North Korea beating the odds despite facing toughest sanctions in decades – how?

Not everyone is on board with shutting off trade to Pyongyang, especially when there is money to be made

A North Korean vehicle carrying a missile passes by during a mass military parade in Pyongyang's Kim Il Sung Square to celebrate the centenary of the birth of the late North Korean founder Kim Il Sung (AP)

Despite North Korea’s deepening isolation, along its border with China and Russia construction of tourist hotels is brisk and mountains of Siberian coal await shipment to Shanghai. A bustling bazaar-style market is overflowing with goods from Mickey Mouse baby shoes to bags of dried kiwi fruit.

The Rason Special Economic Zone, a North Korean experiment in limited capitalism, isn’t likely the next-big-thing-in-Asia that officials here paint it to be. But even as the country is hunkering down under the toughest UN-backed sanctions in decades for its nuclear and long-range missile programs, it is, by North Korean standards, thriving.

For the US, South Korea and Japan, Rason is an irritating reminder that not everyone is on board with shutting off trade to Pyongyang, especially when there is money to be made. The three countries are spearheading efforts to impose even more punitive measures on North Korea for its fifth nuclear test, which was conducted last week and was the North’s most powerful to date.

North Korean officials in charge of trade promotion acknowledge that sanctions and fears of image problems resulting from doing business with the North have significantly slowed the expansion of new foreign businesses – from an average of more than a dozen each year over the past five years to exactly zero so far in 2016.

But they also note that thanks largely to China and Russia, the sanctions have hardly been a death knell. That holds for North Korea in general; its GNP is believed to be growing slightly and signs of economic improvements – such as more goods available, more taxis and traffic on the streets and more people frequenting markets, particularly in the capital, Pyongyang – are noticeable.

“The more sanctions we are subject to, the more powerful our country will become,” Choe Sung Jin, an official in charge of trade promotion, told Associated Press on a visit to the remote zone shortly before Friday’s nuclear test. Clearly the sanctions hurt, but Choe’s remark is something along the lines of the old adage, “what doesn't kill you make you stronger”.

Rason is as far from Pyongyang as a North Korean city could be, tucked into the country's northeast corner. Its economic zone has been a mixed bag of success and failure, but that is only partially because of sanctions.

Unlike Kaesong, the now-closed special industrial complex on the other end of the country near the Demilitarized Zone that was powered by South Korean investment, Rason still has the look of a haphazard attempt at squaring capitalist investment and management techniques with authoritarian socialist ideals.

Pyongyang is aware it needs to lure foreign investment to keep afloat — developing a nuclear arsenal while maintaining a million-man army and attempting to raise the nation’s standard of living is an expensive proposition. But it is not so desperate to revive its moribund economy that it will risk major changes that might jeopardize its political status quo.

In May, leader Kim Jong Un stressed at a major party congress that expanding trade with foreign countries is a priority. At the same time, however, he stood by his nuclear weapons program, which, because of the sanctions it brings, makes expanding trade exceedingly difficult.

Yet it's not impossible, judging by Wharf No 3 – the Russian wharf – of Rason’s Rajin port.

The wharf looked deserted when AP visited three years ago, but on its latest trip, the loading area was piled high with mountains of Siberian coal brought in on Russian trains. The coal was to be transferred to large cargo vessels, either Russian or Chinese, for shipment southward.

A Russian railway from Khassan in Siberia across the border to Rason began operations in 2014. Kim Chol Ho, the port’s vice manager, said shipments have been steadily increasing ever since.

“The Russians plan to bring more than 1 million tons of coal through here this year,” he said. “That’s a 300,000-ton increase over last year.”

The appeal of Rason to the Russians is simple: it’s a gateway to Chinese markets.

Transshipments of coal through the North aren’t banned under the UN sanctions, and it’s far cheaper to transit Rason than to get coal to the Chinese using other routes or means. Russian and Chinese cargo ships are used because the North doesn’t have any ships built for that purpose that are big enough.

Kim noted, as officials here often do, that there is no other port this far north that can be used by ships in the 15,000- to 20,000-ton class all year round. The others in the Russian far east freeze over.

Two other ports are located in the special zone: Sonbong moves about 3 million tons of petroleum and other cargo each year and Ungsang has an annual turnover of 500,000 tons, primarily of timber, according to statistics released for investors in 2015.

“We now have a regular cargo ship traveling between Rason and Shanghai,” Kim said. A few hours later, a Russian train arrived with more coal. The next day, a huge Chinese ship was in port, ready to take it all away.

Officials claim total foreign investment in the zone is more than $500m. About 250 enterprises – local and foreign – are now operating here. Two of the biggest are the Suchaebong Fishery Enterprise, which processes seafood for domestic consumption and export to China, and the Sonbong Garment Factory, where clothing is stitched together and given a “Made in China” tag before being sent back across the border for sale abroad.

The rationale behind that – aside from China being a more palatable country of origin than the North in most markets — is that the materials and designs are provided by China, though the stitching is done in North Korea.

Roughly 80 per cent of the 100 foreign trade enterprises, 21 joint ventures and six foreign representative offices in Rason are Chinese. Thailand, Japan, Dominica, Hong Kong, Italy and Russia are also doing business in Rason. Choe said there are even some US entrepreneurs – though he refused to name them and they could not be quickly confirmed.

“We welcome anyone,” he said after playing a promotional video that featured the song “Roll out the Barrel”.

Choe said the opening of enterprises in Rason went from 70 over the past five years to zero this year because of sanctions announced after the North’s January nuclear test, which was followed the next month by a rocket launch that put a satellite into orbit.

Other signs of economic weakness in Rason predate sanctions. As is often the problem with major, large-scale projects in North Korea, there is no sign of activity at the sprawling Sungri Chemical Factory, an oil refinery built in 1973 under national founder and “Eternal President” Kim Il Sung, Kim Jong Un’s grandfather. The refinery, believed to be one of only two in the country, has been idle for years.

But, on the smaller scale, living standards do appear to be improving.

Rason has one of North Korea’s biggest and best-stocked free markets and a new public gymnasium. A “children's palace” for extracurricular activities is under construction and new hotels dot what was until recently a largely barren main street. After major floods last year, 1,800 new dwellings were erected, creating a residential area that is, by North Korean standards, quite liveable and tidy.

“We have an indoor bathroom, that’s a big change,” Ra In Hae, a 54-year-old housewife, said after turning off the one-channel radio attached to the wall of her new home, which Kim himself visited just after her family moved in. “We even have a little garden to grow vegetables.”

AP