South Korea Quietly Makes other Energy Supply Plans as Russia Faces Fresh Sanctions

A driver refuels a vehicle at a petrol station in Gimpo, South Korea. Asia’s fourth-largest economy almost entirely relies on imports for its fossil fuel needs. Photo: Bloomberg
South Korea is worried about knock-on effects from the Ukraine war on the prices of raw materials it needs to produce goods for export, as it relies on trade to survive more than any other Asian nation.
Its exports contributed 36 per cent of Gross Domestic Product as of 2017, according to the International Monetary Fund – the third-highest among the Organisation for Economic Cooperation and Development’s 38 members, following the Netherlands (64 per cent) and Germany (39 per cent).
The fourth-largest economy in Asia almost entirely relies on imports for its fossil fuel needs, depending on Russian gas and oil for 5-10 per cent of its total energy imports. Most of its crude oil comes from the Middle East and the US, with Russia providing about 5.6 per cent of supply. Russia was South Korea’s second-largest coal supplier after Australia, providing about 17 per cent of the country’s coal imports.
“The direct fallout on South Korea from the Ukraine war is rather limited in light of the limited trade volumes with Russia and Ukraine,” said Jeong Min-hyeon, an analyst at the Korea Institute for International Economic Policy.
“However, increases in prices of raw materials and other imported products are likely to dent the economy as energy costs account for a large part of overall manufacturing costs,” he said.
Francisco Blanch, global commodities head at Bank of America, said in March that Brent crude oil – one of three main benchmarks for prices – could soar to US$150 a barrel by the summer, with a probable “ugly scenario” leap beyond US$200 per barrel if European countries implement oil sanctions on Russia.
Analysts expect the war in Ukraine to be lengthy and have long-term ramifications for global commodities markets.
“Hikes in energy costs will lead to increases in production costs, which in turn will undercut the competitive edge of Korean products in overseas markets. Energy and raw materials’ price hikes will also add to consumers’ prices,” said Jeong.
Seoul’s Ministry of Trade, Industry and Energy said recently that the country’s negligible trade with Ukraine had come to a halt while its exports to Russia also show signs of losing steam.
South Korea’s exports to Russia last year stood at US$10 billion while imports from Russia, mostly energy and other natural resources, came to US$17.4 billion. Its trade volume with Russia accounted for 2.2 per cent of its overall total.
At an emergency government-industry meeting in March to discuss the fallout from the war, car manufacturing representatives said they were already having difficulty securing parts and shipping assembled vehicles abroad because of logistical problems caused by the conflict.
They were also concerned about foreign exchange losses caused by the Russian currency’s devaluation, the ministry said.
Similarly, shipbuilding representatives complained of supply-chain bottlenecks for imported raw materials and components and difficulties with financial transactions.
Nuclear resumption
The South Korean government is providing emergency loans to the tune of US$2 billion for small businesses hit by the war. With Russia facing new sanctions from the US and European Union, the government has been preparing to make up for potential shortfalls in global energy supplies. One strategy has been to consider delaying its planned reduction in nuclear energy generation.
President-elect Yoon Suk-yeol’s new government is widely expected to resume construction of two 1,400-megawatt nuclear reactors, which has been on hold since 2017.
Other measures being considered include tapping into strategic oil reserves and securing alternative energy sources.
South Korea announced last month it would release 4.42 million barrels of its strategic crude reserves to help bring down soaring energy prices and prevent possible shortages amid tensions surrounding Ukraine. It took a similar step in December by releasing 3.17 million barrels at the US’ request.
The finance ministry said in a statement on February 24 that it will look to expand oil imports from the US, the North Sea and the Middle East, coal from Australia, South Africa and Colombia, and gas from Qatar, Australia and the US.
Seoul also plans to cooperate with the International Energy Agency, which works to maintain a steady supply of oil across the globe, if there is a request for a joint effort to stabilise oil prices.
Washington and allies have announced plans to sell almost a quarter-of-a-billion barrels from strategic petroleum reserves.
“South Korea is currently having discussions with the rest of the world to participate in an effort to address the energy crisis,” Trade Minister Yeo Han-koo said in February, adding that there had not been “any discussions about potentially imposing sanctions on any energy products”.
The country still has sufficient energy supplies, however, and did not see an immediate shortage following the Russian invasion, the energy ministry said in February.
The country was the first to follow a White House-led joint release of crude late last year. It has also been grappling with inflationary pressures, and temporarily slashed fuel taxes to rein in price increases.
South Korea had previously reached out to Russia as part of its efforts to diversify its sources of energy imports to reduce its heavy dependence on the Middle East.
“It is desirable for South Korea to maintain this policy and keep the door open for Russian energy as it is easy to ship gas and oil from eastern Siberia and [the island of] Sakhalin to this country. And these parts of Russia are not being directly affected by the war,” said an analyst working for a South Korean state-financed research institute, speaking on condition of anonymity.

About Parvin Faghfouri Azar

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