Politics & Policy

Six-Party Celebration?

Don't discount the North Korea deal just yet.

According to inspectors from the International Atomic Energy Agency, North Korea has shut down its nuclear reactor at Yongbyon. Those familiar with North Korea’s recent history are forgiven for suspecting that this is just part of another Kim Jong-Il extortion attempt. But there is another possibility — that the consequences of pariah status are driving the regime into increasing desperation. There is no more reliable negotiating partner than the person who thinks time is not on his side.  

Former U.N. ambassador John Bolton, who had a hand in devising the Six-Party strategy when he was under secretary of state, recently excoriated the Bush administration for caving in to North Korea:

The Bush administration has effectively ended where North Korea policy is concerned, replaced for the next 18 months by a caretaker government of bureaucrats, technocrats and academics.… This is not a comment on partisan disagreements, but an important signpost that Bush’s clear determination in 2001 to follow a different course has disappeared, replaced with the same flawed conceptual framework that failed so badly in the 1990s.

But wait a minute. By any metric, the deal agreed last February in the Six-Party Talks is far worse from North Korea’s point of view than the Agreed Framework negotiated by the Clinton administration in 1994. Under the Clinton deal, the U.S. alone gave North Korea enormous benefits up front, in payments that sometimes exceeded $200 million a year, all in exchange merely for keeping the Yongbyon reactor frozen. The current agreement requires that North Korea irreversibly and verifiably dismantle the reactor, and give complete clarity on the scope of its nuclear program “to the satisfaction of all parties,” in exchange for a one-time delivery of one million tons of heavy fuel oil (worth about $260 million, according to one estimate), and on the basis of “action for action”; i.e., no more front-loading any benefits for North Korea.

The concessions that have drawn so much fire from traditional supporters of the Bush administration are in the list of “Initial Actions” to be performed within 60 days. North Korea agreed to shut down its Yongbyon reactor, and readmit IAEA inspectors; in exchange, the other five parties were to provide 50,000 tons of heavy fuel oil, while the U.S. promised (in a separate agreement) to “resolve” within 30 days the now-notorious issue of Banco Delta Asia (“BDA”). (Background: BDA is a Macau bank that had become a hub for North Korea’s criminal financial dealings. After the U.S. Treasury Department announced that it was launching an investigation into the bank’s practices in September of 2005, there was a run on the bank and it nearly collapsed. The Macanese authorities seized the bank and froze some $25 million in North Korean funds).

Even if you want to argue that North Korea has once again managed to get something for nothing, you can’t say that it has gotten very much. The market price for 50,000 tons of heavy fuel oil is on the order of $15 million, about enough for a nice townhouse on Manhattan’s Upper East Side. And the oil is not “front-loaded”: it is to be shipped in small batches, one at a time, as North Korea finalizes the shut-down of the Yongbyon facility and the return of IAEA inspections.

As for Banco Delta Asia (“BDA”) the Treasury Department did “resolve” the issue within 30 days — by slapping the bank with a final ruling designating it an “institution of primary money-laundering concern” and cutting it off from the U.S. financial system. However well deserved, it was a slap in the face, and the North Koreans were incensed.

They refused to move on their end of the “initial actions” until they could secure access to the $25 million frozen in BDA accounts. But the U.S. had not frozen those funds, and could not unfreeze them. North Korea’s real problem was that other banks around the world got scared of winding up in BDA’s shoes, and suddenly refused to facilitate transactions involving North Korean funds. Surprised at the stridency that Pyongyang was attaching to the issue, the U.S. agreed to help North Korea gain access to its $25 million. The Federal Reserve Bank of New York finally helped transfer the funds held at BDA to a bank in Russia.

This caused general outrage, because it now appeared that the U.S. government was helping to launder North Korea’s ill-gotten gains. But the Treasury ruling had targeted the bank’s management practices — not the funds themselves. And as one State Department official said to me, “Whatever problems the North Koreans had with the international financial system, they continue to exist. They haven’t gone away.” And they are not going to go away.

Admitting that the $25 million involved in the BDA contretemps was a “relatively small” sum, Ambassador Bolton writes,

the still-unknown variable is whether the State Department made secret commitments to Pyongyang to guarantee its access to international financial markets. Concern about potential side deals has haunted the February 13 agreement since it was signed, and will now do so permanently.

This prospect would be worrisome if it were possible, but the reality is that the State Department simply can’t guarantee any country’s access to the international financial markets. The U.S. government doesn’t control the markets. In order for North Korea to enjoy the access to those markets that it once had, the U.S. would have to roll back all the legislation and regulations and controls put in place to control terrorist financing after September 11 — not only by the United States, but by task forces at the World Bank and International Monetary Fund, and under Security Council resolutions, that set global standards for banking practices which have severely restricted the scope for all kinds of illicit financial activities. In addition, it would have to get banks around the world to roll back the many prophylactic measures put in place in the wake of the Treasury’s preliminary ruling on BDA in September of 2005. Naturally, the United States can’t do all of that. And it wouldn’t even if it could: financial tools have become indispensable to fighting the war on terror.

