Moscow Considers North Korean Debt Write-Off

As Moscow reiterated its promises to write-off much of Pyongyang’s Soviet-era debt, Russia once again tried to offer Kim Jong-Il some economic carrots in an apparent bid to play a bigger role in international efforts to defuse tensions on the Korean Peninsula.

Russia’s renewed efforts to engage North Korea economically is an indication of Moscow’s renewed confidence in its ability to influence Pyongyang. Russia and North Korea had not held any debt negotiations for several years; however, recent attempts to settle the issue signal Moscow’s intention to develop bilateral economic ties. As a legacy of the Soviet-era close ties, Pyongyang owed nearly 4 billion of transferable rubles to Moscow, now estimated at between $8 billion and $11 billion including interest. In the wake of the Soviet collapse in 1991, Moscow has struggled to agree with its former allies on the exchange rate of the quasi hard currency of the former Soviet bloc, transferable rubles.

Earlier this year, Russian officials confirmed that Moscow and Pyongyang has renewed the debt negotiations. On September 13, the Russian media cited finance ministry sources as pledging to write-off the bulk of the North Korean debt by the end of 2011. The deal would reportedly involve writing off 90 percent of the debt, with the remaining 10 percent reinvested in projects in North Korea (Izvestiya, September 13). Facing improving prospects for the debt write-off, Pyongyang hinted at possible political concessions. During his talks in Ulan-Ude on August 24 with Dmitry Medvedev, Kim Jong-Il promised to return to the six-party nuclear talks without pre-conditions (Interfax, RIA Novosti, August 24).

Kim Jong-Il first traveled to Russia in July-August 2001, when his armored train reached Moscow and St. Petersburg, and then in August 2002. Russia’s last attempt to negotiate a strategic agreement with Pyongyang in 2000, ended in an embarrassing failure. Moscow announced that North Korea had agreed to give up its ballistic missile program in exchange for Russia launching civilian satellites into space. But the alleged agreement turned out to be a joke by Kim Jong-Il. In the wake of this incident, Moscow has refrained from any Pyongyang-related initiatives for quite some time.

After the talks in Ulan-Ude on August 24, Medvedev announced that both sides agreed to form a joint commission to discuss gas transit from Russia to South Korea (Interfax, RIA Novosti, August 24). The 1,100-kilometers (km) gas pipeline, of which 700 km would pass through North Korea, would yield 9 billion cubic meters of gas, tentatively from 2018. Russia has long discussed the pipeline project with both North and South Korea. In September 2008, Gazprom and South Korea’s Kogas signed a Memorandum of Understanding to send Siberian gas to South Korea, an estimated $90 billion project that should also allow Russia to diversify away from Europe.

After the visit of Kim Jong-Il, Russian officials agreed to develop economic cooperation with North Korea. On August 26, the presidential envoy in the Far East, Viktor Ishayev, said both sides discussed energy, railway and agriculture ties (Interfax, August 26). Apart from the gas pipeline project, Russian railway monopoly, OAO RZD, has long planned to upgrade the 54 km Khasan-Rajin rail link in order to connect the Trans-Siberian railway with the Korean railway system. On September 9, the RZD head, Vladimir Yakunin, said the company aimed at starting the operation of the Khasan-Rajin section of the railroad that connects Russia and North Korea. The upgrade of the Khasan-Rajin section is seen as a pilot project that antecedes possible rebuilding of the trans-Korean railway (ITAR-TASS, September 9). In early September, North Korean officials discussed joint agricultural projects in Russia’s Primoriye region, including the lease of some 200,000 hectares of land in Romnensky, Mazanovsky and Zavitinsky districts (ITAR-TASS, September 1).

As a symbolic gesture, Russia offered Pyongyang some limited humanitarian assistance. On September 19, the Russian state-run United Grain Company announced it completed delivery of 50,000 tons of wheat to North Korea (RIA Novosti, September 19).

In the wake of the Soviet collapse in 1991, Moscow sharply downgraded its ties with North Korea and bilateral trade remained low due to the country’s economic crisis and its unpaid debts to Russia. Subsequently, Beijing displaced Moscow as North Korea’s main trading partner. The trade turnover between Russia and North Korea has hovered at around $200 million over the past several years, a fraction compared to Russia’s trade with South Korea, estimated at some $10 billion annually. Trade with North Korea has long been of little economic importance to Moscow. Russia exports relatively small amounts of petroleum products, timber, coal, and chemical fertilizers, while North Korea mainly exports its cheap labor resources to Russia. Hence Russia, due to insignificant volumes of its trade with North Korea, is understood to have little to lose from any possible UN sanctions against Pyongyang.

However, Russia has long been reluctant to approve any kind of sanctions against North Korea. Instead, the Kremlin aims at utilizing its economic potential to influence Pyongyang. Moscow is believed to have promised the debt write-off for Pyongyang in order to convince North Korea to return to the six-party nuclear talks and develop trilateral economic ties between Russia and both Koreas.