hankyoreh

By Park Hyun, Washington correspondent

The US Treasury Department has added its own financial sanctions against North Korea to ones recently imposed by the United Nations Security Council.

The new measures are expected to have major repercussions - and trigger a major outcry from Pyongyang - as they are similar in many ways to the sanctions the US imposed against Macau’s Banco Delta Asia (BDA) in 2005.

According to Executive Order 13382 on “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters,” the department included North Korea’s Foreign Trade Bank (FTB), the country’s institution in charge of foreign banking transactions and foreign exchange, as one of the targets for sanctions. The measures bar it from doing business with US banks and freeze all assets under US legal jurisdiction.

The US already has executive orders sanctioning more than 20 North Korean institutions, but the latest measures are different in that they target the country’s key foreign exchange bank. Some North Korean financial institutions were subjected to sanctions in the past, but those banks, which included Tanchon Commercial Bank and Korea Kwangson Banking, were involved in a limited range of activities.

The decision to halt transactions with FTB is expected to have significant repercussions, since the business will have to migrate over to other banks. When companies in outside countries stopped doing business with BDA after the 2005 sanctions, the bank ended up facing a run that left it on the verge of bankruptcy.

“When there’s a foreign bank that US banks aren’t doing business with, banks in other countries start to avoid transactions with it,” explained a finance expert. “They’re worried about suffering the consequences themselves.”

Indeed, the US Treasury Department issued a press release urging banks around the world to be wary of the risks of doing business with FTB.

However, one factor that could affect the impact of the US sanctions is the response from China, which is far and away North Korea’s top trading partner. No specific plans have yet emerged on what the FTB sanctions will entail, but many see them as likely to have a major impact. As with the UNSC sanctions, the question is how much cooperation can be expected from Beijing.

The department’s course of action takes into account the peculiar status of the US dollar on the international financial market. As the internationally dominant currency, it accounts for over 85% of the world’s foreign exchange transactions. Banking on the market is more or less impossible without using a dollar payment system, which means that banks everywhere have to pay heed to the US’s wishes.

Banking transactions in dollars have to go through US banks. Even if a Kookmin Bank (KB) branch in Seoul’s Myeong-dong neighborhood wants to do business in dollars with a Woori Bank branch next door, the two banks can only do it through a US bank. By demanding that US banks stop doing business with FTB, the Treasury Department may have increased the chances that banks in other countries will steer clear of it. Otherwise, their dollar transactions with US banks might be jeopardized.

The department made it clear on Mar. 11 that it would be shutting FTB out of the US financial system. In its press release, it said, “By designating FTB [for sanctions], the Treasury Department is targeting a key financial node in North Korea’s WMD apparatus, and cutting it off from the U.S. financial system.”

Existing sanctions prevent any of North Korea’s banks from using the dollar transaction system. The banks reportedly get around this by setting up dollar-based accounts in other countries. Many believe the department’s next step is likely to be preventing banks in these other countries from doing business with FTB.

It would not be going too far, however, to say that the impact of the sanctions will depend heavily on whether Chinese banks play along. At least 70% of North Korea’s foreign transactions are with China, which accounts for over 90% of its foreign trade (70% if inter-Korean trade is included).

Some observers have hinted that China might go along with the US for fear of encountering problems with its own dollar transaction system.

“Chinese banks aren’t going to be able to help North Korea out,” said a financial world insider.

Indeed, banks in China stopped doing business with BDA during the 2005 sanctions out of concerns about the potential impact. The six-party talks remains on ice for over a year due to objections from Pyongyang, which found itself unable to access US$25 million in deposits because of US sanctions on BDA after the June 19 Joint Declaration.

At the same time, the situation is rather different today, which means the impact may be slighter than in the past.

“In a sense, China was dragged into things against its will in 2005,” said Kim Yeon-chul, a professor at Inje University. “But the US’s standing in the world financial market is different from what it was then.”

Another factor that could soften the impact of sanctions is the fact that North Korea, in addition to having a small amount of foreign financial activity to begin with, is also likely to have made preparations after its BDA experience. A diplomatic source told of hearing intelligence that the country was doing most of its transactions in cash, placing only small amounts in Chinese banks.

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