Rod Rothwell, Co-Chair if KBLA and Alex Jensen discuss the stress that the current Russian invasion of Ukraine has put on one of Korea’s oldest relationships. The first Russian Korean agreement dates back to the 1880’s. During the colonial period, and the Soviet period relations obviously were much weaker, but since the birth of the Russian Federation trade has grown, till it peaked at around 30 billion in bilateral trade in 2011.
Part of this has been significant investments in Russia by Korean firms including manufacturing plants, energy assets and tourism developments.
Korea also imports more than $15 billion dollars’ worth of energy products from Russia. Coal, oil, gas and naphtha being the main fuels. This fuel is not ready to be replaced by either other sources or renewables, so there is a real security risk there.
Apart from that there has been a history of people exchanges with estimates of up to 500,000 people of Korean origin living in Russia.
How this relationship will cope with the stress of the current situation remains to be seen.
Today’s episode is made possible by the support of the Innovation Center Denmark Korea.
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Rod Rothwell, Alex Jenson
Alex Jenson 00:08
You’re listening to Koreabizcast with the KBLA. I’m your host Alex Jensen on this Thursday, March 3, and we thought it would be an appropriate time to address Korea’s responds to Russia’s invasion in Ukraine, including concerns for the business community or especially on that front. Before we get there, I just want to thank for making today’s episode possible Innovation Center, Denmark Seoul, which seeks to create innovation and business opportunities and build up relations between Korean and Danish R&D intensive companies, research institutes and universities. We have with us today as we wanted to address as I mentioned before the Ukraine crisis, a war that still threatens to spiral out of the control that’s already been lost. KBLA co chair rod Rothwell, thank you so much.
Rod Rothwell 00:58
Thank you, Ally, it’s great to be with you.
Alex Jenson 01:01
Well, likewise, you and I have been, like, I’m sure many other people talking about this crisis as it’s unfolded. And it’s reached the point where there’s either already a genuine effect in this part of the world, or there’s going to be a genuine effect. Let’s maybe start with a relationship, though, between South Korea and Russia and what’s kind of at stake by putting that all to one side, freezing it for now.
Rod Rothwell 01:26
Yeah, it is really interesting, I think because Russia and Korea had one of the longest relationships that we know of between Korea and a European power. So the first kind of relationship began way back in 1884 in Gojong’sKim gadong time, and so let’s just a it’s a very long relationship. And the legation was one of the Russian legation, which is a famous building, still in Korea was actually opened in 1890. The churches have been here since the turn of the century. So it is a very long relationship. And despite the fact that I think we all assumed that all we all knew that the Korea would follow the Western Allies and imposing sanctions. It is interesting that this relationship is so old and is so complex. There’s also been a historically a lot of cross migration. In Russia right now, there are about 500,000 people of Korean descent, living in throughout Russia. Now, obviously, there are more towards the eastern side. But there are significant groups in in the western part of Russia as well. And even in Ukraine, there are estimates of up to 13,000 people of Korean descent living in Ukraine. So it is a very complex relationship.
Alex Jenson 03:01
That’s an interesting point on the Ukraine from by the way, because a lot of the media reports are focused on the direct citizens of Korea, who were being counted in the dozens, and we’re being evacuated as this started to break a few days ago. But let’s go further into the trade relations between South Korea and Russia. It’s interesting that there’s actually no free trade agreement there. Because this country has been so active in the last few years and doing FTAs and, and also multilateral deals with as many countries as possible. It seems.
Rod Rothwell 03:39
It is really interesting, isn’t it? like so, like you said, Korea has 27 FTAs at the moment, began way back with Chile back in, I guess 2009. But the negotiations between the Korea and the Russian FTA only began in the middle of 2019. So obviously neither of the countries really saw as a major priority. I think the reason behind that is that the vast majority of imports from Russia are energy imports. So the number one is naphtha, number two is crude oil. Number three is coal. Number four is, is gas. And these are traditionally products that aren’t actually included inside an FTA. So an FTA usually includes agricultural products and manufacturing products. So that could be the reason for the delay. Or maybe it was simply hesitation on the part of both governments. But yeah, no FTA going back so the the trade balance is pretty much a traditional one. In that Korea’s importing vast amounts of energy from Russia. About 25% of the naphtha that we use in Korea comes from Russia, a similar percentage of the of the coal about 25%. Significantly about 13% of the oil we use, and about 10% of the natural gas we use in Korea are Russian based. Now, in terms of pipelines, these are all, obviously Western pipeline, Western facing pipelines. So the German, the German actions on closing those pipelines won’t affect us much. But we can expect significant increases in energy prices, if the if the conflict if the war continues.
