Article Up on Asia Times: China, Copper, the Democratic Republic of Congo--and the IMF

As an illustration of how the IMF and China really don’t get along—despite Beijing’s interest in the IMF in a source of gold and SDRs—I've written a piece for ATol entitled China’s copper deal back in the melt, on a high-profile tussle in the Democratic Republic of Congo.

The IMF is openly lobbying the Congolese government to renegotiate a $9 billion copper and cobalt deal with China, for the stated reason that the project encumbers the DRC government with sovereign debt (an allegation that the Chinese dispute) at the same time the IMF is mediating with the Paris Club to forgive a chunk of the $10 billion tab run and embezzled in the name of the predecessor state of Zaire by kleptocrat-in-chief Mbuto Sese Seko.

In a classic example of the witless stenography that passes for Western reporting on Asian and African issues, the actual story - IMF threatens to withhold debt relief unless the Chinese deal is renegotiated - got a bit of a twist - as in Voice of America's "Chinese Mineral Deal Blocking Congo's IMF Debt Relief."

To get the real story, one perhaps has to dig even deeper—to the case of the Freeman MacMoRan-operated Tenke Fungurume copper mine.

The website operated by whistleblowing ex-Freeport MacMoRan employees with the buzzkilling name “FCXsucks.com” (“FCX” is Freeport’s NYSE ticker symbol) provides some interesting details and analysis.

The TF project is similar in scale to the Chinese project, and will take somewhere between $2.7 billion to $3 billion in copper out of Congo annually when it gets up to speed.

By a remarkable coincidence, at the same time the IMF is complaining about the Chinese deal, the DRC government is trying to renegotiate the sweetheart deal that the TF project got from the Sese Seko regime—a deal that capped the Congolese share in the project at 17.5%.

To compare and contrast, the DRC share in the Chinese project is already at 32%.

The FCXsucks people think the Chinese deal turns out worse than the TF deal despite the higher percentage because the Congolese partner, Gecamines, walks away with less money per year.

But that’s because the Chinese loan disbursement is bigger than the Freeport investment and covers a range of do-gooder infrastructure items not directly related to the deal. From the overall perspective of the DRC, adding the infrastructure improvements to Gecamine’s own ROI, the Chinese deal doesn’t look too bad.

President Kabila reportedly wants to see the DRC’s share in the TF project boosted to 45%, over the vigorous opposition of the project’s investors in the United States and Canada, and the U.S. government.

At the same time, the President is no doubt all ears to the IMF’s insistence that the interest rate on the Chinese project be dialed back from more expensive commercial terms to government-to-government concessional rates, like those China gave Angola.

Perhaps the DRC is less interested in the IMF’s proposal that the Chinese project get scaled back to $6 billion, as that would decrease the quantity of nice things the Chinese would build there in the next few years.

The Democratic Republic of Congo is flat on its back in terms of economic and social infrastructure. China coming in with a fast-track project to help rebuild the country (as the PRC did for Angola, in return for crude oil) is probably more welcome than a lecture from the IMF on Mbuto Sese Seko’s debt.

However, it will not be surprising if President Kabila—eager not to alienate either China or the West—finds a way for both deals—and debt relief--to go ahead.

The war in the Democratic Republic of Congo (previously Zaire) since 1998 has killed an estimated 5.4 million people, making it the bloodiest conflict since World War II.

Although the conflict has attracted intensive meddling from outsiders fixated on the country’s vast mineral reserves, the immense human suffering has inspired little in the way of the high profile attention and assistance.

The website Friends of the Congo provided this chilling perspective on how things are in the eastern end of the republic (the main copper deposits are in the south, in Katanga, which also saw fighting during the wars):

The International Center for Transitional Justice, the Human Rights Center at the University of California, Berkeley and the Payson Center for International Development at Tulane University conducted a survey of 2,620 Congolese between September and December 2007. The study focused North and South Kivu, Ituri, Kinshasa, and Kisangani. The results of the survey were predictable but shocking nonetheless. A summary of the survey revealed:

• 80 percent of respondents said they had been displaced at least three times in the last 15 years
• 75 percent said their cattle or livestock had been stolen
• 66 percent said their home had been destroyed or confiscated
• 61 percent of those polled in the east said they witnessed the violent death of a family member or friend
• 60 percent said one more of their household members had disappeared
• 34 percent said they themselves had been abducted for more than a week
• 53 percent reported being forced to work or being enslaved by armed groups
• 31 percent said they had been wounded in fighting
• 35 percent said they had been tortured
• 46 percent had been threatened with death
• 23 percent had witnessed sexual violence
• 16 percent had been sexually violated and 12 percent multiple times
• 85 percent of people polled believe "those responsible for the violence should be held accountable"

In North Kivu, at the epicenter of the violence, responses to the question "who protects you" were quite revealing. Respondents answered God (44 percent), the army (25 percent), the police (8 percent), nobody (7 percent), U.N. peacekeepers (6 percent).

Emphasis added.

China Discovers Value in the IMF

I have an article up at Asia Times Online about China’s interest in IMF Special Drawing Rights (SDRs) as an alternative to the U.S. dollar as an international reserve currency: China Discovers Value in the IMF.

The Obama administration’s effort to expand the lending capacity of the IMF by US$100 billion—an important precondition for increased issuance of SDRs—is facing united Republican opposition and skepticism from a swath of liberal Democrats in the House of Representatives. The fact that the IMF credit is tacked onto the supplemental appropriation bill for the Iraq and Afghan wars isn’t helping.

