This is what sanctions enforcement looks like: maximum pressure and prices
Data reveals the wider impact of an effective oil embargo in late 2017
Between May and December 2017, for a period of around seven months, North Korean petrol and gas prices spiked, while food prices were also hit.
This was a consequence of an effective Chinese embargo on fuel exports to the North — seen as the high point of Beijing’s enforcement of UN sanctions against the DPRK — but it also had a significant impact on the price of other goods traded in North Korean markets.
What’s more, while the evidence is not conclusive by any means, its after effects and the overall effect of oil sanctions appears to be evident in some price data post-2017.
The data also gives us some idea of when Chinese attitudes toward the North Korean situation began to change.
Summitry may not have occurred prior to March 2018, but it would appear that as early as late October 2017, the Chinese government had decided to relent on its enforcement of draconian oil sanctions.
NK Pro analysis found:
- Fuel prices spiked to between 150% and over 200% of prior levels in mid-to-late 2017. The causes appear to be a semi-embargo on North Korean fuel imports from China, but the effects were acute and did not subside until November 2017 – when relations appear to have begun improving.
- Rice prices were also affected, with prices rising 20+ percentage points, while corn rose by over 60 percentage points. Food prices appear to have returned to normality by late December, but declines in prices had already begun in October 2017.
- Forex was remarkably unaffected by these sanctions, and this is remarkable. Generally, a large spike in the cost of imports like oil should negatively affect the domestic currency, but this did not happen. This may be because the regime engaged in some form of forex management in the market, and/or received continued help in doing so.
Oil is a weapon
After a spate of missile tests in the first four months of 2017, China decided to take action to signal their displeasure with North Korean policymaking.
It is unclear how much crude oil China was exporting to North Korea prior to the implementation of this embargo, nor is it known just how much they cut back.
Nonetheless, the fact there were major cutbacks is very clear with what happened to gasoline and diesel prices in the North Korean marketplace from May onward. This is shown in Figure 1 below.
It is interesting to note that gasoline prices took far longer to return to a normal level than diesel prices did. What is also important to note is that prices had already begun to fall from their peaks in late October. This may indicate that Chinese willingness to enforce such draconian curbs, contrary to what official data indicates.
The dynamics of the North Korean fuel market have been covered in more detail elsewhere, but suffice it to say, the sanctions appear to have had a persistent negative effect on fuel prices in Pyongyang. Prices relative to global benchmarks have remained persistently higher than they were before May 2017.
Food prices also spike
One of what appears to be a secondary effect of these fuel sanctions is the spike in the price of food. Prior to May 2017, rice and corn prices had already begun to rise from recent nadirs.
The red circle is in Figure 2 is where grain prices begin their assent – this is clearly prior to the Chinese fuel embargo. Yet, a large price spike is evident from the data. And to get a clearer picture, let’s take a look at figure 3.
Figure 3 gives some indication of how rice prices were affected by Chinese oil sanctions, or perhaps that food itself was also the target of Chinese sanctions.
Rice prices went up by as much as 25 percentage points, while corn prices also rose by up to 15 percentage points. Rice then fell back to pre-May levels in late November.
Perhaps these rises were due to unrelated changes to the domestic supply situation, but the timing of rice price falls appears and the rise in per capita food availability in 2017, this appears to be rather unlikely.
What is more likely the case is rises in fuel prices had a negative effect on the food supply system. It is an open question what would have happened had diesel prices remained at their artificially high post-May levels beyond November 2017.
The lack of a currency shock
One of the biggest mysteries for observers of North Korea’s economy is the stability of the currency amidst an unprecedented sanctions regime.
This is more mysterious when sanctions appear to have actually been in full-scale operation, like they were between May and October 2017.
Note the area inside the yellow circle, this is during the period of fuel sanctions. There is a brief period of time up to the end of June when RMB spikes in value, but after that the trends return to the norm.
Post-fuel sanctions relief, the RMB loses a substantial amount of value against the won, before spiking again.
What is most interesting about this graph is both the stability of the won amid economic pressure, and the lack of volatility in the forex market compared to what comes after in the following two years.
This may indicate that the actual effect of real sanctions implementation on imports will not be seen in the forex market first, and may remain invisible in the won’s value against hard currencies for a prolonged period, even if fuel sanctions were more rigorously enforced.
When a fuel embargo was imposed on North Korea, fuel prices spiked dramatically, while food prices also appear to have been significantly affected.
However, rice prices were returned back to pre-embargo levels when this embargo was lifted. The fact that the forex market was not significantly affected by these fuel sanctions is most curious.
It may be surmised that more effective implementation of fuel sanctions will not immediately influence the value of the won, but may have a negative impact on food prices, potentially giving policymakers pause before they push for such measures.
Edited by Oliver Hotham
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