Korea eyes the Iranian market

As Iran emerged from 37 years of economic isolation on Saturday, Seoul hopes to regain a lot of business that was shut down five years ago because of sanctions over the country’s nuclear weapons program.

The Ministry of Strategy and Finance said Sunday Korean companies will be able to buy oil from Iran and make financial transactions freely as the government lifted its regulations on trading with the second-largest market in Middle East.

Korea imposed three regulations on local companies’ transactions with Iran in 2010. To make financial transactions, Korean financial firms had to win approval from the Bank of Korea.

For exports, companies were required to be approved by the Ministry of Trade, Industry and Energy. Exports of some strategic items, petrochemicals, automobiles and fine jewelry to Iran have been banned for the past five years.

Korean construction companies had to report to the Ministry of Land, Infrastructure and Transport their orders from Iran.

From now on, all the restrictions will be removed, making Korean companies free to do business with Iranian counterparts.

“The restriction on importing Iranian oil will be eliminated, while exports to the country will also be freed, except for the strategic items,” said Jung Gyu-don, director general of international economic policy division at the Finance Ministry. “We expect infrastructure and shipbuilding orders from Iran, which can be a significant opportunity for securing our growth momentum.”

Under the international sanctions, Korea had to reduce its oil imports from Iran on a gradual basis. Imports of Iranian oil were cut from around 87 million barrels in 2011 to 46 million barrels last year.

Korean construction companies are pinning high hopes on the re-opened Iranian market. Until Korea joined the international community to sanction Iran, it was the sixth largest market for Korean builders. As of 2010, Korean construction firms completed 91 projects worth $12 billion in total.

“A large market is re-opened now,” said a spokesman of Daewoo Engineering & Construction. “We are preparing to take new orders from Iran.”

But considering that oil prices are hovering around $30, it might take some time for large infrastructure construction orders to be actually placed.

“For the time being, new orders from Iran will be mostly upgrades of their outdated facilities in existing infrastructure,” said Kim Jong-kook, a senior official at the International Contractors Association of Korea.

The Iranian government is expected to place about $60 billion worth infrastructure orders this year, said the Export-Import Bank of Korea.

The Seoul branch of Bank Mellat, an Iranian private bank, will resume its operations soon, according to the Finance Ministry. The bank’s branch in Seoul was shut down in 2010 as it was on a list of prohibited Iranian businesses. “Reopening of the bank has been discussed since last year,” said Choi Ji-young, director of foreign exchange regulation at the Finance Ministry. “It seems like the bank will be able to resume operations soon.”

However, all payments with Iran should be made in the Korean won, not the U.S. dollar, since the use of the greenback is still banned. In addition, since not all Iranian businesses are free of sanctions, Korean companies will need to double-check if companies that they want to trade with are on the prohibited list or not. Some harbors in Iran are still off limits.

“Since the international sanctions can be snapped back at any time if Iran is caught developing nukes, Korea companies should add a nullification clause in their contracts with Iranian partners in case of sanctions being restored,” Jung said.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]