The spectacle of liberals teaming up with anti-Obama conservatives in an attempt to hand the White House a humiliating defeat is an interesting one and, to President Obama’s advisors, no doubt unwelcome.

In contrast to its lacksadaisical approach to the release of the hapless Uighur detainees at Guantanamo, the White House is apparently vigorously “whipping” this issue, and one imagines that Rahm Emanuel will be able to prevent 40 Democratic votes from sliding into the “No” camp and dooming the bill.

In any case, the idea that China might be able to diversify away from the dollar without adjusting its artificially low RMB:US$ exchange rate apparently gives some economists, like the Council on Foreign Relations’ Sebastian Mallaby, some heartburn.

In an article mockingly entitled Beijing’s Aspiring Houdinis Play with the Dollar, Mallaby poured scorn on China’s forex ideas:

So neither the IMF idea nor the scattershot attempts to internationalize the yuan will rescue the Chinese from their dilemma. China has accumulated at least $1.5 trillion in dollar assets, according to my Council on Foreign Relations colleague Brad Setser, so a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country about $450 billion — about a tenth of its economy. And, to make the dilemma even more painful, China’s determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.

Bwa-ha-ha-ha! Your pitiful schemes are doomed to failure! The invisible hand will crush you!

Maybe.

But maybe not.

I would suspect that the window of opportunity for condescending sarcasm by arrogant Western economists is closing fast.

Despite half-hearted attempts to blame Chinese T-bill purchases for fueling the West’s propensity toward criminally reckless lending, the signature financial collapse of the last 80 years was engineered by the genius economists of America and Europe, not the dumbass mercantilist Commie bureaucrats of Beijing.

And, in a couple years, it may seem better to have a trillion or two in the bank—as China does—instead of piling up a trillion or two in deficits—as the U.S. is doing.

We’ll see.

Meanwhile, China is also taking concrete steps to use the yuan for international settlements in transactions with Asian countries, promoting yuan transactions by Hong Kong banks, and preparing to sell some yuan denominated bonds.

The settlement efforts are actually modeled on old business arrangements between China, Vietnam, and other ostracized Communist countries back in the day when nobody had dollars and the RMB had to be used to keep score.

In other words, a logical, pragmatic regional approach to the nagging dollar problem, and not piece of foolhardy, grandiose global legerdemain.

Behind Mr. Mallaby’s sneering I detect, perhaps wrongly, the frustration of an economist who sees China dodging the bullet once more.

If China comes out of the current global recession looking pretty good, this will be the second time in the last twenty years that its monetary and forex policy confounded the naysayers, first time being the 1997 financial crisis brought to Asia courtesy of deregulation, George Soros, and the IMF…

…and the RMB exchange rate hawks centered around ex-IMF research department director and determined panda kicker Michael Mussa, Nicholas Lardy, and Morris Goldstein at the Peterson Institute may be forced to examine the assumptions that underlie the view that China’s refusal to float the RMB is counterproductive and futile.

New Day in North Korea Policy?

I have a feeling that Pyongyang, taking a leaf from Iran’s book (and its detention and subsequent release of American journalist Roxana Siberi) has the idea of releasing the two hapless American journalists Laura Ling and Euna Lee--who were just sentenced to twelve years of hard labor for illegally entering North Korea from China and alleged “hostile acts”—as a goodwill gesture to the United States.

It will be interesting to see if the Obama administration will consider the journalists’ release as an adequate olive branch for resumption of talks.

In a sense of where the goalposts are set for hostage-journalists, Bill Richardson, go-to guy for North Korean jawboning (unless Al Gore gets into the act) said:

“Talk of an envoy is premature because what first has to happen is a framework for negotiations on a potential humanitarian release. What we would try to seek would be some kind of a political pardon.”

Hopefully for Ms. Ling and Ms. Lee, the Obama approach to North Korea will gain some traction.

When the old arguments about North Korea resurfaced, I wondered if I could recycle my Korea posts from the Bush administration under the heading SSDD: Same [Stuff] Different Day.

All the familiar soft-power tropes of the confront-Pyongyang years were there: Security Council resolutions, the Proliferation Security Initiative, financial sanctions against North Korean banks, heck even runaway Patriot Act 301 Banco Delta Asia investigation ubermeister Stuart Levey was still there (though the State Department briefing transcripts can’t seem to spell his name properly. Stuart Levy? Hey Stu, don’t stand for that! Freeze their bank accounts til they get it right!).

I wondered if the Obama administration was genuinely or willfully clueless about Kim Jung-Il’s desire for a special relationship with the United States.

The good news, I think, is that the Obama administration has a plan. Not exactly eager engagement, but not just overt hostility or malign neglect, either.

In other words, Different Administration Different Day

The New York Times had a useful North Korea backgrounder a.k.a. supervised spin in the anonymous sourcemobile for longtime passenger David Sanger with Obama administration insiders at the wheel.

The White House essentially put North Korea on notice that the previous exercises in negotiation centered on Pyongyang’s nuclear program won’t be repeated, no matter how many devices Kim Jung-Il sets off.

Because the current foreign policy team has decided that the current regime will never surrender its nukes:

While Mr. Obama was in the Middle East and Europe last week, several senior officials said the president’s national security team had all but set aside the central assumption that guided American policy toward North Korea over the past 16 years and two presidencies: that the North would be willing to ultimately abandon its small arsenal of nuclear weapons in return for some combination of oil, nuclear power plants, money, food and guarantees that the United States would not topple its government, the world’s last Stalinesque regime.

