U.S. Seeks Oil Embargo On North Korea, Freeze Of Kim’s Assets: Draft Resolution

It looks like the Trump administration is going to push the “nuclear” option re: North Korea.

No, not that nuclear option.

As almost every “expert” you care to consult will tell you, the last resort – well, short of actually invading the North or bombing Pyongyang – when it comes to curbing Kim’s nuclear ambitions is to cut off his supply of oil.

This “option” isn’t really an “option” as far as Beijing’s concerned. The issue here is that taking that step would likely create a humanitarian crisis which is something the Chinese are keen on avoiding. Here’s a useful bit from an article The New York Times ran on Tuesday:

What the Chinese call the Friendship Pipeline runs for 20 miles, crossing under the Yalu River and spanning the border between North Korea and China. For more than half a century, it has been both a symbol of the two nations’ alliance and a lifeline for the North’s economy.

Now, in response to North Korea’s latest and most powerful nuclear test, the Trump administration is expected to press China to impose an oil embargo on the North, cutting off the flow of petroleum through the pipeline and on tankers, too. The United States has called for similar measures before, and Beijing has almost always refused.

But no previous American administration has pressed the case as an implicit choice between cutting off the fuel and potential military action.

That puts President Xi Jinping of China in a particularly difficult position. With an important Communist Party leadership conference next month, he will not want to look weak in the face of American pressure. But a destabilizing war on the Korean Peninsula would be even less welcome.

As you’ve probably heard, Moscow opposes cutting off the North’s oil as well. In a call during which South Korea’s Moon Jae-in reportedly said an embargo was “unavoidable,” Putin responded that doing so would “hurt ordinary citizens.” He also added that Russia is exporting “very little” oil to the North – something on the order of 40,000 tons a year.

But at wit’s end, it appears the U.S. is going to push the envelope, because as AFP reports, Washington is looking for an embargo and also seeks a freeze on Kim’s assets:

#BREAKING US seeks asset freeze on North Korean leader Kim Jong-Un, according to draft UN resolution

— AFP News Agency (@AFP) September 6, 2017

To be clear, China is going to have a difficult time holding out on this. There is no “good” option here and you’ve got to think Kim is becoming a liability for Beijing. You’ll hear plenty of people tell you that “China will never agree” – and they may be right. But don’t underestimate the power of self-interest. If Xi determines Kim’s regime is more trouble than it’s worth or, perhaps more poignantly, if Beijing works out a deal that it believes won’t lead to a stepped-up U.S. military presence on the peninsula, all bets are off.

As far as Putin is concerned, if Xi decides enough is enough, it’s hard to imagine that Russia wouldn’t eventually throw in the towel as well.

For now, we’ll leave you with the following excerpts from a BofAML note out last month:

NK’s trade data are very useful for understanding the geopolitical outlook for the region. As Chart 1 suggests, repeated sanctions since 2006 have not curbed NK trade. Rather, they have simply shifted flows to China, which now accounts for about 90% of NK trade. Of course, there is likely a lot of unreported trade, but given China and NK’s long border, most unreported trade is also probably with China. Note that data on the price of rice and the black market value of the NK Won also suggest sanctions have yet to impose significant pain (Chart 2).

Finally, note that trade is vital to NK since it accounts for 20% of GDP and NK imports virtually all of its oil. In our view, this suggests three things. First, it is not necessarily true that sanctions “don’t work” since tough sanctions have never been attempted. Second, given Korea’s dependence on trade for oil and other vital products, a shutdown of trade would cause a severe recession once inventories are run down. Third, the key to making sanctions work is full cooperation from China.