The recent announcement that Russia and North Korea have agreed to write off nearly all of the hermit kingdom’s $11 billion in Soviet-era debt — more than half of North Korea’s foreign debt obligations – reminds us that the bonds between the Sino-Soviet Bloc and its enfant terrible have depreciated into economic surrealism. Here we recount some of the notable chapters in the 65-year effort to float the Democratic People’s Republic of Korea, the world’s most reclusive regime.
This is Part I of a five-part series.
Sino-Soviet Benefactors; Or, Why I Have Two Sugardaddies
The Democratic People’s Republic of Korea (DPRK) was established on the northern half of the Korean peninsula in 1948, the same year that the Republic of Korea (ROK) was established in the south. The Japanese had ruled the entire country until their defeat in 1945, when, in a move opposed by virtually all Koreans, the USSR and US divided the peninsula into separately-administered trusteeships along the 38th parallel. The Soviets underwrote the northern half of the peninsula, while the Americans sponsored the southern half. Game on.
According to declassified CIA documents (whose black-and-white speckled pages make for excellent bedtime reading), the Soviet Union immediately began lending aid to the newly “independent” DPRK. This early Soviet largesse took the form of technological support and manufacturing, but also included education and training in material sciences, which drove the war-ravaged and agrarian north’s emphasis on heavy manufacturing and propelled its early dominance over the war-ravaged and agrarian south. On March 17, 1949, the USSR and the DPRK took the more formal and public step of signing a 10-year “Economic and Cultural Pact” amounting to a $40 million, 2% loan for the purchase of equipment and materials.
Feeling pretty good about his situation, North Korea’s Great Leader, Kim Il Sung, dropped a line to Moscow and Beijing in early 1950 to give Stalin and Mao the heads-up that he intended to invade South Korea. Kim knew, no doubt, that when push came to shove his dictator buddies would have his back. In June, North Korea invaded South Korea and drove the defenders to the southern edge of the peninsula. A US-led counter-offensive arrived in August and within a few months drove the invaders into the far north and up against the Yalu River.
Nicely done there — except on the other side of the Yalu were a million Chinese soldiers, a few hundred thousand of whom drove the Americans and their South Korean allies back below the 38th parallel. The Soviets provided air cover for the counter-counter-offensive, as well as material and aid to both Chinese and North Korean troops. This proxy war (called The Fatherland Liberation in the North but generally known as the Korean War, because that’s where everyone met up to do all the killing) dragged on until an armistice was signed in July 1953, formally creating The Most Ironically Named Place on Earth, the Demilitarized Zone (DMZ), a two-and-a-half-mile-wide stretch of mine-riddled earth separating North from South at the 38th parallel, along which a combined 1 million troops are facing each other and leaning forward.
Thus began the time-honored tradition of North Korea overplaying its hand and expecting bailouts from its Sino-Soviet patrons, who responded to their wayward satellite not out of paternal instinct or filial devotion but in their own calculated self-interests.
To wit, the North’s Soviet sugardaddy pumped in $250 million in aid (notably without compensation) immediately after the cessation of open hostilities — half earmarked for the military, a quarter for light industry, and a quarter for heavy industry. Three months later, Kim Il Sung announced that the USSR had forgiven all of the DPRK’s debt from the war and eased the terms of repayment for its pre-war loans. That was news to Stalin, who had agreed to remit only half of the war debt, but no matter — the precedent for a charitable debt write-off was established, along with the Great Leader’s signature hyperbole.
Within a year, the USSR had sent $75 million in equipment and materials to the DPRK, including materials for such sexy enterprises as cement works, sulfuric acid factories, and meat combines. To make the most of the investment, the USSR also shuttled Soviet technicians between the two countries, providing much-needed technical expertise and placing a human face on the body politic’s teats. Imagine Pyongyang in its post-war days, a smoldering wasteland (the US dropped more bombs on the peninsula during the Korean War than it did worldwide during all of World War II) steadily rising into a cutting-edge planned economy protected and bankrolled by the great eastern superpower, whose pale faces popped up in schools and taverns in a country that defined itself by stringent racial purity.
Things were looking pretty good for the DPRK. Its Sino sugardaddy extended over $500 million in aid and loan credits that decade. Even the CIA noted that the USSR and China were more intent on building up the North Korean economy than the U.S. was in building up the South’s. Though growing apart ideologically, the Soviet Union and China could agree on one thing: the need for a buffer state on the Korean peninsula. That support was designed to quickly build up the North Korean satellite in order to effectuate (by force if not by economics, although your author wonders about the distinction) an eventual reunification of the peninsula. By that measure the investment has failed spectacularly.
But it has succeeded in other practical ways: creating a strong front in the Cold War, sustaining this resource-rich satellite at a bare minimum level, and keeping democracy (and the Americans) at bay. To secure those benefits, Soviet and Sino aid amounted to $1.65 billion for the decade. Not bad, as far as financial backing for a fledgling socialist state goes. The Great Leader was many things, but a poor manipulator of his squabbling sugardaddies he was not. He played Beijing against Moscow like a Korean accordion, securing decades of aid, credits, support and lending that totaled in the billions.
That trifecta served the hermit kingdom well. But the interests and sympathies of the two sugardaddies would be severely tested and delicately redefined over the next 60 years. And North Korea’s debt sits squarely at the center of that family drama.