Looking at history to determined what Pyongyang, Moscow may want in bilateral economic relations
The recent invigoration of Russian-North Korean ties raises interest in the history of Russia’s involvement in Korean affairs. Does the recent upsurge have a solid basis that can be counted on to ensure a long-term Russian involvement in the new era? Why would North Koreans, treating foreigners as suspect, “open up” to Russians? A book, recently published in Russia, entitled The Uneasy Neighborhood: Problems on the Korean Peninsula and Challenges for Russia contains a lot of information to answer these questions and also to understand the basics of Russia’s policy regarding Korea.
The book, authored by a team of Russian Koreanists, both mature and quite young, analyzes both the internal situation and the prospects for economic development in both Koreas, as well as the two Korean states’ relations with the great powers. The most interesting data relates to the USSR/Russia’s relations with North Korea.
The book argues that the historic truth is that the USSR liberated Korea from Japanese occupation and then exerted great assistance to restore and develop the economy of the North, reduced to rubble during the Korean War. Although the economy was modeled along the lines of Stalinist industrialization, this process made it possible for North Korea to utilize its natural resources through the use of Soviet technologies. By 1982 the plants and enterprises built with Soviet assistance and based on Soviet technology produced 63 percent of the nation’s electrical power, 33 percent of its steel, 38 percent of rolled steel, 50 percent of oil products, 25 percent of coke and 42 percent of its iron ore. By unofficial calculations of the Russian experts (based on some unpublished reports of Soviet ministries and organizations, related to foreign economic activity) the USSR assisted the DPRK in the construction of 85 infrastructure projects.
Several thousand North Korean specialists got their higher education in the USSR
By the beginning of the 1980s the USSR provided the DPRK with 2,800 technology packages in areas as varied as geology, machine-building, metallurgy, chemical industry, food and fisheries, the energy sector, agriculture, etc. Also Soviet design bureaus provided documentation for 193 capital construction projects, designs for 742 pieces of equipment, more than 1,100 units of technological documentation and 5,300 documents detailing industrial standards. Several thousand North Korean specialists got their higher education in the USSR. Academic cooperation also flourished as the DPRK Academy of Science was created with the help and along the lines of its USSR counterpart and Russian and Korean scientists undertook such major projects as the Geological Survey of North-East Korea and South of (USSR) Maritime district, to name but one.
The USSR was the biggest market for North Korean goods. Although the list was limited (about 60 major items), imports from the DPRK satisfy USSR demand for some items to a considerable extent: For example, imports from North Korea accounted for 71.2 percent of its magnesite clinker imports, 75.3 percent of cement, 75 percent of chlorinated lime, 15.8 percent of pig iron, 15.1 percent of corn starch, as well as cold-rolled stock, zinc and lead, fruits, electrical engines, etc. At the same time the USSR was the major supplier of oil, coke and coking coal, chemical products, machinery and equipment. Also, the Soviet Union had to deliver raw materials and semi-finished products for enterprises, created with Soviet assistance (they stopped functioning after the abrupt termination of economic cooperation in 1990s, which led to de facto de-industrialization of North Korea).
TRADE PRICE HAGGLING
…many Soviet commodities and much equipment were delivered to DPRK on a ‘friendly’ prices basis, while the actual world price would be much higher
The total USSR aid until the breakup of the Soviet Union, when it was terminated, amounted in current world market prices to about $40 billion by the same calculations. It should be noted that this figure reflects the real volume of aid while official statistics would tend to decrease it – simply because many Soviet commodities and much equipment were delivered to DPRK on a “friendly” prices basis, while the actual world price would be much higher. It should be noted, also, that many North Korean commodities were of no demand on markets beyond the USSR, so the prices were quite arbitrary.
Every year foreign trade officials of the two countries would sit down to agree on the prices on which the goods would be delivered. Although theoretically these prices should have been based on world market prices in U.S. dollars, converted into the so-called “clearing rubles” at a fixed official rate of about 0.6 rubles per dollar (so the “clearing rubles” were a de facto pseudonym for dollars), the reality was quite different. The sides would start by presenting their price suggestions with a reference to global statistics (someone joked that, if communism were to win at the international level, we should leave Switzerland capitalist so as to have a basis for “market prices”), but then the real “tit-for-tat” negotiations started.
