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What is happening?
On February 28, the U.S. and Israel launched strikes on Iran killing Ayatollah Ali Khamenei, Iran’s Supreme Leader, during the initial wave. Iran answered by targeting states allied with the U.S. in the Gulf. The arising conflict has and will continue to affect energy markets, shipping costs, and financial conditions;the extent of this depends on how long the conflict lasts.
In response, an emergency meeting was called by The Bank of Korea (BOK) on Sunday, during which a decision was taken to establish a 24-hour monitoring system. The South Korean stock market is currently experiencing negative impacts. However, investor sentiment has lifted in several key sectors. Korea’s major defense companies have seen sharp gains in investment since the beginning of the conflict. Shipping firms also expect to experience higher revenues if Iran blocks the Strait of Hormuz as it has been threatening to do since that would cause an increase in freight rates.
What is the broader picture?
After the country’s markets returned from a public holiday on March 3, the defense stocks saw huge gains. The shares of the country’s largest defense manufacturer, Hanwha Aerospace, initially went up nearly 25% before pulling back to 20%. Korea Aerospace Industries gained more than 12% before paring to 3.2%. Other manufacturers like Poongsan, an ammunition producer, or Hyundai Rotem, manufacturer of the K2 main battle tank, all saw steep rises in their shares. As an important exporter of defense technology globally, South Korea’s prominence has only increased since the onset of Russia’s full scale invasion of Ukraine in 2022.
However, the apparent gains in defense and shipping do not offset broader vulnerabilities in Korea’s economy, including energy dependence and market volatility. The country’s stock market — the Korea Exchange — which had been the best-performing market globally this year, up to this point, suffered its steepest fall in history on Wednesday, with a daily loss of 12.06%. This was the most extreme decline among all East Asian countries. Even the biggest corporations like Samsung Electronics, SK Hynix and LG Electronics were hit by the losses.
As South Korea imports most of its energy, its key industries, including semiconductor and electronics manufacturing, are heavily dependent on foreign oil and gas, mostly imported from the Middle East. Supertankers carrying oil and gas go through the Strait of Hormuz, currently at risk of disruption by the war. Its economy is export-driven, which makes it is particularly sensitive to swings in oil prices and geopolitical shocks in the Middle East.
Why is it important?
The situation in South Korea illustrates how dependent the global economy is on geopolitical stability. Modern wars create financial shockwaves that spread globally. The reaction of investors suggests that their confidence moves faster in response to real economic change, and uncertainty often precedes actual disruption. As one of many countries heavily reliant on energy imports and global trade routes, South Korea demonstrates how even distant conflicts can expose structural vulnerabilities shared by economies all over the world.