Alex Jenson 05:51
So sanctions at the moment is the order of the day for the outside world in trying to contain Russia and persuade them otherwise. There’s been this question of just going along with global sanctions, or should individual countries go even further? Clearly, a few nations have decided to go down the latter route. South Korea initially said almost reluctantly said it had no choice but to join global sanctions. But I feel like the tone has changed a little bit in the last few days. And Seoul has been pushing a little bit harder with some of the comments publicly against what Russia is doing.
Rod Rothwell 06:30
Yeah, I definitely agree with that. I think you can imagine they will probably send terse phone calls between Western allies and Seoul to kind of say, you know, you guys need to get on the bandwagon. They’re pushing back from that. There are some significant Korean assets inside Russia that perhaps the Korean government needed a little bit more time to understand what the implications might be there significantly. Samsung has both phone manufacturing and some semiconductor. Not really foundries, but semiconductor plants in Russia as well. LG has some white goods, manufacturing plants and some other b2b manufacturing. And the other third most significant I shouldn’t chuckle is Lotte is managing hotels in Moscow and St. Petersburg, and Sakhalin. So there’ll be some minor impact from that. But I guess perhaps Seoul, just needed a little bit more time to work out what the implications might be on those Korean assets.
Alex Jenson 07:45
Yeah, I do think that makes a lot of sense that they would have needed to take some time to consider this because no matter what, for example, US President Joe Biden saying about being prepared for this, I’m sure that many, many of us, including government officials, who are also human beings, would have been shocked by the extent of Russia’s attack and invasion as it unfolded. And it’s a still developing situation, by the way. But the thing about sanctions as soon as we hear that word, I feel like in this part of the world, we think of the difficulty in trying to contain North Korea, for instance, through sanctions, do you think a primary difference is the fact that Russia, its overheads are much larger, its connectedness to the outside world is much more significant. And therefore, sanctions generally can hurt Russia, much more than the North, which is already isolated and basically relying on on China. And apparently cryptocurrency theft, among other things.
Rod Rothwell 08:47
It’s interesting that that you’ve brought up those two ideas like significantly. Russia’s massive trade backdoor a number one trading partner is China. And number two, Russia is very, very well known for its slightly hazy and quite blackhat deals in terms of cryptos. So it’ll be interesting what the impact will be, will the backdoor to China be significant enough for Russia to feel the to lessen the impact of the economic sanctions? And then in terms of cryptos, I think that yeah, the Russians might not be as dependent or obviously not as dependent, as North Korea are on on mining Kryptos to generate cash, but I’m sure there’ll be a lot more investment in that area. But I think you’re right. I think they’re the two main areas that are open to Russia to try to lessen the impact of the sanctions.
Alex Jenson 09:55
But we’ve had a glimpse through photos and things like that and some limited media coverage in Russia, I’ve been kind of impressed by some of the media coverage, you got foreign correspondents of major, even US media organizations standing in Moscow and other parts of Russia reporting on situations like, for example, dissent against the Putin regime. And some people say that well, Russia is allowing a certain allow level of that reporting, just to create the impression that there’s more freedom there than there really is. Now, you know, let’s not go too far down that debate. But just making the point. The thing is, though, that what we’re seeing is an impact on Russians already. Things like the interest rate, rising through the roof markets falling through the floor, and everyday inconveniences in terms of trying to use ATMs and trying to use public transportation not being able to use Apple and Google Pay services and things of that nature are already squeezing Russian. It’s clear, isn’t it that a country of Russia’s size to be feeling this squeeze is very different to North Korea, where the level of control and the level of isolation is, is a different situation, different playing field?
Rod Rothwell 11:12
Yeah, definitely. You know, you can definitely imagine that North Koreans’ sanction has pretty much been their default. Now, since I don’t know about you, but I have no memory of North Korea not being under sanctions. Whereas, you know, yes, Russia has been under sanctions since the invasion of Crimea, but nothing of this scale. And the push on the ruble, this week has been absolutely horrific. What are we down 45% Since the beginning of the week, so that will probably be the the number one, whether the relationships with China, and if China’s going to give them access to any foreign currency will be key there. But that will be. That’ll be something we know about in the future. Like we’re only up to what day seven, we to get back to the Korean impact. I see also that South Korean trade officials have already been in contact with American trade officials to see if they can get some exemptions on some of the products. And I think the key exemption they’re looking for is a chemical called neon, which is key to manufacturing smartphones. And unfortunately, around 40% of the neon imported into South Korea does come from Russia. So when he trade sanctions there will have an immediate flow on onto onto smartphone production.
