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Recycling the Playbook: UNSCR 2321 and Its Coal Caps

By
16 December 2016


On November 30, UN Security Council members gathered for a familiar exercise: to pass a new resolution drafted by the United States and China to impose fresh sanctions on North Korea for its nuclear testing. It was the second such meeting in 10 months.

UN Security Council Resolution (UNSCR) 2321 introduces clarifications and qualitatively new restrictions across a range of sectors intended to close some of the loopholes in previous resolutions. Amongst other things, it prohibits the foreign flagging of North Korean ships, instructs banks to close any existing accounts they held in North Korean financial institutions, bans imports of North Korean non-ferrous metals, and forbids countries from buying statues and monuments from Pyongyang.

However, some of the resolution’s contents will look more familiar, namely the quantitative caps on the volume and value of coal that Member States (read: China) can import from North Korea: the centerpiece of UNSCR 2321.This is not the first time the United States has moved to close a proliferator’s primary export commodity market. Tehran vividly remembers the imposition of similar sanctions on its oil exports, and UNSCR 2321 recycles the Iran sanctions playbook.

Yet key differences between the markets and scale of enforcement monitoring needs for each country will likely prevent coal sanctions against the DPRK from producing a similar outcome. Moreover, UNSCR 2321 and its coal caps are unlikely to generate decisive pressure on North Korea to negotiate over its nuclear and missile programs. Instead, it sets the US and China up for yet another argument over the latter’s (non)compliance, during which the DPRK will be able to forge ahead with its prohibited activities largely unencumbered.

North Korean laborers work beside the Yalu River in Sinuiju, North Korea, near the Chinese city of Dandong.

(photo: Mark Ralston/AFP)

The Restrictions in Resolution 2321

North Korea generates significant revenue from a relatively small number of export commodities, including coal, iron, textiles and seafood products. Coal is by far the most valuable, and China is the DPRK’s primary buyer. In 2015, North Korea sold more than 17 million metric tons of coal to Chinese buyers at reduced rates,[1] generating $1 billion in revenue that Washington argues has been, and will continue to be, partly used to fund Pyongyang’s prohibited programs.

After North Korea’s fourth nuclear test in January 2016, the Obama administration moved to curb North Korea’s earnings from coal exports. UN Security Council Resolution 2270, passed in March, determined that states should not import coal from North Korea unless the transactions were “exclusively for livelihood purposes.” However, the measure neither defined “livelihood purposes” nor clarified whose “livelihood” it meant, and Beijing argued that the coal’s end use (namely, energy generation) exempted its imports from the restrictions. Nevertheless, it moved to shift some of the potential liability to importing companies, asking them to sign a standardized declaration that their transactions were unconnected to North Korea’s nuclear or missile programs and intended only for livelihood purposes. It is unclear if Beijing ever checked these declarations or issued penalties for missing documentation.

China did not curb its coal imports from North Korea between March and November 2016, and imported record amounts in August.[2] Washington’s argument that the coal restrictions helped make UNSCR 2270 the “strongest” sanctions resolution ever quickly fell apart, giving way to consternation over the coal “loophole”—a misnomer for what was in fact a key and deliberate feature for Beijing.

The Iran Playbook

North Korea’s fifth nuclear test in September 2016 presented the United States and China with an opportunity to address their divergent interpretations of the coal restrictions in Resolution 2270, passed in March of this year.

Rather than amending the existing provision, however, Washington and Beijing scrapped the language and replaced it with one of the longest and most complex operative paragraphs in UN sanctions history. According to the new resolution, China’s aggregate coal imports from North Korea in 2017 must not exceed approximately $400 million or 7.5 million metric tons, whichever is lower. Any coal procured within these limits must involve no individuals or entities associated with prohibited programs, and proceeds must exclusively be for the livelihood “of DPRK nationals.” Each month, China must declare its coal imports to the UN Sanctions Committee, which will publish the figures on its website. The Committee will then tell China when it has reached 75 percent, 90 percent and 95 percent of its annual limit. After 95 percent, China must begin to cut off its coal imports from North Korea for the remainder of the year. If fully implemented, the measure would slash the volume and value of Pyongyang’s coal exports by over half.

The measure clearly recycles the US playbook for Iran sanctions, which the Obama administration believes “worked” to coerce Tehran into negotiating over its nuclear program. In 2012, the United States convinced customers of Iranian oil—the country’s most valuable export commodity—to cease or cap their imports at set levels. The European Union imposed sanctions requiring Member States—which included some of the largest markets for Iranian oil—to desist from further petroleum purchases from Iran. China, Japan, India, South Korea and Turkey agreed bilaterally with the United States to make reductions of between 25 and 40 percent. The effect was to slash Iranian exports of crude oil from approximately 2.5 million barrels per day in 2011 to approximately 1 million barrels per day in 2015.[3]

UNSCR 2321’s basic approach to coal exports is the same that the United States took to Iranian oil, with a few key differences. For instance, whereas Iran had approximately 10 major state-based foreign markets for its oil, North Korea has only one for its coal. The success of this provision thus rests entirely on China. It is worth recalling that China’s 25 percent cuts to its Iranian oil imports were the lowest concession made by any of Tehran’s major customers at the time. In the case of North Korea, in which Beijing has a far more direct political interest, we are now asking China to slash over 50 percent of its coal purchases.

