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Lee Sees Russia Pipeline Via N. Korea as Win on Energy Cost

Lee Myung Bak, South Korea's President
Lee Myung Bak, South Korea's president, speaks during an interview in New York. Photographer: Scott Eells/Bloomberg

Sept. 23 (Bloomberg) -- South Korean President Lee Myung Bak said plans to build a natural-gas pipeline across the divided peninsula are realistic, less than a year after a deadly North Korean artillery attack on a disputed island.

“I do not consider this as a far-fetched dream,” Lee said in an interview in New York, speaking through an interpreter. He called the project “a win-win for everyone involved.”

OAO Gazprom, Russia’s gas-export monopoly, this month signed preliminary agreements with South Korea’s Korea Gas Corp. and the North Korean government to build a pipeline that would carry as much as 10 billion cubic meters of gas a year across its eastern border to the peninsula. Lee’s support for the project may signal an easing of tensions between the two nations, which haven’t signed a peace treaty following their 1950-1953 civil war.

“I’m aware that the Russians and the North Koreans have been discussing this issue and that some progress, good progress, is being made,” Lee said. “We can buy gas at reasonable prices; and for the North Koreans, they can also get some benefit by collecting the transaction fee.”

Lee rolled back his predecessor’s “Sunshine Policy” of engaging with North Korea when he came to office in 2008, arguing that the policy rewarded Kim Jong Il’s regime for provocative behavior -- a view echoed by the administration of U.S. President Barack Obama.

Relations with North Korea reached their worst level in decades last year, when North Korea shelled Yeonpyeong Island, killing four people, and was blamed for a torpedo attack on a South Korea warship that claimed 46 lives.

Turning Point

The pipeline project may prove a turning point for inter-Korean relations, Hong Joon Pyo, chairman of Lee’s ruling Grand National Party, told lawmakers Sept. 7. He estimated North Korea could earn about $100 million a year to rebuild its economy, while South Korea might reduce its natural-gas prices by about 30 percent.

Increasing demand from industry and electricity generators for natural gas underpins the economic rationale for the project, said Charles Kim, a New York-based director of Mirae Asset Securities Co.

“South Korea is the world’s second-biggest importer of natural gas, and it’s all coming in on tankers,” Kim said. “Building new nuclear-power plants has become politically unpalatable after the accident in Japan, so this would also boost the demand for natural gas.”

Russia is offering North Korea gas, electricity and railway projects to induce the regime to restart nuclear non-proliferation talks. The two Koreas in July agreed to try to revive the talks, and on Aug. 30 Lee named a new minister, Yu Woo Ik, to lead North Korean affairs in his government.

Foreign Influence

The pipeline plan would bring the most foreign influence into the North Korea economy since the civil war, and this may be too much for the regime in Pyongyang to tolerate, said Nicholas Eberstadt, a political economist at the American Enterprise Institute for Public Policy Research in Washington.

“North Korea’s commercial history is filled with agreements which were never fulfilled,” Eberstadt said. “It is the global master at the game of extracting aid from other nations.”

Higher energy costs are contributing to an inflation rate in South Korea that’s exceeded the central bank’s target ceiling of 4 percent every month this year and increased the cost of living, in a blow to Lee’s popularity. His approval rating has fallen to 31.7 percent, less than half the level of February 2008, according to Realmeter, a polling company in Seoul. That’s the month when he was sworn in to the single five-year term permitted by his country’s constitution.

Growth Forecasts

Separately, Lee said economic growth in South Korea would be in the 4 percent range next year, echoing comments from his finance minster, Bahk Jae Wan, who said during an interview in Washington yesterday that the government has no immediate plans to change its forecasts. The official estimates are 4.5 percent for this year and 4.8 percent in 2012.

“We’re going to have to wait a little bit longer to see the figures coming in after the fourth quarter this year in order for Korea to predict how we’re going to perform next year,” Lee said.

Slowing GDP

He campaigned on a pledge to deliver 7 percent growth and higher standards of living. The 2008 global banking crisis and ensuing recession sent South Korea into three quarters of contraction on an annual basis. While the nation rebounded, with gross domestic product growing at a decade high 8.5 percent in the first quarter of 2010, expansion since has slowed to 3.4 percent in the three months ended June 30.

South Korea’s Kospi Index has dropped about 22 percent since the beginning of August as global equities slumped on concern that the world is heading for another recession. The Kospi fell 5.7 percent today.

The president also said there is “no validity” to criticisms that South Korea is trying to keep the value of its currency low, unfairly boosting the competitiveness of its exporters. The won is down about 5 percent so far this year against the U.S. dollar and 10 percent again Japan’s yen.

South Korea will intervene if there is excessive volatility in the currency, Bahk said. He added that such changes in capital inflows and outflows, in addition to foreign-exchange rates, poses the biggest risk to the economic outlook.

To contact the reporters on this story: Brett Miller in Seoul at; Matt Winkler in New York at

To contact the editor responsible for this story: Peter Hirschberg at

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