RUSSIA MULLS NORTH KOREAN DEBT WRITE-OFF

As Moscow hinted at plans to forgive Pyongyang much of its Soviet-era debt, Russia’s willingness to offer Kim Jong-Il some economic carrots may indicate the Kremlin’s intention to play a bigger role in international efforts to defuse the controversy around the North Korean nuclear program.

Earlier this month, Russian officials confirmed that Moscow and Pyongyang have renewed debt negotiations. In late December 2006, the Russian and North Korean Ministries of Finance discussed a possible debt write-off deal, said Yevgeny Anoshin, spokesman for Konstantin Pulikovsky, who co-chairs the bilateral intergovernmental commission. Anoshin also said that the intergovernmental commission on economic and technical cooperation was due to meet in Moscow in March 2007, mainly to discuss Pyongyang’s debt (Interfax, January 5).

On January 4, the South Korean Chosun daily quoted diplomatic sources in Moscow as saying that Russian Deputy Finance Minister Sergei Storchak and his North Korean counterpart, Kim Yong-Gil, had agreed in principle to write off some 80% of the $8 billion debt owed by North Korea. Russia’s Vneshtorgbank and North Korea’s Trade Bank also agreed to re-estimate the debt at $8 billion including interest, the daily said.

“Russia backed down from its earlier position that it would not continue economic cooperation unless the North repays all its debt, in order to persuade it to take part in trilateral economic cooperation involving Russia and South Korea and return to the six-party nuclear talks,” Chosun quoted diplomatic sources as saying.

The six-party negotiations on North Korea’s nuclear program were restarted in December, but no date for the next round was agreed upon during the talks. Last October, Russia supported U.N. sanctions against Pyongyang over its nuclear test. However, Moscow argued that Pyongyang’s nuclear program should be resolved through diplomatic means. Russia also confirmed that it shared Beijing’s reluctance to introduce stronger sanctions against North Korea, Russia’s neighbor due to a narrow land border near Vladivostok.

Russia’s last attempt to negotiate a strategic agreement with Pyongyang, back in 2000, ended up in an embarrassing failure. Moscow triumphantly announced that North Korea had agreed to give up its ballistic rocket program in exchange for Russia launching its 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.

But now Russia’s emerging pro-active economic approach toward North Korea reveals Russia’s renewed confidence in its ability to influence Pyongyang. Russia and North Korea had not had any debt negotiations for more than five years, and the renewed attempts to have the debt issue settled arguably signaled Moscow’s intention to remove obstacles that had hindered the development of bilateral economic ties.

As a legacy of close Soviet-era ties, Pyongyang owed nearly 4 billion in transferable rubles to Moscow. 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. For example, Pyongyang’s debt principal was estimated anywhere between $2 billion and $7 billion.

The reported bilateral agreement to re-estimate the debt at $8 billion including interest comes as a significant achievement for Russian negotiators, because it would mean Moscow had managed to convince Pyongyang to accept a higher estimate of the debt. Pyongyang’s reported willingness to consider a partial repayment of interest may also be seen as a success for Moscow, because in recent years some of its former allies were highly reluctant to even discuss interest payments when negotiating Soviet-era debts.

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 its insignificant trade volume with North Korea, has little to lose from U.N. sanctions against Pyongyang.

Following the Soviet collapse in 1991, Moscow sharply downgraded its ties with North Korea and bilateral trade remained low due to North Korea’s economic crisis and its unpaid debts to Russia. Beijing subsequently displaced Moscow as North Korea’s main trade partner. Trade turnover between Russia and North Korea has been at around $150 million in the past two years, a fraction of Russia’s trade with South Korea, estimated at some $9 billion in 2006.

As South Korea emerged as Russia’s important trade partner in Northeast Asia, Moscow remained keen to develop economic and security ties with Seoul. On January 5, Russia’s Pacific Fleet commander, Admiral Viktor Fyodorov, announced plans for joint maneuvers with the South Korean Navy next year. In September 2007, Russian naval vessels are due to visit Inchon to train joint rescue missions, he said (Interfax, January 5).

Therefore, Russia appears to be pursuing a balanced policy regarding the Korean Peninsula, aiming at playing a larger role in tackling the nuclear crisis by utilizing its potential to influence Pyongyang. Moscow is believed to be considering a 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.