High-Intensity Russian Sanctions Trigger All-Out Emergency in Auto and Aviation Industries

Concerns Over Mass Bankruptcies Among Parts Suppliers
High Oil Prices Raise Tensions in Tire Industry

Korean Air and Asiana Consider Alternative Routes
Possible Disruptions in Cargo Flights to Europe

On the 27th of last month (local time), buildings in Bucha, a suburb of Kyiv, Ukraine, were destroyed and flames were burning. It is reported that this city was hit by rocket attacks from Russian forces. (Image source=Reuters Yonhap News)

[Asia Economy Reporter Moon Chaeseok] Russia's invasion of Ukraine has triggered tough Western sanctions against Russia, putting Korean companies operating locally on high alert. If the situation prolongs, concerns are rising that automakers such as Hyundai Motor and Kia, as well as auto parts companies, will be significantly affected. Airlines including Korean Air and Asiana Airlines are also closely monitoring the situation.

40.6% of Auto-Related Exports to Russia... Hyundai and Kia Sold 380,000 Units Last Year

According to the automotive industry on the 1st, as the West, including the U.S., announced successive financial and trade sanctions such as expelling Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment network, automakers like Hyundai Motor and parts exporters to Russia are preparing countermeasures. As of last year, Korea's auto-related export share to Russia stands at 40.6%, with passenger cars accounting for 25.5% and auto parts 15.1%.

The Korea Automobile Manufacturers Association predicted that if the conflict between Russia and Ukraine escalates into a full-scale war, domestic sales in Russia could drop by about 29%. Hyundai Motor produced approximately 230,000 vehicles at its Russian plant last year and sold a total of 380,000 vehicles through its local sales subsidiaries, including 206,000 Kia units and 172,000 Hyundai units. Lee Hang-gu, a research fellow at the Korea Automotive Technology Institute, said, "Considering the production volume at Hyundai's Russian plant at the end of last year, it appears Hyundai has proactively secured some inventory in preparation for the Ukraine crisis. However, if the war prolongs and raw material supply disruptions worsen, it will eventually become difficult to sustain operations."

There are also concerns about a decline in domestic demand in Russia due to weakened consumer sentiment and a real deterioration in profitability caused by the depreciation of the ruble.

Auto Parts Industry Also on Alert... Possible Export Restrictions to Russia

From the perspective of domestic auto parts suppliers, Russia is a significant market with annual exports worth $1.5 billion (about 1.0897 trillion KRW), ranking third after the U.S. and China. Therefore, smaller parts companies are expected to be hit earlier than automakers. If Russia's high-intensity sanctions continue, there is even speculation that some companies could face bankruptcy in the worst-case scenario. Since last year, there has been a shortage of automotive semiconductors, and the supply of raw materials for automotive semiconductors such as palladium and platinum is becoming more difficult, inevitably causing production disruptions.

Currently, over 90% of parts exported by domestic suppliers to Russia are delivered to Hyundai's plant located in Saint Petersburg. If parts supply issues arise, it could severely impact the operation of Hyundai and Kia's local factories. Due to U.S. strategic export controls, exports of vehicles equipped with U.S.-made semiconductors or software to Russia could also be restricted. Kim Pil-su, a professor in the Department of Automotive Studies at Daelim University, said, "If payments to first- and second-tier suppliers are delayed by just 2-3 months, the risk of bankruptcy is high. Since semiconductors become automotive modules and modules become finished vehicles, the ripple effects will spread across the industry, eventually causing widespread aftereffects."

Tire Industry Also Watching Impact of High Oil Prices

The tire industry is equally tense. Key raw materials for tires, such as carbon black and synthetic rubber, are petroleum-based, making them directly vulnerable to rising oil prices. If sanctions on Russia intensify, international oil prices could surge, increasing volatility. Additionally, global unresolved logistics bottlenecks have led to rising maritime freight rates, further burdening the tire industry. A tire industry official said, "Tires account for 70-80% of total production volume for export, with exports to Russia making up less than 10%. However, since Russia is also one of the major markets, the export sanctions inevitably affect profitability, so we are on high alert."

However, there is also an expectation that Korean companies operating in Russia may be somewhat insulated from the impact of SWIFT sanctions. Most of Hyundai Motor and domestic parts suppliers reportedly receive payments through German, Italian, and Korean banks. A representative from an automaker told Yonhap News Agency, "If SWIFT sanctions cause payment issues, auto parts companies could suffer significant damage, but currently, it appears that almost no companies are transacting through Russian banks."

Korean Air Considering Suspension of Direct Flights to Moscow

Korean Air, operating passenger flights between Incheon and Moscow, reported no unusual operational issues so far but has established contingency plans such as using detour routes by monitoring local developments in Ukraine and Russia. Korean Air currently operates the Incheon-Moscow passenger route once a week on Thursdays. Cargo flights from Moscow to Frankfurt, Germany, and Amsterdam, the Netherlands, via Moscow operate four times a week. Korean Air is also reportedly reviewing whether to suspend the Moscow-bound flight departing from Incheon International Airport on the 3rd.

Asiana Airlines does not operate passenger flights between Incheon and Moscow but operates cargo flights seven times a week from Incheon to Europe via Moscow. If Russia bans Korean-registered aircraft from passing through its airspace, Korean Air's direct flights to Russia would be suspended, and European flights would have to use southern detour routes. Using detour routes would increase fuel costs. For cargo flights, with already high air freight rates due to high oil prices, further increases are expected, raising concerns among exporters.

Both companies confirmed that since their flights to Europe do not fly over Ukrainian airspace, there have been no route changes due to Russia's invasion so far.

This content was produced with the assistance of AI translation services.