The "Ukraine Invasion" Brings Global Land and Sea Logistics Disruptions... Companies Rush to Prepare Countermeasures

Preference for China Railway over Siberia... Container Shipping Lines Suspend Russia Operations
South Korea's Inclusion in US Export Control FDPR Exemption List Under Close Watch

On the 1st (local time), the streets of Kharkiv, Ukraine's second-largest city, were devastated by attacks from Russian forces, filled with various debris including damaged vehicles. (Image source=EPA Yonhap News)

[Asia Economy Reporter Moon Chaeseok] As international sanctions against Russia intensify, domestic companies are also falling into the quagmire of sanctions. Hyundai Motor's Russian factory has temporarily halted automobile production due to semiconductor supply shortages, and if sanctions against Russia become more concrete, additional damage is expected. Shortages of parts and transportation difficulties also pose significant burdens. The global logistics crisis caused by COVID-19 was already severe, and this situation shows signs of worsening, prompting companies to be busy preparing countermeasures.

Companies are also closely watching whether South Korea will be included in the exceptions to the U.S. export control measure against Russia known as the Foreign Direct Product Rule (FDPR). Since South Korea and the U.S. are conducting related consultations, the level of impact on companies will vary depending on the outcome of these discussions.

Concerns Over Parts Supply and Logistics Network Disruptions

According to the 'Global Supply Chain Insights' report published on the 2nd by the Global Supply Chain Analysis Center under the Ministry of Trade, Industry and Energy and industry sources, Samsung Electronics produces TVs at its factory in the Kaluga region near Moscow, while LG Electronics manufactures home appliances and TVs at its factory in the Luzha area on the outskirts of Moscow. Additionally, KT&G and Paldo have bases near Moscow, and Hyundai Motor and Kia have bases in Saint Petersburg. These local bases either import finished products from regions outside Korea or import raw materials from Korea and then source parts for locally produced items.

Companies are deeply concerned that sanctions against Russia could disrupt parts supply chains and land and sea logistics networks. A source from the electronics industry said, "Although local factories are still operating normally, we have heard that ships have recently found it difficult to enter Russia," adding, "We are closely monitoring the possibility of disruptions in maritime logistics." Another source expressed concern, saying, "There are no immediate problems with parts supply, but if the situation prolongs, local production could be affected."

Since the start of sanctions against Russia, demand has shifted from the Trans-Siberian Railway (TSR), the main land transport route, to the China-Europe Railway (TCR), causing a surge in cargo volume and making logistics difficulties more visible. Although trucking routes from Europe to Russia have not been officially blocked, transport companies are reluctant to use these routes, leading to logistics congestion.

Maritime transport is also expected to face unavoidable disruptions. With MSC, Maersk, and other top global container shipping companies temporarily suspending operations to Russia, the already severely disrupted logistics network due to COVID-19 could worsen. The Supply Chain Analysis Center stated, "At this point, a decrease in semiconductor-related logistics to Russia is expected due to sanctions," and recommended, "Information sharing and prior confirmation of logistics issues at both national and individual company levels are important as the situation evolves."

Earlier, Hyundai Motor announced it would suspend operations at its Saint Petersburg plant in Russia until the 5th due to parts shortages caused by global logistics disruptions. However, the company explained that this was due to the ongoing vehicle semiconductor supply shortage since last year, not the impact of sanctions against Russia.

Efforts to Secure Raw Material Inventory and Diversify Supply Sources

Domestic semiconductor companies are currently focusing on securing inventories of rare gases used in semiconductors, such as neon and krypton. In last year's imports of rare gases to Korea, the share from Russia and Ukraine was 48% for krypton (31% Ukraine, 17% Russia) and 28% for neon (23% Ukraine, 5% Russia). A semiconductor industry official said, "We currently have about three months' worth of inventory and are working on diversifying supply sources to secure stock."

The battery industry, which sources key minerals from China, Australia, and South America, says it is not directly affected but is alert to potential medium- to long-term impacts. The electric vehicle and battery supply chain consists of 'raw materials → material suppliers → battery manufacturers → automakers.' Due to the nature of long-term contracts spanning several years at each stage, the immediate impact is limited, according to the industry. However, with global raw material prices rising sharply recently, the war has increased market uncertainty, fueling price increases, which is a major concern.

According to the Korea Resources Information Service, the price of nickel, a representative battery raw material mineral, is $25,450 per ton as of this date. This is about 38% higher than the previous year's average and is at an all-time high. A battery industry official said, "Rising raw material prices will eventually lead to higher battery and electric vehicle prices," adding, "We are closely monitoring indirect and potential impacts caused by unstable conditions and uncertainties and focusing on diversifying supply chains."

The steel industry is also reviewing securing alternative raw materials and diversifying import sources in preparation for possible supply shortages of coking coal and other materials.

Interest in Whether South Korea Will Be Included in FDPR Exemptions

There is also interest in whether South Korea will be included in the FDPR exemption list. The U.S. applied the FDPR, which prohibits exports if products made by foreign companies outside the U.S. use U.S.-controlled software or designs, as part of sanctions against Russia. The 32 countries including the 27 EU member states, Australia, Canada, Japan, New Zealand, and the UK have imposed independent sanctions equivalent to those of the U.S., thus exempting them from this rule, but South Korean companies were not included in the exceptions. Therefore, products subject to FDPR must go through the U.S. Department of Commerce to be exported to Russia.

Whether some finished products such as smartphones and automobiles will be subject to regulation is a key issue. Finished products and civilian goods are generally not subject to export controls, but since smartphones contain communication chips that could be used for military purposes, they might be included in the controls. Samsung Electronics holds about a 30% market share in the Russian smartphone market as of last year, ranking first. A government official explained, "In 2013, the U.S. eased sanctions on the sale of communication devices to Iran to allow Iranians freer communication with the outside world," suggesting that, based on the Iran case, smartphones might be excluded from export sanctions this time as well.

Regarding automobiles, many vehicles are assembled locally in Russia using modules exported from Korea, so whether module exports are allowed is also a concern. An industry source said, "There are many 'gray areas' in export control items," adding, "We hope the government clarifies these points during Korea-U.S. consultations." In response, Yeo Han-gu, Director-General for Trade Negotiations at the Ministry of Trade, Industry and Energy, who is visiting Mexico ahead of talks with the U.S., stated on the 1st (local time), "We will strive to reach an agreement as soon as possible through high-level face-to-face consultations regarding FDPR exemptions."

Closely Monitoring Global Anti-Russia Movements

Global companies such as Apple and Nike have announced suspensions of product sales or business withdrawals in Russia as a protest against Russia's invasion of Ukraine.

Domestic companies have not yet taken separate measures but are reportedly considering their internal response strategies. Companies that have invested heavily in the Russian market are extremely sensitive to the potential impact on their local operations following this situation and are carefully considering related responses.

Samsung Electronics is the market leader in Russia's smartphone and TV markets, and LG Electronics competes for the top share in home appliances such as washing machines and refrigerators. An industry source said, "For companies that must continue doing business in Russia, this is a very sensitive issue," adding, "We are closely monitoring the recent series of developments." Another source refrained from commenting, saying, "This does not seem to be a matter for companies to decide independently." A government official, speaking personally, said, "I am not sure if we need to voluntarily refrain from selling items that we can sell in Russia."

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