How the North Korean Government Is Squeezing Foreign Currency Out of Its People

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How the North Korean Government Is Squeezing Foreign Currency Out of Its People

The North Korean government’s persistent efforts to acquire foreign currency reflects the severity of the economic crisis the country is facing.

How the North Korean Government Is Squeezing Foreign Currency Out of Its People
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In recent years, the North Korean government has intensified efforts to collect foreign currency held by its citizens. This situation not only reflects North Korea’s lack of foreign currency, but also highlights the country’s poor performing domestic currency (the Korean People’s Won, or KPW) and, more broadly, signals that the country’s economy is in dire straits.

North Korea entered one of its worst economic crises ever following the closure of the China-North Korea border in January 2020 to prevent the spread of COVID-19 into the country. By the end of 2020, North Korea’s external trade (excluding inter-Korean trade) fell to $8.6 billion, a drop of 73.4 percent compared to trade levels in 2019. The country’s foreign trade dropped again in 2021 to $7.1 billion, a decline of 17.3 percent compared to trade levels in 2020. These figures are extremely low; indeed, they have broken the record for North Korea’s lowest trade numbers ever since such data began being collected in 1990.

North Korea has long suffered a lack of foreign currency and, in 2017, the U.N. Security Council adopted four resolutions (Resolutions 2356, 2371, 2375, and 2387) that cut off most of North Korea’s sources of foreign cash. Specifically, the sanction resolutions halted most mineral exports from the country – a major source of trade between China and North Korea – and banned North Koreans from working abroad. The sanctions also stipulated a lower limit on oil imports, which seem to have decreased the amount of crude oil imports into North Korea.

The COVID-19 pandemic only worsened this already difficult situation for North Korea. When the country shut down its borders in January 2020, it essentially closed the doors to what limited trade options it had available. Facing shortages of raw materials, North Korean factories became unable to operate properly, and markets throughout the country experienced a significant degree of stagnation. Naturally, the overall economic downturn caused by the pandemic and the government’s response to it have continued to eat away at the funds needed to rule the country.

In response to the depletion of funds needed for the functioning of the state, the North Korean government began focusing on what it could do to raise funds on the domestic front. Ultimately, the state began employing various means to acquire foreign currency held by its citizens.

A Brief History of North Korea’s Foreign Currency Acquisition Efforts

What kind of methods have North Korean authorities used to acquire foreign currency from its citizens? Before going into specifics, it is important to understand how North Korea has acquired foreign currency in the past. Typically, governments acquire foreign currency through exports, direct investment, tourism, and other official means. North Korea, however, has long taken a different tack in its efforts to acquire foreign currency.

For decades, the North Korean government earned foreign currency by secretly exporting military weapons and technology, illicit drugs, fake cigarettes, and counterfeit currency. Through the years, there has also been a large amount of foreign currency brought in by people in Japan and China.

In the 1960s and 1970s, Koreans in Japan who decided to return to North Korea brought over Japanese yen. In the 1980s, Chongryon, a pro-North Korean organization in Japan, sent considerable amounts of money into the country as well.

From the late 1990s, Chinese renminbi entered North Korea through people who had been forcibly repatriated after defecting into China, from those who voluntarily returned after defecting into China, and through people who visited relatives in China.

With the spread of marketization in the 2000s, North Korea saw a considerable influx of foreign currency from official trade and investment conducted by the state. Of course, a great deal of foreign currency appears to have entered North Korea through smuggling operations conducted largely in the China-North Korea border region. The government appears to have acquired dollars mainly through smuggling operations led by state agencies.

The international community’s implementation of more sanctions in 2017 and the COVID-19 pandemic have led North Korea to shift to increasingly illegal means to acquire foreign currency. For example, according to a 2022 report by Chainalysis, a blockchain data platform, North Korea stole $1.5 billion worth of digital currency from 2017 to 2021.

North Korea has also ignored the ban on sending workers abroad as stipulated by a U.N. Security Council resolution in 2017.

Starting in early 2021, North Korea began recruiting people to be sent abroad for work, and grassroots reporting efforts by Daily NK suggest that North Korean workers have already been sent to China and Russia amid the pandemic. Once abroad, these workers are unable to return home and are forced to take part in foreign currency-earning activities.

