VZCZCXRO7646
RR RUEHCN RUEHGH
DE RUEHSH #0008/01 0140136
ZNY CCCCC ZZH
R 140136Z JAN 10
FM AMCONSUL SHENYANG
TO RUEHC/SECSTATE WASHDC 8956
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHMFISS/COMUSKOREA J2 SEOUL KOR
RUEAIIA/CIA WASHDC 0251
RUEKJCS/DIA WASHDC 0198
RUCGEVC/JOINT STAFF WASHDC 0141
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHDC 0199

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