Lumps of Coal: How China’s Demand for Russia’s Natural Resources Affects North Korea Sanctions Enforcement

By | August 13, 2017 | No Comments

Coal, one of the key economic variables in Northeast Asia. | Image: Wikicommons

North Korea’s coal exports can be a source of confusion. It is well known that the DPRK has significant coal reserves spread across the country (as well as several valuable mineral resources, including, as the linked essay notes, magnesite, zinc, iron, tungsten ore, graphite, gold, barite, apatite, and molybdenite). It is also common knowledge that anthracite coal has been a robust export earner for the military and other powerful arms of the DPRK state for a number of years.

On the other hand, the extent to which Chinese firms continue to import North Korean coal is unclear. That is only partly because coal exports are subject to a “livelihoods exemption,” which permits some but not all of the trade. There are also statistical questions surrounding Chinese customs data. But also, even in the event that Chinese firms have stopped importing from North Korea — in other words, if the Chinese government is in fact both willing and capable of enforcing UN sanctions — it is not clear how the demand for coal is being met. Here, Anthony Rinna investigates the Russian role in the DPRK sanctions system from precisely this perspective. — Christopher Green, Co-editor  

China’s then-Vice Foreign Minister Wu Dawei meets then-Deputy Foreign Minister Alexei Borodavkin in 2009 to discuss North Korea. Beyond the realm of high politics, China-Russia economic relations impact the utility of sanctions against the DPRK. | Image: Xinhua

2016 UNSC Resolutions: Russia’s Reactions  | Approximately two months after North Korea’s fourth and fifth nuclear tests in January and September 2016, the United Nations Security Council adopted two additional resolutions placing sanctions on the DPRK. The first one, Resolution 2270, prohibits the sale of coal and iron ore (among other natural resources) originating in the DPRK. It also calls for action to be taken against banks and financial entities with ties to the DPRK. In November 2016, the UNSC passed Resolution 2321, part of which replaced provisions in Resolution 2270 regarding the sale of natural resources.

In response to Resolution 2270, the Russian government issued a presidential decree stipulating the regulation of North Korean activities in the maritime shipping and financial sectors. Russia’s choice to respond to the sanctions with a decree from the Kremlin, rather than through the state legislature, may indicate a sense of urgency in the Russian government to enact a policy that brings the country into line with UN sanctions as soon as possible.1)Oleh Protysk, “Ruling with Decrees: Presidential Decree Making in Russia and Ukraine,” Europe-Asia Studies, 56 no. 5 (2004): 637-660. Following UN Resolution 2321, Dmitry Skobelkin, Deputy Governor of the Central Bank of Russia, issued a letter outlining restrictions on the financial activities of North Korean banks, as well as limitations on banking for North Korean diplomats in Russia.

The Russian Federation has become an important variable in North Korean foreign policy as of late. Diplomatically speaking, Moscow may even be replacing Beijing as Pyongyang’s most important international partner. Yet, Washington continues to see Russia as part of the second division. A 2017 track 1.5 meeting in Sweden aimed at exploring the possibility of restarting the Six-Party Talks included all former members of the negotiating forum except Russia. There is no evidence that Russia was invited but declined.

It would be a gave mistake, however, to assume that Russia does not have a significant role to play in enforcing sanctions against the DPRK. One of the most problematic areas for sanctions enforcement against North Korea is the coal trade. China has been the target of widespread accusations that it continues to engage with the DPRK’s coal industry. As Russia’s coal industry grows, however, Russia’s role in helping to enforce sanctions does not lie primarily in the legal realm. Rather, Russia’s potential role in sanctions enforcement lies in decreasing China’s need (or desire) to engage with the DPRK coal export sector. In order to do this, Russia’s coal industry must satisfy Chinese demands for coal imports, and do so in a way that China finds cost effective.

In line with its “turn to the East”, the Russian Federation has become an increasingly important player in Asia’s coal market | Image: Wikicommons

North Korean and Russian Coal: Chinese Demand | Coal has long been an important source of hard currency income for North Korea, with its participation in the regional coal trade shaped by the type of coal in its mines. According to a report published by the Wilson Center in Washington, DC, North Korea has vast quantities of very high grade anthracite coal, but wants for lignite or bituminous coal. Metallurgical-grade coals, a category that includes bituminous and lignite coal, are necessary for industrial purposes. Throughout its history, North Korea has therefore relied on imports of metallurgical coals from China and the USSR/Russia.

Given the actions taken at the highest levels, it is clear that Moscow nominally backs UN sanctions against Pyongyang, whilst at the same time continuing to legally use North Korean territory for its own purposes. The fact that Russia can support sanctions through its own domestic legal actions while mitigating their full effects underscores one particularly important aspect of punitive economic measures that goes beyond the letter of the law — the market.

