On 4th January, Iran’s armed forces seized the South Korean oil tanker MT Hankuk Chemi in the Persian Gulf because of the environmental and chemical pollution caused by the ship. Many experts referred that this incident is meant to pressure Seoul to grant Tehran access to $7 billion held by the two South Korean banks which was effectively immobilized as a result of U.S. sanctions, this is little evidence so far to back up these claims. Well, this will be the latest addition to the price that South Korea had to pay for U.S. President Donald Trump’s reversal on the Joint Comprehensive Plan of Action.
As per 2015 negotiation In JCPOA is a multilateral agreement to dismantle most of its nuclear program in exchange for multilateral sanctions relief from the five permanent members of the U.N. Security Council and Germany. In 2016, the deal was first implemented which increased the Iranian GDP by 13 percent which is highly driven by exports from the country’s lucrative oil and gas industry. Towards the end of 2017, Iran was producing almost 3.8 million barrels of crude oil per day that is over 3 million barrels at the beginning of 2016.
On the other hand, in the May 2018 Trump announced that the U.S. exit from the deal, claims that JCPOA allowed Iran in building a nuclear weapons program over time. Well, the reimposition of sanctions on Iran and secondary sanctions on countries invade trading with Iran effective November that year. Through 1st May 2019, temporary exemptions were carved out for major oil importers. Undoubtedly, as a result of 2018 Iranian GDP was constructed by 6 percent before falling by almost 6.7 percent in 2019 along with the corresponding drop in oil exports.
As a major importer of Iranian oil, South Korea was hit hard by the U-turn in U.S. policy. After the implementation of JCPOA, Iran became South Korea’s third-largest source of oil in 2017. Along with this South Korea also turned out to be the largest buyer of Iranian condensate. Its petrochemical industry processed in refineries specifically designed to handle the uniquely light in the sulfur commodity. Due to the sanctions of South Korea’s $7.8 billion in oil imports from Iran in 2017 fell to $2.1 billion by 2019 without any further imports last year. This affected the other South Korean sectors as well. Shipbuilders have lost out on promising contracts for building a new Iranian Oil tanker fleet and construction companies were forced for backing out of projects for modernizing oil and gas facilities. In the past, Seoul worked out the exceptions in U.S. sanctions to permit some trade with Iran. Undoubtedly, the Trump administration has been resolute in almost shutting down the Iranian economy. During the Obama-era sanctions, South Korea has the least ability to import oil from Iran at reduced levels. Additionally, beginning in 2010 bilateral trade payments were settled through won-denominated accounts held by the Central Bank of Iran at two South Korean banks- Woori Bank and the state-run Industrial Bank of Korea. With reimposed sanctions preventing currency exchanges and no wavier from the U.S. Department of Treasury, financing trade between the two countries through this mechanism has become virtually impossible.
Moreover, these frozen accounts even appear to be central to the seizure of the oil tanker. The sanctions went into effect Tehran has been to get back its $7billion, now the important consideration of its deep economic challenges. However, the South Korean government has tried to strike a balance between ignoring becoming a target of U.S. sanctions and addressing the legitimate claims from Iran that the U.S. sanctions and addressing the legitimate claims from Iran exert influence over the Strait of Hormuz by which more than 70% of South Korea’s oil imports travel. Recently, the two sides have worked out an option to use the funds for buying COVID-19 vaccines through the COVAX Facility and receive special approval from the U.S. Treasury. Tehran is concerned about the problems stemming from the dollar conversion process required to purchase the vaccines.
In this case, both Tehran and Seoul have agreed to reach out to a diplomatic solution to the ship seizure. This incident was likely meant for sending a signal beyond South Korea. If the ship was not seized for pollution, it was done eventually to send a message to the United States and the other allies. The issue is not resolved before U.S. President-elect Joe Biden enters the White House on 20th January, Iran may be attempting to use the incident as leverage to get Biden to adhere to his campaign promise of rejoining the JCPOA. Even if settled before, it is a warning to other countries that avoiding U.S. sanctions is not a completely risk-free or costless endeavor.
Either way, the MT Hankuk Chemi is collateral damage within the larger U.S.-Iranian tensions. Undoubtedly, for Seoul, any agreement reached with Tehran over the oil tanker will just be a temporary fix unless the central problems between Tehran and Washington are worked out. In such a scenario, Biden’s return to JCPOA would be a welcomed development. It might not be that easy to jumping back where he left off. Further, considering the reports Iran is ramping up Uranium enrichment. If the issues between South Korea and Iran is not resolved by the time he becomes the president then Biden must vocally support efforts to get the ship back to South Korea that he has suffered in its own right from the sanction on Iran as well as increasing feels clutched elsewhere by U.S. tensions with China.