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 4th 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.