North Korea’s sanctions circumvention shows the Russians the way to bypass the West

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In September 2020, a Hong Kong-registered company transferred ownership of a vessel that had disappeared from maritime tracking databases the previous month to Pyongyang-based Su Ryong San Shipping Co Ltd.

According to UN monitors, the Chinese-owned company imported up to 200,000 tons of sanctioned North Korean coal, which it swapped with a Chinese furniture company for two shipments of fertilizers to North Korea.

The complex corporate maneuvers represented just a tiny part of a global network of shell companies, commodity traders, spies, cybercriminals, banks and ship operators aimed at circumventing international sanctions on North Korean trade and financial transactions.

The network’s operations illustrate the ambiguous role played by China and Russia. Both countries have nominally committed to UN sanctions against Pyongyang, even as they turn a blind eye to the shadowy practices that keep the North Korean regime afloat.

Now that Russia is under heavy pressure from Western sanctions over its invasion of Ukraine, analysts are examining what North Korea’s example can teach Western politicians – not least China’s role in easing economic pressure on Moscow.

“North Korea is instructive in many ways, not the least of which is that it survives because it has outsourced much of its economy to Russia and China,” said James Byrne of the Royal United Services Institute in London.

Russian soldiers in the Ukrainian port city of Mariupol. The invasion has triggered sweeping western sanctions against Moscow © Alexander Nemenov/AFP/Getty Images

In 2017, the US Treasury imposed sanctions on the Bank of Dandong, a small Chinese bank with $10.66 billion in assets.

Zongyuan Liu, a staffer at the Council on Foreign Relations in New York, said Russia may take advantage of Chinese “burner banks” that facilitate illegal transactions but are then liquidated or restored before their activities are discovered.

“This is an established model and is already being used by North Korea and the Iranians,” Liu said. “But the volumes associated with Russia are so large that it will be very difficult to move the money before you get caught up in US sanctions.”

In turn, “China could have more leverage with Russia in negotiating oil and gas deals, which means it could buy Russian oil and gas at deep discounts,” Liu said.

She added that China lifted restrictions on Russian wheat and barley imports in February, just before Russia’s invasion of Ukraine.

Tom Keatinge, director of the Center for Financial Crimes and Security Studies at RUSI, said Chinese banks are already evaluating the risk of handling Russia-related transactions on a case-by-case basis.

“Transactions that are rejected in the western branches of Chinese banks for compliance reasons are then processed in Shanghai if they are deemed strategically important for China,” he said.

“China could well become a clearinghouse for Russian transactions, and there are many interesting tricks that can be employed – be it Mexico’s ‘black peso market’ model for cross-border drug financing or the age-old one Hawala Method of using brokers to facilitate transactions without money changing hands,” Keatinge said.

But Aaron Arnold, an anti-proliferation expert who has served in both the US government and the UN body that oversees violations of North Korean sanctions, noted Iran’s unfortunate experience of building a “barter system with China that’s basically oil.” was against goods”.

“Iran was soon inundated with Chinese goods it neither needed nor wanted,” Arnold said. “Shifting economic activity to China may relieve some sectors, but not the economy as a whole.”

North Korea’s misery — its real gross domestic product was just $27.4 billion in 2020, compared to Russia’s GDP of nearly $1.5 trillion — means sanctions-lifting programs fetching even tens of millions of dollars or less , can make a significant difference to a regime focused solely on survival and self-enrichment.

Allegations contained in the latest UN report on violations of North Korean sanctions included a Taiwanese shipping agency that helped Pyongyang import tens of thousands of tons of oil, a North Korean spy running hotels and casinos in Cambodia, a plan to set up a factory to manufacture Guns and drugs in Uganda and plans to import luxury cars and even a grand piano.

Like Russia, North Korea has an impressive cybercrime capability. The US Treasury Department last week linked North Korean hackers to a $615 million crypto heist of players of Axie Infinity, a popular online game.

But Liu said a far greater threat to the West than individual criminal operations posed by Russia, China and other like-minded countries accelerating efforts to build their own parallel financial systems. North Korea, she added, would be a “key beneficiary” of an “alliance of sanctions dodgers.”

Liu cited Russian Finance Minister Anton Siluanov’s call this month for the Brics Group of Brazil, Russia, India, China and South Africa to expand the use of national currencies and integrate their payment systems.

Several experts have linked the fate of North Korea’s sanctions regime to that of the crumbling world order.

Last month, Russia’s deputy foreign minister met with the North Korean ambassador in Moscow to discuss improving bilateral relations “in the context of changes on the international scene.”

Stephanie Kleine-Ahlbrandt, a non-resident fellow at the Stimson Center think tank in Washington, said: “I would expect Russia and China to see more sanctions violations, as well as an increase in cooperation efforts, particularly at the multilateral level, around the sanctions regimes against North Korea and others weaken countries.”

“The more Russia becomes a pariah, the less interested it will be in maintaining the system,” Keatinge said. “I’m increasingly convinced that we’re going to have financial walled gardens — a garden in the East dominated by China and a garden in the West dominated by the dollar.”

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