Moscow Supports Kim Jong-Un

29 06 2012

(By Leonid Petrov, The Montréal Review, 28 July 2012)

Russia claims it is willing to link divided Korea with energy pipelines and electricity grids. But its economic relations with North Korea indicate a return to the Cold War politics of the past.

In 1948 Stalin sponsored the creation of the DPRK in the Northern half of the Korean peninsula. The following year, Prime Minister Kim Il-sung travelled to Moscow to collect a 2% interest loan of 212 million Soviet Rubles. Some of this money was allocated to build the centrally-planned economy, but much of the funding was used to fuel unification efforts in a war against South Korea between 1950 and 1953. After the end of the disastrous Korean War, the Soviet Union continued to help North Korea with the rebuilding of its cities, industry and infrastructure.

Even during the Sino-Soviet ideological split in the 1960s and 1970s, Moscow tried to curry favour with Pyongyang throughout its confrontation with Beijing. As a bastion of Communism in the Far East that directly faced US troops on the Korean peninsula, North Korea successfully managed to squeeze money from both of its allies during the Cold War. But when the iron curtain fell in the early 1990s, the Democrats in Moscow swiftly recognized Seoul and demanded the payment of debts from Pyongyang.

The timing could not have been worse for North Korea. Most of the country’s capital had been wasted on non-productive sectors, an oversized army, ideological campaigns and extravagant monuments. All that North Korea could offer to Russia as payment-in-kind was a humble list of export goods that did not exceed pickles, cigarettes and ginseng-based medicines. With the death of Kim Il-sung in 1994 and the beginning of natural disasters in 1995, North Korea’s agonising industrial and agricultural sectors collapsed, killing some 3 million people in three consecutive years of famine.

South Korea’s “Sunshine Policy” (1998-2008) and growing humanitarian aid from other regional neighbours permitted North Korea to weather the “Arduous March”; finally showing some signs of recovery in the early 2000s. It was around this time that Moscow once again raised the issue of North Korea’s debt, which had already been calculated at nearly US $8 billion. Russian President Vladimir Putin and Chairman Kim Jong-il visited each other twice to discuss this and other bilateral issues, creating an impression that the debt would be written off rather than paid in full.

In August last year, at the last summit between the North Korean leader Kim Jong-il and the Russian President Medvedev, the parties agreed to move forward on a proposal to build a pipeline that would be capable of transporting Russian natural gas to both Koreas. Simultaneously, North Korea and Russia signed a protocol calling for economic cooperation between the two countries. But international observers immediately questioned the feasibility of such a project in the midst of an ongoing inter-Korean conflict.

The oil markets of the last ten years have been favourable for Russia, allowing the country to save hundreds of billions of petro-dollars from the sale of energy-rich natural resources to its neighbours. Expecting an impoverished North Korea to pay off a Soviet-era debt, which today amounts to US $11 billion, would be unrealistic. Last week the Russian government agreed to discount 90 % of the debt owed by its destitute but stubborn ally. The remaining USD $1.1 billion was promised to be invested in joint Russian-North Korean projects, particularly in education, medical and energy sectors.

One may be surprised by the timing and generosity of the deal. Despite promises of a new era of strength and prosperity, this year saw the DPRK at odds with old evils. The coldest winter and the driest summer in decades have dashed its expectations for a proper harvest. The embarrassment of a faulty rocket launch in April was compounded by the withdrawal of US food-aid and international condemnation. The hyper-inflation of North Korean currency and the continuing energy crisis are not the propitious signs of effective governance by the newest leader in the Kim dynasty. Is Russia trying to help Kim Jong-un consolidate political power and overcome mounting economic difficulties?

This year Russia experienced the return of the Kremlin veteran, Vladimir Putin, to the presidential seat. Although he is associated with political reaction and is concerned by the prospect of “colour revolutions” at home, Russia is desperately running out of friends on the international stage. With Libya and Syria having already become victims of the “Arab Spring”, Moscow is scrambling to buttress dictatorial regimes in its vicinity. Anti-Americanism and curtailed political freedoms once again have become the primary criteria in gaining Kremlin sympathies. Belarus, Iran, the countries of Shanghai Cooperation Organization, and now North Korea, have all received special treatment from the increasingly anti-Western Russia.

