Vulnerable to Shocks from Russia's Invasion of Ukraine
A shock wave caused by Russia’s invasion of Ukraine is spreading across the Korean economy. In particular, Korea’s three major industries -- semiconductors, petrochemicals, and automobiles -- are vulnerable to shocks from the invasion.
The Korean semiconductor industry has to act quickly as it depends on Ukraine and Russia for a large proportion of neon, krypton and xenon needed for semiconductor production. According to a government report, Ukraine and Russia account for 23 percent and 5 percent of Korea's neon imports, respectively. The two countries also account for 48 percent and 49 percent of Korea's krypton and xenon imports, respectively.
The Korean semiconductor industry has begun to expand its gas inventory by three to four times, according to the Korean Ministry of Trade, Industry and Energy. Korean chipmakers also need to prepare for prolonged economic sanction against Russia, such as major countries’ control of exports to Russia.
In January, POSCO developed a technology to extract neon gas by using air separation devices in the oxygen plant of Gwangyang Steelworks. The technology was jointly developed with TEMC, a Korean gas-specialized company. However, POSCO can meet only about 16 percent of domestic demand for neon gas, which means securing additional supply lines is essential. Prices of rare gases are soaring amid global supply chain disruptions.
The Korean petrochemical industry is keeping close eyes on the Ukrainian situation. The biggest problem is a surge in international oil prices. A rise in oil prices leads to a rise in petrochemical sales and profits. This formula works only when oil prices rise slowly. A sudden rise in oil prices to around US$100 a barrel can deal a blow to the Korean petrochemical industry.
Apart from international oil prices, there is the risk of a supply-demand imbalance if the Ukrainian crisis gets prolonged. Korea's oil imports from Russia stood at 53.75 million barrels in 2021, accounting for 5.6 percent of the nation's total crude oil imports of 960.15 million barrels. Currently, domestic oil reserves exceed 100 days, which means that securing oil is not an urgent issue now, but Korea may have difficulty finding alternative oil import lines if Russian crude oil imports are blocked. Currently, the Korean petrochemical industry is looking forward to progress in nuclear negotiations between the United States and Iran and a subsequent resumption of Korea’s oil imports from Iran.
The Korean automobile industry is also highly vulnerable to the shocks from the Ukraine crisis. According to the Korea International Trade Association, automobiles and parts account for 40.6 percent of Korea’s exports to Russia. Vehicles also account for 21.7 percent of Korea’s exports to Ukraine, the largest proportion.
Damage to these industries is expected to grow further as the South Korean government has decided to join major countries’ sanctions against Russia.
Meanwhile, with the U.S. government announcing measures to strengthen a curb on exports to Russia, the Seoul government will begin consultations with Washington to participate in export control beginning from early March. The Korean Ministry of Strategy and Finance held an emergency task force (TF) meeting to discuss these and other matters.
The South Korean government has decided to initiate consultations with the U.S. government early next month to discuss details related to its participation in the export control against Russia. Earlier, the United States announced an independent export control of 57 items and technologies in seven major areas -- semiconductors, computers, information and communication, sensors/lasers, navigation/air electronics, marine and aerospace.
The sanctions also include restrictions on the export of strategic materials to 49 military-related Russian firms and organizations, including the Russian Ministry of National Defense, and require foreign companies that produce products using U.S. technology or software to receive permission from the U.S. government when they export their products to Russia.
The South Korean Ministry of Foreign Affairs warned that if Russia carries out any form of all-out war against Ukraine, despite repeated warnings from the international community, the Korean government will have no choice but to join the global sanctions against Russia, such as export controls. However, as export controls can affect Korean companies and the Korean economy, the Korean government is expected to act cautiously.