South Korea is phasing out sand imports from North Korea, delivering a heavy blow to the impoverished regime which is already reeling economically because of confiscated arms shipments and bungled currency reforms.
Sand was the biggest export to South Korea from the north in 2008, earning Pyongyang $73m. This represents about twice as much as it gains annually from wages at factories in Kaesong, a cross-border industrial zone for South Korean companies.
South Korean officials told the Financial Times that Seoul would phase out sand exports when existing contracts with its northern neighbour expired.
“Once those companies receive their sand, for which they have already paid, that will be the end,” a senior South Korean security official said.
Although it could have a profound political impact, South Korean officials insist that the move has been taken because Seoul is increasingly dredging its own sand domestically.
Exports of arms and counterfeit cigarettes are believed to be worth hundreds of millions of dollars to the communist dictatorship.
Officials admit that South Korea has long worried that money paid for sand goes to the military, but its own increased dredging and the impending conclusion of numerous outstanding contracts have now given it the opportunity to end the trade.
Still, economic instability and lack of funds in North Korea pose risks for Seoul, which is keenly aware of the potential dangers of economic implosion in the north.
Losing the sand trade would compound economic woes for Pyongyang, which in addition to reeling from arms seizures is also suffering the fall-out from a bungled currency revaluation that sparked food shortages and inflation.
North Korea is trying to compensate for the South Korean move by seeking alternative sand markets in Russian construction projects. Russia’s Itar-Tass news agency reported late last year that North Korea would ship sand to Vladivostok for use in building projects for the Asia-Pacific Economic Co-operation summit in 2012.
Sand shipments to South Korea started in 2002 amid inter-Korean rapprochement but were suspended last March while North Korea prepared to blast a long-range missile over Japan.
Under pressure from construction companies hit by the import ban, Seoul resumed imports from North Korea in November. The current flow, however, is less than a fifth of previous levels.
In an effort to salvage the trade with South Korea, Pyongyang has offered to provide sand to South Korean companies in exchange for other building materials and fuel. However, the South Korean unification ministry said domestic companies were not interested and had not applied for export licences to conduct such swaps.
The conservative government of the South Korean president, Lee Myung-bak, has taken a harder line on North Korea than his two predecessors. His North Korea policy is based on persuading Pyongyang to abandon its nuclear programme in exchange for a $40bn package of incentives and infrastructure. North Korea has rejected that idea and most analysts agree it would never surrender atomic weapons, its lone diplomatic bargaining chip.
North Korea is not the only country in Asia concerned about the sand trade. Singapore, which needs large quantities of sand for reclamation and construction, has lost a source of imports after Indonesia and Malaysia in recent years banned sand exports on environmental grounds.
Additional reporting by Kevin Brown in Singapore