Oil price plunge to affect Korea's Middle East policy

Experts divided over lower price impact on

cooperation with Middle East in non-oil sectors

By Kang Hyun-kyung

Lee Kwon-hyung, economist at the Korea Institute for International Economic Policy

Kwon Tae-kyun, former Korean ambassador to the United Arab Emirates

The Korean government has recently redefined its role in the Middle East.

For several decades, it limited its role to simply supporting Korean companies operating in the region and helping them win lucrative contracts there.

In December, the Ministry of Foreign Affairs announced that it would be proactive and ambitous. The new strategy, dubbed “middle power diplomacy,” signaled a shift in Korea’s Middle East policy.

Foreign Minister Yun Byung-se declared 2015 as the “Year of the Middle East” in the history of Korea’s diplomacy. He called Middle Eastern countries “perfect partners,” as it has much in common with them in terms of history and geopolitics.

He said there will be a flurry of summits and dialogue with the leaders of Korea and Middle Eastern countries this year.

The nation’s growing interest in the Middle East came as Gulf Cooperation Council (GCC) countries were preparing for the post-oil economy era. This new focus will create plenty of cooperation opportunities between Korea and the region in non-oil industries.

Korea’s new Middle East strategy is still in the works. But those who are familiar with the government’s vision say it basically calls for a principled approach to the Middle East and strategic thinking based on “universal values and international norms.”

Under the new vision, Korea will seek a greater voice in such regional issues as the Iranian nuclear program and the Syrian refugee crisis in an effort to become a more active player in the region.

The drive to bolster ties with the Middle East, however, is being put to the test. Falling oil prices are expected to hold back Korea’s ambitious Middle East policy.

“I would not rule out the possibility that GCC countries will cut spending on infrastructure projects,” Kwon Tae-kyun, former Korean ambassador to the United Arab Emirates, told The Korea Times on Jan. 13.

“The role of the private sector in GCC countries is limited, and the economies depend mainly on spending from the public sector. The oil price plunge, if it continues for a longer period of time, can prompt GCC governments to cut funding for new projects or to delay payments of construction projects completed by Korean companies.”

Falling oil prices are generally viewed as a positive factor for the Korean economy, as the Korea is a major oil importer and relies heavily on exports for growth. However, falling prices are a negative factor for Korean construction companies, as, experts warn, they could cost the companies lucrative deals in the Middle East.

Kwon says the falling oil prices may have a far-reaching effect on the diplomatic environment, as they could put a brake on Korea’s cooperation with GCC states in non-oil industries. Korea and some GCC countries have been discussing ways to conduct joint projects in third countries.

Non-oil industry cooperation

GCC countries have deep pockets and expertise in Africa and the Middle East, where demand for construction and other projects is high owing to significant economic growth. Business opportunities in these regions also interest Korean companies, as they have the technology and knowhow. But Korean companies do not have sufficient finance and understanding of the emerging regions to make the projects succeed.

“The rationale for joint partnerships between Korea and GCC countries in third countries are their own unrivaled strengths, which their counterparts lack,” Kwon, who first came up with the idea for such partnerships, said.

“Therefore, Korea and GCC countries can benefit a lot if the former’s technology is combined with the latter’s funding.”

The joint overseas projects drew attention as Abu Dhabi’s crown prince expressed his interest in such partnerships with Korea last year.

During a summit with President Park Geun-hye in Abu Dhabi in May 2014, Crown Prince Sheikh Mohammed bin Sayed Al Nahyan proposed that his country and Korea find joint business opportunities in third countries. Since then, the two sides agreed to team up on nuclear power plants projects in the Middle East, Africa and Southwest Asian nations.

Korea signed a similar agreement with Qatar in November when President Sheikh Tamim bin Hamad Al Thani attended a summit with President Park in Korea. The Prime Minister’s Office and investment authorities in Qatar signed a memorandum of understanding with Korea for joint projects in third countries.

Saudi Arabia, meanwhile, expressed its deep interest in partnering with Korea to implement its vision to achieve a knowledge economy in preparation for the post-oil economy era.

Falling oil prices, however, will inevitably affect non-oil industry cooperation between Korea and GCC states, as these petrostates will have to run deficits, Kwon says.

Lee Kwon-hyung, the head of the Middle East Team at the Korea Institute for International Economic Policy in Seoul, however, disagrees. The economist remains optimistic about Korea’s partnership with GCC states despite the oil price plunge.

Lee says oil prices will unlikely affect GCC countries’ preparation for the post-oil economy era because of their focus on infrastructure building.

“Saudi Arabia’s budget this year, for example, didn’t reflect a change in strategy caused by oil prices,” he said. “Spending on infrastructure building remained the same. The Saudi government believes oil prices may rebound by later this year or early next year.”

Even though oil prices will continue to fall for three or four more years, Lee says, the country won’t attempt to rewrite its national strategy.

“Chances are that the country may want to change how it enters contracts such that they give more autonomy to developers. This means that the Middle Eastern country may want developers to finance the projects that it awards. If this happens, Korean companies will need to adapt to the new environment.”

Lee, however, remains cautious about the government’s middle power diplomacy in the Middle East.

“It’s good for us to have a strategy and a principled approach when dealing with the emerging market,” he said. “But the problem is that there is a possibility that the middle power diplomacy could be misinterpreted in the region, and some people there may feel uncomfortable about the term, as it could sound intrusive.”

Conspiracy theories

Oil prices have remained around $100 per barrel from 2010 to the first half of 2014. But since June, they have more than halved, falling below $50 per barrel.

Various theories have been presented to explain the falling oil prices during the six-year period.

A decrease in demand for oil as a result of the sluggish world economy seems the most logical explanation. However, another school of thought speculates that the falling oil prices since June are the result of a Saudi Arabia-led plot to put U.S. shale oil developers out of business.

The shale oil revolution has enabled the United States to produce record levels of shale oil and consequently, to import less oil from the Middle East.

Another conspiracy theory is that the oil price plunge is the intended result of a U.S.-Saudi Arabia teamwork in an attempt to punish their common enemies, Russia and Iran.

Iran’s nuclear weapons program poses a grave threat not only to the U.S.-Middle East strategy but also to that of GCC countries, as they will also have to deal with Iran should it develop nuclear bombs.

In addition, GCC countries are at odds with Russia in the Syrian crisis. While the former detests the Bashar al-Assad regime, the latter supports it.

Given that Iran and Russia are two of the countries that were hit hard by the oil price crisis, supporters of the conspiracy theory, such as Kwon, argue that the U.S.-GCC partnership to put the two nations under pressure makes sense.

But Lee does not subscribe to these theories, saying they contradict each other. One says falling oil prices are the result of U.S.-GCC cooperation, while the other states that Saudi Arabia is targeting U.S. shale oil developers, he said. “As an economist, I am more convinced by the supply-demand theory.”