Alex Jenson 12:48
And you can sympathize with people relying on that. But on the other hand you watch videos of of kids crying after leaving Ukraine, and it’s just so moving. And you think well, what’s the alternative? We either go through some extreme economic pain if necessary, or we end a conflict, which would be significantly more painful. And this is actually still a question Is it Rod that I talked about the North Korea situation before there’s still a danger of this spilling out of control? And we’ve got to keep that perspective when when we’re imposing these sanctions. That yes, Korea’s economy will be affected too. And it’s a necessary cost to factor into the risk equation.
Rod Rothwell 13:33
Yeah, I think you’re right. And I think that, you know, there are none of these. There are none of these imports from Russia, which can’t be substituted. And that I can put my hand on my Australian heart and say right now that Australia would be very, very eager to substitute all of these products for Korea, pretty much on the drop of a hat. So yeah, with some with some quick moving, which is not something we usually associate with Korean trade policy, but with some quick movements, and with lots of phone calls, the impact of any kind of energy sanction, or chemical sanctions could be lessened by occurring by substituting them. I am quite concerned about the not only the the Koreans living in the Ukraine, but also the Koreans living in Russia, how they must be feeling because they’ve suddenly gone from being in a very protected place to where they can fly home. So obviously now, those Koreans can’t fly home. They’re basically stuck in Russia, so that’s another thing that we might think about how is this isolation, this social isolation that’s happening in Russia going to impact the Russians that live here? But you and I, we have very good Russian friends in Korea. How is this isolation going to impact them?
Alex Jenson 15:20
Yeah, I was gonna say that as well. It’s very important for us, I think, to stand up for them. Considering them as individuals, I’ve been a bit concerned about the global push to pretty much remove Russian interests from every walk of life, even walks of life, which don’t seemingly have any direct connection with the Putin regime and in benefiting financially and benefiting its push in this war. I think one final thing that I want to say in terms of Korea’s impact is the prices that are going up already, we’ve already been in a situation before this crisis, where the Bank of Korea’s inflation prediction for this year was at a high that we’ve not seen for a decade, energy prices are only going to go further up. Now. The US response to that is kind of look at domestic manufacturing kind of make America great, again, type attitude from the Biden administration. For Korea, we don’t have that luxury of be able to rely on domestic production of raw materials, especially not right away. And on the raw materials from we can’t manufacture something out of nothing. Do you feel in this new Cold War sentiment? We’re going to have to shift our trade partners and exacerbate this new world order to a certain extent.
Rod Rothwell 16:38
I think that for me, you know, again, it’s only day seven. So you don’t want to read permanency into a situation which is not yet permanent. And something we hope doesn’t become permanent. But yeah, it does go back to the things that you and I talked about, in depth before Christmas, about Korea, securing its its energy resources through renewables, and also diversifying its supply chains as much as possible with secure trading partners. So for me, it’s a further reinforcement of this thing that I believe that a secret to Korea’s continued economic growth is going to be less reliance on imported energy. And if this is another spur in the side of that, then that’s really good. We’re still only up to I think 5% of our energy here being generated from renewables, which is way behind everybody else in the OECD. And in terms of secure supply chains, for rare earths, and, and critical minerals, then, yes, we need to make sure that Korea has a diversified supply chain as much as possible in those areas.
Alex Jenson 18:02
Yeah, well, if we can get positive outcomes like turning further to renewables in the long run, then that can be absolutely vital. Rod Rothwell, co chair of the KTLA, thank you very much for sharing some of the insights and research that you’ve been doing on this topic. And obviously, still a lot of uncertainty. But I feel in the face of this confusion. I think we’ve all got to kind of communicate and maybe we can open up that opportunity to find us on LinkedIn to search KBLA and if anybody has any concerns, questions or messages related to this or an area that you’d like us to look into, Rod, I think we’d very much welcome that, wouldn’t we?
Rod Rothwell 18:42
Definitely, definitely thank you very much. I really appreciate having the opportunity to talk with you today.
Alex Jenson 18:48
Also want to thank Innovation Center Denmark Seoul again for making today’s episode possible. If anyone is not on LinkedIn by the way, and you want another way to reach us. Let me also give our email info at KBLA dotnet otherwise, see you again tomorrow.