By Troy Stangarone

With sanctions by the United States and the European Union continuing to tighten on Iran, Korea has announced that it will halt imports of Iranian oil as of July 1. Korea’s decision makes it the first of Iran’s major export markets, and a key Asian consumer of Iranian oil, to fully cut off its supply of Iranian crude. Korea’s move contrasts with Iran’s other key export markets and could pay dividends to Korea in the future, but does not come without costs.

While the United States recently granted Korea a 180 day waiver from U.S. financial sanctions, the European Union has refused to grant a waiver from its ban on the sale of protection and indemnity insurance (P&I) for shipments of Iranian oil. The EU’s sanctions have proven effective because 90 percent of P&I is handled through European insurers, including 100 percent of Iranian shipments. Without the ability to purchase insurance for their shipments, Hyundai Oilbank and SK Energy would have been unable to insure a tanker’s cargo, its liability after a collision, environmental pollution and the risk of war – a real potential given Iran’s prior threats to seal off the Strait of Hormuz and Israel’s unease with Iran’s nuclear program.

Asian countries are the biggest purchasers of Iranian oil, accounting for 60 percent of Iran’s oil exports. However, in contrast with Korea, the 4^th largest purchaser of Iran’s crude oil, Japan, India, and China have all sought ways to get around the EU ban. Japan recently passed a law to provide its importers with sovereign, state based, insurance for their imports,  an option Korea choose not to take. India and China have reached varying deals for Iran to provide insurance and ship the oil.

While Korea imports almost 10 percent of its oil from Iran, it has been preparing for this eventuality. Had it not received a waiver from U.S. sanctions, it would have likely had to take similar steps. Knowing that, Korea has essentially taken three measures to address the crisis. First, it sought to build up its oil reserves.  It stockpiled Iranian oil, increasing imports by 57 percent in April, before declining by 40 percent in May as it worked to secure a waiver from the United States. At the same time, Korea sought out alternatives to Iranian oil during President Lee Myung-bak’s trip to the Middle East in February. The deals struck on that trip have allowed Korea to replace its imports of Iranian crude with other suppliers in the Middle East. According to Reuters:

Shipments from Kuwait in the first five months rose 23.3 percent to 348,493 bpd, while those from Saudi Arabia rose 7.9 percent to 838,678 bpd. Imports from the UAE increased 8.6 percent to 258,263 bpd, the KNOC data showed.

January-May imports from Qatar rose 14.3 percent to 280,829 bpd.

In the short term, Korea has addressed its energy needs in a manner that reduces its risks from the uncertainty surrounding Iran’s nuclear program. It will also have distinguished itself from its competitors in the region by not skirting the sanctions. This will likely not go unnoticed by the United States, the European Union, and numerous Middle Eastern states that have concerns about Iran’s nuclear program. This could benefit Korea through deeper ties with other states in a key region for meeting Korea’s energy needs.

However, there are potential costs. Iran has not yet made a statement on Korea’s decision, but Korea does have broader interests in Iran that its decision to halt imports could affect. First, Korea has developed a significant commercial relationship with Iran and it has been becoming an increasingly important market for Korean exports. Over the last decade, Korea has seen its exports to Iran increase from $1.2 billion to $6.0 billion last year. Iran could seek to limit the access of Korean exports to its markets in retaliation. Additionally, should a solution be found to the Iranian nuclear crisis, Korea could find itself less welcome in Iran than Japan, India, and China, all of whom will continue to import Iranian oil.

While the potential for costs exists, Korea has deftly handled a difficult situation. As an energy importer, it has managed to replace most of the oil that it would have lost and ensure that its broader economy will not be impacted by either U.S. or European sanctions on Iran. It also avoided having the state take on additional liabilities by not choosing to supply insurance for Iranian shipments. At the same time, the steps it has taken should also help Korea to deepen its ties with more stable energy suppliers in a volatile region.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.

Photo from Daniel Ramirez’s photo stream on flickr Creative Commons.

By Troy Stangarone

In recent years, the perception of Korea on the global stage has begun to change. This shift is partly a reflection of Korea’s emerging economic stature. While China may get much of the press, decades of economic success have led other developing nations to view Korea as a model for economic development, a role which Korea has begun to embrace.  At the same time, Korea’s own economic growth has seen it become one of the top ten trading nations and an emerging voice in global economic forums such as the G-20.