Now, after examining the still-inconclusive evidence about the results of North Korea’s second nuclear test, the administration has come to different conclusions: that Pyonyang’s top priority is to be recognized as a nuclear state, that it is unwilling to bargain away its weapons and that it sees tests as a way to help sell its nuclear technology.

“This entirely changes the dynamic of how you deal with them,” a senior national security aide said.

The unspoken corollary appears to be that, since regime change is also off the table, the United States has decided it can live with a nuclear North Korea—as long as it doesn’t proliferate.

The State Department press briefing on Friday displayed, to my mind, sweet reasonableness and a marked shift from security to economic terms of debate.

Assistant Secretary Philip Crowley resisted the urge to hype the red-meat issue of the trial of Lee and Ling.

He did state the official “ultimate” policy to denuclearize North Korea, but also made the case for engagement by touching on the point frequently harped on by China Matters as the proper point of departure for U.S. policy: that North Korea is an Asian economic dragon en ovo:

We want to get North Korea back into a negotiating process. We want to get them to stop doing things that are destabilizing in the region and start to focus on what it has to do in the future. I mean, if you look at South – at North Korea’s economy, I mean, 30 years ago, it was one of the wealthier countries in the region, and today it is one of the poorest countries on Earth. So I think – and certainly, its neighbors have advanced significantly from an economic standpoint – these facts are known in North Korea. So to the extent that we can find financial levers to put appropriate pressure on North Korea, it’s not – that’s not an end in itself; it is a means to an end.

What we ultimately want is a denuclearized North Korea. We want a country that is acting constructively, beginning to integrate itself into the larger community, act responsibly with respect to its neighbors. That’s our ultimate objective, and we will continue to use whatever levers that we see available and we think will be effective. But our ultimate objective is to get back to negotiations and to get – and to start to once again make progress on the commitments that North Korea has made previously.

…

I would think that over time, the increase in – the gap between North Korea and the rest of the region is growing larger. Those facts have to be known to the people of North Korea. And they eventually – I mean, this is what’s tragic about this whole situation. North Korea is spending billions of dollars to fire off missiles, conduct nuclear tests, and yet they’re not able to feed their people.[emph. added]

But even if talks do resume, North Korea will have to deal with the Obama administration’s stated intention not to enable another expensive and unproductive nuclear boondoggle as a precondition for detailed negotiations.

As Defense Secretary Gates said, “I’m tired of buying the same horse twice.”

In other words, I see the prospect for some systematic “Nixon Goes to China” diplomatic engagement, rather than another session of ritualized extortion centered on Kim Jung Il’s nuclear program.

We’ll see if the Obama administration can display the requisite ritualized aggression at the UN Security Council needed to deflect Republican charges of capitulation and appeasement.

To set the anchor for negotiation, I think the Obama administration is drawing a PSI red line for North Korea that even China may be able live with—and, more importantly, affirm in a UN Security Council resolution: no exports of missiles or missile technology, let alone nuclear technology or devices

Distinct and reasonable Proliferation Security Initiative guidelines—ones that involve inspections only by host navies in their own territorial waters—will, I believe, be important to China.

Little known fact: China was a conspicuous and helpless victim of a-U.S. directed diversion and inspection in the pre-PSI days:

In the Yin He incident of 1993, the Clinton administration alleged that a Chinese container ship was carrying chemical weapons precursors destined for Iran. Diplomatic pressure by the United States prevented the Yin He from docking at any of its planned ports of call. After futile representations and impotent protests by the Chinese government and 20 days in nautical and diplomatic limbo the unlucky vessel finally proceeded to Saudi Arabia’s Dammam Port for a joint inspection of its 728 containers by the United States, China, and the Saudis—which found nothing.

John Bolton’s subsequent effort to purpose the PSI as the tool for an indiscriminate and destabilizing economic blockade of North Korea for the purpose of regime change did nothing to endear the initiative to China.

With only a minor global naval presence, the Chinese are extremely leery of establishing a precedent for the U.S. and/or its allies to barge aboard other countries’ ships in pursuit of whatever.

China will endorse the exercise of a PSI initiative against North Korea gingerly, if at all.

But if the Obama administration can come up with a sanction that China sincerely supports (as opposed to the sanctions of the Bush administration, which targeted China almost as much as North Korea and were openly opposed by the PRC) while holding out the possibility of diplomatic and economic engagement, we might actually see some movement on North Korea.

And Kim Jong Il, eager to secure his son’s succession and a controlled opening to the global economy, might decide that the Obama administration is offering him the best opportunity he can expect from the United States in his dwindling lifetime.

America's Dirty North Korean Secret

There’s nothing new about Kim Jung Il setting off atomic bombs and launching missiles in order to attract attention.

The same thing happened in 2006.

At the heart of North Korea’s seemingly reckless behavior is a strong desire to assert an independent economic and geopolitical role for itself in North Asia.

Lips and teeth rhetoric notwithstanding, North Korea and China have never been that close.

Kim Il-sung was Stalin’s client. China fought against the United States on North Korea’s behalf in the Korean War, but still resents the fact that this exercise in socialist solidarity forced the Communists to abandon their planned invasion of Taiwan and the reunification of the country.

North Korea’s serious economic problems—and its desperate reliance on China’s good offices--began when the Soviet Union broke up and Moscow abandoned its traditional patronage of Pyongyang.

North Korea has never behaved like a loyal ally of China’s, let alone a client.

At one tense moment in their relations, Pyongyang even threatened to open air links with Taipei in retaliation for Beijing’s lack of cooperativeness.

In the minds of the North Koreans, I would suspect that they see their nation as, potentially, another South Korea.

