[Interview] Head of State-Funded Research Institute Who Met Putin: "Ukraine War Won't End This Year"

"Russian Economy Much Better Off Than Europe's"
"Russo-Korean Relations Broken" Putin's Response Sparks Attention

[Interview = Asia Economy Jeong Jae-hyung, Economic Finance Editor; Summary = Lee Jun-hyung, Reporter] Last October, the 'Valdai Discussion Club' was held in Moscow, Russia. This event, hosted annually by the Russian government since 2004, gathers experts from around the world to discuss issues related to Russia. Last year's event attracted attention as it was held amid the ongoing Russia-Ukraine war.

In particular, a question posed by a Korean participant to Russian President Vladimir Putin at this event became a hot topic. Putin responded to his question by saying, "Korea-Russia relations are very good," but added, "(However) if Korea supplies weapons and ammunition to Ukraine, Korea-Russia relations will collapse." In this regard, then-President Yoon Suk-yeol drew a line by stating, "(Weapon supply) is a matter of our sovereignty."

The person who asked the question that stirred Korea-Russia relations was Kim Heung-jong, President of the Korea Institute for International Economic Policy (KIEP). In a recent interview held at the Asia Economy building in Jung-gu, Seoul, Kim said, "The Russia-Ukraine war is likely to continue this year as well," adding, "Even if dramatic ceasefire or armistice negotiations occur, it will take a long time, and in any case, the sanction phase due to the war will continue until the end of this year." He also mentioned that the Korean War armistice negotiations began in 1951 but were concluded about two years later in 1953. He added, "I also attended the Valdai Discussion Club in 2021, and President Putin looked more lively and healthier last year," and "He seemed confident about the Russian economy."

Interview_Kim Heung-jong, President of the Korea Institute for International Economic Policy. Photo by Kim Hyun-min kimhyun81@

- What are the three biggest variables in the foreign economy this year?

▲ First, geopolitical risks. The Russia-Ukraine war will continue and is weighing down the global economic recovery. The second is anti-inflation policies, specifically central banks' interest rate hikes. The overall feeling is that they are going for strong anti-inflation policies, but if the recession becomes too severe, there might be a hard landing, and some compromise might be reached. Some level of inflation will likely persist for a long time.

- The market expects interest rate cuts within the year.

▲ The U.S. planned to keep raising rates this year to reach a 6% benchmark rate, but that seems unlikely now. The economy is deteriorating. They will raise rates to some extent, but I don't think they will cut rates again this year. Central banks do not even consider that.

- The market hopes for cuts.

▲ That should be seen as wishful thinking. The third is persistent supply chain issues and the restructuring of supply chains after the pandemic. There will be risks arising from artificial restructuring strategies.

- Does supply chain instability cause inflation?

▲ Supply-side inflation is difficult to manage through central banks or national economic policies. Government policies are basically demand management policies. Supply-side problems seem likely to continue. The supply chains disrupted after the pandemic have been reorganized quite a bit. Looking at logistics now, shipping rates rose to ten times pre-COVID-19 levels but have dropped to about twice as much now. Still, the problem remains that labor is hard to find.

- Why has labor supply decreased?

▲ Common explanations include digital transformation and structural changes after the pandemic. For example, taxi drivers switching to delivery drivers. But there are bigger factors than structural changes. First, many people have moved into the economically inactive population. Governments provided substantial cash support during COVID-19, so many people became economically inactive and are not seeking jobs. If they have cash, they tend not to return to work. Second, often overlooked is that before the pandemic, there was significant labor mobility between countries, especially short-term seasonal labor. For example, workers from South America would come to California to pick cherries and then leave. In the UK, seasonal workers would come during harvest, and in France during grape picking. Seasonal and short-term labor was cut off by the pandemic. In Korea, many foreign workers worked alongside domestic workers in coastal fisheries and construction. This is a common phenomenon worldwide in developed countries. I believe interest rate decisions should not be based on the labor market alone. The U.S. Fed says rates must be raised because the labor market is tight, but that's not true. A qualitative approach is needed to activate short-term and seasonal labor.

- Since the pandemic is somewhat over, isn't there room for normalization?

▲ It takes time. Usually, workers come for six months to a year. H2 and E9 visa holders come and go. It will take time to normalize. Labor markets in Korea and other countries look tight numerically, but this is a problem that should be resolved through qualitative measures, not by raising rates assuming the economy is overheating.

- When will the Ukraine war end?