It is difficult to imagine it doing so. There has been little indication that Beijing’s thinking on the North Korean nuclear issue, or its distaste for sanctions as a tool of coercion, has changed since March, even with a fifth nuclear test. Had it changed, one might have expected to see Resolution 2321 negotiated in less time than the nearly three months it took. Most telling was the statement delivered by China’s ambassador following the UN Security Council vote. Beijing, he emphasised, has no intention of curbing “normal economic and trade activities” with North Korea.[4] Yet the very point of the resolution’s coal provisions is for China to do just that.

Weaknesses in 2321’s Coal Restrictions

UNSCR 2321’s weaknesses no longer lie principally in the livelihood carve-out. Rather, they relate to the nature of systematically curbing Chinese coal imports from North Korea, a workaround available to Beijing should it wish to avoid large-scale action.

The success of the resolution’s coal caps relies on Beijing’s political will to control, and if necessary, shut down the trading activity of a vast number of Chinese small and medium enterprises operating in the border provinces. Iranian oil reductions, which involved a small number of mostly state actors, were an entirely different task.

Hundreds of Chinese companies in Liaoning and Jilin Provinces have recorded coal imports from North Korea in the last five years.[5] For many, imported North Korean coal is central to their business, and they are therefore likely to continue purchasing it as usual in the early months of 2017. If trading patterns proceed next year as they have in 2016, China would reach the Security Council caps around summer 2017.[6] In that circumstance, Beijing would theoretically have to put a hard stop to the imports of hundreds of firms, fighting past widespread compartmentalization within the Chinese system (particularly between federal, provincial and local authorities) to achieve this.

China is eager to create the impression that it will do this, and it too has a playbook that it recycles to promote a public compliance narrative. In the immediate aftermath of a resolution, while the world is watching, Beijing publicises a small number of regulatory changes that advance the idea that China may finally be clamping down on its North Korean neighbor. Only once most eyes have turned away do suspicions of a ‘business as usual’ approach by Beijing re-emerge. It thus comes as no surprise that on December 10, 2016, Beijing announced that it was ordering its firms importing coal from North Korea to stop for the remaining three weeks of the year, unless orders had already been shipped. The effect will be minimal; if they see evidence of enforcement, most firms will merely delay coal deliveries until early January, at which point coal caps in the resolution reset and news cycles move elsewhere.

Next year will therefore be the true test, and it is hard to fathom the Chinese government systematically controlling the actions of hundreds of its companies throughout the year. Past experience shows that China has been unwilling to take systematic enforcement action pursuant to UNSC sanctions provisions, even when the total number of potential enforcement cases was much smaller.[7] The notion that it would start now with such an enormous undertaking seems fanciful, particularly if Beijing’s higher-level thinking on North Korea has not fundamentally changed. Furthermore, China is traditionally wary of unsettling its minority communities; rigidly enforcing coal trade caps would bring an ax to the business of Korean ethnic minorities in Chinese border provinces, potentially stoking domestic political tensions.

Reading UNSCR 2321 with a skeptical lens reveals a second weakness, namely, a means for China to avoid implementing the provisions in a way that Washington intends, and still arguing it is compliant. According to the resolution, it is the UN Sanctions Committee’s responsibility to determine whether China is nearing its aggregate coal purchase limits. To independently make such a determination on the basis of volume, the Committee will use data on monthly coal imports supplied directly by Beijing. Presumably, it will compare these figures against publicly-available customs data to create some confidence that Beijing is not cooking the books. If China wishes to avoid comprehensively implementing UNSCR 2321’s volume limits on coal, it could simply undermine the integrity or public availability of that customs data, and insist on the correctness of the data it provides.

Washington should also ready itself for an argument on measures relating to limits on the value of coal. The US aim in capping annual coal imports at approximately $400 million was partly to end North Korea’s practice of undercutting other coal suppliers on price. Consequently, the job of valuing the coal that China reports to the Sanctions Committee each month will fall to the UN Panel of Experts. According to the resolution, the panel will have to transmit an “estimate of the average (mean) price in US dollars of coal exported from the DPRK that month on the basis of credible and factually accurate trade data” (emphasis added).