Indeed, the material foundation for an economic miracle in North Korea is stronger than South Korea’s.

It might be said that North Korea’s economic avatar is China’s state-mediated growth, while South Korea relies on a resource-poor, globalized Japanese-style hypereconomy whose long-term sustainability is open to question.

Unlike South Korea, North Korea has abundant supplies of hydropower and coal energy.
The canard that North Korea is “dependent on China for most of its energy supplies” needs to be laid to rest periodically.

In 2006, I took a close look at the North Korean conundrum in a post entitled Intimate Enemies: Pyongyang, Beijing, and the Nuclear Factor.

It gives an idea of the risibly small import needs of North Korea, in contrast to the immense foreign food and energy inputs required to sustain the South Korean economy.

According to the Federation of American Scientists, North Korea has significant reserves of coal and hydropower and continues:

Oil accounts for about 6% of total North Korean primary energy consumption, and is largely limited to non-substitutable uses such as motor gasoline, diesel, and jet fuel. Oil is imported from China and the Soviet Union by pipeline, and from Iran by sea.

North Korea relies on coal for power generation, exports over $100 million of coal to China per annum, and even exports electric power to China on occasion, presumably when it is desperate for a quick shot of foreign exchange. Last year it imported about $286 million dollars worth of petroleum products from China, mostly crude.

In contrast, South Korea imports 70% of its grain and 97% of its energy needs—a combined tab of about $20 billion per year—to keep its economy humming.

The difference, of course, is that South Korea is integrated into the global capitalist economy and easily generates the hard currency needed for its imports. North Korea went the other way, allying with a socialist bloc that collapsed catastrophically in 1989 and now has to scramble to come up with the foreign exchange to finance its imports.

It is certainly true that North Korea is dependent on China for most of its petroleum needs.

China’s insistence on doling out diesel and other products only in return for hard currency has certainly contributed to the devastation of North Korea’s agriculture and industry.

Energy supply is undoubtedly a sore point in the already fraught relations between the two countries and I suspect China is squeamish about playing the petroleum card any more aggressively than it already has, lest it provoke a furious outburst from Pyongyang.

The partial energy blockage is, in one sense, counterproductive. It feeds the North Korean elite’s sense of grievance and provides it with a useful external scapegoat for its enormous troubles.

I think it would be worth considering that North Korea’s highly disciplined, militarized autocracy is nationalistic and patriotic does not consider itself a collection of criminal fiends guzzling imported cognac while dancing on the crumbling bones of its suffering citizens.

It considers itself a society that, if it was able to shed its pariah status and rejoin the family of nations as a PRC-style mixed socialist export-oriented economy (with an impoverished and ill-nourished workforce grateful for any wage above the starvation level), would probably thrive and have no problem importing the relatively insignificant energy inputs it needs to survive.

North Korea wants improved relations with the United States, and to engage in a controlled opening of its economy and society. In return, Pyongyang is offering itself to Washington as a counterweight to Beijing in North Asia.

The dirty secret of U.S.—North Korea relations is that the United States, unwilling to take positive measures that would prolong the survival of the Kim Jung Il regime, let alone midwife its return to respectability in the international community, has decided to let the situation fester—and the North Korean people rot in a misery that is probably eminently reversible.

Does the Obama Administration Have Any Clue About North Korea?

The Bush administration refuses to deal with Kim Jung Il





















The Obama administration calls on China to handle the North Korea mess


Ah, for the good old days of the Bush administration.

So simple, so easy to predict and analyze.

One always knew that it would make the stupidest, most violent, and most vehement response to any policy irritant.

Like Curly of the Three Stooges banging himself on the head with a two-by-four to rout a pesky fly.

I am willing to give the Obama foreign policy team more credit.

But maybe we’ve only upgraded from the Three Stooges to the Marx Brothers.

I find the willful bewilderment of the U.S. foreign policy apparatus on the issue of North Korea’s recent nuclear and missile tests utterly baffling.

The explanation, to me at least, is rather simple.

North Korea is facing hostility from the right wing government in South Korea. It is dealing with calculated indifference from China, which is more interested in links with Seoul than Pyongyang.

North Korea is begging for one of those (I’m sorry, but it has to be said) “Nixon goes to China” moments from the Obama administration, so it can improve its economic and geopolitical position (and secure the survival of the current set of characters running things in Pyongyang) without worrying about the US taking advantage of the regime destabilization opportunities that will be created by any attempt to open up an profoundly impoverished society sandwiched between three very prosperous states: China, South Korea, and Japan.

Kim Jung Il wants to shuffle the geopolitical deck in North Asia by closing the books on the Six Party talks (mediated by China and a necessary evil when Pyongyang faced the concentrated hostility of the Bush administration) and negotiating directly with the United States.

Banging off nuclear tests and firing missiles don’t look like the best way to attract Washington’s attention, but Kim Jung Il is doing the best with the meager hand he’s got.

When the tired old tropes about insane dictators are trotted out, I hope someone realizes that it’s a matter of survival for small states disliked by the U.S. to be careful, rational, and calculating; it’s only superpowers like the United States that can afford occasional spasms of insanity like the Bush administration’s plan to democratize the Middle East through invasion.

Kim has a plan and he’s currently considering what kind of provocation will force the United States to deal with him, without endangering the survival of his regime.

