Are Sanctions Part of the Problem?

Unlike much of US policy towards North Korea, its sanctions strategy has remained constant. Particularly since 2016, its primary objective has been to create regime-threatening economic pressure on the DPRK. Washington has attempted to do this by denying the North opportunities to earn foreign exchange through the export of commodities or labor and reducing the import of petroleum or petroleum products. The US has deployed its formidable arsenal of financial tools and other unilateral US sanctions to deter third parties from providing goods, financial links or services to many elements of the North Korean economy. This effort did not abate even after the Trump-Kim summit in Singapore earlier this year, when many other aspects of US policy—notably presidential rhetoric about the North Korean leadership and its policy on military exercises with the ROK—seemed to spin 180 degrees.

Has the constancy on sanctions, amid what is otherwise an inconsistent US policy, been part of the problem? Has US enthusiasm for imposing harsh sanctions and economic pain derailed the denuclearization process, as some people believe happened in the Bush administration when US-DPRK negotiations were affected by the imposition of sanctions on Banco Delta Asia?[1] This seems unlikely. The Trump administration is reportedly divided over aspects of negotiations with the DPRK, but seems unified on the importance of maintaining sanctions to provide leverage on Pyongyang. Paradoxically, however, the administration’s uncharacteristic constancy on sanctions obscures real problems in its approach. The specific sanctions the administration has taken since Singapore are entirely logical if one accepts USG assumptions about the situation. Unfortunately, those assumptions may no longer be valid (if they ever were).

What Are They Trying to Do?

From a purely technical point of view, one has to admire the way the Trump administration created leverage on North Korea with sanctions. Through the end of 2017, it managed to inflict serious economic damage on Pyongyang. The Bank of Korea recently estimated that the DPRK’s GDP shrank by 3.5 percent in 2017—a reversal of several consecutive years of modest GDP growth.[2] The economic decline was most severe in mining, one of the sectors hit hardest by tougher UN sanctions.

Of course, the primary reason sanctions worked so well in 2017 and the first quarter of 2018 is that China enforced them strongly. But the US also did a professional job of creating the proper disincentives for sanctions evasion. US unilateral sanctions were not only very cleverly targeted against North Korea, but also against third-country entities that might assist Pyongyang in evading UN sanctions on coal or other exports and on petroleum imports. The administration was particularly incensed by the use of ship-to-ship transfers to evade UN oil sanctions. The Department of Treasury sanctioned Russian, Chinese and other third country entities involved in maritime evasion and the Department of State issued a white paper on maritime evasion techniques.[3] On July 23 the US government asked the UN Sanctions Committee to order a halt to all refined petroleum products to North Korea, because that country had already exceeded its UNSC mandated annual ceiling of 500,000 barrels of product import. This effort was not surprisingly blocked by Russia and China given both their interest in fostering the improved political climate after the Singapore, Beijing and Panmunjom summits, and the likely complicity of Russian and Chinese entities in the refined product shipments.

The USG took additional steps in August. Twice last month Treasury designated entities from China, Russia and Singapore for sanctions evasion in the areas of shipping and finance. It was particularly notable that a Russian bank was designated which in effect excludes it from financial business with the US. These actions will not end all sanctions evasion. There will always be players with little to lose in the global economy (Agrosoyuz, the sanctioned Russian bank, for example, was the 203rd largest bank in Russia with assets of less than $200 million) who are willing to run risks to garner the rewards from sanctions-busting. Nonetheless, they do send a chill through any major economic players who might be tempted to get into the game.

The Barrel Has Moved

The problem with the US sanctions effort is not one of execution or even of intent. Rather it is the assumptions about the North Korea dilemma that make US sanctions problematic. The basic assumption behind the US effort is that we have North Korea over a barrel and that current sanctions are the leverage that will move Pyongyang to agree to denuclearization. However, Kim Jong Un’s summitry campaign has moved that barrel.

It is very likely that Kim felt pressure from sanctions when he opened his peace offensive on New Year’s Day. Trade with China had fallen to near zero. In addition, he (and his Chinese and South Korean counterparts) were almost certainly concerned about the risk that the exchanges of intemperate rhetoric and the cycle of provocations and increased sanctions that had played out in 2017 would create a military crisis. Indeed, it is very likely that China’s reasons for enforcing sanctions so stringently last year had much to do with keeping the Washington and Pyongyang from going off the deep end—giving Trump a more palatable means to punish Kim while strongly signaling the need to stop the North’s testing program. Sanctions were thus important for pressuring North Korea, but full pressure could only be exerted by putting peace on the Korean Peninsula at risk. In effect, the DPRK could only be held over the sanctions barrel while peace in the region was also dangled over a much deeper and more frightening barrel.

Since the beginning of this year, all the broader conditions surrounding sanctions have shifted. South Korea is anxious to begin economic integration efforts with the North. China has gotten what it most wanted from stringent sanctions enforcement: an end to North Korean provocation of the US, a DPRK commitment to economic reform, and renewed respect from Kim for the Chinese leadership. Nobody but the US has any great interest in sanctions pressure and the remarkable reversal of President Trump’s rhetoric about North Korea undercut even the US ability to make sanctions work. There is no longer anyone dangling over the barrel—except perhaps the credibility of the US effort.

Pyongyang Does Not Buy Our Narrative

Even if Pyongyang were feeling the heat from sanctions, it seems unlikely that it would give up its nuclear weapons solely to get sanctions relief. While the leadership has signaled the economy is now the priority, it is doing so because it believed that the North’s nuclear deterrent is sufficient to provide security. It seems highly unlikely it would trade this security for prosperity: Kim can’t get to where he wants to go if sanctions are not eased, but he probably also believes the regime cannot achieve its economic goals if it denuclearizes in the current environment. Some experts—including this writer—might suspect that all of Kim’s summitry was just a tactical ploy to undermine sanctions and to deny the US the opportunity to act militarily. But it is also possible that Kim sincerely believes his effort is about creating a peace regime in which nuclear weapons become far less relevant and sanctions fade away.

