By Kim Tong-hyung
Soaring inflation and falling exports are high on the list of concerns for Korean policymakers. Both could be made dramatically worse by the standoff between Iran and the West over the Strait of Hormuz.
While fears of another oil spike have been climbing as the war of words intensify between Iran and Western nations, Korea, an economy over-reliant on exports, is also concerned about the possibility of temporary losing one of its biggest markets in the Arab world.
While Korea last month reluctantly joined a growing group of nations moving to weaken Teheran economically, there have been uneasy talks with Washington over reducing Iranian oil imports, which accounted for about 10 percent of the crude the country bought last year.
With U.S. winning key support from nations such as Japan for tough oil sanctions against Iran, over a nuclear program it suspects is geared toward developing atomic bombs, Korean policymakers have accepted that Iranian oil imports will have to be cut.
That of course would spike fuel prices and pump up the levels of consumer prices that are already uncomfortably high, but the authorities have been losing both the battle and the war against inflation anyway.
Just as serious for government officials is the Iran standoff dealing another blow to exports, which account for around half of the Korean economy, that are already reeling from the effects of the eurozone debt crisis and sluggishness in major markets, the U.S. and China.
A U.S. delegation led by Robert Einhorn, the State Department’s special advisor for nonproliferation and arms control, was recently in Seoul talking with Korean officials over increasing pressure on Iran and to soothe concerns that stronger sanctions will drive up oil prices.
According to government sources here, the officials used the meeting with Einhorn to request an exemption clause in the upcoming sanctions that will allow Korean companies to continue exporting their products to the Middle Eastern country. Should the U.S. refuse, Korea Inc. will be losing an export market worth more than $7 billion a year.
Korean companies have been attempting to clarify and reduce exposure under the U.S. National Defense Authorization Act (NDAA), which took effect on the New Year. It imposes sanctions on companies trading with a number of countries including Iran 60 days after its enforcement, which means that Korean companies exporting to Iran after early March will be treated unfavorably in their business with the U.S.
The law, however, also has an exception clause that allows banks that have gained U.S. approval to continue financial transactions with the Iranian central bank.
Korean government officials have asked Einhorn whether Korean banks could be considered for this exception, according to the sources, as this would be crucial for local industrial groups Samsung Electronics and Hyundai Motor to keep key parts of their businesses in Iran running.
Since 2010, Korean banks have been executing transactions with Iran through won-denominated accounts at government-owned Woori Bank and Industrial Bank of Korea (IBK), which are connected with the Iranian central bank.
Officials at the strategy and finance, and knowledge economy ministries declined to comment on the possibilities of Woori and IBK gaining the exceptions.
``There is a possibility that Korean exporters could be hurt from the standoff in Iran as the country has been growing as an export market,’’ Knowledge Economy Minister Hong Seok-woo told reporters Wednesday.
``We plan to work closely with the U.S. and prevent the extreme possibility that exports to Iran become completely blocked.’’
More than 2,200 Korean companies are exporting products to Iran. For 281 of the firms, sales generated from Iran account for more than half of their foreign business. The ratcheting political tensions between Iran and the West have certainly provided Korean firms the chance to exploit the dramatically reduced presence of American and European firms in the Middle Eastern nation.
Local technology makers Samsung Electronics and LG Electronics have cemented leadership in markets such as consumer electronics and mobile phones. However, Hyundai Motor has halted its export of vehicles to Iran since November following pressure from consumer groups in the U.S.
The NDAA provides a longer grace period for oil imports at six months. Crude prices have been elevating in recent weeks with Iran, in response to widening economic sanctions, issuing fresh threats to cut off up to 17 million barrels per day of oil supply from world markets by shutting down the Strait of Hormuz.
The strip of water between Iran and Oman represents one of the world's most important shipping lanes and the fragile global economy needs a military confrontation there like a hole in the head.