Corporate Debt Review

How Russia Continues to Supply Oil to North Korea

Black Market Black Gold

Early in October of last year, I described here how Russia was supplying crude oil and oil products to North Korea in evasion of UN sanctions. Those sanctions are designed to reduce what had been about 4 million barrels of imported oil product to about 500,000 barrels a day. Raw crude oil also moves into the country from China on an existing pipeline.

The process of smuggling oil is continuing despite heightened sanctions passed in December. And given the decline in North Korean refinery capacity, a noted reduction in prices for both gasoline and diesel in the capital of Pyongyang over the past month is testimony to a rise in successful product smuggling, as well.

Today, I shall explain how my sources say it is taking place.

The latest offshore episodes involve the high-sea transfer of oil from Russian-controlled tankers to North Korean freighters. But such exchanges are hardly the only examples. Hong Kong-based shipping companies are increasingly used for the same purpose.

Some of these transfers occurring in the South China Sea (itself a friction point in global energy controversy) have been tracked and recorded by US intelligence reconnaissance aircraft.

Two such episodes surfaced at the end of last year. One of these, an estimated crude oil transfer of 600 tons (a bit over 4,200 barrels), took place from the Hong Kong-registered Lighthouse Winmore. That tanker is pictured below.

The Lighthouse Winmore - a Hong Kong-flagged vessel suspected of transferring oil to North Korea in violation of international sanctions, photographed near Yeosu, South Korea in late December. Photograph credit Yonhap, via Reuters

The Lighthouse Winmore – a Hong Kong-flagged vessel suspected of transferring oil to North Korea in violation of international sanctions, photographed near Yeosu, South Korea in late December.

Photograph credit Yonhap, via Reuters

Last month, the US unsuccessfully attempted to persuade the UN Security Council to blacklist ten tankers from Hong Kong, North and South Korea, China, and Taiwan. Ending up on such a list would have made it difficult for the vessels to be admitted to just about any port in the world.

The Chinese have denied the charges and even US diplomats acknowledge that proof of activity in evasion of sanctions is difficult to prove. Essentially, in such moves, revealing publicly some of the intelligence gathered with a clear indication that additional evidence is available makes it more difficult for selected evasions to continue.

Making certain specific examples of sanction violations public, however, is really directed elsewhere. It is intended to increase pressure on the three most used venues for oil transport to North Korea. One is the overland route from mainland China.

Now That’s Druzhny

While difficult to document precisely, considerable evidence exists. Even Beijing does not deny it is taking place, but categorically rejects it as a result of any official government policy. The reality points to the very porous nature of the border between the countries and the long smuggling tradition involving a wide array of product. What may be taking place, Chinese authorities posit, is locally determined and without central government approval.

The volume moving across that border remains limited by the availability of trucks to transport the oil. Or at least that is what Hong Kong-based sources tell me. In addition, there are anecdotal indications that Beijing may be putting some pressure on the Chinese locals to reduce the traffic.

The other two venues are more significant and indicate Russia remains the primary provider of North Korean oil in defiance of international sanctions, according to information provided below from sources in my network.

The second of the three routes is the Russian land connection. The border between the two countries is narrow, amounting to barely 11 miles on land and an additional maritime area of 12 miles. The only official border crossing is the Korea Russia Druzhny (“Friendship”) Bridge traversing the Tumen River and opened in 1959.

The bridge is ostensibly railway only and connects Khasan on the Russian side with Tumanganin in North Korea. The Khasan rail station is less than a half mile from the bridge and a spur has connected the two since the bridge became operational.

Unfortunately, the rail connection is complicated by being dual gauged, given the distinct rail system on Russian lines. This requires an inefficient exchange of undercarriages to maintain trade.

Planks have been laid down to allow limited vehicle traffic.  However, there are a number of other easier to use road routes between the two countries utilizing cross-overs into China.

Of interest are results provided by reconnaissance that has recently detected new road traffic through Russian territory paralleling the Tumen River. Traditionally called Linenaya Ulitsa (“Linen Street”), this is no more than a dirt road. Over the past two months it has been frequented by heavy truck, APC (armored personnel carrier), and tank traffic.

Portion of "Linen Street" on the Russian side of the border. The Tumen River and both North Korean and Chinese territory are seen in the distance. Source: Google Maps.

Portion of “Linen Street” on the Russian side of the border. The Tumen River and both North Korean and Chinese territory are seen in the distance.

Source: Google Maps.

A connection to wider paved roads into the Chinese prefecture of Yanbian abutting both Russia and North Korea is also available. This new land exchange would provide for increasing volume of crude oil and oil products between Russia and North Korea.

ESPO-sé

The The third venue is almost unquestionably the primary method used by Russia. It involves drawing from shipments involving tanker traffic from Kozmino, the Pacific coast port near Nakhodka serving as the eastern terminus on the East Siberia Pacific Ocean (ESPO) export pipeline.

ESPO is the major Russian route to supply expanded oil export traffic to Asia and elsewhere. Consignments moving south have been tapped via high seas tanker-to-freighter transfers of product apparently invoiced to other Asian clients but ending up diverted to North Korea.

Yet the invoice paperwork, often already traveling through a series of international oil traders, hides what is going on. Contacts suggest the manifests would provide contracted documentation for an amount of oil lower than what was pumped onto the tanker at Kozmino. The excess amount would be siphoned in route with the amount declared in the manifest delivered to the contract partner at the tanker’s final location.

Several of the tankers involved appear to be the same as entries on the US suggested blacklist. Others are also registered in Hong Kong or Panama.

Port of Kozmino on the Russian Pacific coast. Photograph: Nakhodka Maritime Services

Port of Kozmino on the Russian Pacific coast. Photograph: Nakhodka Maritime Services

One may conclude the provision of oil and oil products to North Korea is simply another way by which the Kremlin is playing geopolitics against the West. But there may well be a more compelling rationale for the decision in Moscow to confront UN sanctions, moves which the Russians have officially supported in UN voting.

As one of my contacts in Minenergo (the Russian Ministry of Energy) succinctly confided last week: “There is a choice between two unpalatable results at play here. One is the risk impendent on violating UN sanctions. The other is the risk of what would happen from a collapse in the [North] Korean regime.” He added: “Regional stability obliges that the oil trade continues, despite the unsavory character of the leadership on the receiving end.”

Another contact points to the increasing Russian military traffic down “Linen Street,” to which I drew attention earlier in this piece, as another indication of Moscow’s concern over the increasingly suspect stability on the North Korean side of the Tumen River.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.