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Geopolitical Diary: North Korea Back in the Driver's Seat

Strategic Forecasting, Morning Intelligence Brief - April 18, 2007


Days after an agreed deadline to shut down its Yongbyon nuclear

reactor and invite International Atomic Energy Agency inspectors

back in, North Korea had yet to comply as of Tuesday. While there

are conflicting reports of satellite imagery showing "unusual

activity" around the Yongbyon site -- suggesting Pyongyang is about

to comply -- The United States has made it clear it has yet to be

notified of concrete action by North Korea.


Despite the delays, there is little sense of urgency -- and a

general acceptance that North Korea will be late, but ultimately

will shut down the site. The sense of crisis surrounding North

Korea's nuclear program has faded to near-ennui.


In February, months after North Korea tested a nuclear device,

representatives from North Korea, the United States, China, South

Korea, Russia and Japan signed an agreement laying out a phased

process to shut down North Korea's nuclear program and start down

the path of economic cooperation and international diplomatic

engagement with Pyongyang. The agreement marked a breakthrough in

negotiations that had been dragging since September 2005, when,

just after the six parties issued a common statement on the goals

of the nuclear negotiations, the U.S. Treasury Department took

action against the Macau-based Banco Delta Asia (BDA) -- accusing

the bank of assisting North Korea in laundering counterfeit money,

and freezing some $25 million in North Korean-related funds.


The BDA freeze hit North Korea in three ways. First, BDA was a key

bank through which the North Korean government and businesses

conducted international transactions in dollars, euros, yen and

yuan. Shutting down the BDA accounts not only closed off this

avenue of foreign exchange, but also triggered other banks dealing

with North Korean-related accounts to cease working with Pyongyang.

North Korea's international transactions, small though they are,

were significantly hindered.


Second, the freeze was a strike against North Korea's pride. The

punitive action was seen as a slap against the North Korean regime,

and coupled with the accusations of counterfeiting and money

laundering, besmirched the North Korean name (not that it was

especially clean to begin with). For Pyongyang, this was a direct

insult to the regime and leadership -- and North Korean negotiators

have been known to walk out of meetings over much-less-significant

slights, such as when foreign negotiators failed to greet them at

the door.


The third aspect, and perhaps the most significant, was that the

BDA action, coming just days after the September joint statement of

principals, convinced North Korea that the U.S. administration with

which it was dealing was untrustworthy. From Pyongyang's

perspective, if Washington would strike out at North Korea (albeit

economically) immediately after agreeing to work toward consensus,

the talk of cooperation obviously was false. Pyongyang refused to

re-engage in the six-party process until Washington freed up the

BDA accounts.


But as time went on, and Pyongyang kept stalling, it also noted

something more in the seemingly bipolar attitude of the United

States -- a clear lack of policy unity. This was something the

North Koreans knew how to deal with, and they soon started raising

the stakes, leading to a series of missile launches in July 2006

and a nuclear test the following October. Through these provocative

actions, North Korea sought to exploit the factional rift inside

the U.S. government -- just as Pyongyang had skillfully played off

rifts between Washington and Seoul to gain additional leverage.


The U.S. position had been that it would in no way unfreeze the

money; the reason for freezing the funds was Pyongyang's illicit

activity, and Washington could not let that go without setting a

bad precedent, not only for North Korea but also for other

countries. But now, elements in the U.S. State Department and

elsewhere pushed to re-engage North Korea, saying the BDA issue had

stalled dialogue and led to the nuclear test -- and that

re-engagement, rather than isolation and punishment, was the only

way to defuse the crisis (shy of the last resort of military

action ). And as the Bush administration grew more focused on Iraq

and Iran, and saw its Republican majority slip away in the House

and Senate, it finally conceded, allowing a resolution of the BDA

issue and thus re-engagement with North Korea.


This was a major victory for Pyongyang: the United States

completely reversed its earlier stance. Even though Washington

released its hold on the funds shortly after the February

agreement, few banks were willing to accept the money for fear of

U.S. action against them for touching tainted money -- and it took

almost the entire two months of the first phase of the agreement

for Washington finally to work out a deal whereby North Korea could

simply withdraw the money directly from BDA.


Pyongyang is now probing just how much weakness there is in the

U.S. position. The accession to North Korean demands, and the U.S.

delay in fulfillment -- coming on top of the West's rather

restrained reaction to North Korea's nuclear test -- gave

Pyongyang both the confidence and the justification to delay its

own action. North Korea will shut down Yongbyon, and likely within

a few days, but Pyongyang feels that it has once again taken the

driver's seat, and is seeing just how far it can go before reaching

a U.S. break point. And it is now much less trusting that a lasting

deal with the Bush administration would be meaningful.

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