Sino-NK

A recent report published by the Korea International Trade Association (KITA) demonstrates that the ROK has, in contrast to other like-minded democracies, increased its share of coal imports from the Russian Federation since the start of the Russia-Ukraine War. This hardly means, however, that continued business with Russia isn’t fraught with risk for Korean firms. A brief summary of the longer report, translated into English for Sino-NK’s readership, highlights several of the economic challenges the ROK continues to face from Russia in spite of the increase in energy-based trade. 

Increased dependence on coal exports from Russia and the need for diversification and dispersion.^[1]

Amid uncertainty over the global supply chain due to the Russia-Ukraine War, it has come to light that as the price of coal has decreased, South Korean imports of Russian coal have increased, necessitating special countermeasures. 

Furthermore, data show that if the price of energy raw materials go up by 10%, domestic production costs will rise by 0.64%. 

As the fighting between Russia and Ukraine intensified, in contrast to how the EU, Japan and Taiwan reduced the amount of Russian coal they imported, the ROK’s imports of Russian coal increased from 17.5% in 2021 to 25.5% as of April 2023. 

All this was detailed in a report titled “Russian responses to international sanctions and their effects on the ROK economy” issued by the Korea International Trade Association (KITA, chaired by Koo Ja-yeol), an international trade-focused organization, on June 27.

The contents of the report emphasize that insofar as Russia hints that it could retaliate against the recent trend of tightening of international sanctions against Moscow, Korea needs to take preemptive measures against such risk factors. 

Looking at Russia’s past retaliatory measures and its current behavior, there are four major likely scenarios that could occur in the future. 

Those four scenarios include: ① restricting natural resource energy supplies ② refusing to extend the Black Sea Grain Initiative ③ increasing the disadvantages companies wishing to withdraw from Russia could face, and ④ taking measures regarding special items exported to the ROK.

The Black Sea Grain Initiative, which allows Ukraine to export grains via the Black Sea even during wartime, plays a key role in allowing supplies of Ukrainian agricultural products to reach the global market 

As a result of analyzing the impact on the domestic economy by scenario, the negative impact is expected to be limited in most situations.

In 2022, Russia took up 0.9% of the ROK’s total exports, and constituted a mere 2.1% of the ROK’s import market. 

Among the 10,957 items South Korea imported in 2022, the number of items for which the ROK depended on Russia for more than 90% of imports totaled 23, amounting to 0.2% of the total amount of imports. 

However, while the numerical amount of items such as radioactive isotopes, non-alloy steel and ferro-silicon chromium (a raw material used in steel-making) is not large, more than 90% of imports of these items came from Russia, raising the need to diversify supply lines. 

In 2022, the items (percentage-wise) for which the ROK depended on Russia for imports include radioactive isotopes (100%), non-alloy steel (97.0%) and ferro-silicon chromium (92.2%).

Since the start of the Russia-Ukraine War, the amount of coal exports from Russia has increased, and as such it is necessary for South Korea to take precautions against supply risk. 

One of Russia’s main coal export centers, Vostochny Port, is geographically adjacent to Korea, and since the start of the war, as the price of coal exports have gone down, South Korean imports of coal have increased. 

As a result of analyzing the connection to business, if the price of energy resources goes up 10%, the entire cost of domestic production will rise 0.64%. 

In order to enact a swift response in the case of an emergency situation, the ROK needs to monitor the course of the Russia-Ukraine War in real time, secure a safe supply of coal, and find alternative sources of natural energy resource supply imports as an alternative to Russia in order to minimize threats. 

Furthermore, as Russia has been increasing the severity of disadvantages faced by foreign companies within the country, the South Korean government needs to offer financial support to Korean companies insofar as those companies that have entered the Russian market continue to face financial difficulties. 

Newly-established regulations that entered into force last March that force companies wishing to dispose of their assets in Russia to make a donation [to the Russian budget – ed.] have ended up creating a financial burden on those companies that would otherwise choose to leave Russia. 

These regulations force those wishing to sell of their assets to pay between 5-10% of their market value as a donation. 

As such, it is necessary to provide companies that wish to withdraw from Russia but would face financial burdens in selling off their assets with financial support such as money to cover fees as well as low-interest loans. 

Not only is risk mitigation important, but so is it important for the Korean government and the private sector to offer an organic response to opportunities from postwar reconstruction operations. 

If Korean companies are selected to participate in the postwar reconstruction of Ukraine, which is projected to cost up to USD 750 billion, companies can expect to enjoy large economic benefits. In particular, we can expect a rebound in overseas construction orders, which have been consistently low since 2014.

Do Wonbin, a researcher at KITA, stated that “Looking at the effects of Russian measures on the whole of the ROK’s economy,  they are limited in scope” he explained. “However” he argued “the ROK government needs to prepare appropriate support measures for some of the Korean companies in Russia that have been damaged”.

In addition, the report’s authors emphasized that “what is important is not merely making preparations against risk, but also actively working to take advantage of opportunities” as “the cost of Ukraine’s post-war reconstruction operations could reach up to 750 billion dollars, the government and the private sector need to make preparations ahead of time for when the war is declared over.”

Original article by Kim Hwankuk. Translated by Anthony V. Rinna.

[1] [Source]: Increased dependence on coal exports from Russia and the need for diversification and dispersion [높아진 對러시아 석탄의존도, 다변화와 분산 필요], Sanup News, June 27, 2023, http://www.sanupnews.com/news/articleView.html?idxno=51871#:~:text=러%2D우%20전쟁으로%20국제,0.64%25%20높아진다는%20지적이다.