Iran threatened Wednesday to halt all imports of goods from South Korea in response to Seoul’s announcement a day earlier that it would stop accepting Iranian oil.
South Korea said Tuesday that it would suspend all Iranian oil imports from the start of July in response to a European Union insurance ban on tankers carrying crude from Iran.
The Iranian ambassador to South Korea, Ahmad Masumifar, responded by saying in an interview with the South Korean news agency Yonhap on Wednesday that Tehran “may decide to fully stop importing Korean goods.”
The Iranian envoy said some Asian countries are taking measures to continue oil imports from the Middle Eastern nation.
Last week, Japan’s parliament approved a bill providing $7.6 billion of state guarantees for shipments of oil from Iran to cover insurance to be axed by the European insurers. Iran is South Korea’s third-largest market in the Middle East, worth $6.1 billion in 2011, up from $4.6 billion in 2010.
Iran’s other big oil customers in the region are Japan, China and India — none of which have announced plans to stop receiving shipments.
The Knowledge Economy Ministry said in a statement Tuesday that it relies heavily on European companies for insurance of its oil imports and has sent representatives to the EU to make the case for continuing insurance coverage.
The suspension of crude imports effectively reduces Seoul’s exports to Iran due to the risk of default on payments. South Korean exporters have been indirectly paid through the Iranian central bank’s won-denominated accounts in Seoul, into which South Korean refiners pay for Iranian crude to avoid U.S. financial sanctions over Iran’s nuclear program.
Iran oil ban to damage 2900 Korean companies
2,900 Korean companies which engage in trade with Iran, would be hit harshly over Korean oil ban against Iran.
Most worrisome are small- and medium-sized companies that would take a direct hit. According to the Knowledge Economy Ministry, about 2,900 Korean companies engage in trade with Iran and 2,700 of them are SMEs. They usually receive payments for merchandise exports from the money Tehran earns from selling oil to Korean refiners under a unique settlement system. Now the money barely amounts to 1.8 trillion won and SMES can’t get paid if oil imports from Iran are halted.
The situation becomes all the more serious should the Iranian envoy’s threat translate into action. The government says it will help SMES diversify to export to other countries but it won’t be easy to look for new markets in such a short span of time. Instead, they urge the government to expand soft loans.
Fundamentally, the government will have to consider continuing oil imports, following in the footsteps of Japan that passed a bill last week offering $7.6 billion in state guarantees for oil shipments from Iran to cover the insurance to be withdrawn by European insurers. This means that the government will offer payment guarantees that could reach as much as $7 billion to transport the oil.
This measure, however, could force the government to run a high risk in the event of a naval disaster and can be controversial because of the need to get approval at the National Assembly and possible privileges.
The biggest question is that it’s hard to foresee when the latest Iran crisis can be resolved. It is for this reason that the government should brace for the worst-case scenario on the assumption that the situation will be prolonged.