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Oil and Electronics: Development of Economic Cooperation between Korea and Russia

13 February 2018
Oil and Electronics: Development of Economic Cooperation between Korea and Russia

The Republic of Korea is Russia's third major partner in Asia by trade turnover. In 2017, import and export volumes between the two countries increased by 41% to almost $19bn. South Korea will promote bilateral cooperation as the Strategic Partner of the International Industrial Trade Fair INNOPROM-2018.

What areas of cooperation are Russia and Korea currently prioritizing? What is the history of economic relations between the two countries? INNOPROM VIEW answers these questions.

Grain of Paradox

The Republic of Korea is a vivid example of export-oriented economy. This Asian country has pursued export development for over 60 years: left with no capital or natural resources in the aftermath of the 1950-1953 war, South Korea has focused on industrialization and external trade, accordingto the information provided on the government website Korea.net. 

The national economy is currently showing impressive progress and is quite competitive. In November 2017, South Korea claimed the sixth place on the WTO exporter list with 3.6% share in global exports. In 2017, the Republic of Korea sold $571.1bn worth of goods in foreign markets. Compared with 2016, the number went up by 15.9%, and the projected increase for 2018 constitutes 4%. Still, the Korean government is also prepared for the pessimistic scenario.

"There are risk factors, such as a strong Korean won, high interest rates, an increased oil price and geopolitical uncertainties. We will put all our efforts into the first half of the year to take preemptive action against those risks and to maintain rising exports,"
― Paik Ungyu, Minister of Trade, Industry and Energy of the Republic of Korea, stated.
In 2017, electronic devices accounted for the largest share in South Korean exports worth $60.5bn. World renowned brands, such as SamsungLG, and Daewoo Electronics, are the key players in the electronics segment. 

Oil product exports account for $25.3bn and constitute Korea's second largest exported item. The petrochemical industry is perceived as a strategic sector of the national economy. South Korea is Asia's leading supplier of diesel and jet fuel, gasoline, break oils, etc. 

"The development of hydrocarbon processing in South Korea is quite paradoxical, for the country possesses no oil or natural gas resources. Major market players include SK Global Chemical, Lotte ChemicalGS CaltexS-Oil and Hyundai Oil Bank, as well as Samsung Total Petrochemicals," the Ministry of Economic Development of the Russian Federation indicates in its report.

The list of top Korean exports also includes processors and control units ($21.3bn) and world renowned Korean cars ($19.1bn sales of transport vehicles with 1.5-3.0L engine capacity). Exports of liquid crystal equipment and devices account for $14.5bn. 

Another flagship area of the Korean economy is the production of marine equipment and transports: in 2017, the Korean shipbuilders exported tankers for $13.1bn and drilling rigs and production platforms for $11.8bn. Major companies working in this segment include Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries

Top Innovator

In 2016, the Republic of Korea claimed the top spot in the ranking of the most developed innovative countries and 5th place based on the number of high technology companies with the highest market capitalization, according to Bloomberg Innovation Index. South Korea's technological power may facilitate innovative development in the Russian Federation. The Russian Government seeks to strengthen and expand its cooperation with the Republic of Korea.

"The Russia-Korea Committee on Industrial Cooperation serves as an important element in the development of bilateral relations. The Committee may prove efficient in facilitating a technological breakthrough by identifying major joint projects in robotics, artificial intelligence, and information technologies,"
— George Kalamanov, Deputy Minister of Industry and Trade of the Russian Federation, stated.

International Industrial Trade Fair INNOPROM has been designated as the strategic site for strengthening bilateral relations. In 2017, the Republic of Korea presented its national stand at the exhibition for the first time. DaeHwa Industrial Machinery Co., Ltd. and U-JIN TECH Corp. demonstrated their technologies as part of the INNOPROM.METALWORKING track. 

Representatives of major national organizations, such as KOTRAKITAKorea Association of Machinery Industry (KOAMI), and Korea Association of Robot Industry (KAR) took part in INNOPROM Business Program. 

South Korea will serve as the Strategic Partner of INNOPROM-2018. The Korean national display will feature top national companies. At the Russia-Korea Industrial Forum, corporate representatives and the authorities will discuss cooperation prospects and conduct negotiations. 

