June 18, 2009 / 7:12 AM / 10 years ago

N.Korea's weak trade, currency hint at more arms sales

BEIJING (Reuters) - A drop in trade and the value of North Korea’s currency has cut the regime’s access to foreign exchange, raising the risk Pyongyang will increase the sale of its military know-how abroad despite tighter U.N. sanctions.

North Korea’s economy has shrunk since Kim Jong-il took power in 1994, and analysts say a recent nuclear test and a spate of missile launches could be an attempt to distract the population from their economic distress as he tries to set up his youngest son as his successor.

“We are seeing a downturn in trade with both South Korea as things deteriorate with Kumgang and Kaesong as well as with China,” said Stephan Haggard at the University of California, San Diego, referring to a resort and industrial park located in the North but run by the South.

“Given the fact that North Korea has been facing a more and more hostile external environment, we can expect more incentives to engage in missile sales and other illicit activities in order to earn foreign exchange.”

The United States and others have said they suspect North Korea of selling arms, missile parts and proliferating nuclear expertise in violation of earlier U.N. sanctions. They suspect North Korea of also selling illegal drugs, as well as counterfeit U.S. dollars and cigarettes, in order to earn hard currency.

After the May 25 nuclear test, the U.N. Security Council imposed sanctions meant to stamp out arms exports.

The resolution authorized U.N. member states to also inspect North Korean sea, air and land cargo, requiring them to seize and destroy shipped goods that violate the sanctions.

In addition, Washington could target banks suspected of aiding the North in illicit activity. A similar move in 2005 ended almost all of the North’s international financial transactions.

Cho Myung-chul, an expert on North Korea’s economy at the Korea Institute for International Economic Policy in Seoul, said the destitute state would strive to survive on its own.

“This means they will invest more in their military power and their private businesses, to try to boost their independence and ride out” the international restrictions, Cho said.

“North Korea will endlessly try to export arms. They are unable to shake this thought from their minds because exporting arms is a very profitable business compared to other goods.”

BORDER TRADE

At Dandong on the Chinese-Korean border, the number of trucks making the crossing recovered to nearly 100 a day last month, locals said, as commodity prices improved after a dismal winter.

That trade could suffer if China rigorously inspects trucks, trains or passengers, which Chinese analysts said it is more likely to do than risk a confrontation over ship inspections.

In recent years, North Korea has become more economically open, particularly to Chinese trade and investment. Most interactions involve state-owned firms or the powerful military.

A further downturn in the North’s legitimate economy — estimated to be worth about $20 billion a year — gives them less stake in normal trade interactions.

The North’s legitimate exports were worth an estimated $1.7 billion last year, but at current rates are likely to drop below $1.5 billion this year.

Dollar-denominated trade with South Korea has shrunk sharply in value since early 2008, when South Korean president Lee Myung-Bak took office with a sterner stance against the North.

Until then a net importer of goods from the South, North Korea became a net exporter in 2008 and has remained so this year. A March dispute over the South Korean-invested industrial park at Kaesong has hastened the decline in total trade.

In the first four months, the value of imports from the South dropped 81 percent to $166 million, while exports dropped 72 percent to $266 million, according to the South’s customs office.

Trade with China, at $2.8 billion last year North Korea’s most important trading relationship, has held up better. Still, total trade value slid 3.7 percent in the first four months.

Estimates of the North Korean won’s depreciation vary from about 20 percent against the U.S. dollar to 27 percent against the Chinese yuan, reflecting traders’ need for Chinese money.

One Chinese yuan now trades for 550 North Korean won, compared with about 400 won last year, said traders in the Chinese border city of Dandong. Quotes for one U.S. dollar have fallen to about 4,000 won from about 3,200 won.

North Korean banks trade currency close to the black market rate, while a currency exchange office in Pyongyang’s main market is staffed by government workers in a quasi-official role, said a frequent Chinese traveler.

In theory a weaker won would make North Korean goods cheaper and more appealing but the broken economy produces few things it can sell abroad.

“We’re not interested in anything they produce except raw materials,” said a Chinese businesswoman surnamed Han.

North Korean coal shipments spiked in March and April, offsetting a drop in the value of ore and light goods exports.

“No-one settles in won, but there are a lot of dollars coming over,” said a resident in Dandong, where most trade with North Korea flows.

Additional reporting by Christine Kim in Seoul, Editing by Dean Yates

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