanctions for the North Korean economy (without considering the humanitarian aspect) and domestic policy are clear. But in addition to unexpected benefits for North Korea, sanctions also inflict harm on the sanctioning countries. For example, the ban on North Korean labor force imports has deprived certain countries of the opportunity to spread “soft power” through people-to-people contact with North Koreans—what could otherwise play a positive role in integrating North Korean society into the international community. The same goes for a curtailment of trade with North Korea. North Korea’s economic system is evolving: its leadership studies different models of economic development and conducts limited reforms. Due to a lack of trade relations with North Korea, its future trade partners will face difficulties understanding its market.

As a result of sanctions, Russia and Japan will face new obstacles in implementing rare earth mining projects. Russia has lost substantial political influence in North Korea and its Far East region has suffered economically from the loss of a substantial source of labor for its construction sector. The number of North Korean workers in Russia dropped from 34,000 in 2017 to 11,000 by the end of 2018. The number of workers in the Far East of Russia was 14,000 before the adoption of the last resolution, and now it is just about 3,000. Trilateral economic cooperation (for example, the so-called Trans-Korean projects involving Russia, South Korea, and North Korea) cannot be fully implemented in the current sanctions environment.

China, as it was said above, has monopolized influence on North Korea and thus has benefited from UNSC sanctions, but only in the short- to medium-term. China’s growing influence will not be calmly observed by North Korea. The growth of North Korea’s dependence on China is usually accompanied by anti-Chinese sentiments. After activating its diplomacy and foreign policy, North Korea has more chances to diversify and reduce the influence of China.

Finally, sanctions against North Korea, including the most recent ones, have not had any influence on the sphere they were initially targeting—North Korean nuclear and missile program. North Korea shows no signs that it is ready to give up its nuclear status. The country has completed the test phase, become a de facto nuclear state, and according to some reports, appears to have begun the mass production of successfully tested weapons, something Kim Jong-un identified as a goal in his New Year speech of 2018 (KCNA, “Kim Jong Un Makes New Year Address,” January 1, 2018). North Korea retains the ingredients necessary for the further development of its nuclear missile program—industrial and human resources and a scientific/technological base. The cost of North Korea’s nuclear program remains relatively cheap and the production of nuclear weapons is difficult to detect, unlike tests and missile launches. North Korea can continue to build up its nuclear potential, while also conducting international dialogues and developing its economy. If North Korea continues to work on import substitution and achieving energy independence, while at the same time skillfully maneuvering between the great powers, then sanctions will ultimately lose even the small influence that they have on North Korean policy now. Kim Jong-un's position during the second summit with President Trump proves that while sanctions are an important issue for North Korea, the country derives certain benefits from the current sanctions environment, and that Kim Jong-un, like Trump, is in no hurry either.

The above writer, Dr. Anastasia Barannikova, is a visiting fellow with the Russia and Eurasia Program at the Center for Strategic and International Studies in Washington, D.C. She is a research fellow at ADM Nevelskoy Maritime State University in Vladivostok, Russia.