In partnership with Dragonfly
TERRORISM & POLITICAL VIOLENCE | THEME
Economic pressures push North Korea to engagement or provocation
A new US president and the economic impact of COVID-19 raise the potential for re-engagement with North Korea in 2021, but also for provocation and instability on the Korean Peninsula. The region was a major foreign focus in the first half of the Trump presidency, but while meetings between the countries’ leaders dialled down the ‘fire and fury’ of 2017, they ultimately yielded little. Now Pyongyang is under substantial economic pressure during the pandemic.
This means that pursuing sanctions relief is very likely to be a top priority for North Korea in 2021. And unless the new Biden administration engages, there is a high likelihood of the North launching provocations in a bid to extract diplomatic or economic concessions as it has done in the past. President Biden’s senior official for Asia policy has acknowledged the need to quickly decide on its approach to avoid any escalations, but for now the policy remains undefined.
In the absence of engagement, the growing urgency in Pyongyang over the economic situation would most likely drive a resumption of military provocations to gain leverage over the US and revive stalled talks. Although a resumption of longer-range missiles or nuclear testing is less likely, at least in the first half of 2021, short-range tests would be more likely. The limited impact of such actions on conflict risk on the Peninsula is one of the reasons why we have lowered the country rating for the South from severe to high.
“North Korea may target South Korea when it comes to limited petty provocations directed primarily towards the US.”
An apparent reduction in tensions in inter-Korean relations during 2020 suggests that both countries are keen on avoiding a potential military escalation or breakdown in ties. In 2020, Kim Jong-un made a concerted effort to de-escalate tensions with South Korea on several occasions. And this approach is likely to continue as the North looks to break Seoul away from its backing of US sanctions – particularly if the Biden administration further tightens measures.
But North Korea may target South Korea when it comes to limited petty provocations directed primarily towards the US. Such acts serve to gain leverage over sanctions relief negotiations and are likely to consist of military exercises and shows of force close to the Demilitarised Zone. These are particularly likely around the planned resumption of US-South Korea military exercises.
How the Biden administration might respond is unclear given a review of the US’ 'entire' policy towards North Korea is underway in search of a 'new approach'. But based on comments so far, a coordinated diplomatic approach to sanctions enforcement, messaging and negotiation are likely to stand at the heart of this new policy. This would diverge from the personality-led approach under Trump, but is likely to also be ineffective if the new administration continues to insist on unilateral denuclearisation by the North.
Figure 1 DPRK weapons testing 2016 - 2020
Source: 2021 Dragonfly
Aon insights
The analyses on the Korean peninsula and Myanmar - and the recent events seen in Israel-Palestine - illustrate the potential losses associated with internal and cross-border conflict, falling outside the definition that triggers a sabotage and terrorism programme. There is a spectrum of violence that can impact people, operations and assets aligned with the broader peril of political violence; a cover responding to property damage and business interruption from acts of insurrection, rebellion, revolution, mutiny, coup d’etat, civil war and war. It can be extended to include the strikes, riots, civil commotion covers traditionally seen on property programmes, and more recently is being restricted or excluded as appetite in some of those markets responds to unanticipated losses in this space. London market solutions are developing non-damage coverages that respond to elements of these broader perils, specifically to non-violent protests, which can generate significant financial impacts on key export and supply routes. Matching a portfolio’s global exposure to the appropriate insurance is the approach we use to minimise the potential for over or underinsurance. Using data from our partners at Dragonfly and Aon’s internal modelling teams to illustrate local threat, the values at risk, and the scale of a worst case loss - all underpinned by clear analysis - provides a strong foundation to build a strategy for insurance spend.
Scott Bolton Director – Terrorism Global Broking Centre, Aon
Aon insights
In Myanmar, we have witnessed delays and terminations, particularly with cross-border infrastructure projects and contracts. For some, this has resulted in contract frustration and non-payment, triggering political risk insurance claims. When the political outlook stabilises in Myanmar, market capacity will start to return for new deals, particularly for strategic infrastructure projects which have been delayed by the political instability. As a general comment, we are seeing increasing demand for political risks insurance from multilaterals, export credit agencies, lenders and corporations, driven by their strategic use for mitigation, financing and concentration reasons. A further trend and one that we expect to see continuing beyond 2021, is increasing capacity for comprehensive non-payment cover supporting project finance. Steve Taylor Head of Credit Solutions, Asia Aon
Coup in Myanmar
The army retook power in Myanmar on 1 February 2021, ending a decade of democratisation and ousting a civilian government that had overwhelmingly won a general election just months earlier. The risk of political violence had remained high in the country throughout the last ten years with multiple armed ethnic groups continuing to fight the military, and outbreaks of state-led and communal anti-Rohingya violence. But this had typically left the largest cities untouched; the coup brought violent instability to the commercial heart of the country. Within a week of the military takeover the first large protests against the coup erupted in Yangon and spread quickly across the country. Police initially used non-lethal weapons, but the first protester was killed on 19 February, during a demonstration in the capital, Naypyidaw. By mid-March, the UN reported 138 dead amid almost daily protests as the security forces escalated the use of violence and intimidation tactics in a bid to suppress opposition. The freedom of information has also come under attack, with the revoking the licences of several local media outlets and arrest of dozens of journalists. The coup and its aftermath pose multiple challenges for business: from operational insecurity, to reputational and compliance risks, particularly if transparency suffers in a more closed society and further international sanctions are reintroduced. As of mid-March the US had implemented the most comprehensive sanctions, including blacklisting of two military holding companies that are deeply embedded in the local economy. Other countries such as Canada, New Zealand and the UK have also implemented targeted sanctions. There appears to be little international appetite to impose a comprehensive sanctions regime against the poorest country in Southeast Asia. It is likely to get poorer still as the effects of the coup hit home. Already, the early signs are not positive. Industrial production, new business activity and new investment have all collapsed since the takeover – even as East and Southeast Asian states, the largest investors in the country, hold back from implementing sanctions. The longer the post-coup uncertainty persists, the longer-lasting the negative effects will be, regardless of the army’s promise to hold a general election after a year. Any post-coup vote is most likely to take place under a system specifically designed by the military to preserve its own power. Imitating the approach taken by the junta in Thailand as it tried to rebrand itself as a civilian government may create some kind of political stability, but it is unlikely to win support domestically or trust from new foreign investors. As in Thailand, this risks economic development falling short of the country’s potential in the coming years, and the creation of longer-term instability and political violence.
“The coup and its aftermath pose multiple challenges for business: from operational insecurity, to reputational and compliance risks, particularly if transparency suffers in a more closed society and further international sanctions are reintroduced.”