Therefore, earnest calls on China from the United States to handle the unpleasant, grinding chore of restraining and cleaning up after the North Korean pit bull are unlikely to yield positive results because

a) the North Koreans are trying to break away from Chinese influence and will fight U.S. efforts to force them back into the framework of the Six Party talks;

b) as long as North Korea is politically and diplomatically isolated from the rest of the world and hopelessly dependent on Chinese assistance and diplomatic good offices, it’s in China’s interest simply to let the matter fester without a resolution of the nuclear and missile issues that worry Japan and the western powers.

The analogy isn’t perfect, but we’re basically telling the wife who’s screaming out the window that she’s getting battered by her spouse to go back and work things out with her husband.

The way the current policy is evolving, it will simply increase China’s leverage on North Korea without achieving significant improvements in the regime’s behavior.

One would like to think this point is clear to the Obama administration.

Maybe they’ve got the whole situation scoped out, have decided that the North Korean problem will be solved in Obama’s second term (i.e. never) and have consciously made the call to let Kim stew in his dysfunctional relationship with the Chinese.

Then again, maybe they’re just clueless.

But in either case, for the sake of the long-suffering North Korean people, I hope the Obama administration has more in mind than malign neglect.


Nixon-Mao image from The New Yorker

Article on Guantanamo Uyghurs Up at Asia Times Online

I wrote an article Uyghurs Sold Out by the US for Asia Times Online.

It describes how the Republican counterattack on President Obama’s Guantanamo policy torpedoed the simultaneous release of 17 Uyghur detainees at Guantanamo to destinations in the United States and Europe.

The release was closer than most people realize.

There are indications that Obama hoped to announce the Uyghur release as part of the rollout of his new post-Guantanamo security and detention policy last week.

The twist was that European governments—led by Germany—had agreed to take Uyghurs only if the United States took some, too and bore the brunt of China’s displeasure.

When the Republicans stampeded the Congress on the Guantanamo issue and Harry Reid joined the NIMBY posturing about chunking terrorists in America’s neighborhoods, the Uyghur release went pffft.

The Republican effort was spearheaded by Newt Gingrich, who wrote a shamelessly misleading and inflammatory op-ed about the Uyghur detainees, characterizing them as dangerous, television-flinging Islamicist terrorists.

The question of interest: did Mr. Gingrich unwittingly scotch the planned release in the course of an opportunistic attack? Or did he knowingly seize upon the Uyghur issue in order to sabotage the release and deny Mr.Obama a signal and significant foreign policy victory?

In either case, it looks like another dishonorable chapter in the biography of America's Machiavelli.

WaPo’s Colum Lynch Gets the North Korea BDA Story Bass Ackwards

I heard one Colum Lynch, UN correspondent for the Washington Post, pontificating on the current North Korean nuke crisis on PRI (Public Radio International).

Lynch joined the PRI anchor, Lisa Mullins, in lauding the financial sanctions imposed on Banco Delta Asia in 2005 by the Bush administration as an example of " some measures against North Korea that worked" i.e. a model of effective multi-lateral soft-power shenanigans.

I understand that liberals are enamored of soft power as a more desirable alternative to the “bomb ‘em all and let God sort ‘em out” unilateralism of the Bush administration.

But listing the BDA circus as an example of the exercise of multi-lateral, rule o’ law soft power is nonsense.

The BDA sanctions—and the hardliner policy behind them—drove North Korea to build and explode a nuclear bomb.

North Korea only resumed negotiations with the U.S. when the BDA sanctions were abandoned.

It’s an embarrassing chapter in neo-con history; I guess that’s why we don’t hear much about it.

Except here.

Patient readers of this blog know that I posted non-stop on the BDA situation in 2006 and 2007.

The Banco Delta Asia sanctions were a complete failure.

They were instituted by anti-North Korean hardliners within the Bush administration in order to advance a regime change agenda on the cheap.

They were not an exercise in multilateralism. They were an attempt to impose a unilateral American North Korea policy when the Bush administration was unable to persuade China, Russia, and pretty much anyone else to institute an economic blockade against Pyongyang.

We didn’t sanction North Korea; we sanctioned our allies. And we threatened to sanction China, whose sympathy and support is critical to any North Korea policy.

Banco Delta Asia was chosen as a test case, to threaten China with an attack on their banking interests if they didn’t toe the U.S. line on North Korea.

Contrary to Mr. Lynch’s ignorant assertion that North Korea employed BDA as a conduit to launder counterfeit currency, the only confirmed instance of North Korean account holders attempting to deposit counterfeit cash in BDA occurred in 1994, and was detected and reported by BDA. .

The hardline policy epitomized by the BDA sanctions collapsed soon after North Korea exploded its nuclear bomb.

Instead, Secretary of State Rice turned to Christopher Hill to negotiate with North Korea within the framework of the Six-Party talks mediated by China.

After an agreement was reached, the Treasury Department deliberately obstructed a key element—the return of $24 million dollars in North Korea-related accounts at BDA to Pyongyang—for three months in a futile effort to sabotage the deal.

It’s a fascinating story.

When the history of the decline of the U.S. financial system is written, the BDA fiasco will probably be recognized as a tipping point, when the Treasury Department emerged as the Bush administration’s international hatchet man and its traditional image as an honest broker and diligent guardian of the integrity of the international financial system was irrevocably tainted.

Unless, of course, that history is written by Colum Lynch.

Ugh.

One could do worse than to read the reporting of McClatchy’s Kevin Hall, the only journalist, in my opinion, who got the North Korean sanctions story right.

Of course, you could also do worse than read the 58 posts I wrote on North Korea between October 2006 and October 2007.

Here’s one.

Fittingly, it dissects a craptacular piece of mainstream media reporting.

