A senior economic analyst believes the current disruption to bilateral trade between Iran and South Korea is temporary, and there is reason to be optimistic about future economic ties.
Esfandyar Batmanghelidj, the founder of Bourse & Bazaar, a think-tank focused on Iran’s international economic relations, has made the remarks in an interview with Iranian daily newspaper Etemad.
What follows is the full text of the interview:
Republic of Korea (ROK) was a reliable customer for Iran’s naphtha, natural gas condensate and other Petroleum products of Islamic Republic of Iran, why ROK government decided to reverse its course on trade with Iran? Many say that its too expensive to buy same products from other suppliers, why ROK decided that it’s worth to pay a overhead?
At the same time that the Trump administration was launching its “maximum pressure” sanctions on Iran, the government of South Korean president Moon Jae-in was seeking the support of the United States in finding a diplomatic solution for tensions with North Korea. He could not afford to challenge the Trump administration on its Iran policy, although the South Korean government has continued to express its concerns over the confrontational approach President Trump is taking.
It’s been said by Iranian officials that there are some due debts which ROK is unwilling to pay, but ROK officials said that the money has been paid and it’s being saved in a bank account according to contracts. Do you think it is a legal disagreement between the two sides, or ROK is breaching deals with Iran and willingly withhold the payments? If it is due to US sanctions do you think that there is any workaround? Is the ROK engaged or has it been ever engaged with Iran to find a solution or workaround?
The Trump administration is actively discouraging countries around the world from providing Iran free access to its foreign exchange reserves. In an interview in December 2019, special envoy for Iran Brian Hook boasted that Iran has access to just 10% of its reserves. This is probably an exaggerated figure, but it illustrates the problem facing Iran. In each country where Iran used to sell oil, the Central Bank of Iran maintains billions of dollars of reserves. By placing sanctions on the CBI and by using political pressure, the US government has made central banks in other countries fearful of allowing Iran to make payments or transfer funds from these accounts. This is even a problem when it comes to Iran’s use of these reserves for humanitarian trade, which are technically exempt from the sanctions that have been placed. There is no clear workaround and this is the fundamental problem that has made initiatives such as INSTEX, the French President’s proposed $15 billion credit line, and Iran’s IMF loan request so difficult to implement. But even if Iran’s former customers are not able to find workarounds, that does not mean they are happy about the situation. This is an unprecedented use of secondary sanctions and it has hurt US relations with many allies, including France, Germany, the United Kingdom, Japan, and South Korea.
Recently there were reports about South Korean consumer electronic companies leaving Iran; is that related to Iranian money withheld in Korea? Did those companies escape from possible seizure of assets upon Seoul’s order? Or they just were afraid of US possible punishments?
In this environment, it is easy to assume that the decision of companies to reduce sales activities or leave the Iranian market is related to political decisions or sanctions pressure. But multinational companies make strategic decisions independently of their governments, and we should remember that the economic situation in Iran has also become more difficult. It is more expensive to maintain operations under sanctions conditions and while companies may find profitable models, it is difficult to repatriate those profits because of banking restrictions. But the long-term outlook remains positive. Iran is a large and fundamentally attractive consumer market and South Korean consumer companies can be expected to remain committed to Iran, even if they face disruptions today.
When the US stated that part of its so-called “maximum pressure campaign” is to reduce Iran oil exports to zero, there were concerns in ROK that their Petrochemical Industries are being hit by this decision because they were using Iran’s very light natural gas condensates which could not be replaced by other products (like Qatar naphtha or US LNG). Did ROK find a workaround for that concern? Are those petrochemical complexes producing with their intended capacity right now? It has been reported that the US had plans to help ROK companies to redesign their production line to use other crude material, did the US ever start such a project in South Korea? US proposed same ideas before to South Africa and India, and successfully redesigned South Africa custom-made refinery to ditch Iranian heavy oil; has the US started same projects in ROK and India? How is it profitable financially or economically for US to redesign other countries’ oil facilities for free to ditch Iranian oil?
The sanctions on Iranian oil exports hit South Korea’s petrochemical companies hard. Companies like SK Incheon Petrochem, Hyundai Oilbank, and Hanwha Petrochemical not only needed to find new suppliers of crude oil and condensates, often at higher prices, but they needed to spend several hundred million dollars to change the configuration of their facilities to process the new grades of crude and condensate. The US did not actively assist these companies in adapting to the new conditions or compensate them for the costs, but the Trump administration did recommend that South Korea should increase purchases of American LPG and condensates. The Trump administration announced it would withdraw from the JCPOA in May 2018. The oil waivers granted to South Korea and seven other countries were revoked in May 2019. South Korean companies had around one year to make the expensive changes to their production facilities and supply chains and they did, replacing imports from Iran with purchases from countries like Russia and Qatar, but also from the United States.
Like many other economies, ROK will be eager to revitalize her economy after current depression caused by coronavirus outbreak, is there any possibility that Seoul approaches toward Iran for cheaper Petroleum products or it will pursue current path to completely abide by US orders?
Unfortunately, China is the only Iranian oil customer that has demonstrated the capacity and willingness to continued purchasing crude oil in violation of US secondary sanctions. South Korea depends on US support for its national security and needs to ensure that the unpredictable Trump administration does not escalate tensions with North Korea. In the face of these challenges, Moon Jae-in cannot afford to defy the Trump administration’s Iran policy and must protect his relationship with Trump. However, in the event Trump loses his reelection, we can expect an effort by the Biden administration to reenter the JCPOA, which would include either the full removal of secondary sanctions on oil sales or the issuing of new waivers to allow South Korea to resume purchases of oil as one of Iran’s key customers. So it is important that Iran maintains a constructive relationship with South Korea. The two countries are facing a temporary disruption to bilateral trade and there is reason to be optimistic about future economic ties.