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| A signboard at a gas station in Seoul shows the spike in gasoline prices, Sunday. Nationwide gasoline prices, according to oil price information website Opinet, are on an upward trajectory for six consecutive weeks and have reached 1,739.8 won ($1.44) per liter. Yonhap |
Korea to consult US in early March on export curbs on Russia
By Yi Whan-woo
The Korean economy is facing growing risks as the escalating Ukraine-Russia conflict leads to a surge in prices of international oil and raw materials, which will deal a lasting blow to both inflation and the growth of Asia's fourth-largest economy, according to analysts Sunday.
Entering its fourth day, the Russian invasion of Ukraine is underway in multiple areas, spawning fears that the large-scale assault could drag on for months and further affect the prices of oil and other raw materials.
This is likely to weigh further on forecasts of Korea's economic growth and consumer prices, as most projections were made before Russia's threat of war or did not take into account the possibility of the assault growing into a full-scale conflict.
The Ministry of Economy and Finance announced Sunday that the government will begin consultations with the United States beginning in early March over Korea's participation in U.S.-led export curbs on Russia.
On Friday, Washington said export controls on 57 sensitive items and technologies in seven fields _ semiconductors, computers, IT, sensors and laser, autonomous navigation, marine technology and aerospace technology. It also announced the removal of some Russian banks from the SWIFT financial messaging system, essentially barring them from international transactions.
Analysts warn of a domino effect from the crunch in energy and raw materials.
They noted that a rise in oil and raw materials costs will create a ripple effect on manufacturing and daily living expenses, and accordingly, deepen consumer inflation, which so far, is projected to grow 3.1 percent ― a 10-year-high ― in 2022.
The rising costs will also slow down exports and worsen the trade balance that is likely to remain in the red for three straight months in February, and ultimately hurt the annual growth projection in the low 3 percent range.
The benchmark KOSPI, after taking a beating so far this year due to a selling spree by foreign investors, remains in the 2,600 point level after plunging more than 2 percent, Thursday, as investors were spooked by the Russian invasion of Ukraine.
The won-dollar exchange rate surpassed the worrying threshold of 1,200 won per U.S. dollar, also on Thursday.
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| People gather in front of a damaged residential building in Koshytsa Street, a suburb of the Ukrainian capital Kyiv, where a military shell allegedly hit, Friday. Russian forces reached the outskirts of Kyiv on Friday as Ukrainian President Volodymyr Zelenskyy said the invading troops were targeting civilians and explosions could be heard in the besieged capital. AFP-Yonhap |
"I would not say the regional risks caused by the Ukraine-Russia conflict on our economy are still higher than the ones caused by the U.S. and China trade rift, but it certainly can deal a blow to us concerning a supply crunch," said Joo Won, deputy director of the Hyundai Research Institute.
He noted that oil prices, which once surpassed $100 a barrel last week and are forecast to surge to as high as $150 a barrel, can go up further if the U.S.-led sanctions on Russia last a long time.
He referred to Russia as being a rich supplier of oil, natural gas, nickel and aluminum, and Ukraine being abundant in wheat and rare gases for chips, such as neon, argon, krypton and xenon.
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| Bank of Korea (BOK) Deputy Governor Lee Hwan-seok, center, gives a briefing on the country's economic outlook at the BOK headquarters in Seoul, Thursday, hours before Russia's launch of a full-scale attack on Ukraine on the same day. The BOK said its inflation projection of 3.1 percent for 2022 took into account heightening tensions in Ukraine but not the possibility of a full-scale war. Yonhap |
According to the Korea Economic Research Institute (KERI), if international oil prices rise to $100 per barrel, Korea's consumer price index (CPI) can go up by 1.1 percentage points.
The Bank of Korea (BOK) on Thursday revised up the 2022 CPI projection from the previous 2 percent to 3.1 percent, after the average monthly inflation rate surpassed 3 percent for four consecutive months through January.
The BOK explained that it took into account escalating tensions in Ukraine in deciding the annual inflation rate, but the projection excluded a possible full-scale war and harsher intentional sanctions.
KERI speculated that Korea's current account balance will decrease by $30.5 billion when oil prices rise to $100 a barrel and by $51.6 billion when they go up to $120 a barrel.
The growth of the country's export-reliant economy in return will shrink by 0.3 percentage point at $100 a barrel and 0.4 percentage point at $120 a barrel. The finance ministry forecast the country's economy to grow 3.1 percent and the BOK projects 3-percent growth this year.
"You can see how the Ukraine crisis can put additional pressure on Korea's inflation and business environment," said Jung Kyu-chul, a fellow at the Korea Development Institute (KDI).