Growing Sophistication in How the Government Collects Foreign Currency

On top of these more traditional efforts to acquire foreign currency, North Korea’s government is now accelerating efforts to acquire foreign cash from its own citizens.

In one specific example from late 2021, North Korea distributed food to its people in commemoration of the September 9 anniversary of the founding of the DPRK at prices cheaper than those in local markets. Consumers were encouraged to use foreign currency, including RMB, to purchase the food from state-run shops.

The country’s authorities are also accepting “non-tax burdens” (quasi-taxes) in foreign currency rather than domestic currency. North Koreans have long supplied cash, in-kind contributions, and labor to government-led construction and maintenance projects. Recently, the authorities have forced their citizens to pay such quasi-taxes for various public capital and public services as well. North Korean leader Kim Jong Un called for the extermination of non-tax burdens at the Eighth Party Congress in January 2021; however, reports from inside the country suggest that these quasi-taxes continue to be levied.

That the North Korean government is pushing for these quasi-taxes to be paid in foreign currency is very significant. Namely, it shows that the North Korean government acknowledges that its own currency is practically worthless.

In fact, North Korea’s domestic currency, the KPW, has also lost much of its value since the country’s 2009 currency reform, which was broadly aimed at exerting central government control over the country’s finances. With domestic currency lacking much in value, many North Koreans turned to using foreign currency in private business and smuggling activities, a development that has led to periodic attempts by the regime to ban the use of foreign currency in the country. Yet, North Korean authorities appear generally to have accepted the circulation of foreign currency such as dollars and RMB over the years because of its widespread use and because they can collect and place it in state coffers.

North Korea’s government is also trying to earn foreign currency through the sale of services related to cell phones, which are popular among North Koreans.

The country’s postal agency, Korean Post, imports cell phones from China at around $80 dollars each, then sells them for around $300 per device. When considering that North Korea has imported and sold a cumulative total of 6 million such devices (based on Daily NK data compiled in 2011), the government may have made around $1.32 billion just from this business.

Moreover, Korean Post branch offices are offering to install a cooking app for 25 RMB (around $3.70), while service centers charge 30 RMB (around $4.45) for the same service.

Starting last year, the authorities have also been investigating how much foreign currency people possess and are demanding that this cash be placed into banks. The financial administration departments in each region’s people’s committee (provincial government) have been reporting the amount of foreign currency held by people in their jurisdictions and forcing people to place the money in banks and use debit cards to withdraw it.

North Korea’s government experienced strong resistance to the 2009 currency reform and, perhaps with that experience in mind, the authorities have thus far conducted their current efforts to collect foreign currency in a relatively subdued manner. That being said, the state’s methods and policies regarding acquisition of foreign currency appear both extreme and coercive in nature.

Facing Dwindling Foreign Currency Reserves, North Korea Will Continue Efforts to Acquire Foreign Cash

Since March of this year, North Korea has moved to place trading companies nationwide under direct control of the Cabinet, and disband trading companies that, despite their connections with important government agencies, have failed to take part in import-export activities over the last several years.

The state has taken on these efforts to change the country’s trade-related ecosystem as part of efforts to restore the national unitary trade system. North Korean leader Kim Jong Un has permitted some freedom in how companies conduct trade since gaining power in 2012; however, his government’s recent moves suggest that, going forward, only the state will have the right to manage trade activities.

The change in how trade companies operate is connected to the country’s lack of foreign currency. In short, it suggests that, given international sanctions and COVID-19 remain problems, the authorities feel the need to tightly control the country’s limited foreign currency supplies. Indeed, there are signs that the state plans to focus the limited supply of foreign currency solely on the purchase of absolutely essential imports.

The North Korean government’s persistent efforts to acquire foreign currency reflects the severity of the economic crisis the country is facing due to international sanctions and the COVID-19 pandemic. For the time being, the country may be able to eke by with the foreign currency it has in reserves; however, it should be clear that the regime is creating an elaborate system of squeezing foreign currency out of its own people as part of efforts to prepare for a continuation of the current economic crisis.