Also, for those looking for an insight into the motives behind the current bomb and missile tests, the article points to an abiding preoccupation of North Korea: the hope that the United States will respond to these provocations by entering into direct negotiations with the North Korea to normalize relations, thereby enabling Pyongyong to reduce its reliance on its overbearing and not-too-friendly ally, the People's Republic of China.

Thursday, July 19, 2007

Two Lost Years

History Gets Whacked by Lazy Time Magazine Stenography on North Korean “Soprano State”...

...But Lawrence Wilkerson Provides a Much Needed Corrective

With the shutdown of the reactor at Yongbyon, the Six Party agreement to denuclearize North Korea has lumbered into its next stage.

That means it’s time for all the hardliners who eagerly predicted the collapse of the agreement (and, indeed, may have worked actively to sabotage it by hindering the unfreezing of the North Korean accounts at Banco Delta Asia in Macau) to avoid unwelcome comparisons between their own counterproductive measures and the current success of the engagement policy.

Facts must be spun, failure must be obfuscated, reputations must be burnished and, I suppose, think tank sinecures must be defended until indifference and fading memory permit these indefatigable and unchastened screwups to return to positions of power within the U.S. foreign policy bureaucracy.

So it looks like it’s time once again for a complacent press will provide political cover to anxious Beltway apparatchiks in return for access to a selective slice of the inside story...

...one that glosses over a crucial two year period of failure—2005 and 2006—during which North Korea policy was under the undisputed control of the hardliners.

Case in point: Time Magazine’s expose of Kim Jung Il, “The Tony Soprano of North Korea.”

The article draws on assertions by David Asher, currently at the Heritage Foundation, who worked as a senior advisor in the State Department until mid-2005.

Mr. Asher was the driving force behind the hardliners’ aggressive implementation of the Illegal Activities Initiative (IAI). The IAI focused the enforcement actions of various U.S. departments on alleged illegal activities by North Korea, including cigarette counterfeiting, the meth trade, Supernote counterfeiting, money laundering and trade in protected species.

Mr. Asher’s twin legacies will probably be 1) using the IAI to instigate the Patriot Act Section 311 investigation of Banco Delta Asia in Macau that turned into an embarrassing fiasco and 2) his notorious but publicly unsupported statement that the investigation was a part of a planned effort to intimidate China by “killing the chicken to scare the monkeys”.

Time’s authors, Bill Powell and Adam Zagorin, could have grilled Mr. Asher about his role in the Bush administration’s hardline North Korean diplomacy in 2005/2006, which ended in North Korea’s detonation of its first atomic bomb, the failure to create an effective regional coalition to support Washington’s policy of confrontation against Pyongyang, the departure of the key hardline architects, Bolton, Joseph, et. al., and the laborious dismantling (and discrediting) of the ineffectual U.S.-led financial blockade that failed to bring Kim Jung Il to his knees.

Too bad they didn’t.

The story of how the hardliners drove America’s North Korea policy into a ditch is an interesting and important one, and it isn’t too hard to dig out.

Recently, I had the pleasure of corresponding with Lawrence Wilkerson, Secretary of State Colin Powell’s Chief of Staff during the first George W. Bush administration.

My attention had been drawn to Mr. Wilkerson by the contrast between his perspective on the IAI and a recent claim of Mr. Asher’s.

Lawrence Wilkerson, as reported in the Wall Street Journal in 2005, had this to say about the IAI:


Larry Wilkerson, who was former Secretary of State Colin Powell's chief of staff, said in an interview that the effort -- which officials named the Illicit Activities Initiative -- was launched to augment, rather than undercut, diplomacy.

In Congressional testimony in 2007, David Asher spoke of his resistance to the U.S. concession on Banco Delta Asia that ended the standoff concerning the frozen North Korean funds, and provided his characterization of the IAI::

“We designed this initiative with the goal of countering these [illicit] activities themselves...not necessarily supporting the Six Party talks.”

Well, which was it? Was the IAI designed for diplomacy...or something else?

Mr. Wilkerson, who, one might say, was present at the creation, commented to China Matters:

[The North Korea Working Group] was the most successful interagency group of the first Bush administration. It had members from every element of the federal bureaucracy. We forged a consensus, a way ahead, a plan of attack...

The primary reason of the Illicit Activities Initiative was to give us a tool for negotiating the Six Party agreement. That tool would be the "stick" with which we would attempt to make the DPRK negotiators more receptive to our desires with regard to their nuclear and missile programs, as well as their illicit activities. ...

David Asher liked to assume there was a real crimefighter I’m going to get you [component to the IAI]. [But it was always meant to be] orchestrated with astute diplomacy.

... I believe that once we had gone, John Bolton and others put the IAI to use as a stand-alone policy to attempt to force regime change in Pyongyang by drying up the money with which Kim Jong-il essentially kept his generals happy.

As to whether getting the North Koreans to walk out of the Six Party talks was part of the original, devilishly clever scheme for the Illicit Activities Initiative, I had this exchange with Mr. Wilkerson:

Was the BDA investigation part of the plan? Was the North Korean walkout in 2005 a contingency you had planned for?

No. [In President Bush’s second term] other people, John Bolton, Bob Joseph took away the dual track. They lusted after it, got ahold of it [the IAI], went whole hog [to use it to destabilize North Korea ].

That wasn’t so hard, was it?

In contrast to Mr. Asher’s assertion, Mr. Wilkerson states that the Illicit Activities Initiative was designed to complement American diplomacy in the Six Party talks.

So it might be enlightening for Mr. Asher to explain how the Illicit Activities Initiative was repurposed at the beginning of President Bush’s second term as an acceptable substitute for Six Party diplomacy...