Visionary Business Mission

Economic relations between the two countries go back 29 years, and the first steps in bilateral cooperation were quite remarkable. South Korea paved the way for fostering its ties with the Russian business by opening the Moscow office of the Korea Trade-Investment Promotion Agency (KOTRA) in 1989 during the breakdown of the Soviet Union. The office started its operations even before the Republic of Korea established diplomatic relations with Russia.

"Thus, KOTRA pioneered direct bilateral trade relations which had previously been mediated by other countries. KOTRA definitely deserves credit for the Korean goods' current strong position in the Russian market and Korea being Russia's third largest trade partner in Asia,"
— Jaehong Kim, CEO of KOTRA Moscow, pointed out.

The Agency opened its offices in St. Petersburg, Vladivostok, and Novosibirsk in order to assist Russian and Korean entrepreneurs with finding partners and participating in business missions. Several major production sites were built in Russia after a series of negotiations and sales tests. Projects initiated by Korean industrial groups were launched in the 2000s and early 2010s. 

For example, in 2006 LG Electronics constructed a production facility in the Moscow Region. The site is currently the largest manufacturer of electronics and household appliances in Europe. The company invested over $350mln into its Russian branch in 2006-14. According to LG Russia, the corporation plans to increase its investment in the future. In the meantime, the Greater Moscow authorities intend to allocate a special site for Asian projects. 

"We would like to create a special industrial park accommodating predominantly Korean companies specializing in trade and processing of, for example, seafood and other goods,"
— Andrey Vorobyov, Governor of the Moscow Region, shared.

Car manufacturer Hyundai Motor Co opened its Hyundai Motor Manufacturing Rus assembly facility in St. Petersburg in 2010. Consequently, Hyundai boosted its sales not only in Russia, but also in other countries. In 2017, the facility assembled 233,500 vehicles; 5900 of them were sold outside of Russia. 

The Kaluga Region has attracted several major Korean projects, such as Samsung production facility Samsung Electronics Rus Kaluga, which manufactures household appliances sold predominantly in Russia and the CIS. Moreover, since 2016 the facility has supported Samsung's expansion into the European market with a special line of washing machines distributed to 20 countries of Eastern and Western Europe. As at 2016, Samsung invested more than $250mln into its Russian plant. Moreover, the Kaluga Region accommodates the KT&G tobacco factory ($73mln capital investment) and Lotte Group confectionery ($100mln). 

Orion, a Korean spongecake and chocolate maker, opened its first Russian office in 1996, launched its production facility in Tver in 2006, and set up another production site in Novosibirsk in 2008. Total investment is estimated at $60mln. In 2017, the company announced its plan to invest over RUB 4.7bn into commissioning additional production facilities in the Tver Region. 

Construction of Korean enterprises in Russia is but one instance of bilateral cooperation. Other examples include collaboration in the aerospace sector (Roskosmos' participation in the development of Korea Space Launch Vehicle KSLV-1), as well as research, energy, pharmaceuticals, and other segments. 

Tourism and the Chemical Industry

In 2016, mutual turnover between Russia and the Republic of Korea amounted to $13.4bn, and in 2017 it increased by 41.4% to $18.96bn.
According to Korea Customs Service, Russia's main export item is raw materials: in 2017, South Korea imported oil products (crude oil, light and medium distillates, etc.) for $5.5bn, coal for $2.6bn, and liquefied natural gas for $711mln. Russia imported Korean transport vehicles (for the most part, passenger cars) and parts worth $1.7bn. Moreover, South Korea also supplied Russia with watercraft (almost $300mln) and structures made of ferrous metals (approximately $250mln). 
South Korea directly invested $53.3mln into the Russian economy over the first three quarters of 2017; total FDI has reached $2.58bn. According to the Ministry of Economic Development of the Russian Federation, Korean companies prefer to invest in the Central (more than 50% of total investment) and Northwestern (27%) Federal Districts. 

The Far East has attracted approximately 14% of South Korean investment, but the Russian authorities are negotiating further extension of bilateral cooperation in the region. In the Far Eastern Federal District, the Korean businesses have invested $434 into 10 projects in fish processing, tourism infrastructure, and chemical production.

"We will do our best to increase the number of investment projects. I personally believe that economic cooperation lays a solid foundation for mutual rapport and promotes good bilateral relations,"
— Yury Trutnev, Plenipotentiary Representative of the President of the Russian Federation in the Far Eastern Federal District, stated.

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