Moscow has eyed development of the Russian Far East in its dealings with Korea. Wikimedia Commons
Usually parity was sought within the narrow list of the so-called “free currency commodities,” meaning the goods in demand on the global market, i.e. oil form Soviet side and non-ferrous metals and magnesite clinker from North Korean side. The result of these tedious negotiations was a list of commodity prices of bilateral trade, which was very far from real global prices. Most of it was kept secret. Based on these prices, the yearly Trade Protocol was signed that provided for equal costs of deliveries during the year as the “clearing rubles” mechanism was not supposed to result in any imbalances beyond the goods supplied on the basis of long-term credit, agreed at the government level.
The cost of “turnkey plants” supplied to North Korea was even further from reality and mostly depended of the supplier’s ability to force finance quotas from the Soviet budget authorities, as the supplies were effected on the basis of Soviet credit, which everybody understood would never be returned. For example, in the mid-1990’s, when the Korean Peninsula Energy Development Organization (KEDO) started to calculate the price tag for a hypothetical nuclear LWR power plant, similar to one agreed upon between the USSR and DPRK in 1985, Russian experts were amazed (probably along with North Koreans, who never disclosed it), that this price in dollar terms was several times higher than the USSR-type nuclear power plant (a Soviet credit for it was used only partially). Although the Soviet side, especially in 1970’s-80’s tried to get some payback, mostly in the form of deliveries of the production of the Soviet-built enterprises (like car batteries, wire, etc.) only a fraction of the debts were ever received. The Soviet side had to formally re-finance themselves by providing additional credit.
TRADE IMBALANCE AND BREAKDOWN
The North Korean side was in the habit of under-fulfilling their export obligations according to the bilateral yearly trade protocol, which by the middle of year, would result in a growing imbalance in USSR exports vis-à-vis DPRK exports. North Korea would usually explain it in political terms, as the need to concentrate all force on “fighting American imperialism and its South Korean puppets” and pledged to increase deliveries to make up for the loss during the remaining months, asking the Soviet side not to decrease supplies of the goods essential for the functioning of North Korean basic industries (such as oil and coking coal), on a political level as a last resort.
…by the early 1990s, when the ‘fraternal economic relations ended, the Russian side calculated (North Korea’s) debt at 3.6 billion rubles – about $6 billion
However the Soviets nevertheless tried to “regulate” their supplies not to let the imbalance (“saldo of bilateral payments”) become too big, as this required providing North Korea with unsolicited credits, which the DPRK had no resources to repay. As is widely known the result by the early 1990s, when the “fraternal economic relations” ended, the Russian side calculated the debt at 3.6 billion rubles – about $6 billion according to the above-mentioned official rate. Of course, much of this debt was related to armament supplies, which are not reviewed in this article, and North Koreans were indignant when Russia calculated this portion of debt in the same manner as the “civil” portion, claiming that the “USSR in fact paid for its own security on the Eastern flank.”
The contradictions continued to accumulate during the perestroika period while the ability and desire of the USSR, under the new pro-reform leadership, to assist the North Korean regime decreased. On November 2, 1990, even before the breakup of the USSR, North Korea had to sign an agreement on payments in free currency in bilateral trade that essentially ended the era of cooperation. Trade plummeted, credit assistance was suspended, bilateral programs frozen, Russian technicians left North Korea, raw materials and spare parts supplies from Russia virtually stopped, and this led to a halt in production of a major part of North Korean industry.
So what does the DPRK want from Russia now? Does it expect the revival of the Soviet-era partnership when Russia would invest in new projects in North Korea without clear guarantees on return on investments? Does it think that due to the growing confrontation with the West, that Russia can provide preferential treatment to North Korean requests? Does it expect Russia to use its remaining technological potential to restore industrial objects (especially in energy sector) once built with its help? Does it expect Russia to become “a bridge” to get financing from South Korea in the framework of trilateral projects?
All these questions become more and more relevant with the nearing of the Kim Jong Un’s possible first visit to Russia in May. We will try to speculate further on it in part two.
Featured Image: Russia_President_Putin_Korea_Visiting_01 by KOREA.NET - Official page of the Republic of Koreaon 2013-11-13 18:20:57
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