Economic impact of Ukraine conflict key focus of government

Vice Finance Minister Lee Eog-weon, left, heading a government task force meeting regarding Ukraine situation in Seoul on Tuesday. [YONHAP]

Korea is preparing for any economic shocks from a possible invasion of Ukraine by Russia, the finance ministry said during a government task force meeting Tuesday.

"Recently, the Russian military presence has increased, as has the presence of Western militaries," said Lee Eog-won, vice finance minister during the meeting. Some embassies in Kyiv have been closed, with staff moved to safer locations.

"If instability becomes worse, it could have a negative impact on our economy overall, including through supply disruptions, limiting the economic recovery and expanding uncertainties in the financial market."

The government plans to set up a hotline for Korean companies operating in the area through the state-owned Korea Trade Investment Promotion Agency (Kotra) and the Korea International Trade Association (KITA).

Kotra will be initiating an emergency network with Korean companies through its office in Kyiv.

The Korean government said it will prepare air and sea logistics networks in case the crisis affects the movement of goods by rail in Europe.

"Each government institution will create or reinforce specific action plans so that they can act instantly," Lee said.

The market continues to struggle as military tensions increase in Ukraine.

Although the Kospi drop was limited compared to Monday's, the Seoul benchmark lost 27.94 points or 1.03 percent.

The bigger concern is surging crude prices resulting from the conflict, which may add inflationary pressures.

West Texas Intermediate (WTI) crude on Feb. 14 went up 2.5 percent to $95.46 per barrel, the highest since September 2014. The situation with Brent crude was the same as it exceeded $96 per barrel, also the highest since September 2014.
Russia is a major supplier of crude in Europe as it produces 10 million barrels a day, which accounts for roughly 10 percent of the world's crude supply. The United States produces roughly 700,000 barrels, about 3 percent.

The price of oil products, including petroleum and diesel, started to increase at double-digit rates from April last year. In April 2021, oil product prices were up 13.4 percent year-on-year, the sharpest year-on-year increase since March 2017.

The government believed the significant surge of oil prices were not a danger to rapid economic recovery both home and abroad, but concerns started to grow as the double-digit growth of oil product prices showed no signs of slowing down.
When asked in October if the government has a contingency plan in case international crude prices continue the upward momentum, the government responded that it projects international prices to stabilize in the first quarter.

In January, the price of oil products rose 16.4 percent. Gas for automobiles surged nearly 35 percent.

"While Russia and the Western countries will continue to talk, it is unlikely that an agreement will be reached anytime soon," said Seo Jung-hun, an analyst at Samsung Securities. "However, there is also the low possibility of the situation turning for the worst as the economic situation of either sides aren't favorable. Yet for the time being, it is likely to have a downward pressure on the market."

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]