The effectiveness of sanctions against the DPRK depends in part upon how much Russia is able to fill the void in Chinese demand for imported materials that emerges as a result of anti-DPRK sanctions. Legal actions at the UN level are certainly not enough to cut into the China-North Korea coal trade. Having considered factors such as consistency in the price of coal and the effectiveness of sanctions, David von Hippel and Peter Hayes estimate that the DPRK would lose between 700 million and one billion dollars in export revenue during 2017 and beyond. Nevertheless, von Hippel and Hayes also assert that while sanctions on coal would undercut North Korea’s ability to import international consumer goods, sanctions would simply push the DPRK to economize and focus on military procurement and development. Furthermore, Chinese firms could simply import coal from North Korea without complying with financial reporting obligations (i.e. “off the books”). North Korean coal imports could also enter the country due to Chinese customs officials’ failure to fully enforce the ban.

Generally, Russia’s coal exports have been rising since 2006, and since at least 2009, Russian coal exports have shifted away from Euro-Atlantic to Asian markets. By 2014, according to statistics provided by Russia’s energy ministry, eastern markets accounted for almost half of coal export earnings. Russia’s coal exports to the DPRK appear to have primarily been lignite. Russia even attempted to establish a joint coal trade with both North and South Korea. In 2014, South Korea agreed to purchase Russian coal by way of the Rason economic zone in North Korea. This project proved to be short-lived, however; it came to a halt in 2016.

Today, coal for the Chinese market continues to come through North Korea. While the most recent UN sanctions have placed a total ban on importing coal from North Korea, current UN resolutions still contain loopholes that allow for certain exceptions to the coal ban. These include allowing Russian coal to be shipped by way of Rason. Thus, even if China receives Russian coal that is not North Korean in origin, North Korea still generates revenue through the Russian use of its facilities.

While outside observers have accused China of failing to fully enforce the ban on coal imports from North Korea, China’s coal imports from Russia have increased since the ban. Among the major players in Russia’s coal export market is Primorskugol, a subsidiary of the privately-owned Siberian Coal Energy Company (SUEK). Primorskugol has begun to export quantities of lignite coal to China following an increase in Chinese demand. While China’s western and north-central provinces (such as Inner Mongolia and Shaanxi) produce their own coal, according to a report from Oxford University, China’s internal market is beset by logistical difficulties, including insufficient rail infrastructure through the Chinese mainland. This has made it difficult to get coal to the industrial eastern coastal regions of the PRC.

In contrast, maritime ports along the Chinese east coast have relatively little difficulty facilitating the flow of coal in the domestic market. Thus, until and unless China can compensate for its underdeveloped rail system, Russia is poised to take advantage of its connections to China’s east coast by sea. Russia’s exports of lignite coal to China rose 188,000 tons between 2015 and 2016. In January and February 2017, Russia’s coal exports to China were 476,000 and 655,000 tons, respectively; during those same months, Russia’s coal exports to North Korea were 219,000 tons and 213,000 respectively.

We can therefore conclude that China’s enforcement of the coal ban is partially contingent upon, first, the volume of China’s demand for anthracite coal; and second, how much of that demand Russia can meet. According to Primorskugol company data, sales of anthracite to China amounted to fewer than 17,000 tons in January 2017.

An overview of international coal imports and exports. China a major importer of coal, finds itself between two exporters.| Image: Wikicommons

In addition to the specific type of coal that China needs, the issue of logistics and shipping also plays a role in the effectiveness of sanctions. Even if shipping Russian coal through Rason is not a violation of UN sanctions, it does nevertheless undermine the very purpose of the sanctions. We cannot reasonably expect Russia to approve a ban on the use of Rason shipping facilities by third countries. That being said, Russian coal imports to China are also possible either by rail or direct shipping from China to Russia, as major Russian ports – Nakhodka, Vladivostok and Vostochny – are connected both by rail and sea. The rail lines at the ports connect to routes to both Rason and Harbin. Thus, whether or not Russian coal bound for China passes through Rason is dependent upon where in China demand is heavier as well as whether shipping by rail or sea is more cost effective.

Conclusion | Even as countries may legally support a ban on North Korean coal sales, market economics determines the fundamental strength of sanctions more than decrees or legislation. Russia officially approves of the prohibition on the sale of North Korean coal abroad. Yet the real role Russia has to play is not in approval and enforcement of sanctions, but rather its ability to satiate Chinese demand for coal that may not be satisfied due to sanctions. Much will depend not only on the types of coal China may demand, but also the cost effectiveness to China of implementing the sanctions and seeking alternative sources for coal, including the Russian Federation, versus buying it off the books from North Korea. Cost effectiveness, of course, depends in large part on logistics. Even if Russia can legally ship coal through the North Korean port of Rason, Russian firms may well elect to use rail routes to transfer their product to the Chinese market if that proves to be a more profitable method of delivery.

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1. Oleh Protysk, “Ruling with Decrees: Presidential Decree Making in Russia and Ukraine,” Europe-Asia Studies, 56 no. 5 (2004): 637-660.