Washington will read that to mean average global coal prices, but Beijing could interpret it to refer to the mean prices that Chinese companies paid for North Korean coal the preceding month, and it may therefore declare a rock-bottom value for its coal imports from the outset.[8] Combined with any move to restrict the public availability of Chinese customs data on coal, this language could well become a new livelihood “loophole.”

Team America: World Police

A wider and more significant challenge will be to monitor the implementation of this complex and far-reaching resolution, with its coal restrictions and numerous other provisions, across all UN Member States. To build on one expert’s recent characterization of DPRK sanctions as an expanding “sieve,” it is essential to scrutinize what falls through if the sanctions regime is to be more than paper.

Monitoring Member States for inaction on the sanctions and North Korea for evasion of the measures is a challenging and resource-intensive undertaking. North Korea’s illicit overseas networks have developed elaborate and sophisticated tactics to conceal their links to North Korea and to prohibited activities Companies, bank accounts, and ships they control rarely appear as North Korean on paper. Focused investigation is often needed to reveal the North Korean puppeteers behind the paper trail.

Few are sufficiently equipped to carry out this detailed monitoring. In contrast to previous resolutions, UNSCR 2321 places more of the burden on the UN Sanctions Committee and Panel of Experts. While the Sanctions Committee has some capacity to take on a greater role, the Panel is already hugely under-resourced. Eight people are being asked to independently investigate breaches of the arms embargo, track the activities of dodgy diplomats, detect and counter North Korean illicit finance, value North Korean coal, monitor illegal trade in non-ferrous metals, identify prohibited registrations of North Korean controlled vessels, and seek out evidence of Pyongyang’s statue and monument building in foreign countries, amongst other things. They will undoubtedly struggle to cover all of these bases.

The United States—the architect of what is now the most complex UN sanctions regime—will have to continue taking up the difference in the growing monitoring burden. Others simply are not interested in or capable of devoting comparable resources to the issue, and if Chinese customs data vanishes from public view or is compromised in some other way, the US policing role will only become more apparent. These dynamics could make it harder to promote much-needed multilateral cooperation on DPRK sanctions implementation, especially with countries apathetic towards the North Korean threat and wary of being perceived to be bending to Washington’s will.

Managing Expectations

US Ambassador to the United Nations Samantha Power asserted on the day of 2321’s adoption that the resolution “breaks new and important ground,”[9] and she is right. On paper, the resolution expands the sanctions regime against North Korea in many directions, making the regime more complex than ever before. But her statement that the resolution, with coal caps at its heart, “imposes unprecedented costs on the DPRK regime,”[10] should be met with greater skepticism. Its power to impose costs derives exclusively from Chinese implementation. Given the limitations of recycling the Iran playbook for the North Korea sanctions regime, the extent of North Korean evasive activities and the scale of the international monitoring challenge, UNSCR 2321’s prospects for generating this effect in any useful timeframe are dim. Instead, its most significant outcome may be just another protracted argument over compliance between the US and China, all the while allowing North Korea to continue to rapidly advance its prohibited programs.

 

 

 

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[1] Leo Byrne, “Draft resolution also adds further designations, prohibits North Korean statue exports: Reuters,” NK News, November 28, 2016, https://www.nknews.org/2016/11/new-un-resolution-aims-to-cut-n-koreas-coal-revenues-by-600-mil/.

[2] Ibid.

[3] “Sanctions Against Iran: A Guide to Targets, Terms and Timetables, Belfer Center for Science and International Affairs, June 2015, http://belfercenter.ksg.harvard.edu/files/Iran%20Sanctions.pdf.

[4] Statement by Liu Jeiyi, UN Security Council, 30 November 2016, http://www.china-un.org/eng/hyyfy/t1420805.htm.

[5] Author’s study of Chinese customs data, accessed via Panjiva.

[6] In 2016, Chinese imports of North Korean coal hit $400 million and 7.5 million tons in May. Leo Bryne, “Beijing bans North Korean coal for rest of December,” NK News, December 12, 2016, https://www.nknews.org/2016/12/beijing-bans-north-korean-coal-for-rest-of-december/?t=1481710022381.

[7] China’s disinterest in systematically screening Air Koryo charter flight cargo, which North Korea has frequently used to ship proliferation-sensitive items, is one example. While China has been willing to modify bureaucratic procedures, its enforcement activities have traditionally been the weak link in the chain.

[8] Information declared by China will be made available on the 1718 Sanctions Committee website: https://www.un.org/sc/suborg/en/sanctions/1718.

[9] US Mission to the United Nations. Explanation of Vote at the Adoption of UN Security Council Resolution 2321 on Sanctions on the Democratic People’s Republic of Korea. November 30, 2016. https://usun.state.gov/remarks/7575.

[10] Ibid.

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Credit for photo of young North Korean girl: T.M. All rights reserved, used with permission.