Iran threatened to cease importing Korean products on Wednesday in retaliation to Seoul’s decision to halt purchasing Iranian crude in line with EU sanctions.

“Iran may decide to fully stop imports of Korean goods if the Korean government realizes its decisions to ban Iran oil imports,” Hormoz Ghahremani, a spokesperson for the Iranian Embassy in Seoul, told the Korea Herald.

The Ministry of Knowledge Economy said Tuesday it will suspend oil imports from the Gulf country starting July 1, when an EU ban on insurance for ships carrying the crude comes into effect.

The political tit-for-tat is expected to deal a serious blow to businesses in both countries.

Iran is Korea’s third-largest market in the Middle East. Korea’s exports to the country shot up about 32 percent on-year to $6.07 billion in 2011 and more than 40 percent to $2.9 billion in the first five months of 2012, ministry data shows.

Nearly 3,000 Korean firms sell to Iran steel sheets, synthetic resins, home appliances and other items.

“We’re striving to come up with measures to cope with the situation in consultation with the Ministry of Knowledge Economy and other related agencies but having difficulty securing an alternative source of insurance,” Foreign Ministry deputy spokesperson Han Hye-jin told The Korea Herald.

Washington and Europe have been pressing Tehran to relinquish its bid for atomic weapons by axing transactions with the Iranian central bank and thus squeezing oil revenues, a key driver of the Iranian economy. Iran insists its programs are strictly for civilian use.

Seoul has been in talks with the EU to be exempted from the sanction on worries over its possible impact on the domestic petrol market. It won a six-month waiver from the U.S. early this month.

Korea is the world’s fifth-biggest crude buyer and imports almost all its oil needs.

However, the EU decided to proceed with its insurance ban after last week’s negotiations between Iran and six world powers failed to reach a breakthrough.

That will force two local refiners ― SK Energy and Hyundai Oilbank ― to halt imports from one of its main crude suppliers unless they find substitute insurers.

About 90 percent of the world’s tanker insurance is underwritten in the West. A supertanker carrying around 2 million barrels of oil would need $1 billion insurance coverage against personal injury and environmental liability, industry officials say.

Local refiners have called for state guarantees as Japan plans to provide $7.6 billion worth of insurance coverage for Iranian crude shipments.

Seoul, however, remains reluctant to take an official stance in light of its ties with the U.S. and EU, as well as the North Korean nuclear issues. Its attempt to engage domestic insurers has also not made progress due to the coverage’s gigantic scale.

Despite the ban, the Korean government is not forecasting any imminent oil supply shortage or price hike. It has already curbed imports by more than 28 percent on-year in the first quarter, according to LIG Investment & Securities, a brokerage in Seoul.

Iran was Korea’s fourth-largest crude provider after Saudi Arabia, Kuwait and Qatar. Iran accounted for 9.4 percent of total oil imports estimated at 930 million barrels last year, government figures show.

To minimize market swings, Korea expanded imports from other Gulf and Southeast Asian countries and turned to non-conventional oil varieties from such regions as Latin America and the North Sea. 

By Shin Hyon-hee and Robert Lee
(heeshin@heraldcorp.com) (robert@heraldcorp.com)