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The Peninsula

South Korea’s Iran Sanctions Conundrum

Published January 23, 2012
Category: South Korea

By Troy Stangarone

For years experts have known that Iran and North Korea have cooperated on missile technology, and suspected that they did so in pursuing their nuclear ambitions as well. But as tensions between the United States and Iran increase, Seoul is increasingly finding itself caught in the middle as its economic and national security interest come into conflict. Should it take part in sanctions that could harm South Korea’s own economic interests, or back its closest ally in an effort to bring Iran back to the negotiation table over its suspected nuclear weapons program?

While South Korea supported previous rounds of sanctions against Iran in 2010 and the fall of 2011 with seemingly little negative economic impact, the new push by the United States to squeeze Iran’s oil exports more directly impacts Seoul’s economic interests. As is the case with much of Asia, Iran and the Middle East are a significant source of oil for Korea. Through the first eleven months of 2011, Iran accounted for 9.6 percent of Korea’s oil imports, while 80 percent of Korea’s oil imports pass through the Strait of Hormuz.

Without its own domestic energy reserves South Korea is dependent upon imports to meet its energy needs. However, replacing Iranian oil may not be as simple as buying from another supplier because of questions regarding current surplus oil supplies. Iran currently supplies the world with about 2.2 million barrels of oil per day, while the U.S. Energy Information Agency estimates that OPEC has about 3 million barrels a day of spare capacity at the moment. Most of the world’s spare capacity is in OPEC, which is expected to see its surplus capacity rise to a little more than 4 million barrels a day later this year as Libya and Iraq bring more capacity on line.  Though some experts question whether Saudi Arabia, which has the world’s largest spare capacity, truly has the ability to increase its production as much as is believed, while analysts at Goldman Sachs estimate that there may be very little spare capacity overall.

In addition to having to find a new supplier at the same time as other major oil importers such as Europe; South Korea will likely face an increasing price for oil and a loss of export markets. As enlarged demand for non-Iranian oil drives up prices, cheaper Iranian oil will be increasingly inaccessible to South Korea. At the same time, the Persian Gulf has become an attractive export destination for Korean products. Through the first eleven months of 2011, South Korea exported $5.7 billion dollars to Iran and another $9.4 billion to other states in the Persian Gulf, up from $1.2 billion a decade earlier in Iran and $1.75 billion in the rest of the Persian Gulf. Some of this trade, especially with Saudi Arabia, could likely be diverted to Red Sea ports, but South Korea would still likely see a fall in exports to the region if hostilities were to break out.

However, it is not only the United States push for sanctions that threatens South Korea’s economic interests. Facing increasingly tough sanctions and growing isolation, Iran’s regime has threatened to close the Strait of Hormuz and said there would be consequences for Middle Eastern nations that raise oil production to replace embargoed Iranian supplies Iran’s threats alone have kept oil prices over $100 per barrel in the last month from uncertainty over tensions in the region. All of this is creating another dimension for Korean policy makers to consider. While Iran could not likely close off the Strait of Hormuz for long, it is capable of mining or harassing ships in the strait, as it did during the Iran-Iraq War, which could drive up the cost of oil. According to the New York Times, if Iran were to take similar actions the price of oil could rise 50 percent within days.

This is where national security interests conflict with South Korea’s economic interests. Like Iran, North Korea remains one of the world’s pressing nuclear proliferation concerns. While South Korea has expressed support for U.S. efforts to check Iran’s nuclear ambitions, it has yet to announce if or how much it will reduce its imports from Iran.  As Seoul weighs its options, it faces three considerations. Because Iranian and North Korean nuclear proliferation are becoming linked in the United States and the international community, there is pressure for South Korea to take action against proliferation in general. More specifically, as Seoul weighs options to reduce the potential economic impact on its economy, it must balance the efforts it makes and ensure that they do not inadvertently undermine U.S. efforts to get other Asian nations to take part in the sanctions. Lastly, because the United States Congress is taking a hard and bi-partisan line on sanctions, South Korea runs the risk of meeting requests of the U.S. administration but not the expectations of the U.S. Congress, potentially creating additional points of tension with the United States.

However, even if Seoul complies with the sanctions it will still potentially face risks. If the United States efforts were to fail, Israel might feel increasingly compelled to act on its own. If it did, a conflict in the Middle East might bring about the economic consequences Seoul seeks to avoid. Either way, South Korea’s security and economic interests are at risk from instability in the Middle East

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 Official Navy Imagery photostream on flickr Creative Commons.

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