North Korea in Focus

North Korea in Focus

Whilst in the current low volatility market phase it has been hard to find events that could truly shake global markets, the situation with North Korea and the Rest of the World is a serious and developing story. China called on all parties in the Korean standoff to remain calm and "stop irritating each other". It followed military exercises by both North and South Korea, as well as the US, after a period of tense rhetoric. Thus far, investors have been sanguine to the potential risks, taking the view that this is similar to previous episodes, where rhetoric ramps up to a pinch point, which leads to negotiations between countries and a compromise deal is struck.

The difficulty as time progresses however, is that North Korea gets a step closer to achieving a credible and effective nuclear weapon. This is at the heart of the fear from President Trump currently. Already the country have intermediate range ballistic missiles that have a range of around 1,200 miles, so within range of parts of Japan or the US. A growing body of the US military intelligence now feel that North Korea are capable of producing a nuclear weapon every couple of months.  Therefore, that would mean by the end of Trump’s first term there could be at least fifty nuclear weapons under the control of North Korea. The regime are also currently threatening another nuclear test, which would be the sixth in just over eleven years. Indeed, the last test in September 2016 managed to generate an explosion similar to the size of Hiroshima.

It is important to remember that in 2017, North Korea is still a true communist state where all aspects of life are controlled. Where you live, what you can say, who you associate with, whom one may date and marry, what one does for work and after work, what one eats, what one wears, what songs one hears, what art one sees, what books one reads, what rank one has in society, and what regions, if any, one can travel to. Reading a novel or a work of history, religion, or philosophy; watching an unapproved movie; listening to non-Korean news; or privately questioning the regime—all are “crimes” that could send one to the gulag for life.

As of 2015, North Korea had diplomatic relations with 166 countries and embassies in 47 countries. North Korea continues to have strong ties with its socialist southeast Asian allies in Vietnam and Laos, as well as with Cambodia. Most of the foreign embassies accredited to North Korea are located in Beijing rather than in Pyongyang. The Korean Demilitarized Zone with South Korea is the most heavily fortified border in the world.

The Obama administration tried dialogue with North Korea but ultimately rested with sanctions. At this time, it threatened the United States and its Asian allies with destruction, announced the nullification of the 1953 armistice, rattled South Korea with cyber-attacks and military provocations, and increased already horrific human rights violations against its citizens. Some of their latest rhetoric continues to be shocking in tone, an article in early May suggested: 'The army of the Democratic People's Republic of Korea (DPRK), full of the spirit of annihilating the enemies, is waiting for an order to wage a final sacred war, with their guns levelled at the detestable targets. Our strike will all at once turn into sea of fire, completely destroying enemies and winning a final victory.'

Dealing with the current leader, Kim Jong Un, is a tricky challenge for President Trump and it is clear that China hold the key to any negotiations. Initially a series of more restrictive sanctions would be the route that advisors would favour, possibly cutting off energy supplies as the most effective measure. Having seen other regimes fall, the North Korean leader will see the nuclear deterrent as essential in guaranteeing the regime. China also will want to see some semblance of the regime stay in place.  However, Beijing and Pyongyang have a relationship forged in the blood of the Korean War, and China remains its wayward neighbour’s main provider of aid and trade.

However, ties have begun to fray in recent years, with China increasingly exasperated by the North’s nuclear antics and fearful of a regional crisis. North Korean leader Kim Jong-Un has yet to visit Beijing, more than five years after taking power. However, China will not want to see 22m refugees come across its border or see a US military presence in South Korea. Back in 1994, the first North Korea crisis was abated when the regime agreed to suspend development in exchange for oil. However, this accord later broke down during the George Bush era.

It would also appear that North Korea is building up islands in the Yellow Sea and may be preparing them for installation of military hardware. A string of islands near the Sohae satellite launching station, north-west of Pyongyang, have been beefed up with buildings, extra concrete areas and wide roads over a period of several years, according to reports. Sohae has been used to launch satellite-bearing rockets but also, earlier this year, to test a new engine for an intercontinental ballistic missile. Analysts suggested construction work on the nearby islands, some of which are linked to the mainland by causeways, might allow North Korea to launch missiles there or install defensive anti-aircraft weaponry.

A war with North Korea is unthinkable; another possible route to pursue would be to tempt Kim with the wealth effect. He has always argued for development for the nation and this must surely be the long-term path to try to follow.

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