By Kyle Ferrier*
Iran’s seizure of the South Korean oil tanker the MT Hankuk Chemi in early January is undoubtedly linked to Tehran’s immobilised funds in Seoul. It is also clear that the dispute will require Washington’s involvement in one way or another to be resolved. What that will look like and when it will come is still unsure, but the longer it takes the worse off South Korea will be.
At the core of the issue is former US President Donald Trump’s withdrawal from the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). Negotiated under his predecessor, the agreement provided Iran international sanctions relief in exchange for dismantling most of its nuclear program. Although most experts agreed the deal was working as intended, Trump withdrew the United States from the JCPOA in 2018, claiming it did not go far enough to prevent Iran from developing nuclear weapons.
With the US withdrawal came not only the reimposition of sanctions on Iran, but also the threat of secondary sanctions on other countries found to be trading with Iran, including those that were still signatory to the agreement.
For South Korea, Iran had become an important economic partner in the years when it had access to global markets. In 2015, the year before the JCPOA went into effect, South Korea imported 5.7 million tons of oil from Iran, but by 2017 this had shot up to 18 million tons, making Iran one of South Korea’s top three sources of oil.
Under a scheme set up in 2010, these trade payments were settled through won-denominated accounts owned by the Central Bank of Iran at two South Korean banks. Even with forewarning and exemptions that allowed Seoul to import Iranian oil for nearly a year after Trump terminated US participation in the JCPOA, when the spigot was turned off about US$7 billion was left in the account.
Without significant progress in the negotiations to get these funds returned, Tehran has by all accounts seized the ship as leverage to pressure Seoul, but the main stumbling block is still Washington.
Iran and South Korea have reportedly worked out that Iran can use the funds to purchase COVID-19 vaccines through the COVAX Facility with special approval from the US Treasury, though this has yet to happen and it is unclear exactly why. Iranian officials claim the South Korean banks are wary of being targeted by US sanctions while South Korean officials suggest Tehran is the one that is hesitant to act. Either way, the fear of US sanctions is the main problem.
To be sure, South Korea has come nowhere close to suffering from these sanctions as much as Iran has, but Seoul has still taken a financial hit and would like to resolve the current standstill as quickly and amicably as possible.
In addition to losing a major source of energy and inputs for its petrochemical industry, South Korean companies lost lucrative contracts to modernise Iran’s oil and gas facilities and oil tanker fleet. Promising small business cooperation in high-tech fields also ground to a halt. If the current predicament drags on and leaves a blemish on Tehran’s perception of the country, South Korean businesses could be severely disadvantaged if and when sanctions are lifted.
In this sense, the new Biden administration’s interest in re-entering the JCPOA is certainly a welcome change. But it may wind up taking longer than previously thought.
Over the past year, Iran and the United States, with the help of Israel, have engaged in a series of escalating provocations recently culminating in Tehran ramping up its uranium enrichment and the assassination of a top Iranian nuclear scientist likely at the hands of Israel. All of these developments have complicated the timeline and conditions for a US return.
During their confirmation hearings, Biden’s picks for Secretary of State and Director of National Intelligence each stated Washington was a ‘long way’ from re-joining the JCPOA. Additionally, both the Biden administration and Tehran want the other to be in compliance before returning to deal, and even then the United States could seek to leverage this compliance to address other areas of concern such as Iran’s missile program.
Seoul is looking to other diplomatic channels for help — including reaching out to one of Iran’s closest partners, Qatar — though it would be better served by elevating its efforts with the United States.
While it has been reported that the US Treasury has granted sanctions exemptions for Iran’s funds in South Korea to be used for the coronavirus vaccine, there have not been any major public statements that could assuage the fears of either Tehran or the two South Korean banks. Progress in closed-door talks with the United States are apparently behind Iran’s decision in early February to release the ship’s crew, but getting a high-level statement out in the open will likely be necessary for the safe return of the ship and its captain.
Securing such a public message out could help bring this unfortunate chapter in Iran–South Korea relations to a quick and agreeable close and may even help to open a new one for the United States and Iran. Amid its own standoff with Iran as to who will move towards compliance first, Washington could use this pronouncement as a low-cost goodwill gesture with Tehran to start building diplomatic momentum.
*About the author: Kyle Ferrier is a Fellow and Director of Academic Affairs at the Korea Economic Institute of America (KEI). All views expressed in the article are the author’s own and do not necessarily reflect those of any institution or organisation.
Source: This article was published by East Asia Forum