washingtonpost.com
Iran sanctions challenge South Korea to balance interests

By Chico Harlan
Washington Post Foreign Service
Friday, August 20, 2010; A15

SEOUL -- South Korea, a nation that prides itself on its adaptive economy and its tight alliance with the United States, has come under pressure from the Obama administration to sacrifice the first for the sake of the second by signing on to stringent new sanctions against Iran. After much dithering, Seoul learned this week that it is running out of time to respond.

The U.S. request, part of President Obama's strategy to contain Iran's nuclear weapons ambitions, has ignited a debate here about how best to balance the request by its closest ally with its own economic interests. Iran is South Korea's largest trading partner in the Middle East and supplies about 10 percent of its oil. If Seoul restricts financial dealings with Tehran -- exceeding measures outlined in the latest U.N. resolution -- it will jeopardize a relationship worth an estimated $10 billion a year.

On the other hand, the move would reinforce an alliance that U.S. and South Korean officials say has never been more important. When Seoul blamed North Korea for the March sinking of the Cheonan warship, Washington backed the findings of an investigation that said as much. As Pyongyang now plans a hereditary power transfer, raising fears of further belligerence, the U.S. and South Korean militaries have held joint military exercises as a show of solidarity. And last month, Secretary of State Hillary Rodham Clinton and Defense Secretary Robert M. Gates visited Seoul and discussed new sanctions against the North.

South Korea had planned to respond to the U.S. request by October, when the Treasury Department was expected to release details of the new financial sanctions against Iran. But on Monday, that plan was derailed when Treasury unveiled its measures weeks early -- and deprived Seoul of its rationale for delay.

According to economic and political analysts here, the move is likely to force President Lee Myung-bak's hand. Canada, Australia, the European Union and Japan have already agreed to enforce the stronger measures. Given security concerns on the Korean Peninsula and the South's military ties with the United States, Lee has "no choice but to follow the recommendations from Washington," said Alon Levkowitz, a Korea expert at Jerusalem's Hebrew University.

That decision could come at a cost.

"The South Korean people would not be happy about it, and there would be backlash against the U.S., too," said Moon Chung-in, a Yonsei University professor of political science. "Koreans think Lee Myung-bak has identified too much with the U.S., and if he goes along with this, I think that question could be the major issue in the next presidential elections."

For years, South Korea has separated its security interests and economic interests, treating North Korea and Iran -- often linked by their nuclear ambitions -- as, respectively, a threat and a place to get rich.

A trade relationship that gained traction in the 1970s now features 2,000 small and medium-size South Korean businesses with footprints in Iran and, according to the Korea Times, 25 South Korean mega-corporations, including giants Hyundai, LG and Samsung.

The measure for which the United States is trying to rally international support, the Comprehensive Iran Sanctions, Accountability and Divestment Act, targets Iran's energy sector, which sustains its economy. Several of South Korea's largest oil refiners, including SK Energy and Hyundai Oil Bank, buy Iranian crude. At the beginning of July, the South Korean firm GS Engineering & Construction, citing sanctions, independently canceled a $1.2 billion project to refine Iranian natural gas.

Another key part of Obama's plan to curb nuclear proliferation calls for participating countries to freeze the assets of financial institutions suspected of being used to fund weapons development or other illicit activities. One of those targeted is Iran's Bank Mellat, which happens to have a single Asian branch, based in Seoul, and is accused of facilitating hundreds of millions of dollars' worth of nuclear-related transactions. According to South Korea's Yonhap news service, Bank Mellat is used for 70 percent of South Korean export transactions with Iran. Washington wants Seoul to close it.

South Korean officials have kept a low profile in recent weeks, promising to implement the less stringent U.N. resolution but also to watch the "potential impact on [the] domestic economy," said Kim Young-sun, a spokesman for the Ministry of Foreign Affairs and Trade.

The prospect of harsher penalties has prompted angry rhetoric from Tehran, including threats to raise tariffs on South Korean products by 200 percent. "We will hike [tariffs] so much so that no one will be able to buy foreign goods," Iranian Vice President Mohammad Reza Rahimi said, according to Iranian news media. Seoul officials also say they fear losing access to Iranian oil.

Yoon-shik Park, a finance professor at George Washington University and a former financial adviser at Samsung, said South Korea will probably fall into line on the U.S. sanctions but also seek "wiggle room."

"If the South Korean government can find a way to satisfy the letter of the law while channeling their economic activities away from Iranian institutions -- non-Iranian banks, maybe in Dubai -- that's the first step," Park said. "And then use some back-channel diplomatic efforts with the Iranian government. That is what I think South Korea should do, to avoid blowing this up into an open trade war."

Special correspondent Yoonjung Seo contributed to this report.

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