Presentation to HKGCC on Asia Regional Threat Assessment

Presentation to HKGCC on

Asia Regional Threat Assessment

Steve VickersPresident & CEO

International Risk Ltd.

16 June, 2003

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Asia Regional Threat Assessment

Given the scale of the region and short time available, International Risk will focus on three key areas:

• North Korea Crisis• Terrorism in Asia• SARS and the downstream consequences:

– Economic– Political

• We have posted papers on these subjects on www.intl-risk.com

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North Korea

“By far the most pressing and potentially dangerous threat to East Asia today”

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North Korea

While the world’s attention was focused on Iraq and SARS, the situation in North Korea has escalated.

North Korea is once again using the threat of developing nuclear weapons to blackmail the developed world.

• What does this mean to the region?• Will their high risk strategy succeed?

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Current Situation

• The present crisis emerged openly last Oct when US officials said that North Korea had admitted to running a secret nuclear weapons programme

• This programme is in breach of the 1994 nuclear safeguard agreement

• The US then suspended oil shipments to North Korea

• North Korea pulled out of the nuclear Non-Proliferation Treaty – expelling the UN monitoring team

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Current Situation

• North Korea resumes work on plutonium reprocessing at Yongbyon

• Throughout the crisis North Koreans have demanded face-to-face negotiation with the US

• US has played “hard-ball” and has insisted on multilateral talks with other involved parties

• The situation gradually escalated and the US moved an aircraft carrier to the region – deployed Stealth fighters

• North Korea threatened to fire ballistic missiles and attempted to force down a US spy plane in international airspace

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Current Situation

• Something had to give – on 12 April “Dear Leader” apparently wavered:– Perhaps due to swift defeat of Iraq and

downfall of Saddam Hussein– Perhaps he realised he had taken

brinkmanship too far– Perhaps the PRC – his closest “friend” had

put pressure on him to face reality• North Korea conceded to talks of a

multilateral nature and agreed to accept China’s presence in Beijing on 23 April

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Current Situation

• Talks broke down apparently in disarray – US claims that North Korea threatened to prove that they had nuclear weapons. North Koreans claimed they had made a “new bold proposal”

• President Bush tells NBC that North Korea “was back to the old blackmail game”

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Current Situation

• On 28 April, Chinese Foreign Ministry briefed 20 western diplomats and gave China’s version of the talks.– North Koreans had offered a deal which

includes dismantling nuclear programme– Suspending ballistic missile tests– Halting missile exports– US would be required to change its

“antagonistic attitude”– No further US talk of regime change

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Current Situation

• The US was caught off guard by this Chinese announcement. Secretary of State Colin Powell says – “They put forward a plan that would ultimately deal with their nuclear capability and their missile activities, but they, of course, expect something considerable in return.”

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Current Situation

• Crux of the dilemma – Washington will not pay for the elimination of Pyongyang’s nuclear weapons– Washington is emboldened after the

victory over Saddam– Payment would preserve the Stalinist

regime• “Dearest Leader” is convinced that his

road to salvation is directly associated with possession of nuclear weapons

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Current Situation

• Conversely the US is adamant that possession of nuclear weapons by the “axis of evil” is not acceptable

• Recent reports in Japanese media have referred to meetings between Iranian & North Korean technicians

• Sources suggest that Pyongyang has at least two prototype devices and that the regime can produce nuclear weapons in months rather than years

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Current Situation

• North Korea has stated that UN sanctions would be tantamount to a “declaration of war”

• China’s national interests lie in the preservation of a non-nuclear North Korean state

• US congressmen have visited North Korea in late May

• The United States is planning to move its fighting forces in South Korea well away from the de facto border with North Korea.

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Current Situation

• Some speculate that the Bush administration is preparing for a pre-emptive attack against North Korea and needs to remove forces that might be hostage to any retaliation by North Korean artillery

• Richard Perle, the former Pentagon official and an architect of the Bush administration’s strategy to topple Saddam Hussein, said President Bush should consider bombing North Korea’s nuclear production facilities if diplomatic efforts fail

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Current Situation

• Yongbyon, the site of a reactor and a plutonium reprocessing plant that North Korea has said it has restarted, lies about 60 miles north of Pyongyang

• North Korea warned the USA against arms build-up in South Korea

• Japan’s efforts to update its security legislation reached a milestone when an overwhelming Diet majority passed three defense bills designed to deal with a military attack from abroad

