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Cut off from banks, they barter
Why banks matter
When Australia sells iron ore to Japan, nobody ships pallets of cash across the Pacific. The payment moves through a network of international banks that both sides trust to keep score. Russia and North Korea have both been almost entirely cut out of that network.
What gets swapped
So North Korea receives food, fuel, fertilizer, and building materials in exchange for its munitions and its men. Barter makes the true size of the trade almost impossible to track, and exactly how many munitions Russia receives is classified military information, which gives both sides a reason to keep things vague.
Why surpluses stall
The same arrangement makes it hard for North Korea to run a meaningful trade surplus with Russia, because there is nothing it could receive in return. The system of international finance that tracks who owes what to whom is unavailable to both of them. The only alternative is extending credit on a handshake, either trusting North Korea or trusting a Russia that is now in the fourth year of one of the most expensive wars in modern history.
How do banks move money across borders?
Most cross-border payments run through correspondent banking, where banks keep accounts with one another and adjust the balances. SWIFT, a messaging network founded in 1973 and based in Belgium, carries the payment instructions between them. It does not hold or move money itself. In 2022, several Russian banks were disconnected from SWIFT after the invasion of Ukraine.
Why is barter so hard to scale?
Barter needs what economists call a double coincidence of wants: each side must want exactly what the other has, at the same time. The English economist William Stanley Jevons described the problem in his 1875 book Money and the Mechanism of Exchange. Money solves it by letting one side sell for something everyone accepts and buy later. Without it, every deal has to be matched item for item, and both sides have to agree on an exchange rate between the goods.
Why are North Korean banks shut out?
In 2016, UN Security Council Resolution 2270 ordered member states to close the branches and offices of North Korean banks within their borders. The Financial Action Task Force, an intergovernmental body that sets standards against money laundering, has kept North Korea on its list of jurisdictions subject to a call for action since 2011. Resolution 2270 gave countries ninety days to complete the closures.
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