April 24, 2014 12:00 am JST

Pyongyang adjusts its strategy amid whispers of dwindling cash stash

MASANORI YAMAKUCHI, Nikkei deputy editor

North Korean leader Kim Jong Un presides over the first meeting of "airpersons" of the Korean People's Army in Pyongyang on April 15. © REUTERS/KCNA

TOKYO -- The most important period of the year for North Korea has passed, with the regime playing its cards a bit more carefully than in the past. 

     April 11 was the second anniversary of Kim Jong Un's inauguration as first secretary of the Workers' Party. April 15 was the Day of the Sun, the nation's biggest festival, which celebrates the birthday of late leader Kim Il Sung. Around this time in 2012, the North launched a long-range ballistic missile that failed but nevertheless unnerved neighboring nations. In 2013, Pyongyang rattled its saber again as the young Kim sought to shore up his power.

     But this year the North has struck a slightly different tone, apparently because of a domestic problem: the rapid shrinkage of a hidden fund vital to the regime's survival.

     North Korea did launch midrange Rodong ballistic missiles into the sea this year to coincide with a March 26 summit between the leaders of Japan, the U.S. and South Korea. It has also threatened to carry out a "new form" of nuclear test.

     But beneath this bluster are signs of restraint. Pyongyang limited the range of the Rodongs to about half their maximum capability. In doing so, it avoided stirring up much international ire.

     While reining in its own missiles, the Kim regime also reached outward. In director-general-level talks with Japan, the North reversed a long-held policy and agreed to discuss past abductions of foreign nationals. In particular, it said it would reopen investigations into kidnappings of Japanese citizens.

     After makeshift drones were found crashed in South Korea -- contraptions Seoul said were almost certainly from the North -- Pyongyang said it was being slandered by the Park Geun-hye administration. Yet it also proposed opening a joint inquiry into the matter. 

     In addition, Pyongyang recently demanded the condition-free resumption of the six-party talks on its nuclear program. There are rumors it has unofficially contacted the U.S. to discuss the issue.

     All of this is risky for Kim. By taking the initiative in opening dialogue with Japan, the U.S. and South Korea, his regime may give an impression of weakness. And the young leader has only come halfway in cementing his grip on the state.

     So why is he so eager to talk?

     A North Korea watcher believes it stems from "frustration with sanctions imposed by the world community." The North Korean economy is chronically impoverished, but lately there are whispers about the financial health of the supreme leader himself.

The price of loyalty

On April 9, the North Korean Supreme People's Assembly approved the government's account settlements for fiscal 2013 and budget for the new year. But certain funds do not appear on those books: those for the military and the rulers.

     Kim Jong Il, the current leader's late father, separated the accounts for the military sector. This was to allow the creation of a "military economy" with a wide-open spigot for spending on conventional weapons as well as development of nuclear arms and missiles.

     The senior Kim also established a secret stash of foreign currency earned in all sorts of illegal ways -- among them counterfeiting and selling fake brand-name cigarettes. This "royal economy" was not just for enjoying the high life himself but also for ensuring the loyalty of the government officials who help to sustain the regime.

     The stash, said to have reached $20 billion to $30 billion under Kim Jong Il, is used to buy food, alcohol, cars and other luxuries from abroad. These imports go to a small cadre of executives who have sworn their allegiance. "It takes $1 billion a year to keep the elite loyal," said a former North Korean security-service insider who defected.

     This explains why Kim Jong Un has been splashing out on high-rise condominiums in Pyongyang, amusement parks, ski resorts and other projects. Problem is, as the international circle closes on the North, it is getting more difficult to rake in money through arms exports and other illicit trading.

     Even China, under President Xi Jinping, has shown a willingness to sanction Pyongyang. More than 80% of the goods available to North Korea come from its massive neighbor. If Beijing were to, say, stop supplying oil, it would immediately push the North's economy to the brink.

     Kim Jong Un is striving to export labor as another way of earning foreign currency. He has reportedly dispatched 50,000 to 100,000 North Koreans to some 40 nations. Beyond construction workers and other manual laborers, information-technology engineers and physicians are reportedly working near the Chinese-North Korean border.

     The migrants earn only about 10% of what they are owed, as "loyalty funds" are withheld as donations to the regime, plus another chunk to cover food and living costs. Companies must sign employment contracts directly with North Korean authorities, so most of the workers' wages go straight to a safe in Room 39 of the Workers' Party -- the office in charge of foreign-currency procurement.

     Labor exports bring North Korea's ruling elite several hundred million dollars in foreign currency each year. But that is not enough: Gifts for officials are apparently becoming fewer and farther between. 

     Kim Jong Un touts his efforts to rebuild the nation's economy, but he has accomplished little. Amid the threats of further nuclear and ballistic missile tests, the regime appears to be pushing for dialogue with South Korea, Japan and the U.S. in an urgent bid to loosen sanctions and acquire more economic aid.