While Korea’s economic success has brought it a more significant role on the global stage over the last few years, that same success has also expanded Korea’s national interests around the globe. This is perhaps nowhere more evident than in the Middle East, where Korea’s interests and relations are rapidly changing.

While the Middle East has long been a source of energy imports, Korea’s own trade with the region was often limited, though the region was a significant source for construction projects. In the last decade alone, Korean exports to the Middle East have grown from only $7.1 billion in 2001 to $34 billion last year, or nearly two-thirds of Korea’s exports to the United States. At the same time, the Middle East remains a key supplier of energy to power the Korean economy with the region accounting for about 87 percent of Korea’s oil imports and nearly 50 percent of its imports of natural gas.

Korea’s dependence on the Middle East for energy and its success in developing export markets in the region gives Korea a strong interest in peace and stability in the region. At the same time, Korea is seen as a more attractive partner in the Middle East. In a recent interview with the Korea Times, Saudi Arabia’s Ambassador to the Korea said that “The Kingdom pays special attention to its relationship with the Republic of Korea, in recognition of Korea’s leading role in the international community.”

The enhanced standing that Korea is developing in the region was evident on President Lee Myung-bak’s recent trip. Ostensibly about securing commitments for increased oil supplies from the region in anticipation of cooperating in U.S. sanctions efforts towards Iran, President Lee left the region with an agreement to raise Korea’s relationship with Turkey to that of a strategic partnership, the establishment of a high level cooperation committee to handle cooperation between Qatar and Korea on economic and security issues, and an agreement to negotiate a defense cooperation pact with Saudi Arabia, which will send its first military attaché in Asia to Korea.

On the economic side, President Lee also saw benefits. With indications that Korea is preparing to cut its imports of oil from Iran (which accounts for roughly 10 percent of Korea’s oil imports) by upwards of 50 percent, Korea secured a pledge from Saudi Arabia to make the difference in any oil shortage and a new 20 year contract to supply crude oil to Korea.  Qatar also agreed to a 20 year contract to provide Korea with an additional 2 million tons of liquefied natural gas per year.

With the region as a whole undergoing significant political change, Korea’s growing ties with Turkey could also be a strategic benefit to Korea in the long run as many of the transitioning governments in the region look to Ankara as an exemplar of Middle Eastern democracy. To those ends, Korea and Turkey are already in the process of negotiating an FTA that could serve as a broader Middle East export platform for Korea and the two sides also agreed to resume talks on the construction of two nuclear reactors in Turkey. If successful, the talks would represent the second major nuclear contract for Korea after its 2009 deal to build four plants in the United Arab Emirates.

However, despite growing ties to the Middle East, Korea also finds itself more exposed to instability in the region. The current confrontation with Iran has put the majority of Korea’s oil imports at risk should tensions over Iran’s suspected nuclear program break out into conflict, while the tumult of the Arab Spring has impacted Korea’s exports to some of the impacted nations in the region, such as Libya where exports fell from $1.4 billion in 2010 to a mere $181 million in 2011. While not as extreme a drop, even exports to Egypt fell from a high of $2.2 billion to $1.7 billion as a result of the transitions taking place in the region.

Korea has been able to benefit from increasing exports to the Middle East as part of a conscious strategy to diversify its export markets. Beyond the Middle East, Korea has also made increasing inroads into Latin America and Africa and has developed a strategy of using FTAs to ensure that Korea is not dependent upon any one market for its exports. At the same time, while Korea has been pursuing more renewable resources and energy efficiency under its “Green Korea” policies, it has not yet been able to successfully diversify the sources of its energy imports.

In the long run, Korea is likely to benefit substantially from enhanced ties with the Middle East. If new, democratic governments in the region are able to expand the benefits of economic growth to the wider population, Korea would likely benefit from increasing consumer markets in the region. However, as its energy and economic ties to the region increase, Korea will also find itself increasingly caught in the conflicts of the region. So far, Korea has managed to navigate these challenges in the Middle East well, as long as it continues to do so it will likely see its status in the region rise.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.

The photo is from the dead pixel’s photo stream on flickr Creative Commons.

