Iran is paving the way for another Middle East boom for Korean firms through Iran in 40 years after the first boom in the 1970s.
In early May, during President Park Geun-hye’s state-visit to Iran, South Korea and Iran signed 66 MOUs for economic cooperation about 30 projects worth US$37.1billion. The volume of economic cooperation agreed on by Seoul and Teheran this time is the largest-ever amount and makes Korea anticipate not only big business opportunities in Iran but “a second Middle East boom” for the Korean economy.
The government expects that these economic cooperation projects are implemented as planned, the trade between the two nations will return to a level before the start of the international economic sanction. The bilateral trade peaked at US$17.4 billion in 2011 prior to the start of the economic embargo. Since then, the figure had plummeted and reached US$6.1 billion, about one third of the highest trade volume last year.
In many aspects, Iran is an attractive market. Iran is one of the richest countries in terms of natural resources. A long economic sanction is fueling demand for rebuilding infrastructure such as railroads and roads. The nation has a market of about 80 million people. The Iranian market is of a quite meaning as a new market for Korean companies.
Korean TV dramas such as Daejanggeum and Jumong enjoyed explosive popularity in Iran. During the sanction period, many Korean companies did not withdraw from Iran. These two facts led the Iranian people to have a good impression of Korea and Korean companies.
What’s the matter, however, is that not only Korea but its rivals such as China and Japan are doing everything they can do to preoccupy the Iranian market
In particular, Chinese President Xi Jinping visited Iran as the first foreign head of state after the lift of the trade embargo in January this year.
President Xi held a summit meeting with Iranian President Hassan Rouhani. During the meeting the two leaders elevated their relationship to the level of strategic partnership and saw eye to eye about expanding bilateral cooperation in all sectors such as crude oil, gas, nuclear power and railroads.
In addition, the two countries agreed to expand their bilateral trade to US$600 billion within ten years. The target volume is about 11 times the volume of trade (US$52 billion) between the two countries in 2014.
The agreement signed this time also has a clause related to the construction of Silk Road on land and at sea (one Road One Belt project) pushed forward with by the Chinese government.
Under the circumstances, Korea laid a foundation for the expansion of economic cooperation with Iran through the Korean President’s first state-visit to Iran since the formation of diplomatic relations between the two nations in 1962. Therefore, it is important how many fruits Korea will practically gain by putting this occasion to good use.
In fact, some people questioned the actual outcomes of the agreements in economic cooperation signed during President Park’s state-visit to Iran just after she came back to Korea.
On May 8, Iran’s Tasnim News Agency reported that the project of Teheran Shomal Freeway which Daewoo Engineering and Construction signed a contract to build may be built by an Iranian construction company.
“The Korean consortium should fulfill its responsibilities so that the MOU will be implemented within four months,” said the CEO of CDTIC. “Otherwise, CDTIC will sign a contract with Khatam-al Anbiya of the Iranian Revolutionary Guard Corps (IRGC).”
Hyundai Engineering and Construction also unveiled that the MOU with CDTIC for the construction of the US$1.7 billion worth Chabahar-Jahedan Railroad and the US$600 million Mianeh-Tabriz Railroad was scratched off on May 9. The amount of the money equals about two trillion won in the Korean currency. As some expressed their concerns, the cancellation of the projects is blamed on the weak binding power of MOUs.
Such a cancellation and a threat to cancel fueled the concerns about the feasibility of the largest-ever size of the economic cooperation between Korea and Iran, which was called “hitting the jackpot.” And more people raised their voices that a thorough preparation should be made to find a way to revitalize the Korean economy through the Middle East by maximizing the results of President Park’s visit to Iran to be the key momentum for a second Middle East boom.
Responding to such voices, President Park herself held a private-public joint meeting to discuss the ways to promote the economic outcomes of her visit to Iran at Cheong Wa Dae. In the meeting, participants discussed follow-up measures to carry out the projects signed in Iran in the future. .
The outcomes of the cooperation between the two countries, however, are shown most apparently in oil import from Iran. Iranian oil import by Korean oil refiners such as SK Innovation has been on a sharp rise since the lift of the sanction in January.
According to the Korea National Oil Corporation, the volume of Iranian oil import by Korea in the first quarter of this year soared 122.8% to 22,849,000 barrels from 10,252,000 barrels a year earlier.
It is presumed that a considerable amount of crude oil imported from Iran is condensate. Condensate is volatile liquid hydrocarbons from natural gas. The material can be refined to produce naphtha at lower cost than crude oil.
Korean oil refiners expanded related production facilities prior to the importation of Iranian crude oil. SK Incheon Oil Chemical already built facilities that produce high-value-added petrochemical products based on condensate by investing 1.6 trillion won. n the other hand, Hyundai Oil Bank established Hyundai Chemical, a joint venture with Lotte Chemical and is now building a condensate refining plant at its Daesan Plant.
S. Korea to Make a US$84.5 Billion Export to Iran by 2025
In the meantime, the Korea Economic Research Institute predicted on May 11 that the expansion of economic cooperation between Korea and Iran will result in US$84.5 billion in Korea’s exports to Iran and create 680,000 jobs for ten years from 2016 to 2025 in its report titled “Effects of Korea-Iran Economic Cooperation and Measures for Korean Companies.
The research focused on infrastructure and plants, construction services, petrochemicals, automobiles, cultural contents, home appliances, and smart phones, all of which are greatly impacted by the expansion of economic cooperation between the two nations.
The institute expects that Korea will be able to ink US$84.5 billion in exports for ten years from 2016 to 2025 if Korea expands economic cooperation with Iran by connecting exports and investment in Iran.
The institute says that exports will reach US$18.5 billion in construction, US$17.6 billion in automobiles, US$14.8 billion in petrochemicals, US$11.7 billion in infrastructure and plants, US$ 11.1 billion in handsets, US$ 9.9 billion in home appliances and US$ 1.1 billion in cultural contents.
“The ripple effects of economic cooperation between Korea and Iran can be maximized when exports and advancement into Iran are realized at the same time,” said Choi Nam-seok, a professor at Jeonbuk National University. “Thus, Korea should go ahead with economic cooperation in a direction to expand local investment and exports complementarily. In particular, it is needed to switch Korea’s foreign direct investment to Iran from Saudi Arabia.”
“The government also move ahead with Korea-Iran financial cooperation in order to help Korean companies that want to make a foray into the Iranian market raise funds,” Choi added.
“Korea should build partnerships to get financial support with financial institutions in Korea and Middle Eastern countries as well as with international multilateral development financial institutions and export credit agencies,” Choi emphasized.
“The domestic state-run banks can directly help domestic investors and exporters raise funds,” Choi continued. “It is necessary to move forward with joint businesses with European companies with financial power and to make a package deal to trade equities with construction rights in the development of resources such as oil and gas in Iran,” he added.