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[Research Preview] Finding Loopholes in Sanctions: Effects of Sanctions on North Korea’s Refined Oil Prices

January 6, 2020

By Kyoochul Kim, Fellow at KDI


※ This article is part of KDI Journal of Economic Policy, November 2020

During 2016 and 2017, North Korea conducted three nuclear tests and four missile launches, and in response, the international community strengthened its sanctions against North Korea. The sanctions are aimed at deterring North Korea from developing nuclear weapons, and in order to achieve this, the main means are to block the inflow of foreign currency into North Korea and to ban the import of goods related to its nuclear development efforts. Specifically, the main goals of the sanctions against North Korea is to ban the exports of anthracite, processed garments, and marine products, with the goal of limiting the acquisition of foreign currency by North Korea, and to ban the import of machinery, setting a limit on the amount of oil (crude oil and refined oil products) introduced and thus hurting the North Korean economy. To evaluate whether these economic sanctions were effective as a means to achieve these goals, verification of the effectiveness of sanctions against North Korea must be regarded as a very important task.

Discussions of the effectiveness of sanctions against North Korea are mainly focused on North Korea’s foreign trade. The impact of sanctions, identified by trade data, is easily confirmed, with North Korea’s exports amounting to $260 million in 2019, only nine percent of the $2.9 billion in 2016, just before the sanctions. Moreover, at the 2018 US-North Korea summit in Singapore, the effectiveness of sanctions was gaining strength again, as it was known that Kim Jong-un’s most important request was to lift the sanctions. On the other hand, if we look at economic indicators inside North Korea, such as rice prices and market exchange rates observed in informal markets there, it appears that sanctions have yet to exert any influence, as these figures, used to determine North Korea’s price index, remain fairly stable even after the sanctions. Therefore, concluding that the sanctions were effective against North Korea remains controversial.

In North Korea, like other countries, oil resources are necessarily very important strategic materials. Because North Korea is not an oil-producing country, the introduction of crude oil and refined products is directly related to the stability of the North Korean regime. There have been numerous UN Security Council sanctions against North Korea, but limiting the introduction of oil is the last stage. As the sanctions against North Korea have gradually strengthened, it can be said that the international community used oil sanctions as the last resort. The oil restriction was an important issue for both North Korea and the international community, as some say that China and Russia, permanent members of the U.N. Security Council and in amicable relations with North Korea, reached an agreement only at the end.

This paper initially examines how sanctions against North Korea affected how the market prices of refined oil products (gasoline and diesel), the main items under sanction, fluctuated in North Korea. The study also hypothesizes and explains why sanctions have or have not affected the prices of refined petroleum products. According to the analysis, the prices of refined petroleum products traded in North Korea’s marketplaces, though they were temporarily affected by sanctions, remained stable in the long run. This suggests that there has not been much change in long-term supply and demand levels, although there have been short-term fluctuations in oil prices due to sentimental factors for North Koreans.

If these findings are accurate, this leads to the question of how the market price of refined oil in North Korea can remain stable despite the fact that the introduction of refined oil is restricted due to the sanctions. This can be explained by annual reports by the UN Security Council’s North Korea Sanctions Committee, which estimates the magnitudes of illegal transshipments of refined petroleum products. These reports suggest that even after the sanctions restricted the introduction of refined petroleum products, the amount of refined petroleum products procured by North Korea may not differ greatly from that before the sanctions. This does not mean that sanctions are completely useless or ineffective. With regard to essential strategic materials such as oil, the North Korean authorities will seek a loophole in the sanctions, which could halve their effects.

This study is organized as follows. Chapter 2 reviews recent studies on economic sanctions. Chapter 3 outlines international sanctions against North Korea and summarizes the ongoing discussion about the effectiveness of sanctions against North Korea. Chapter 4 examines data on North Korea’s refined oil prices and other related variables. Chapter 5 constructs an econometric model to analyze the impact of sanctions on North Korea’s refined oil prices and presents the results. Chapter 6 hypothesizes the reason for this outcome and presents supporting evidence. Chapter 7 summarizes the discussion and concludes this paper.

※ This paper is an extension of Kim, 2018, Analysis of North Korea’s Oil Trade and Policy Implications, Policy Study 2018-10, KDI (in Korean).
 
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The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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