What to do about Russian fossil fuel imports?

By Troy Stangarone

In recent weeks, Gazprom has cut the flow of gas into Europe along the Nord Stream 1 pipeline by 60 percent, while also cutting off some of the countries that refused Russia's demand to pay in rubles.

Along with Europe's own efforts to wean itself off Russian fossil fuels, this has placed pressure on EU countries to find alternative energy sources before the situation becomes more critical in winter.

Russia's actions also have implications for Korea's energy policy. Since the war began, prices of LNG, coal, and petroleum have all increased driving inflation higher. There is also the issue of how Korea will handle its own imports of Russian energy.

So far, there has been no formal request from the United States or Europe for Korea to wean itself off Russian fossil fuels. Even if there is no formal request, Russia's decision to weaponize its energy exports raises the question of whether it is prudent in the long term to continue to import fossil fuels from Russia.

While Russia is only Korea's fourth-largest source of fossil fuels, it is not an insignificant one. Last year, Russia accounted for about 5 percent of Korea's imports of LNG, 6 percent of crude oil, 17.5 percent of coal, and was the top source of naphtha.

Despite no formal commitment to reduce energy imports from Russia, volumes of most imports have declined this year. Imports of crude petroleum are down 21 percent compared to last year, with strong growth in imports from the United States, Saudi Arabia, Kuwait, and Iraq helping to fill the gap. Imports of naphtha are down almost 40 percent, with imports from India, Saudi Arabia, and Qatar each up significantly.

However, not all fossil fuel imports from Russia have declined significantly. Imports of coal are essentially flat with only a 2 percent decline, while imports of LNG are up 9 percent.

In the short term, Korea and other countries can adapt by importing energy from other countries. Russia will as well. When China began to informally sanction Australian coal over Canberra's push for an investigation into the origins of COVID-19, it found buyers in other countries.

Russian fossil fuels will also make their way into international markets. Some countries will be all too willing to purchase Russian energy exports, freeing up production from elsewhere. Russia, which was not previously a significant source of oil for India, for example, is now India's second-largest supplier.

Other countries will no doubt be willing to do the same. However, not all Russian energy exports will make it onto the market. Sanctions will deny Russia access to Western technology it needs to maintain production. In the case of fuels such as LNG, the capacity to redirect all of Russia's prior exports to Europe will not exist for years. In the absence of increased production in other countries, there will likely be shortages.

What is the best way for Korea to handle the expected continuation in disruptions to energy imports in the short-to-medium term? One option is to continue looking for other sources while waiting for Russia to be accepted back as a normal energy exporter. This, however, presents two risks. Sanctions removal has historically been slow in the absence of significant change by the sanctioned country. It is unclear that the mere ending of the war in Ukraine would be sufficient to lift sanctions on Russia. Additionally, U.S. and European sanctions on Russian fossil fuels could be strengthened over time.

Even if Russia were to become a normal export partner over the next five years, Moscow has demonstrated a willingness to use its energy exports in a coercive manner. Dependence on Russian fossil fuel imports over the long term entails its own set of risks outside of sanctions.

Another option would be to bring forward investments in renewables related to Korea's own climate change objectives to lessen the need for imports of Russian fossil fuels and fossil fuels more generally. In the long term, this would enhance Korea's energy security. It also holds the potential to spur domestic job creation in new industries.

Economists such as Daniel Gros and John Sturm have also suggested countries could put in place special energy tariffs on any spot market purchase of Russian energy imports. This would allow supplies to continue to flow, but by driving up the price with a tariff countries may be able to induce Russia into a lower price that reduces the revenue it gains from energy exports. Korea could then redistribute the funds from the tariff to those most impacted by increasing energy prices.

While the natural instinct may be to ride out the current crisis, the economic disruptions caused by Russia's invasion of Ukraine also present an important opportunity for Korea to address both its climate change objectives and improve energy security. These are just a few of the options Korea could take, but times of disruption are often the best to begin charting a new course.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.