▲ After the war, I went to Moscow last October and met Putin. The Valdai Discussion Club gathers experts and top intellectuals for a four-hour Q&A. Putin personally created it in 2004 and manages it with affection. In 2021 in Sochi, Putin stayed for three and a half hours, but last year he stayed almost four hours. He gave a 30-40 minute speech, talked about the war, and then held a free Q&A. Overall, he looked more lively and healthier last year than the year before. In 2021, he seemed like a caged beast, frustrated, but last year, perhaps because he had taken action, he looked better and showed confidence in the Russian economy.

- I heard that Western sanctions prevent imports of computers and such.

▲ There is no short-term problem. With the huge oil dollars earned last year, supplies are procured from China. From June to August last year, gas was supplied to Europe, and the money earned then was more than what is usually earned in a year. With this, many daily necessities were purchased from China, so there is no problem with essentials.

Currently, semiconductor exports are completely controlled. Semiconductors are used not only in general computers but also in war weapons. Both advanced and general-purpose semiconductors are blocked. It is said that some are bought from China, but China is also struggling and cannot supply much. Overall, there is a semiconductor shortage. Because of this shortage, the war capability will gradually decline over time.

- So will the war end this year?

▲ However, the war seems likely to continue this year. The sanction phase due to the war will last at least until the end of this year. Even if there is a dramatic ceasefire or armistice, the effects of sanctions will continue until the end of the year. Neither side has sat at the negotiation table. Thinking about the Korean War, it took two years from the start of negotiations to the actual armistice. Negotiations are like that. The war will not end this year without even sitting at the table. Never. What I felt in Moscow was that the war would last long. If the Russian economy had collapsed, the war would not last long, but that was not the case. The situation was much better than in Europe, essentials were supplied. The problem is with internal consumer goods and luxury goods. Chinese cars were widely imported. There were many Geely cars. In the short term, Russia has the ability to survive. So this war does not seem likely to end easily.

- I thought the U.S. and Europe supplying tanks meant pushing forward into Russian-occupied areas.

▲ The difference between the West and Ukraine's solution is Crimea. During the Korean War, the U.S. pushed to the 38th parallel and then stayed still for about three days. At that time, Korean troops advanced without U.S. permission. It's the same situation. From Ukraine's perspective, since the war started, they want to restore the status quo. So they want to reclaim Crimea. They want missiles, weapons, everything. They have the will to fight. From the West's perspective, they wonder, "Is that the right thing to do?" They say, "Shouldn't we just return to the pre-war situation?" But Zelensky says, "If we do that, they will invade again. That situation would be before February 24, 2022. Would Russia just stay still? Eventually, in 5-10 years, they will come again. To eradicate the root cause, Crimea must be recovered." The West thinks, "Isn't the war getting too big? Historically, Crimea was Russian territory."

- Zelensky receives Western support but must follow the West's position on Crimea, right?

▲ What if he doesn't listen and invades? What if he invades and causes trouble and then says 'take it or leave it'? Moreover, the West itself is not unified and is mixed. Some want to end the war now, some want to negotiate until the end and then settle on borders, some want to return to pre-February 24 borders. There is no principle in supplying war materials. They give a little, then stop. Basically, there is no unified strategy.

- Will Europe inevitably separate from Russia to achieve energy independence?

▲ It has already started. Energy independence means moving to liquefied natural gas (LNG). Pipeline gas (PNG) was cheap, and investments were made in pipeline construction, so Europe depended on PNG. PNG is supplied as high-pressure gas without liquefaction, so it is cheap. To use LNG in Europe, natural gas must be liquefied, transported, and then regasified. Building regasification facilities takes three years. Because it takes three years, Europe started building facilities in earnest in the second half of last year. Besides this, they built mini regasification facilities that take one year. Some are already operational. More than 21 mini regasification facilities on ships along the coast are being built. These are built by private contractors, but governments likely required contracts guaranteeing at least 10 years. They have to use LNG for 10 years, and even if the Russia-Ukraine war ends, Europe will have to rely on LNG for the foreseeable future, maybe forever, if trust in Russia is not restored.

- That's a big change.

▲ This opportunity has structurally changed the European energy procurement market, and a strong (demand) competitor has emerged for the three East Asian countries?Korea, China, and Japan?that heavily depend on LNG. LNG prices are likely to remain high. Prices may drop temporarily due to seasonal factors, but natural gas prices have fundamentally increased. Heating costs are contracted by Korea Gas Corporation with Qatar and others. Long-term contracts of 20-30 years secure volumes. Prices are often unpredictable and reflect export prices at the time of contract. Long-term contracts do not guarantee favorable prices but ensure stable supply.