Kim would have to be almost suicidal to denuclearize totally. But he might see a future in which his nuclear weapons are not seen as a great concern to the vast majority of the world (including the US) as is the case with India. A North Korea normalized by a peace treaty and economic interconnection with South Korea and the world would not be treated as a dangerous nuclear rogue state in this scenario, but as a state with unique security reasons to maintain a nuclear deterrent that need not destabilize global peace. If this is the case, he might expect the focus of negotiations and leverage to center around the trade-offs between elements of a peace regime and limitations on his nuclear and missile programs that would allow him to maintain security but also reassure the outside world. He might expect sanctions to be peeled away as necessary to implement progress in this area and on the economic cooperation that he and his South Korean counterpart favor. In short, the US sees sanctions as vital to forcing Kim to our will. Now that the Chinese are off his back on sanctions enforcement, he sees them as a secondary obstacle.

Can We Turn the Switch Back On?

Now that the glow has faded from Singapore and the US confronts the reality that North Korean denuclearization remains a very difficult if not unreachable objective, is it possible to restore sanctions pressure to December 2017 levels? The US approach to Kim since January can only be seen as rational if the Trump administration sincerely believes it can restore sanctions pressure if dialogue on denuclearization falters. Perhaps the administration is correct. After all, things are not totally broken. Although the Chinese have resumed issuing visas for North Korean workers and Chinese customs enforcement has apparently returned to its more mediocre level after peaking last year, the sanctions dam has not been breached—North Korea has not yet recovered its mineral export markets.

The evasions we are seeing were predictable. As things currently stand, North Korea can’t achieve its economic goals with sanctions, but the US can’t bring the regime to its knees, either. While this situation is probably not good enough for the US to achieve its objectives, it is also unsustainable. Pressure to move forward with economic projects with the North is building in South Korea and Chinese and Russian entities will only get better and bolder at evasion.[4]

To restore the situation to that which existed before January 1, the US would have to change some of the diplomatic and political conditions created by Kim’s summitry. This will be a heavy lift diplomatically and politically especially for an administration so prone to wild oscillation. It is difficult to see how the US can restore the perception of the North Korean nuclear threat that existed in 2017 after it has normalized Kim’s image in the US and the world at Singapore. It would take a heroic diplomatic effort to pull the ROK back from engagement—unless the DPRK blunders. And it seems unlikely that the Chinese leadership would be willing to give Trump the benefit of the doubt again now that it: a) has restored a more favorable environment for itself in Pyongyang, and b) has reevaluated its ability to manipulate Trump. What is left then is the possibility of a unilateral US effort to restore crisis conditions through a return to rhetorical bluster and possible military action. This is unlikely to occur prior to the first Tuesday in November, since to do so now would be to admit Trump had been duped at Singapore.

What Now?

The US probably does need to do what it can to maintain the current sanctions regime. But it will also likely need to drop its illusion that the sanctions regime, even if it can be strengthened, can coerce North Korea to denuclearize. If this current impasse over denuclearization continues, however, it would be fruitless to concede ground in this area right now. Holding the line through the remainder of the year and doing what is possible to reduce sanctions evasion is going to be a difficult but achievable objective.

In the meantime, the administration might look to upcoming opportunities like the UN General Assembly to shore up its diplomatic position not only with Pyongyang, but also with Beijing and Seoul. Sanctions will be more sustainable if they are harnessed to a new diplomatic initiative to create a peace regime for the peninsula or to some North Korean concession on denuclearization. The US needs to find a card other than sanctions to play if it wants to move the denuclearization dialogue forward and still maintain sanctions. At some point, it will also have to consider how to phase sanctions relief with incremental North Korean steps toward denuclearization. Its current position of total denuclearization before consideration of sanctions relief is not going to fly in Pyongyang, Seoul, Beijing or in the United Nations.

  1. [1]

    The US imposed sanctions on Banco Delta Asia, a Macao based bank in September 2005. The announcement of sanctions was almost simultaneous with the issuing of the Joint Statement of the Six Parties that seemed at the time to lay the groundwork for North Korean denuclearization. The sanctions had two results. First, they produced a run on the bank and created disproportionately severe financial constraints on North Korea for a while. Second, they froze denuclearization diplomacy until the US and DPRK could find a means to return to the DPRK the funds that had been frozen at BDA. Hardliners believe BDA was the magic sanctions bullet that was wasted in the pursuit of fruitless diplomacy. Engagement oriented analysts believe BDA sidetracked a diplomatic breakthrough and may well have been deliberate sabotage in a deeply divided Bush administration. This article will avoid re-litigating this debate.

  2. [2]

    Bank of Korea Press Release, “Gross Domestic Product Estimates for North Korea 2017,” July 20, 2018.

  3. [3]

    US Department of State, “North Korea Sanctions & Enforcement Actions Advisory,” July 23, 2018.

  4. [4]

    An argument can be made that sanctions could be ratcheted up if the US deployed secondary sanctions against major Chinese entities involved with evasion. Given the major trade issues affecting hundreds of billions of dollars of US-Chinese trade, it might be difficult to carry off such an operation now without complicating even further the US-China trade war. In that sense, if no other, President Trump may be correct to say it may be wise to put off resolving Chinese sanctions enforcement until after the US-China trade war is resolved.

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