TRYING TO TAME THE INFLATIONARY BEAST

C O N F I D E N T I A L SECTION 01 OF 02 SHENYANG 000008

NOFORN
SIPDIS

DEPARTMENT FOR EAP/K, EAP/CM, INR

E.O. 12958: DECL: TEN YEARS AFTER KOREAN REUNIFICATION
TAGS: CH ECON EFIN EIND EMIN KN KS PGOV PREL SENV
SUBJECT: TRYING TO TAME THE INFLATIONARY BEAST

Classified By: Consul General Stephen B. Wickman. For Reasons 1.4 (b) a
nd (d)


1. (C) Summary: On January 3, a Consulate contact who delivers
oil to North Korean partners told PolOff in strict confidence
that millions of dollars currently sit unclaimed in China
Merchant Bank accounts opened by North Korean businessmen and
government officials recalled from China in the spring of
2009, caught in the DPRK's currency reform, which was likely
a vain attempt to stem inflation. Without improved ties to
the U.S., the DPRK will show no improvements, despite
ambitious plans. He compared the DPRK business environment
to that of the former Soviet Union. While "face" is important
in negotiating honestly, system cleavages ensure that deals
are broken for personal gain. End Summary.

A POLICY DESTINED FOR FAILURE?
--------------

2. (C) According a Dandong-based oil trader, who requested
strict protection in a meeting with Poloff on January 3,
millions of dollars currently sit in the China Merchants Bank
in accounts held by North Korean businessmen and government
officials recalled from China during the initial promotion of
Kim Jong-un as successor in the spring of 2009, while Kim
Jong-il recovered from his stroke. The accounts, opened using
legitimate North Korean passports (i.e. issued to the account
holder),borrowed North Korean passports, or Chinese I.D.
cards, can only be accessed with a code known to the account
holder. The contact opined that the money will likely remain
untouched for the foreseeable future due to new currency
policies making it difficult to use and hold foreign currency
in North Korea.


3. (C) Also according to our contact, the currency exchange
and revaluation came as the DPRK government took steps to
combat high inflation and has had a negative impact on
business. He compared the situation to rampant inflation in
Ecuador in the early 2000s and pointed out that on his most
recent trip to the DPRK) which pre-dated currency reform -
one kilogram (kg) of sea cucumbers cost more that USD 110 per
kg. He called this a massive price increase compared to a
previous trip three or four months prior and representative
of economy-wide inflation. Due to the currency revaluation,
our contact did no business in North Korea in the month of
November, despite having contracts in place for continued oil
delivery. This caused the contact's DPRK partner to lose
several hundred thousand dollars. The contact did not specify
the amount of his own losses. While business has since
resumed, most trade between China and the DPRK remains at a
near standstill. He added that civil servants and the middle
class (e.g. teachers) were particularly hard hit as they
cannot exchange money earned outside of their jobs without
explaining the origin of the money.


4. (C) The contact believes the new currency policy will not
have the intended effect of controlling inflation. The
closing of markets that used foreign currency has compounded
the scarcity problem. Nearly all trade must now be done in
North Korean won, though our contact's oil trades continue to
be dollar-denominated. Finally, the North Korean people
continue to lack faith in the new currency, which is causing
continuing economic uncertainty and creating high demand for
ever scarcer goods, according to our contact.

A LITTLE HELP HERE?
--------------

5. (C) Our contact also shared his opinions on broader DPRK
policy. He believes North Korea wants first and foremost
improved ties with the United States, though the nuclear
issue makes this unlikely. He has also heard talk in North
Korea of new measures to improve agricultural production and
light industry, and to increase foreign trade. However,
because of the DPRK's increased restrictions on coal and
timber exports, limits on mining exports, lack of an
industrial base, and limited ability to increase agricultural
outputs, he sees progress as highly unlikely. He pointed to
the contradiction between North Korea's attempts to seek
improved ties with the outside world while simultaneously
demanding greater domestic economic control. He also
reported that overfishing has lead to decreased seafood
production and exports. Without improved ties to the U.S., he
concluded, North Korea will not recover.


SHENYANG 00000008 002 OF 002



6. (C) Our contact compared doing business with North Korea to
doing business with the former Soviet Union. North Koreans
(like the Chinese) place a high importance on issues of
"face" and contract negotiations are pursued in good faith.
As in the Soviet Union, however, the system does not support
good-faith contracts, resulting in North Korean supervisors
breaking contracts for their own gain. He experienced
significant cash losses due to broken contracts when he first
began dealing with the DPRK in the 1992-97 period. As a
result, he ceased dealing with many former clients and now
only does business with a few powerful, credit- and
trustworthy official counterparts in the oil and logistics
business. He generally sources oil destined for western
North Korea from Russia, while sourcing oil sent to the east
coast from southern China. The ships he uses to deliver oil
carry 2,000-3,000 tons. He has provided 12 trucks that
currently run throughout the DPRK carrying goods. The trucks
and shipments are managed by a state-owned, North Korean
joint-venture partner.


7. (C) During our meeting, the contact stopped several times
to reiterate his desire for our conversation to remain
private. He does not want his name known. He works for a
powerful Chinese State-owned enterprise, and the oil
companies with which he does business in North Korea are
powerful organizations in their own right. He also said DPRK
secret police are extremely effective and powerful, even in
running operations across the border in China. He often
looked around the room nervously during our meeting, rubbing
his neck, face and hands. He said Australian and Canadian
reporters had somehow come across his name and phone number
and had pestered him for information. He said he found this
extremely discomfiting.

WICKMAN