It's time to stop oil exports to North Korea as sanctions, experts say

Key Points
  • China should stop exporting crude oil to North Korea after Pyongyang defied the international community by testing a nuclear bomb on Sunday
  • Kim Jong Un's regime is adept at working around international trade sanctions, but it needs crude to power its military and its transport operations
China could consider an oil embargo on NKorea: Expert

China should stop exporting crude oil to North Korea after the reclusive nation defied the international community by testing a nuclear bomb on Sunday despite numerous international trade sanctions, experts told CNBC.

"If China decides to cut off that vital supply of crude oil going to North Korea, there will be an immediate and pretty costly impact on the economy," said Scott Seaman, director for Asia at geopolitical consultancy Eurasia Group.

The move, if implemented, would have a major impact on North Korea's military and transport operations, Seaman told CNBC's "Squawk Box."

North Korea has become "extremely adept" at moving around international sanctions, even though they may prove effective in the long run, said Jonathan Pollack, a senior fellow at Brookings Institution.

"The real issue here is whether China and Russia will be prepared to go into domains that until now they have not been prepared to enter and that very specifically concerns oil," Pollack told CNBC's "Street Signs."

"If the Chinese and the Russians both would be prepared to limit, or suspend outright, oil deliveries to the north, that's a very consequential step. It may have a much, much more potent effect than all of these issues related to sanctions," Pollack added.

Chinese July gasoline exports to North Korea were down 97 percent from a year ago, but analysts said its crude oil exports to Pyongyang still keep the regime humming.

China does not report crude oil exports to North Korea, but industry sources told Reuters in April that the country supplies about 520,000 tonnes of crude a year to North Korea through an old pipeline.

Meanwhile, bilateral Russia-North Korea trade doubled to $31.4 million in the first quarter of 2017 from a year ago, Reuters reported in August. Most shipments were oil, coal and refined products.

On Sunday, President Xi and Russian President Vladimir Putin agreed on the sidelines of a summit that they will "appropriately deal with" North Korea's latest nuclear test, Chinese state news agency Xinhua reported.

Xi was in Xiamen hosting that summit just as the test was conducted and news of the move has overshadowed the meeting's agenda, embarrassing the Chinese leader, Seaman and a colleague wrote in a Eurasia note. Xi is widely viewed to be seeking a second term at the once-in-five-years 19th Communist Party Congress in October.

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The Eurasia Group note said that with Pyongyang's latest provocation, Beijing will finally reduce crude oil exports to North Korea substantially. Still, they wrote, that would only be "for a limited period to prevent a total economic collapse. China wants to impose real pain without bringing down the system."

"China supplies around 90 percent of Pyongyang's demand for crude oil, and cutting this flow would likely have an immediate and costly impact on North Korea's economy," the consultancy added.

The last time China took this step was in the spring of 2003, when it cut off oil supply for three days after a missile test.

The Chinese have been reluctant to take that route because they have feared that doing so may destabilize the Kim Jong Un regime and the region, but Pyongyang's latest underground nuclear test — its sixth since 2006 — may have crossed Beijing's "red line of sorts," Eurasia said.

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The debate is also playing out in Chinese state media where national concerns about nuclear radiation play against a desire to avoid greater intervention.

"China's strategic security and environmental safety is the bottom line for China in showing restraint. If North Korea crosses this line, the current framework for Sino-North Korean ties will break down," said Communist Party-linked Global Times in a unsigned Sunday editorial.

But "if China completely cuts off the supply of oil to North Korea or even closes the China-North Korea border, it is uncertain whether we can deter Pyongyang from conducting further nuclear tests and missile launches," the paper added.

Any confrontation between China and North Korea would allow Washington and Seoul to shift the responsibility for the nuclear issue to Beijing, "which does not fit China's national interests."

The United Nations Security Council is set to meet on Monday to discuss an international response North Korea's latest nuclear test.