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North Korea Masters Sanctions Evasion as Kim’s Deadline Nears

David Wainer
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North Korea Masters Sanctions Evasion as Kim’s Deadline Nears

(Bloomberg) -- North Korea is poking holes through a global web of sanctions and generating enough cash to keep its nuclear weapons program moving along as a year-end deadline Kim Jong Un set to reach a deal with the U.S. approaches -- with little progress in sight.

Instead of “concrete, verifiable steps toward denuclearization” -- a mantra of President Donald Trump’s policy toward Pyongyang -- Kim has yet to make any concessions on his nation’s nuclear program. The ability of the North Korean leader to find ways around United Nations sanctions is making it difficult for America’s “maximum pressure” campaign to deliver on what the Trump administration has promised.

“The problem is there is wiggle room, and while the sanctions are effective at squeezing the economy over the long run, I don’t believe Chairman Kim Jong Un sees them as a challenge in the short term,” Hugh Griffiths, who led the UN’s panel of experts on North Korea until earlier this year, said in an interview.

Kim has repeatedly threatened to find a “new way” if negotiations with the U.S. fail to progress by year-end, and recent talks in Stockholm lasted less than half a day. That timeline may reflect the American political calendar as much as Kim’s own. Trump could be hard-pressed to secure progress on North Korea while facing a possible impeachment trial and running for re-election.

Also making a year-end breakthrough less likely: the chief U.S. negotiator, Stephen Biegun, is Trump’s pick to be the No. 2 official at the State Department. While the formal nomination hasn’t yet been sent to the Senate, Biegun’s largely been unable to meet his North Korean counterparts this year.

Keeping Up With Plot of the Trump-Kim Nuclear Show: QuickTake

The result is a deadlock for diplomacy, which could be just what Kim wants. The U.S. is pushing hard to bring North Korea back to negotiations and South Korea was taking North Korea’s deadline “very seriously,” South Korean National Security Adviser Chung Eui-yong told reporters on Sunday.

“We have nothing to show for several years of diplomacy except for a far more capable North Korea and a less robust U.S.-South Korea relationship,” said Richard Haass, president of the Council on Foreign Relations. “He is uninterested in denuclearization. He’s interested in keeping nuclear weapons, keeping ballistic missiles and getting out from under sanctions. And it seems to me he’s making some progress.”

Underscoring the delicate state of U.S.-South Korea ties, Defense Secretary Mark Esper said Friday that Seoul needs to contribute more to host U.S. troops there. That followed Trump’s demands that South Korea pay about $5 billion to continue hosting U.S. troops, above the current level of about $1 billion per year.

“Korea is a wealthy country, and could and should pay more to offset the cost of defense,” Esper said at the start of an eight-day trip through Asia. He said he wants talks with Seoul finished by the end of the year.

North Korea has fired off at least 20 missiles in a dozen different military tests since breaking a testing freeze in May, with the maneuvers seen by experts as improving Kim’s ability to launch quick strikes through new weapons that could eventually deliver nuclear warheads.

Yet that doesn’t mean Kim will resume testing of long-range missiles or walk away from talks with the U.S. immediately after his deadline, as those options also pose risks to his regime.

While they haven’t forced Kim into making nuclear concessions, U.S.-led sanctions have had a significant impact on his besieged economy. North Korea’s exports plunged 86% to just $240 million in 2018, while imports fell 31% as gross domestic product contracted 4.1%, according to estimates from South Korea’s central bank.

Griffiths said the volume of North Korean coal sales had fallen sharply as countries like China and Russia keep the country’s ships away from their ports. But Pyongyang has found loopholes, like delivering coal at sea in ship-to-ship transfers. That takes advantage of the lack of inter-agency cooperation in some East and South Asian countries who are less adept at coordinating among port authorities, safety inspectors and coast guards.

In the first four months of this year, North Korea raked in $93 million via 127 deliveries of prohibited coal shipments, according to evidence provided to the UN panel of experts. That revenue stream helps it ease the pain of sanctions.

Even with its isolated and restricted economy, North Korea can afford to push ahead with its nuclear aspirations because its 1950s-era program is relatively cheap and it spends more than 20% of GDP on the military. The country has spent about $100 million to test more than 30 ballistic missiles since 2011, according to South Korean estimates.

North Korea has also been successful in breaching UN-imposed caps on oil imports. In a letter in June to the UN, the U.S. said the regime had already exceeded the 500,000 barrels of oil permitted. North Korea has been so successful in importing refined petroleum that the most recent UN report said “overall stable prices for gasoline and diesel” show “a lack of domestic shortages.”

Cyber Attacks

Then there’s North Korea’s growing mastery of cyber attacks and financial theft. According to the UN, North Korean agents have amassed about $2 billion by stealing money from financial institutions and cryptocurrency exchanges. Griffiths said his own panel was hacked several times.

Citing the growing sophistication, Stephanie Kleine-Ahlbrandt, who also served on the UN panel, pointed to one example in which North Korean cyber operatives gained access to the ATM networks of an undisclosed country, prompting 10,000 cash distributions to individuals across more than 20 countries in five hours.

North Korea doesn’t “have to jump through hoops to arrange complicated evasion schemes,” Kleine-Ahlbrandt said in comments reported by the website 38 North. “Instead, it can just hack into a bank to steal money.”

Trump has shrugged off the more recent North Korean weapons tests, saying Kim has lived up to his pledge to halt tests of nuclear weapons and intercontinental ballistic missiles.

‘Love Letters’

At the same time, North Korea continues to argue that the U.S. is failing to take steps needed to achieve a breakthrough. Pyongyang has called U.S.-led joint military drills with South Korea a “breach” of agreements reached with the U.S. Washington isn’t taking seriously the year-end deadline, North Korea’s state-run news agency warned.

Susan Rice, a former national security adviser to President Barack Obama, said Trump has allowed Kim Jong Un to keep on developing his program by sending him “love letters” without getting anything “concrete” in return.

“The pressure is now off North Korea, and the Russians and the Chinese have eased sanctions,” Rice said on Nov. 7 at “The Year Ahead” conference in New York hosted by Bloomberg LP, the parent of Bloomberg News. “And the American people have been lulled into a false sense of security.”

(Updates to add comments from Pentagon chief Esper from eighth paragraph)

--With assistance from Jihye Lee, Jon Herskovitz and Glen Carey.

To contact the reporter on this story: David Wainer in New York at dwainer3@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net, John Harney

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