UN Imposes Severe New Sanctions on North Korea but Only Modest Oil Sanctions

Photo by DPR of Korea

by Rajiv Biswas, Asia Pacific Chief Economist for IHS Markit

Although the US had pushed for severe sanctions on oil exports and had proposed a complete ban on oil exports to North Korea during UN Security Council negotiations for the new sanctions measures, these were not approved by some other permanent members of the UN Security Council.

However, some more moderate sanctions on oil exports to North Korea were included in the latest UN Security Council resolution, which increased economic sanctions on the country with the objective of bringing North Korea back to the six party talks.

The new UN sanctions on oil exports to North Korea are relatively moderate in scope compared to the original US proposal regarding oil exports, and would be unlikely to have much impact on the operations of the North Korean military.

Under the new sanctions resolution passed by the UN Security Council on 11 September, UN members would only need to cap oil exports to North Korea at the average level over the past 12 months, although the new UN resolution also bans exports of natural gas liquids and condensates and caps exports of refined petroleum products to North Korea at 2 million barrels per year for the 2018 calendar year and 500,000 barrels for the last quarter of 2017.

As China has been the major supplier of oil to North Korea, the new resolution would have little impact on Chinese oil exports to the country, since the exports would be capped at recent export levels over the past 12 months. However, China or Chinese oil companies could still decide to unilaterally impose tougher oil export sanctions on North Korea.

Chinese trade data shows that Chinese gasoline exports to the North fell sharply, to just 120 tons in July, compared to 8,262 tons in June. This reflects the decision of Chinese state-owned oil company China National Petroleum Corporation to cut sales of oil to North Korea due to credit risk concerns about potential non-payment by North Korea.

However, Chinese exports of diesel to North Korea actually increased from 367 tonnes in June to 1,162 tonnes in July, indicating that the North Korean regime is still getting some fuel supplies from China, which can keep its most essential operations functioning.

However, the new UN sanctions resolution will still hit North Korea’s foreign exchange earnings from exports hard, as the new sanctions include a complete ban on North Korean exports of textiles, including fabrics and partially completed apparel. Textiles are one of North Korea’s major exports, with a total export value estimated at USD 750 million in 2016.

The new UN resolution also further clamped down on North Korean guest workers abroad by banning the issue of new work permits for North Korean workers by UN member countries. The new sanctions also authorized UN member countries to inspect ships if they have reasonable grounds to believe that the ships are carrying North Korean goods that are subject to UN sanctions.

The latest UN Security Council sanctions will clearly ramp up economic pressure on North Korea and further choke off foreign exchange inflows, which have already been significantly reduced by previous UN sanctions resolutions. However, the relatively moderate sanctions imposed on oil exports to North Korea will not have much impact on one of the North Korean regime’s greatest potential economic pressure points, which is its dependency on oil imports.