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Current Situation

• Now Japan has wartime legislation spelling out basic responses not only to an actual attack but also to an “anticipated” attack. The Self-Defense Forces Law has been amended to facilitate SDF deployment during such contingencies. The law governing the Security Council of Japan also has been revised to create a crisis-response committee

• Japan has belatedly taken steps to curb cash transfers from Japan to North Korea

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Current Situation

• 200,000 Koreans live in Japan• 40% of the Japanese “Pachinko business”

is run by North Koreans• Japan has now eventually clamped down

on illegal exports of strategic components to North Korea following revelations that parts smuggled into the Stalinist state were used to produce ballistic missiles

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Current Situation

• A spokesman for the North Korean Central Committee of the Kim Il-Sung Socialist Youth League, in a statement on 11 Jun bitterly denounced the “US imperialists” plan to beef up their forces as an unpardonable criminal move

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Current Situation

• “The five million youth who have cultivated matchless power and wisdom under the guidance of Kim Jong-Il, illustrious commander born of heaven, will become human bombs and sledgehammers and mercilessly wipe out the US imperialist aggressors if they ignite a war on this land and drop even a single bomb over beloved Pyongyang”

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Current Situation

• Prime Minister John Howard has committed the Australian Navy to a blockade of North Korea to return to its non-proliferation commitments. Mr. Howard said Australia had sought to be involved in any international effort to intercept vessels travelling to and from North Korea

• This situation will come to a head within months – not years. We must be prepared for the economic and political fallout

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International Risk’s Assessment• A war remains unlikely in the short term. The

crisis was cooked up by Pyongyang, just as on previous occasions, to squeeze financial concessions out of the developed world and North Korea’s frightened neighbours. Some US officials argue that the original leaking of the news that Pyongyang was resuming work at its nuclear facility was done purely for financial blackmail and that there is still no proof that North Koreans have nuclear weapons. However, the possibility that it already has or can soon make them remains North Korea’s ace in the hole. Kim Jong Il is also trying to prove himself as tough as his late father.

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International Risk’s Assessment

• A significant danger is that war could erupt from a miscalculation. President Bush may well believe he can deal with this impoverished, starving country without going to war but he may inadvertently push the "Dear Leader" into a situation where North Korea will attempt to unleash "Weapons of Mass Destruction“ or lash out at the US forces in South Korea or Japan

• New measures associated with cutting off revenue from Japan to North Korea are not fully understood and could prove to be the “straw that broke the camels back” in respect of North Korea

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• In another scenario, “Dearest Leader” may defy the Americans and start up his nuclear production line, forcing the US to use their smart bombs to destroy his nuclear facilities. This would, of course, incur the danger of spreading nuclear contamination to neighbouring countries or of outright war – Seoul is badly exposed.

• There is little doubt that is what the North Koreans are gambling on – that President Bush and the Japanese will pay up rather than run these risks. This is “Russian Roulette” played to the extreme.

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• Whilst the current crisis has been triggered by Pyongyang’s nuclear sabre-rattling, the harsh reality remains that even if the current crisis is contained in the short term, one way or another; that North Korea remains a potent threat through chemical and biological weapons of mass destruction. This is an issue that has yet to be addressed. It is doubtful that the US & Japan will let this situation continue for much longer and Kim Jong Il’s regime will come to an end – the question is not if, but when and how much damage will be done in the process

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The Economy

• Run on outmoded communist lines and beset by natural calamities

• Large scale starvation • Wages are probably lowest anywhere in

the world• Country reliant on a trickle of oil and food

from China & on aid from the West• Japan (curiously) is the largest importer of

North Korean products – Japan imported US$225 million of North Korean product in 2001

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The Economy

• Japanese men bought 650,000 Korean suits in 2002

• Large exporter of illegal drugs – Ice to Japan

• 200,000 Koreans living in Japan send money back to North Korea

• Much of the Japanese Pachinko business is funding North Korea regime

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The Rocket Economy

• A paradox - North Korean rocket program is strangely one of North Korea’s biggest money earners

• North Korea has helped Pakistan and Iran with their missile programs and has supplied the Yemeni military with Scuds

• US say that North Korea is the largest proliferator of missiles and missile technology on the earth

• North Korea reported to have shipped Scub-B missiles to Pakistan in Feb 2003

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A Criminal Regime

• Hyundai payments made to a front for “Room 35” (North Korean secret service)

• “Room 35” also responsible for:– Kidnapping– Drug trafficking– Counterfeiting of US dollars– Cigarettes smuggling