...so that North Korea walked out of the Six Party talks, detonated a bomb, and demanded a humiliating retreat by the United States on the signature action of the Illicit Activities Initiative—the action against BDA...

...so that the talks could resume in early 2007 under China’s aegis at essentially the same point we were at in early 2005...

...or during the Clinton administration for that matter...

...except of course that North Korea now has the atomic bomb...

...and enough plutonium stockpiled to make several more.

Hardly a glowing endorsement for the decision to pursue the Illicit Activities Initiative independently of (and seemingly at the expense of) Six Party diplomacy

I did request a comment from Mr. Asher, but he didn’t respond.

Maybe Time had the same problem.

Of course, now that the hardliner policy failed with a thud (or the crump of an underground nuclear test), it seems to be in Mr. Asher’s interest to downplay the marked discontinuity in North Korea policy during the first two years of President Bush’s second term, as well as the role Mr. Asher played in that redirection.

Instead, Time got another retelling of Mr. Asher’s increasingly shopworn tales concerning Royal Charm and Smoking Dragon stings against alleged illicit North Korean activity, albeit with some of that patented Time factchecking.

That would seem to be the point, as far as Mr. Asher is concerned: keeping the focus on continued North Korean perfidy instead of the spasm of hardliner ineptitude that gave North Korea the bomb and left America playing second fiddle to China in North Asia.

There is some news, albeit of a negative sort, buried deep in the end of the article--the relative softpedaling of North Korean counterfeiting allegations.

Time writes:

According to U.S. and South Korean intelligence reports, the North has been producing the counterfeit bills at least since 1994. The South Korean intelligence service two years ago said it could confirm production only until 1998, but at least twice in recent years, claim U.S. and South Korean sources, the U.S. has presented the South Korean government with supernotes said to have been produced in 2001 and 2003.

A 2006 State Department estimate puts the amount of counterfeit currency in circulation at $45 million to $48 million. Estimate is the key word. Of all the illicit businesses from which North Korea profits, counterfeiting is the one about which outsiders know the least. U.S. officials say they don't believe the North Koreans produced the equipment to print such high-quality counterfeit bills. If that's the case, where did they get it from? No U.S. agency interviewed for this story, including Treasury, State and the Secret Service, could say. U.S. sources also say they do not know where in North Korea the notes are produced.

It does seem likely, however, that Kim's government is running the scam. [emphasis added]

Pretty weak beer, especially when compared to the prior allegations of extensive Supernote counterfeiting by North Korea that formed the central justification for the global financial campaign orchestrated against North Korea in 2005 and 2006 by the hardliners.

Heritage Foundation researcher Balbina Hwang—who currently occupies Mr. Asher’s advisor slot at the State Department—asserted that North Korea annually produced hundreds of millions of dollars worth of Supernotes.

Supernote counterfeiting was deemed an act of economic warfare, an act that Ed Royce (Rep., California, and the voice of the hardliners on the House Foreign Affairs Committee) darkly opined would justify the financial implosion of the Pyongyong regime by the United States.

In 2006, David Asher characterized North Korea’s Supernote involvement as follows :

The US Secret Service has been investigating the circulation of the “supernote” counterfeit dollars since 1989. Last year it charged that the counterfeit US notes were “manufactured in, and under auspices of the government of, the Democratic People’s Republic of Korea (“North Korea”). Individuals, including North Korean nationals acting as ostensible government officials, engaged in the worldwide transportation, delivery, and sale of quantities of Supernotes.” As the Secret Service has now revealed, the Federal Reserve Bank has come into the possession of roughly $48 million of these notes in the last fifteen years. Some argue that this shows that counterfeiting is just a drop in the bucket. Let me argue against this view.


To be fair, it wasn’t just David Asher.

According to Mr. Wilkerson, when he was at State before 2005 the briefings were pretty categorical:

I sat in meetings with the Treasury and Secret Service and they essentially convinced me [that North Korea was producing Supernotes inside North Korea and trafficking in them].

Now he adds a self-deprecating verbal shrug:

But I thought there were WMDs inside Iraq too.

Maybe the reporting of McClatchy and the investigations of Karl Bender concerning the immense technical and logistical hurdles Pyongyang would have had to overcome—and the paucity of evidence for any significant operation--are persuading the administration to back away from the North Korean Supernote allegations.

Or maybe, with the North Korean crisis cooling off, the government decided simply to stop yanking our chain about Kim Jung Il’s private Supernote factory, and allow the location of the purported facility to continue its hegira to our next designated boogie man (prior to North Korea, the United States had cited Lebanon’s Bekaa Valley a.k.a. Hezbollah, and then Iran as sources for the insidious notes).

In any event, the shift from a casus belli involving hundreds of millions of dollars in Supernotes produced inside North Korea to Time’s “we don’t know where or how much or how they do it or if they’re still even making them” is quite a step back.

While Mr. Powell and Mr. Zagorin missed the significance of the apparent retreat on the Supernote story, they also managed to add a few errors to their reporting about this hot-button issue:

a) Contra their statement quoted above, “estimate” is not the “key word” in describing the $45-$48 million number for circulating counterfeit currency; the key word is “confidence”.

Mr. Asher has energetically hyped the possibility of an enormous undetected North Korean Supernote menace by dismissing Treasury’s data on counterfeits as a mere “estimate”.

