What we’re dealing with
The author is an economics professor and head of the Institute for Peace and Unification Studies at Seoul National University.
In an address in late September, Kim Yo-jong — the powerful sister of North Korean leader Kim Jong-un — called for “action” from the South Korean government. A few days later, North Korea’s state-run news outlet KCNA reiterated that Seoul must work “aggressively” to address pending issues with North Korea.
Pyongyang appears to have lost its cool. After the second summit in Hanoi with the U.S. collapsed in 2019, Kim Jong-un declared Pyongyang would not engage with Washington unless it came up with a new approach. In July 2020, Kim Yo-jong huffily said North Korea could live with sanctions and would not play by U.S. rules.
But suddenly North Korea has turned to pressuring South Korea as if it has lost patience and become desperate. The change of mood stems from economic hardships. My assumption is that household incomes in North Korea were shaved by a quarter in the 2017-2019 period from the levels of three years earlier. Output of cement, which should have been least affected by international sanction, shrank by 25 percent last year from 2015. Pyongyang, which had underestimated the impact of international sanctions, is beginning to feel a serious pinch.
Moreover, the Covid-19 pandemic has deepened its woes. Foreign exchange reserves, on which the regime relies to run state affairs, have been emptying out. If it runs out of foreign exchange reserves, it cannot import oil even if trade resumes. The Kim dynasty cannot buy foreign consumer goods or gifts to indulge its class of elite citizens. To sustain the sanctions environment, the regime must absorb some of the foreign currency stashed away in the private sector.
The regime may have thought that some of that hidden money would surface when its borders with China were sealed to defend against Covid-19. But the regime feared resistance from people if it forced them to cough up the cash. Also, an overt campaign could have pleased the U.S. in its rationale over sanctions.
The regime devised discreet means to use the market to buy back privately held foreign currency cheaply. Since borders were sealed, North Koreans who could not trade or smuggle goods would have to use hard currency in marketplaces. If U.S. dollars or the Chinese yuan cannot be spent in the market, the value of foreign money would sharply depreciate.
But it could not outright ban foreign currency as it did in its monetary reforms in 2009. The regime had to employ a shadowy depreciation campaign to feign a devaluation of the greenbacks. The operation has so far worked. One U.S. dollar, which traded for 8,000 North Korean won last October, fell to 5,000 won; one yuan, which used to sell for 1,200 won, slipped to 700 won.
The second stage of the operation was to secretly move privately-held foreign money to state coffers. Although the black market has been wooing dollars at cheaper exchange rates, not many North Koreans came to convert their greenbacks to won. The regime has issued “cash tickets” to draw out hard foreign currencies.
Cash coupon existed in the North before. Foreign currencies had to be exchanged with cash coupons for people to buy merchandise in North Korea. The token is an exchange for foreign hard currency. But the tokens this time were issued without the pretext of an exchange with foreign currency. The regime feigned as if it were issuing some kind of cash equivalent to a disaster relief to residents instead of giving the impression that the regime wants to collect foreign currency through the cash coupons. If it really was handing out disaster relief, it would have doled out cash instead of going through the hassle of issuing cash tickets. Certainly, not many residents would have traded in foreign money for cash tickets. If the measure was enforced, the regime’s poor financial state could have been exposed.
North Korea’s tactics against denuclearization demands are to conceal, pressure and shake down. It conceals its difficulties, presses ahead with weapons development to pressure South Korea and the U.S., and shakes down Seoul to help ease economic sanctions and bargain with Washington for favorable terms. South Korea must respond with an accurate understanding of the North Korean situation. Denuclearization talks can pick up only when Kim Jong-un realizes that Seoul sees through the North Korean lie. We must read North Korean maneuvering, build a military deterrence, and act within our tight alliance with the U.S.
The idea of easing sanctions just because North Korea agrees to return to dialogue is premature and immature. If sanctions are lifted to bring Pyongyang to the negotiating table, Seoul and Washington will lose their bargaining power. If North Korea stalls during the negotiating process, it can become a nuclear weapons state. Some propose a snap-back condition based on the premise that if North Korea refuses denuclearization, the international community can impose sanctions on North Korea again. But the idea cannot work amidst a heated power contest between America and China.
North Korea cannot avoid negotiations for long when its economic hardships continue under sanctions. Kim Yo-jong’s call for action from Seoul is proof. The Moon Jae-in administration is eager to rekindle negotiations. But the result is more important than the beginning. If the negotiations start off on the wrong foot, they can never go well. A precise understanding of the situation is most important.