• Prominent Macau presence• Illegal profits go to North Korean armed

forces and to support the colourful life style of “Dear Leader”

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A Criminal Regime

• Most recent incident – Australian navy captured a North Korean freighter. 26 North Koreans charged with smuggling more than 50 kgs of heroin worth US$50 million

• Defectors from the Kim Il-Sung regime revealed that the “Dear Leader” had ordered the cultivation of opium crops since 1992 and use foreign aid donations of fertilizers to boost his opium crop

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A Criminal Regime

• Wide-spread abuse of the “diplomatic bag” since the 1970s – US$100 “super” notes– Rhino horns from Africa to China– Arms trafficking globally

• Various motives for kidnapping - including 1978 kidnapping of South Korean director and his wife from Hong Kong!

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Regional Effects of the Crisis• Highly complex • China originally adopted a hands-off

approach but is now embroiled in the process

• China’s national interest lies in a continuation of a non-nuclear North Korean state

• Japan warns of a pre-emptive strike – this may signal the end of Japanese post-war pacifism

• South Korea whilst hoping for reunification is pre-occupied by its own issues and its fledging democracy

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Regional Effects of the Crisis

• With the Iraq situation resolved, considerable attention is now focused on North Korea & this will shortly impact on East Asian markets – negatively

• Impact of revenue “embargos” on the North not fully understood – more dangerous than in other sanctions situations

• Strong possibility of an arms race in Asia if Japan goes nuclear

• A naval blockade of the North will have far reaching consequences

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Japan & the North Korean Crisis

• Kim Jong Il is only threatened by the US• Kim’s life line is possession of nuclear

weapons – in his view• US success in Iraq will increase Kim’s

conviction that he must go nuclear – and soon

• In the event of war the financial markets in Japan and Korea will face meltdown

• Following a successful US military strike and Kim’s fall – Japan will need to fund the rebuilding of North Korea

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Japan & the North Korean Crisis

• International Risk assess the cost of North Korean reconstruction at US$400 billion of which Japan would pay US$100-150 billion or 5% or more of its GDP

• The other option is that the “Dear Leader” wins out and North Korea becomes a nuclear power and the US does not attack him. This would spark a dangerous Asian arms race led by Japan with China closely following. For Japan the cost of re-arming could be at least 8% of GDP per year. That would radically affect the budget deficit

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Rebuilding North Korea

• Even if conflict is averted this time it is unlikely that North Korea can continue to hold the world to ransom

• Sooner or later it will collapse and be forced to join the rest of the world

• In either case North Korea will need to be rebuilt from top to bottom

• Ironically this may offer extraordinary opportunities and companies should start to consider strategic planning now

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Minimum Corporate Requirements

In the light of these circumstances International Risk recommends that it is critical that corporations have, at the very minimum, the following in place:• Corporate headquarters Crisis Incident

Management Plans

• Local office Crisis & Emergency Plans

• Emergency Evacuation Plans

• Simulated Incident Training Programmes

• Travel & Security Plans

• Updated Corporate Security Plans

Terrorism & Instability In Asia -




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• Developments in Iraq, Afghanistan and the Middle East have had a significant impact on the outlook in Asia – in particular South East Asia

• Whilst North Asia, notably China, Hong Kong, Japan and South Korea (other than the associated threat from the North) are assessed to be at relatively lower risk than the remainder of Asia, we should not be complacent in this respect

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Current active groups around the region include the following:

• Jemaah Islamiyah (JI)• Abu Sayyaf• Moro National Liberation Front (MNLF)• Moro Islamic Liberation Front (MILF)• Kumpulan Myjahideen Malaysia (KMM)

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• Jemaah Islamiyah (JI)– There are now about 50 JI members

detained in six South-East Asian countries: Cambodia, Indonesia, Malaysia, the Philippines, Singapore & Thailand

– Formed in the mid-1980s by two Indonesian clerics, it evolved a terrorist edge in the mid-1990s when one of its founders, the late Abdullah Sungkar, established contact with Osama Bin Laden’s Al Qaeda network

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• Jemaah Islamiyah (JI)– Abu Bakar Bashir, an Indonesian of

Yemeni descent, is the group’s spiritual leader and operational leader

– The objective of JI is to establish a unified South East Asian Islamic state stretching from southern Thailand, through the Malay Peninsula, including Singapore and cross the Indonesian archipelago, and into the southern Philippines