Whereas Beijing was once the only power that remained content to sink trillions of Yuan into North Korea simply to prop up a buffer state ruled by an anachronistic regime, Moscow is now returning to an East Asia policy that echoes of the Cold War. Instead of reprimanding Kim Jong-un for his provocative actions and belligerent rhetoric, Putin is dumping of trillions of tax-payers’ roubles into supporting a friendly dictator. Moscow’s empty promises to persuade North Korea to end its nuclear weapons program are in clear conflict with North Korea’s determination to remain a self-proclaimed nuclear power for the sake of its regime survival.

Northeast Asia is again becoming a theatre for large-scale geostrategic games where powerful empires scrum in a noxious struggle for domination, leaving 75 million Koreans in a state of anxious suspense.  Given the current situation, hopes for peace and reconciliation remain untenable.

See the Korean version of this article here… 모스크바는 김정은을 지지한다?


North Korea: Witness to Transformation | More on the Pipeline

22 09 2011

(by Stephan Haggard | September 20th, 2011 )

No sooner had we posted a skeptical note on the political economy of pipelines than we appeared to be undercut by the flow of events. President Lee Myung Bak said that the pipeline project could move forward at a faster-than-expected pace.

On a single day—September 15– Alexey Miller, chairman of Gazprom’s management committee, hosted separate meetings with both Choo Kangsoo, CEO of South Korea’s Kogas, and Kim Hui Yong, the DPRK’s Oil Industry Minister. Miller signed an “MOU” with the North Koreans and a “Roadmap” on the project with the South Koreans. The Korea Herald reports speculation that Seoul and Moscow seek to make progress by November when Lee and Medvedev will meet at the G20 summit in Cannes on Nov. 3-4, the APEC summit in Hawaii on Nov. 12-13 and the East Asia Summit in Bali on Nov. 18-19.

Is this thing going to happen? Not so fast. The little details that are leaking out actually confirm a number of our doubts and concerns:

  • There is one report that at the August summit, Kim Jong Il was seeking as much as $500 million a year in transit fees from the pipeline deal. So we did a little back-of-the-envelope calculation. The project anticipates pumping 10 billion cubic feet of gas a year when completed. Current prices are about $145 per thousand cubic feet. In short, Dear Leader wants $500 million transit fees on $1.45 billion worth of gas. As the report deadpans, this was about five times what the Russians had expected.
  • It appears that the transit fee issue was ultimately linked to debt relief. The Soviets/Russians had extended about $11 billion to the North Koreans; needless to say, it has not been serviced. In parallel negotiations resumed in June, the Russians recently agreed to write off 90 percent of the debt, investing the remainder in “joint business projects to be launched in the North down the road.” This may be good for the pipeline project, but shows that the Russians are doubling down on the Kim Jong Il regime, as my colleague Marc Noland also noted in an earlier post.
  • But perhaps most interesting are the terms that the South Koreans are seeking in order to mitigate the risk associated with the project. Recall that the Russians are already shipping LNG to the South and will have an expanded ability to do so with the recent completion of the Sakhalin-Khabarovsk-Vladivostok gas transmission system, albeit at higher cost. The South Koreans are building an LNG storage site at Samcheok, Gangwon Province. According to none other than Hong Joon Pyo, chair of the ruling Grand National Party, South Korea is insisting that the Russians take responsibility for building and maintaining the pipeline. Moreover, they want guarantees that if North Korea turns off the spigot, then the Russians would provide the gas by sea at a 30% discount.

Russia has a strong interest in expanding its Asian sales ever since the Sakhalin-2 project went online in the Pacific in 2009. Most of the Sakhalin-2 gas goes to Japan and South Korea is a natural market. The pipeline is a win-win for all parties. But the fact that the GNP has gone soft on the project should give the Russians pause. How much are the Russians willing to pay for it, politically, economically and in terms of risk?

In a must-read post on 38 North Georgy Toloraya suggests that the answer may be “a lot.” Toloraya argues that Russia is looking East and North Korea is seen as a strategic entry point where the Russians can make their presence felt. This does not strike us a promising strategy to say the least. But the evidence is mounting that Moscow is pursuing it. If the Russians are willing to absorb the risk, Hong Joon Pyo may well be right: why should South Korea object? Let the Russians handle the North Koreans. Good luck.