It is crucial to grasp the Treasury’s preliminary ruling was not merely a global disaster for North Korea. The disaster was also largely irreversible. And the full extent of the damage remains an open question, because the impact has come largely in the form of second- and third-order market effects that the U.S. government in many cases could not even have predicted. As I related in a recent issue of National Review, the international financial markets shuddered when they saw what happened to BDA. Banks around the world reacted by instituting “know-your-customer” due diligence requirements, by refusing to take on new North Korean business, and even by closing their existing accounts. North Korea’s most important illicit transactions have become difficult or impossible. The financial security of the regime has suffered a grievous blow.

Kim Jong-Il’s regime may indeed be in far more trouble than anybody realizes. Here are a few signs:

‐ North Korea is breaking new ground as an economic basket case. In default on its debts, it can no longer borrow internationally, and has few legitimate exports. It can’t produce enough food to feed its population, and can’t afford enough energy to keep its society functioning. Like the Cubans, the North Koreans have proven utterly incompetent at the management of a planned economy. As international subsidies have become increasingly central to its survival, the country’s economic fundamentals have continued to deteriorate. Furthermore, the U.S. has succeeded in making the Six-Party forum a gatekeeper for much of the economic assistance North Korea needs. This means that the U.S. has acquired a lever with which to manipulate the amount of aid North Korea gets from the outside. This is critically important in the area of energy, which (unlike food) North Korea typically has had to pay for in hard cash.

‐ The regime’s internal authority appears to be crumbling. A lively black market has arisen in contraband coming across the rugged, remote, and vast Chinese border. China’s policy is to keep things and people from North Korea out of China, but it doesn’t really care what moves in the other direction. According to Andrei Lankov, this has resulted in a flood of radios and televisions that can capture South Korean signals, as well as video-recorders, and videotapes of South Korean soap operas. In the early 1990s, possession of any such contraband was extremely dangerous. Nowadays, even the internal security police routinely watch South Korean videotapes with their families. Travelers to the North Korea report a newfound taste for disregarding the law among common North Koreans — from smoking right under “no smoking” signs to selling goods in restricted areas.

‐ North Korean diplomacy has failed to counter the Six-Party strategy devised by the Bush administration (of which John Bolton was a chief architect). The main reason is that China’s perception of its own interests have shifted dramatically, which has permitted America to form a much more united front with North Korea’s neighbors. China was always North Korea’s closest ally, and after the Cold War, its only ally. But today, China is less concerned with helping North Korea than with keeping North Korea’s problems from spilling over the border. What’s more, North Korea’s traditional enemies — the U.S., Japan, and South Korea — have become China’s most important trading partners, and China has quite naturally become increasingly protective of their interests — out of self-interest. If you want a sense of the current state of relations between China and the Hermit Kingdom, consider this tidbit: Last summer, when China sent a shipment of aid to North Korea by rail, Pyongyang refused to return the trains, and sent the rail crews back over the border on foot.

Indeed North Korea’s diplomatic failure is a signal of what just might, with any luck, be a general collapse in Pyongyang’s strategic position. Nicholas Eberstadt, perhaps the most brilliant of Bolton’s colleagues at the American Enterprise Institute, has long argued that the purpose of North Korea’s nuclear program is to extract from its neighbors, by extortion, those things that it would otherwise have to depend on international charity for. It seems clear that he’s right.

And yet notice what North Korea got for its trouble when it detonated a nuclear device last October: a Security Council resolution further restricting the regime’s access to international trade and travel. Pyongyang had warned that this would be an act of war. But notice what happened: nothing; no adverse reaction from Pyongyang, no handout from its neighbors. In fact, establishing a framework for energy aid to North Korea through the Six-Party Talks, “commitment for commitment, and action for action,” limits the scope for China and South Korea to cut separate deals. This by itself is an enormous diplomatic victory for the United States, and could begin to create an excruciating strategic situation for North Korea.

The Six-Party strategy has made it a lot more difficult for North Korea to realize the extortion “value” of its investment in nuclear weapons. That may well be contributing to a sense of growing desperation in Pyongyang. The regime may have concluded that time is not on its side. If so, those who designed the Six-Party strategy will be able to take a lot of credit — among them, John Bolton.

 – Mario Loyola is a fellow at the Foundation for Defense of Democracies.

Mario Loyola is a senior fellow at the Competitive Enterprise Institute, the director of the Environmental Finance and Risk Management Program of Florida International University, and a visiting fellow at the National Security Institute of George Mason University. The opinions expressed in this column are his alone.


The Latest