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• Jemaah Islamiyah (JI)– The organisation has spread to include

cells in every country in South-East Asia, as well as in Australia

– In Cambodia, two Thais and an Egyptian were arrested on 28 May 03 & accused of being members of JI and having links with Al-Qaeda

– In Thailand, on 11 June 03, 4 suspects linked to JI were arrested – suspected of plotting to blow up tourist sites & 5 western embassies in Thailand, including the US Embassy in Bangkok

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• Abu Sayaaf– Formed in the 1990s by Afghan-trained

Muslim firebrand Abdurajak Abubakar Janjalani ostensibly to fight for an independent Islamic state in the south, the Abu Sayyaf reached a peak of about 1,000 members

– A loosely organised bandit group after Janjalani was gunned down by police in 1998 and succeeded by his younger brothers

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• Abu Sayaaf– Intelligence reports show there to be only

about 70 Abu Sayyaf rebels operating in the southern island of Basilan currently and about 300 in nearby Jolo island

– However the group is still capable of launching terrorist activities in tandem with other rebel groups such as the MILF

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• Jemaah Islamiyah and Abu Sayyaf have documented links to Al Qaeda and there is little doubt that in forthcoming months terrorist incidents will occur in the following locations:– Indonesia– Philippines– Southern Thailand– Pakistan

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• Additionally American, British and Australian interests throughout the region will be potential targets – especially “icon” companies identified as being symbols of their home countries

• There is a current trend toward “softer targets”

• Action against Al-Qaeda has created a “hornets nest effect”

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International Risk’s Assessment• Attacks on shipping especially in the

Straits of Malacca can be anticipated• Aceh and other parts of Indonesia will

continue to be troublesome - irrespective of military action by the Indonesian authorities

• Attacks on oil/gas pipelines in Aceh are highly likely

• Complacency in Singapore and Hong Kong could facilitate terrorist attacks on foreign interests

• We need to keep our guard up

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Minimum Corporate RequirementsIn the light of these circumstances International Risk recommends that it is critical that corporations have, at the very minimum, the following in place:• Corporate headquarters Crisis Incident

Management Plans

• Local office Crisis & Emergency Plans

• Emergency Evacuation Plans

• Simulated Incident Training Programmes

• Travel & Security Plans

• Updated Corporate Security Plans

SARS & the Downstream

Consequences



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• If SARS is actually contained in China by the end of July, the economic slump will be arrested and growth will quickly resume

• East Asia (less Japan) will be able to achieve a growth rate of 4.5% – 5% which would be 0.6% - 1% lower than last year. However Singapore & Hong Kong are likely to experience flat or even negative growth

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• The structural nature of the Chinese economy suggests that fallout will be quite limited

• The most heavily affected area - services sector only represents 28% of the economy. Whilst manufacturing sector – 54% and agricultural sector – 14% are unlikely to be seriously affected. China’s overall economic growth rate may fall from last year’s reported 7.6% to around 6.5%

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International Risk’s Assessment• Japan & South Korea – likely to suffer only

a marginal impact on their growth – no more than 0.1-0.2%. But if the virus should spread to the two countries, the economic fallout would become more pronounced. A fall in output of Japanese manufacturers in SARS-affected areas of 10% over a year could cut Japan’s economic growth rate by 0.6%, although economists estimate a decline of between 0.2-0.3%

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• At The Canton Trade Fair in April 2003, export orders won by Chinese firms were 75% below last year. A significant proportion of China’s overall foreign trade deals are signed in this trade show. However because labour, raw materials & production costs in China remain lower than others, any shift will likely be limited & temporary

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• Currently the long-term competitiveness of the Greater China region & Southeast Asia as manufacturing & trading centres have not been undermined by SARS

• No significant disruption to production operations in Guangdong or other SARS-affected areas in China, Taiwan or Singapore

• Only a handful of factories have had to briefly shut down their production lines because of suspected SARS infections

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SARS and Politics

• The political ramifications of the SARS epidemic in China were most significant and could potentially have provided a “triggering” event endangering the ruling communist party

• After a poor initial response that seriously undermined its credibility, the central government in Beijing reacted forcefully and effectively

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SARS and Politics

• Through a series of mishaps the Hong Kong SAR Government lost considerable credibility and Mr. Tung’s longer term “durability” was brought into sharp relief as a consequence

• In the end the political damage may equal the economic debris

• SARS II will return next season – we all need to be prepared!!

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International Risk

Websitewww.intl-risk.com

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Presentation to HKGCC on Asia Regional Threat Assessment