By Troy Stangarone

For years experts have known that Iran and North Korea have cooperated on missile technology, and suspected that they did so in pursuing their nuclear ambitions as well. But as tensions between the United States and Iran increase, Seoul is increasingly finding itself caught in the middle as its economic and national security interest come into conflict. Should it take part in sanctions that could harm South Korea’s own economic interests, or back its closest ally in an effort to bring Iran back to the negotiation table over its suspected nuclear weapons program?

While South Korea supported previous rounds of sanctions against Iran in 2010 and the fall of 2011 with seemingly little negative economic impact, the new push by the United States to squeeze Iran’s oil exports more directly impacts Seoul’s economic interests. As is the case with much of Asia, Iran and the Middle East are a significant source of oil for Korea. Through the first eleven months of 2011, Iran accounted for 9.6 percent of Korea’s oil imports, while 80 percent of Korea’s oil imports pass through the Strait of Hormuz.

Without its own domestic energy reserves South Korea is dependent upon imports to meet its energy needs. However, replacing Iranian oil may not be as simple as buying from another supplier because of questions regarding current surplus oil supplies. Iran currently supplies the world with about 2.2 million barrels of oil per day, while the U.S. Energy Information Agency estimates that OPEC has about 3 million barrels a day of spare capacity at the moment. Most of the world’s spare capacity is in OPEC, which is expected to see its surplus capacity rise to a little more than 4 million barrels a day later this year as Libya and Iraq bring more capacity on line.  Though some experts question whether Saudi Arabia, which has the world’s largest spare capacity, truly has the ability to increase its production as much as is believed, while analysts at Goldman Sachs estimate that there may be very little spare capacity overall.

In addition to having to find a new supplier at the same time as other major oil importers such as Europe; South Korea will likely face an increasing price for oil and a loss of export markets. As enlarged demand for non-Iranian oil drives up prices, cheaper Iranian oil will be increasingly inaccessible to South Korea. At the same time, the Persian Gulf has become an attractive export destination for Korean products. Through the first eleven months of 2011, South Korea exported $5.7 billion dollars to Iran and another $9.4 billion to other states in the Persian Gulf, up from $1.2 billion a decade earlier in Iran and $1.75 billion in the rest of the Persian Gulf. Some of this trade, especially with Saudi Arabia, could likely be diverted to Red Sea ports, but South Korea would still likely see a fall in exports to the region if hostilities were to break out.

However, it is not only the United States push for sanctions that threatens South Korea’s economic interests. Facing increasingly tough sanctions and growing isolation, Iran’s regime has threatened to close the Strait of Hormuz and said there would be consequences for Middle Eastern nations that raise oil production to replace embargoed Iranian supplies Iran’s threats alone have kept oil prices over $100 per barrel in the last month from uncertainty over tensions in the region. All of this is creating another dimension for Korean policy makers to consider. While Iran could not likely close off the Strait of Hormuz for long, it is capable of mining or harassing ships in the strait, as it did during the Iran-Iraq War, which could drive up the cost of oil. According to the New York Times, if Iran were to take similar actions the price of oil could rise 50 percent within days.

This is where national security interests conflict with South Korea’s economic interests. Like Iran, North Korea remains one of the world’s pressing nuclear proliferation concerns. While South Korea has expressed support for U.S. efforts to check Iran’s nuclear ambitions, it has yet to announce if or how much it will reduce its imports from Iran.  As Seoul weighs its options, it faces three considerations. Because Iranian and North Korean nuclear proliferation are becoming linked in the United States and the international community, there is pressure for South Korea to take action against proliferation in general. More specifically, as Seoul weighs options to reduce the potential economic impact on its economy, it must balance the efforts it makes and ensure that they do not inadvertently undermine U.S. efforts to get other Asian nations to take part in the sanctions. Lastly, because the United States Congress is taking a hard and bi-partisan line on sanctions, South Korea runs the risk of meeting requests of the U.S. administration but not the expectations of the U.S. Congress, potentially creating additional points of tension with the United States.

However, even if Seoul complies with the sanctions it will still potentially face risks. If the United States efforts were to fail, Israel might feel increasingly compelled to act on its own. If it did, a conflict in the Middle East might bring about the economic consequences Seoul seeks to avoid. Either way, South Korea’s security and economic interests are at risk from instability in the Middle East

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.

Photo from Official Navy Imagery photostream on flickr Creative Commons.