Global Insight Perspective

Significance

The United States’ move to unfreeze the funds serves to remove what has constituted the key stumbling bloc to progress on nuclear disarmament under the six-party framework.

Implications

The move has been carefully timed, coming immediately ahead of the key round of the latest round of six-party talks to address the closure of the Yongbyon nuclear facility.

Outlook

The move signals willingness on all sides to move ahead with the nuclear disarmament process, which is a positive development for the non-proliferation regime in general and the reduction of tensions in north-east Asia in particular.

Risk Rating Change

Global Insight has upgraded North Korea Security Risk Rating by 0.25 to 2.25 to reflect the improved security environment. The agreement aids in lifting North Korea out of its diplomatic isolation and relieves sanctions that may have undermined regime stability. Successful diplomacy is likely to further boost the position of the diplomatic establishment within North Korea and sideline hardliners from the military supporting the continued development of the country’s nuclear programme.

Sticking Point Resolved

The U.S. government today agreed to the release of around US$24million in North Korean funds that have been frozen at the Macau-based Banco Delta Asia (BDA) since September 2005, thereby removing a major sticking point for the landmark nuclear agreement reached with North Korea last month to proceed (see North Korea: 14 February 2007: Six-Party Talks Yield Success as North Korea Agrees to First Steps Towards Nuclear Disarmament). The unfreezing of the funds came immediately ahead of the resumption of a fresh round of six-party talks, including North Korea, the United States, China, South Korea, Japan and Russia, to discuss the implementation of the agreement. U.S. Deputy Assistant Treasury Secretary Daniel Glaser held that the funds frozen over counterfeiting allegations would be transferred from BDA to a North Korean account held at the Bank of China in Beijing. It was emphasised that the funds would be channelled towards social services, including humanitarian aid and education in the impoverished country to be employed “solely for the betterment of the North Korean people”, thereby dispelling concerns that the unfrozen funds would be funnelled into the pockets of the Kim Jong-Il leadership. This solution to the long-standing banking feud was allegedly proposed by North Korean officials, who had assured that the funds would be used for the intended purposes.

The End of a Long-Standing Banking Feud

The announcement of the unfreezing of the funds comes immediately ahead of a fresh round of six-party talks to commence in Beijing. The Pyongyang government has repeatedly insisted on progress on the issue to ensue before the other terms of the accord were to be implemented, notably the shutdown of the Yongbyon nuclear reactor, which is to be the focal point of the latest round of talks. Under the 13 February agreement, North Korea agreed to shut down its main Yongbyon nuclear reactor within 60 days in return for 50,000 metric tonnes of fuel aid, as well as economic aid equal to the same value. The closure of Yongbyon is subsequently to be verified by international weapons inspectors from the International Atomic Energy Agency (IAEA). The Kim Jong-Il regime further agreed to provide the international community with a complete overview of its current nuclear programmes and to dismantle existing nuclear facilities. After this, it is expected to receive an additional 1 million tonnes of fuel oil. In return, the United States agreed to heed North Korean calls for it to resolve financial restrictions against BDA within 30 days.

The U.S. agreement to address North Korean calls for the unfreezing of its funds spells the end to a long-term feud. It was the imposition of sanctions by the U.S. Treasury in September 2005 that hamstrung the Stalinist regime’s international banking options, which led the country to leave the six-party talks in November of that year. The North Korean political leadership subsequently reiterated that the lifting of the financial sanctions was a precondition for it returning to the negotiations, with the Stalinist country having found itself in an economic stranglehold due to both U.S. financial sanctions and the UN-sponsored sanctions imposed over its first-ever October 2006 nuclear bomb test. Over the past weeks, North Korea had signalled that it would not tolerate any prevarication on the matter with North Korea’s top nuclear negotiator snubbing Mohamed ElBaradei when he came to visit the isolated country last week in a bid to normalise relations after North Korea expelled IAEA inspectors four years ago.

Outlook and Implications

The United States’ move to unfreeze the funds serves to remove what has constituted the key stumbling bloc to progress on nuclear disarmament under the six-party framework. It comes following a significant change in U.S. foreign policy, allowing for direct bilateral engagement with North Korea and willingness to address the sanctions issue in return for progress on the nuclear talks following a long-term policy of de-linking the two issues. The move has been carefully timed, coming immediately ahead of the key round of the latest round of six-party talks to address the closure of the Yongbyon nuclear facility. By removing the most immediate obstacle to the successful implementation of the nuclear disarmament accord, it sets the stage for constructive engagement and for the provisions of the accord to be implemented on schedule. As such, the next step will be discussion of the dismantlement of the Yongbyon nuclear reactor with North Korean top nuclear negotiator Kim Kye-Gwan having pledged that nuclear activities will be brought to a halt if sanctions are lifted, according to Agence France-Presse (AFP). North Korean officials have indicated that the Pyongyang regime has already undertaken preparatory work to close down the Yongbyon reactor, according to Chinese state media.

However, a number of complicated issues have not been addressed and may come to hamper later progress. This includes the question of how to address North Korea’s existing nuclear weapons. The country is yet to normalise relations with the IAEA, and questions remain over the reversibility of the closure of Yongbyon with the international community being likely to call for the denuclearisation process to be irreversible—a demand that North Korea may oppose at least until adequate security guarantees have been obtained. It will further be a difficult task to effectively monitor what the Pyongyang government declares as its nuclear facilities and the subsequent moves to shut them down, with the country being known for having numerous mountain-side tunnels where such projects can be hidden. North Korea has a long record of back-tracking on commitments, and sceptics have continued to voice concern that this may be an attempt to obtain international aid without taking serious steps to dismantle the nuclear programme. North Korea reached a similar agreement with the United States in 1994, which then fell apart in 2002 when then U.S. top nuclear envoy James Baker alleged that Pyongyang was attempting to produce weapons-grade uranium, a claim on which the U.S. administration has been backtracking over the past month. Meanwhile, the question of who should provide the pledged energy aid may become a problem down the line. Japan has remained reluctant to become involved until North Korea agrees to address the issue of Japanese nationals abducted by North Korea in the 1970s and 1980s, but the initial batch of 50,000 tonnes of fuel oil will be supplied by South Korea.

Such concerns aside, the move to move beyond this key stumbling bloc signals willingness on all sides to move ahead with the nuclear disarmament process. Global Insight has decided to upgrade North Korea Security Risk Rating by 0.25 to 2.25 to reflect what is a positive development in terms of the non-proliferation regime in general and the reduction of tensions in North-East Asia and North Korea in particular. The agreement aids in lifting North Korea out of its diplomatic isolation giving the impoverished regime access to the international banking system again after various sanctions have put significant pressure on the political leadership serving to undermine regime stability. Successful diplomacy is likely to further boost the position of the diplomatic establishment within North Korea and sideline hardliners from the military supporting the continued development of the country’s nuclear programme.

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