However, the Treasury Department has studied the international traffic in counterfeit U.S. currency exhaustively in a multi-year effort by the Federal Reserve Board involving visits to dozens of countries and is confident—with considerably more authority than Mr. Asher can muster-- that there is no significant reservoir of undetected counterfeit notes of any kind, including Supernotes.

b) The total of $45--$48 million in circulation is all counterfeit currency, not just Supernotes.

c) Only $45 million in Supernotes has been seized in the last fifteen years, as Asher himself says in his other statement. That’s an average of $3 million a year (for perspective, about $500 billion in US currency is in circulation worldwide).

Humph. I’ll bet Mr. Luce only needed one reporter to get it all wrong, back in the day.

Extensive Supernote counterfeiting was an important allegation not only because of the provocative and symbolic character of the outrage against America’s currency.

It was the only case in which the United States could claim to be the primary injured party and assert the right to lead a global action against North Korea outside the frustratingly incremental, multi-lateral Six Party and UN processes reserved for the nuclear, WMD, and missile issues.

The other major examples of alleged North Korean illicit activities did not have the United States as their primary target—they were concerns for China and Japan.

In both these cases, even with Japan’s highly confrontational stance toward North Korea, the injured parties did not see fit to characterize the North Korean activity as a casus belli that could not be handled by local and international law enforcement.

If the North Koreans are churning out huge quantities of counterfeit cigarettes, the main destination would be China, where an astounding percentage--over 90%--of imported cigarettes on the market are illicit—either smuggled or counterfeit.

If North Korean factories were making meth, the primary market would be Japan.

According to reports I’ve seen, meth is tolerated in Japan, presumably because it encourages the get-up-and-go-and-go-and-go-go-go ethos that is supposed to make Japanese society tick, and the yakuza’s drug trafficking is tolerated as long as it sticks to meth and stays away from cocaine and opiates. As a result, the market is served by immense illegal factories in the Philippines, Taiwan, and/or whatever locale offers the best combination of access to ephedrine, lax enforcement, and corruption.

The business is run by sophisticated, flexible, and internationalized criminal cartels whose entrepreneurial acumen is one of the true faces of 21st century globalism.

Which brings me to a gripe about the soundbite du jour on North Korea, “the Soprano State.”

David Asher et. al. probably found this formulation very useful, as the concept of a North Korean state fundamentally criminal in its nature justified an attack against any and all North Korean activities without the need to build a persuasive case in each and every instance.

I wouldn’t be surprised if the North Korean government, at a high level, countenances some dirty dealing. But I don’t think they’re the Sopranos; I think they’re the Gang Who Couldn’t Shoot Straight, relatively ineffectual amateur criminals stuck in the low-profit links of the Asian criminal supply chain.

Does anybody think the North Korean bureaucrats and generals can outhustle and outmuscle the fearsome Chinese triads who, if one might recall, were the designated Asian menace back in the 1990s?

I believe North Korea’s fundamental identity is that of a sclerotic dictatorship trying to cling to power and revive its moribund economy in an environment of overt US and Japanese hostility and Chinese malign indifference. Its willingness to engage in criminal activity is moderated by the requirements of its diplomacy and the need to achieve some sort of modus vivendi with the West that will allow Pyongyang to share in the immense river of trade and investment cash flowing through North Asia via South Korea, Europe, and China today.

Which means I believe this piece of analysis in the Time article is just plain wrong:

But even if Pyongyang agrees to disarm, there's little reason to believe that the regime will abandon its nefarious business dealings. By keeping Kim's top military and security officials happy, such lucrative enterprises help the dictator maintain his grip on power and resist pressure to open up the North's broken, Stalinist economy. [emphasis added]

Fact is, Kim Jung Il is trying to strengthen his regime by a controlled opening to the West—as the Chinese did in the 1980s—through special economic development zones and preferential policies to attract foreign investment.

Kim would love to preside over a one-party post-socialist business-friendly state that could claim US appreciation and support for acting as a counterweight to China in Asia.

Prospects for a Nixon-goes-to-China rapprochement have, of course, been pretty dim during the Bush administration.

The US campaign to block North Korea’s foreign trade and investment-related initiatives—and prevent Kim from prolonging his rule by presiding over a more prosperous and globalized North Korean economy—would make for an interesting story by itself.

The story would include items like our serial harassment of the Daedong Credit Bank—the foreign-owned North Korea bank meant to promote foreign investment in the Hermit Kingdom, that happened to account for 25% of the money tied up in Banco Delta Asia—and efforts to discourage participation in the Kaesong Industrial Park, North Korea’s flagship export processing zone catering to foreign manufacturers.

But I guess it’s too complicated.

The simple narrative of North Korea as a “Soprano State” is comforting, because it allows us to ignore or disdain the forces acting against American diplomacy in the region.

That, of course, is the problem.

It’s reckless and dangerous to simplify the North Korean issue to that of a repulsive toad king that the world would gladly spit out of its mouth, if only it got a strong enough slap on the back from the United States.

That kind of mindset makes it too easy for lazy and cynical bureaucrats to promote badly-conceived policies and then excuse and obscure their own failures by exploiting the genuine but also carefully cultivated abhorrence that America feels for Kim Jung Il.

Looking at the current state of play on the Korean peninsula, we should be asking:

Was it worth it to abandon nuclear diplomacy for two years to pursue provocative but relatively insignificant allegations of North Korean wrongdoing in a futile effort to get Kim Jung Il to dance to our tune?

In other words, was pursuing the Illicit Activities Initiative more important than supporting the Six Party talks, as Mr. Asher seems to think?

Now, with North Korea possessing the bomb, and lined up with China, Russia, and South Korea in a position of advantage in North Asia, the answer seems obvious.

I just wish Time had asked the question.